FUNDAMENTALS OF COST

ACCOUNTING

Submitted by- Tanishka Kasana (9015)

Yeshika Sukhija (9035)
Raunaq Kalra(9019)

DIRECT & INDIRECT LABOUR

 S.NO TOPIC

1 INTRODUCTION

2 DIRECT LABOUR

3 EXAMPLES OF DIRECT LABOUR

4 INDIRECT LABOUR WITH EXAMPLES

Top 5 Departments of Labour Cost Control

5
What are Labour costs requiring special
6 treatment?

 LABOUR COST
Human efforts used for conversion of
materials into finished products or doing
various jobs in the business are known as
labour. Payment made towards the labour
is called labour cost. It can also be direct
and indirect.
 DIRECT LABOUR
Direct labour is all labour experienced and directly involved in altering the
condition, composition or constitution of the product. The wages paid to skilled
and unskilled workers for manual work or mechanical work for operating
machinery, which can be specifically allocated to a particular unit of production,
is known as direct wages or direct labour cost. Hence, ‘direct wage’ may be defined
as the measure of direct labour in terms of money. It is specifically and
conveniently traceable to the specific products wages paid to the goldsmith for
making gold ornamentt is an example of direct labour.

• Direct labor refers to the salaries and wages paid to workers that can be directly
attributed to specific products or services.
• It includes the cost of regular working hours, overtime hours worked, payroll
taxes, unemployment tax, Medicare, employment insurance, etc.
• Direct labor can be allocated to overhead in the production process.

 EXAMPLES OF DIRECT LABOUR

• One example of a direct labor cost is the hourly salary of a quality assurance inspector
adjusted to include healthcare benefits and short-term disability.

• Another example could be the annual salary of a welder who works on the production line of
a steel parts manufacturing company.

• Machine Operator

• Shoe maker

• Carpenter

• Weaver
•

 INDIRECT LABOUR

Indirect labor is the cost of any labor that supports the production process, but which is not
directly involved in the active conversion of materials into finished products.

Since indirect labor cannot be traced back to a specific product or service, the related cost can’t be billed
to the goods produced or the services rendered. It represents the overhead to the business needed to support
the level of operations.

Examples of indirect labor positions are:

• Production supervisor
• Purchasing staff
• Materials handling staff
• Materials management staff
• Quality control staff

The cost of these types of indirect labor are charged to factory overhead, and from there to the
units of production manufactured during the reporting period. This means that the cost of
indirect labor related to the production process ends up in either ending inventory or the cost
of goods sold.

 Top 5 Departments of Labour Cost Control

(1) Personnel Department:

This department in a large organisation is responsible for recruitment, training discharge, transfer etc. and
maintaining their records.

The main functions are:

(i) Receiving requisition for labour from various departments
(ii) Selection and Recruitment
(iii) Information to the concerned departments like requisioning department and pay roll department.

(2) Engineering and Work Study Department:

This department helps in labour cost control through following functions:

(i) Preparing production plans and specifications for each job,
(ii) Initiating and supervising research and experimental work
(iii) Maintaining efficient and safe working conditions
(iv) Performing work-studies e.g., Time study, Motion study etc.
(v) Analyzing jobs and job evaluation and studies
(vi) Performance appraisals and labour Productivity
(vii) Fixing Piece rate.

(3) Time Keeping Department:

Its functions are maintenance of attendance records of employees and job time booking.

(4) Payroll Department:

This department has to perform following functions:

(i) To maintain record of job classification and wage rate of each and every employee,
(ii) To verify and to summarise the time of each worker as shown on daily time cards,
(iii) To calculate wages earned by each and every worker
(iv) To prepare payroll of every department,
(v) To calculate total amount of wages and deductions for each employee
(vi) To disburse wages
(vii) To devise a suitable internal check preparing and paying out wages.

(5) Cost Accounting Department:

This department is concerned with:

(i) Documentation of Wages Accounting
(ii) Analysis of total labour cost and
(iii) Treatment of idle time, Overtime, Leave Pay etc.

