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CHAPTER 3
LABOUR AND COST CONTROL
Chapter Outline: After going through this chapter students
will be able to understand about
Meaning and Concept of Labour Cost
Direct and Indirect Labour Cost
Control of Labour Cost
Organisation for Control of Labour Cost Idle Time
Labour Turnover
Factors Affecting Cost of Labour Method of Remuneration
Analysis of Accounting for Labour and Cost Control
o Direct Labour Cost to Prime Cost Ratio
o Direct Labour Cost to Factory Cost Ratio
o Direct Labour Cost to Cost of Production Ratio
o Direct Labour Cost to Cost of Sales Ratio
Labour Costs
Social
Gross Wages Contributions
Other Costs
/ Earnings payable by
the employer
71
Essentials of Estimation and Costing
Labour is such an element, the storing of which for the future is not possible, therefore it is similar to most
perishable material. Keeping material idle will not result in loss unless such material is of perishable nature;
but on the hand, keeping labour idle will result in loss as for such idle time also remuneration has to be paid.
Labour has established itself as a very important part of the organization, in modern labour management and,
hence no problem with labour, except with human approach, can be successfully solved. If management takes
any measure which affects the social, financial or political interest of the labour, that may result in strike
disruption in work and drainage of money. As a result, a term agreement is entered by the present day
management with the labour unions and the obligations mentioned therein are faithfully obeyed.
Labour cost control means labour cost control per unit. Unit cost can be reduced by obtaining more output
against the same rate of remuneration. Thus labour cost reduction means for the same wage obtaining more
output or for the higher wage obtaining more output but does not at all means wage-cut.
Industrial undertakings used to engage the following different type of labours:
1 Regular labour
2 Hired labour
3 Casual labour
4 Out workers
‘Regular labour’ are those labours who have been recruited on the permanent requirements basis, ‘hired labour’
are those who have been hired through labour agents or contractors, casual labours are those
labours who have been engaged on temporary basis as and when required and ‘out workers’ are those who
have been recruited as regular or casual labour but has been sent to sites or customers’ premises.
Workers of all categories are classified into skilled labour and unskilled labour, besides the above
classification.
Labour Cost
Direct Indirect
Labour Cost Labour Cost
Overheads
72
Essentials of Estimation and Costing
Any labour cost that is specially incurred for or can be readily charged to or identified with a specific job,
contract, work order or any other unit of cost is termed as direct labour cost. Wages for supervision, wages for
foremen, wages for labours who are actually engaged in operation or process are the examples of direct labour
cost. Idle time, overtime, and fringe benefits associated with direct labor workers pose particular problems in
accounting for labor costs. Are these costs a part of the costs of direct labor or are they something else?
Idle Time Overtime Fringe Benefits
Idle Time : Machine beak downs, materials shortages, power failure, and the like result in idle time. The labor
costs incurred during idle time are ordinarily treated as manufacturing overhead cost rather than as a direct
labor cost. Most managers feel that such costs should be spread over all the production of a period rather than
just the jobs that happen to be in process when breakdown or other disruptions occur.
Overtime Premium: The overtime premium paid to all factory workers (direct labor as well as indirect labor)
is usually considered to be a part of manufacturing overhead and is not assigned to any particular order. At
first glance this may seem strange, since overtime is always spent working on some particular order. The reason
is that it would be considered unfair and arbitrary to charge an overtime premium against a particular order
simply because the order happened to fall on the tail end of the daily production schedule.
Labour Fringe Benefits : Labour fringe benefits are made up of employment-related costs paid by the employer
and include the cost of insurance programs, retirement plans, various supplemental unemployment benefits,
and hospitalization plans. The employer also pays employer’s share of Social Security, Medicare, workers’
commission, federal employment tax, and state unemployment insurance.
Indirect labour is for work in general. The importance of the distinction lies in the fact that whereas direct
labour can be identified with and charged to the job, indirect labour cannot be so charged and has, therefore to
be treated as part of the factory overheads to be included in the cost of production. For example, salaries and
wages of supervisors, storekeepers, maintenance labour, etc.3
73
Essentials of Estimation and Costing
equitable remuneration
Establishment of labour
performance report.
Scientific method of
analysis.
system.
system
work.
Fig 3.3: Control of Labour Costs
The objectives of proper control on labour cost is effectively achieved through the functions of various
departments responsible for controlling labour cost in an organisation.
The following are the important departments for control over labour costs:
1 Personnel Department
2 Engineering and Works Study Department
3 Time Keeping Department
4 Pay Roll Department
5 Cost Accounting Department.
Personnel department plays a very important role in control of labour costs. It is primarily concerned with the
recruitment of labours on the basis of employee placement requisition and imparting training to them and
thereafter placing them to the job for which they are best suited. In order to achieve the efficient utilization of
manpower resources, this department is responsible to execution of labour policies which have been laid
down by top management.
