COST ACCOUNTING – I

Module IV : Labour Costing

Introduction :
Labour cost is the second most important element of cost after materials. It
represents human resources used in production. So significant is the role of
labour, that productivity of all other resources depends on the productivity of
human resources.
Labour cost is divided into direct and indirect labour.
Direct Labour is the cost of that labour which is expended in altering the
construction, composition or condition of the product. It is directly engaged in
production work and can be conveniently identified or attributed wholly to a
particular job, process or cost unit. Wages of a machine operator is a direct labour
cost.
Indirect Labour cost is the wages paid to those workers who are not directly
engaged in converting raw materials into finished products. Such costs cannot be
conveniently identified with a particular job, product or cost unit. Supervisors,
inspectors, clerks, instructors, peons, watchmen and cleaners are examples.
Organisation for Accounting and Control of Labour Cost
There are mainly five departments in an organization which deal with Labour.
These are as follows:
1. Personnel department:
This is a service department and is mainly concerned with the proper
selection and training of workers and placing them on jobs for which they
are best suited.

2. Engineering department
This department prepares plans and specifications of jobs, makes job
analysis, conducts time and motion studies, makes provision for safe
working conditions and supervises production activities.
 3. Time keeping department :
This department is concerned with recording of workers time. The
recording of time put in by workers is required not only for attendance and
wage calculation purpose but also for the purpose of cost analysis and
apportionment of labour cost over various jobs.

4. Payroll department
This department maintains a record of job classification and wage rate of
each employee and performs the function of computation of wages
payable to them by preparing payroll or wage sheet. It is also responsible
for disbursement of wages.

5. Cost accounting department

This department accumulates and classifies all cost data of which labour is
one important element. It analyses the payroll and prepares routine and
special labour cost reports for submission to management so that proper
control may be exercised on labour cost.
LABOUR TURNOVER :
Labour turnover is defined as the rate in change in the composition of the labour
force in an organization. Labour turnover varies greatly between different trades
and industries, for example part time and seasonal labour will have higher rates.
There are three alternative methods by which labour turnover rate is computed.
Once a particular method is selected, it should be followed consistently.
1. Separation method
This method takes into account only those workers who have left during
the period. Its formula is:

Labour turnover rate = No of workers left during the period x 100

Avg. No. of workers during the period
 Average No. = No of workers in No of workers in
Beginning + End

2
Multiplication by 100 in the above formula indicates rate in percentage.

2. Replacement method
This method takes into account only those new workers who have joined in
the place of those who have left.
Labour turnover Rate =No. of workers replaced during the periodx 100
Avg. No. of workers during the period
If new workers are engaged for expansion programme or any other such
purpose, they are not considered for this computation.

3. Flux method
This shows the total change in the composition of labour force due to
separations and replacement of workers. Its formula is :

Labour turnover rate = No. of workers left + No of workers replaced x 100

Average No. of workers

Causes of Labour turnover

Labour turnover reports should be prepared regularly to be placed before the
management, giving breakdown of the causes as to why the workers left. The
causes may be classified into two broad categories :
a) Avoidable causes
b) Unavoidable causes

a) Avoidable causes :
i. Low wages and allowances
ii. Unhappy relations with co workers and supervisors
 iii. Unsatisfactory working conditions
iv. Trade union rivalry
v. Lack of medical facilities
vi. Inadequate job security and retirement benefits

b) Unavoidable causes :
i. Death or retirement
ii. Illness or accident
iii. Domestic problems
iv. Discharge on disciplinary grounds
v. Seasonal nature of business
vi. Change in plant location
vii. Personal dislike for job or environment
viii. Marriage – particularly in the case of women workers
ix. Change of job for betterment
Effect of Labour turnover :
Labour turnover can also be beneficial at certain times particularly in lower
management level as it creates vacancies for internal promotions which acts as a
motivation for young workers. On the other hand, labour turnover should be
minimized because it leads to increased cost of production.
The cost of production can be classified into two types as explained below :
Preventive Costs – These are the costs which are incurred to keep the work force
satisfied and to prevent or discourage them from leaving the organization
Replacement Costs – These are the losses and wastages arising because of
inexperienced new labour force replacing the existing one as well as the cost of
recruitment and training of the new workers.
Cost of labour turnover should be based on number of workers in each
department. But in case the cost is on account of a particular department then it
should be charged completely to that department.
IDLE Time :
Idle time represents the time for which they are paid but no production is
obtained. E.g. time when production is interrupted by machine break down, tea
breaks.
It can be due to following causes :
 Productive causes: idle time due to machine break down, power failures,
waiting for raw materials or tools, waiting for instructions.
It can be controlled by proper planning , supervision & maintenance.

 Administrative causes: Idle time caused by administrative decisions like

underutilization of plant capacity during depressions.
It is generally not controllable.

 Economic causes : Idle time due to seasonal nature of certain industries like
woollen goods, ice cream where production is not evenly distributed over
the year. Labour remains idle in this slack season. Sometimes this idle time
is beyond control.
Treatment of Idle Time:
Normal Idle Time: This is that wastage of labour time which cannot be avoided
and has to be borne by the employer.(tea break, rest intervals, time spent on
setting of machines etc.
It may be treated as :
 As FOH
 As direct wages

Abnormal Idle Time: This is that idle time which arises due to reasons not
connected to normal production.( Strikes, accidents etc.)
It is not included in cost and is transferred to costing P&L account.
Methods of remuneration:
Time Rate System
Wages = No of hrs.Worked X rate /hr.
Piece rate system
Wages = No of units produced X rate /unit

Incentives Plan
 Halsey Plan
Bonus = 50% (Time saved x Time Rate)
Total Earning = (Time rate x time taken) + Bonus

 Rowan Plan
Bonus = Time saved x Time taken x Time rate
Time allowed
Total Earning = (Time taken x time rate) + Bonus