 What are Labour costs requiring special treatment?

Idle time
When the workers do not perform the work but skill they are to be paid the wages, such time is called the idle time. Idle is the
difficult between the time for which they are actually pad and t

he time they actual work. For example, if a worker is actual paid the wages for 8 hours but he had worker for 2 hours only, the
difference of 1 hour to term as idle time. Idle time arises due to the shortage of material, breakdown of machinery, strike etc.

The idle time can be divided into two types as given below:
a. Normal idle time: the idle time that is caused due to the normal causes like the nature of production, available of raw materials
and production process is called the normal idle time. The following are some of the example of normal idle time.
• The time between the factory gate and normal idle time.
• The waiting time before the work is started.
• The waiting time before the machine get started.
• The time between the two works.
• The idle time caused due to maintenance of machinery.
• For the fulfilment of personal needs like tea taking, toileting etc.

b. Abnormal idle time: the idle time that is the result of some abnormal situations is called the abnormal idle time. Such idle time is
not the output of the production process. These types of idle time emerge due to the following reasons.
• A very long maintenance of the machinery.
• Strike and lockout by workers.
• No supply of electricity, water etc.

• No supply of raw materials.

• No availability of tools and equipment as required.
• No time instruction by the supervisors to the workers.

Accounting for Idle Time

The accounting of the normal and abnormal idle time are maintained differently.
a. Accounting for  normal idle time: the way of maintaining the record of normal idle time is mentioned below:

b. Accounting for abnormal idle time:  the wages paid for the abnormal idle time is regarded as abnormal loss and debited to
profit and loss account.

Control of idle time

Generally, effective supervision and direction help to reduce the normal idle time. To control the abnormal idle time. Proper
attention has to be paid for material, equipment and fuel/power. The following are some of the measure that can be taken for
control the idle time.
• Discourage the tendencies of waiting time through effective supervision and direction.
• Development of proper production plan.
• Regular checking of the sources of water, electricity, fuels etc.
• Effective use of the idle time card.
• Cordial relationship with the suppliers and repair and antennae department.

 Overtime
Over and above the normal working hours, if a worker spends more time on the job it is generally know as overtime.
For example, in a factory the workers are required to work for 8 hours a day but if a worker is asked to work 10 hours
a day, the time of two hours will be treated as overtime. In Nepal, if a worker works more than 9 hours in a or for more
than 48 hours in a week, he is tread to be engaged in overtime. The wages rate   of overtime work to be paid is double to
a worker of his basis hourly rate. The overtime labour costs are treated as part of direct wages or indirect wages
depending upon the nature of labour, i.e. direct or indirect.
Total wages = normal wages + overtime wages
= normal time x normal rate + overtime x overtime rate

Treatment of overtime wages

As pointed out, overtime is generally paid at a higher rate than the normal time. The overtime wages consist of
normal wages ' and' overtime premium'. The normal wages from the part of the direct wages, but the overtime failure
premium should be treated in the following manner.
i. Where the overtime work become necessary to complete a job within a specified date as required by the customer, the
overtime premium or overtime cost should be directly charged to the job concerned by way of direct wages.
ii. Where the overtime work become necessary as a result of general pressure of work, the overtime premium should be
treated as an item of overheads.
iii. Where the overtime work becomes necessary on account of fault planning in a department, the overtime
premium or cost should be treated as an item of department overheads.
iv. Where overtime work is due to abnormal causes, i.e., flood, fire etc., the overtime cost should be charged to the
costing profit and loss account.

Holiday and vacation pay

Employees are entailed for some holidays and vacations in almost all organizations. The period of vocations and
holidays will out be in a particular proportion to production labour all to time. For this reason, vocation and holiday
pay calls for special accounting treatment. Payment, which will be due to an employee during vacations and
holidays, is conspired as overtime. It is spread over the production for the whole year, no single part of a particular
period should carry undue budge on this holiday per should to the job directly.