(2) Engineering and Works Study Department
Engineering department is primarily concerned with maintaining control over working conditions and
production methods for each job, process, operation or departments.
It is performed by undertaking the following functions :
74
Essentials of Estimation and Costing
In order to maintain control over working conditions and production methods carrying a detailed study of the
following operations is necessary:
(a) Method Study
(b) Motion Study
(c) Time Study
(d) Job Analysis
(e) Job Evaluation
(f) Merit Rating.
Method
Study
Merit Motion
Rating Study
Job
Time
Evaluati
Study
on
Job
Analysis
(a) Method Study: It is one of the important components of work study. The main aims of this study is to
find a scheme of least wastage. Method Study is defined as “a systematic and scientific evaluation
ofexisting and proposed plans and performance of any work system and the evaluation of improvement,
through analytical process of critical examination.”
(b) Motion Study: Frank Gilbreth, who is the real founder of Motion Study. According to him motion study
may be defined as the “science of eliminating wastefulness resulting from ill-directed and inefficient motions.”
The following are the important objectives of the motion study:
75
Essentials of Estimation and Costing
(c) Time Study: Time study is also called work measurement. Time study may be defined as “the art of
observing and recording the time required to do each detailed element of an industrial operation.”
Uses of Time Study are following:
1 It assists in setting standard time for each operation.
2 It facilitates effective labour cost control.
3 It helps to ascertain ideal time and over time to men and machines.
4 It is useful to establish fair and suitable wage rates and incentives.
5 It facilitates effective utilization of resources.
(d) Job Analysis: Job Analysis is a formal and detailed study of jobs. Job analysis may be defined as the
process of determining by observation and study the task, which comprise the job, the methods and equipment
used and the skills and attitudes required for successful performance of the job.
The following are the important advantages of job analysis:
Timekeeping: It refers to recording of each worker’s time of coming in and going out of the factory during
engagement of the factory. It is essential for the purpose of attendance and determination of wage payable to
each worker.
Objectives of Timekeeping: The following are the important objectives of timekeeping:
1 Preparation of payrolls
2 Ensuring discipline in attendance
3 Apportionment of overhead on the basis of labour hours
4 Effective utilization of human resources
5 Minimization of labour costs
6 Ascertaining ideal labour time and ideal machine time.
Methods of Timekeeping: The following are the two important methods of timekeeping:
(a) Manual Method:
76
Essentials of Estimation and Costing
(b) Dial Time Records: This is a machine which is used for recording correct attendance time of arrival and
departure of worker automatically. This recorder has a number of holes about the circumference. Each hole
represents worker’s number which corresponds to identification of allotted clock numbers. At the time of
77
Essentials of Estimation and Costing
arrival and departure of worker, by operating this machine, the dial arm into a hole and the time is automatically
recorded on an attendance sheet placed inside. This machine is most suitable in small scale industries.
(c) Key Recorder System: In this machine there are a number of keys, each key denotes worker’s number.
When the time of arrival and departure the worker inserts his allotted key in the key hole and gives a turn,
the ticket time and clock time are recorded on a sheet of paper. This method is economical and easy to operate.
Time Booking: It refers recording the time of each worker for each department, operation, process or job during
engagement of the factory. It is useful for the purpose of cost analysis and effective cost control.
Objectives of Time Booking: The following are the main objectives of time booking:
1 To ascertain the cost of each job, operation or process.
2 To ascertain the cost of ideal time.
3 Apportionment of overhead based on the suitable basis.
4 To establish the fair and suitable wage system.
5 To ensure the proper utilization of attendance time.
6 To ensure the effective cost control and cost reduction.
Methods of Time Booking: In order to achieve the effective utilization of manpower resources, recording the
correct time of workers and labour cost control is essential to adopt various methods of time booking.
The following are the important methods used for time booking:
1 Daily Time Sheet
2 Weekly Time Sheet
3 Job Cards or Job Tickets:
78
Essentials of Estimation and Costing
calculation of wages for each job but also it shows the details of the work to be done by the worker.
(c) Combined Time and Job Card: Under this system, job card is prepared on the basis of attendance time
and actual time spent by the worker. This system is useful to ascertain idle time, time taken and time booking
on account of pay rolls.
(d) Piece Work Card: This system is adopted where the piece wage payment is applicable.8
Idle Time
Wage payment is made on the basis of quantity of output produced by the worker. A piece work card is allotted
to each worker on which recording the quantity of work to be done by each worker is given. For determination
of piece wage payment, the time spent by the worker is not taken into account. This method is suitable only
for small scale industries.
Idle Time is that time during which the workers spend their time without giving any production or benefit to
the employer and concern. The idle time may arise due to non-availability of raw materials, shortage of power,
machine breakdown etc.
Types of Idle Time: It refers to any loss of time which is inherent in every situation which cannot be avoided.
Any cost associated with the normal idle time are mostly fixed in nature. The normal idle time arises due to
the following reasons:
1 Time taken for personal affairs.
2 Time taken for lunch and tea break.
3 Time taken for obtaining work.
4 Time taken for changing from one job to another.
5 Waiting time for getting instructions, tools and or raw materials, spare parts etc.
6 Time taken by the workers to walk between factory gate and place of work.
Abnormal idle time refers to any loss of time which may occur due to some abnormal reasons.
Abnormal idle time can be prevented through effective planning and control. The abnormal idle time may arise
due to the following avoidable reasons:
1 Faulty planning.
2 Lack of co-operation and co-ordination.
3 Power failure.
4 Time lost due to delayed instructions.
5 Time lost due to inefficiency of workers.
6 Time lost due to non-availability of raw materials, spare parts, tools etc.
7 Time lost due to strikes, lock outs and lay-off.
Normal Idle Time: Normal idle time wages is treated as a part of cost of production. Thus, in case of direct
workers an allowance for normal idle time is built into labour cost rates. In the case of indirect workers, normal
idle time wage is spread over, all the products or jobs through the process of absorption of factory overheads.
Abnormal Idle Time: Abnormal idle time cost is not included as a part of production cost and is shown as a
separate item in the Costing Profit and Loss Account so that normal cost is not distributed.
Over Time: The term “over time” refers to when a worker works beyond the normal working hours or
scheduled time is known as ‘overtime.’ According to Factories Act, the wage rate of overtime work is to be
paid at double the normal rate of wages. The extra amount of remuneration is paid to the worker in addition to
79
Essentials of Estimation and Costing
Adequate supervision
Ensuring availability of raw materials, spare parts
Encouraging productivity
Reducing labour turnover
Ensuring effective system of repairs and maintenance, material handling and smooth flow of
production
Fair and equitable remuneration to efficient and inefficient workers.
This is one of the important departments, which is responsible for computation, preparation, and payment of
wages to all employees of the entire organization. Wage Sheet or Pay Roll is prepared on the basis of the Piece
Work Card or Time Card or both. It is a statement which shows the detailed records of the employees’
remunerations such as gross wages, various reductions and net wages for particular period.
In order to ensure the proper determination and preparation of wage sheet, the pay roll department should be
taken a special care. A systematic procedure for payment of wages should be adopted to preventing of frauds
and irregularities in wage payments. Effective supervision and strict control are essential to ensure that the
worker is not paid twice or no dummy name of workmen have been entered in the pay roll.
Labour Turnover
Labour Turnover may be defined as “the rate of changes in labour force, i.e., the percentage of changes in the
labour force of an organization during a specific period. Higher rate of labour turnover indicates that labour is
80
Essentials of Estimation and Costing
not stable and there are frequent changes in the labour force in the organization.
It will affect the efficiency of the workers and overall profitability of the firm. The determinant result of labour
turnover is expressed in terms of percentage.
Methods of Measurement of Labour Turnover: The following are the important methods of measuring labour
turnover: (a) Separation Method (b) Replacement Method (c) Flux Method.
(a) Separation Method: Under this method, labour turnover is calculated by dividing the total number of
separation (number of employees left or discharged) during the period by the average number of workers on
the pay roll.
Thus, the formula is:
No. of Separation during the Period
(b) Replacement Method: In this method, labour turnover is measured by dividing the number of
replacement of workers during the period by average number of workers during the period.
Thus formula may be expressed as :
81
1 Increased cost of recruitment, training and placement
2 Increased cost of production
3 Decrease in output due to inefficient or newly recruited workers
4 Higher accident rate due to negligence or mishandling of machines
5 Low team spirit due to lack of co-operation and co-ordination between the workers and
employers.
The chief aim of the preventive costs which are incurred in order to keep the workers satisfied and reduce the
labour turnover rate as much as possible. These preventive costs which include the following:
(a) Cost of providing medical facilities, canteen and other welfare facilities
(b) Cost of administration
(c) Cost of providing better working conditions
(d) Cost of pension, gratuity, provident fund and other retirement benefits.
Replacement Costs: These costs include the following:
(a) Cost of recruitment, training and placement
(b) Increase wastages and scrap
(c) Cost of repairs and maintenance including machine breakdowns
(d) Cost of compensation on account of accidents
(e) Loss of output due to inefficiency or newly recruited workers.
3.5 FACTORS AFFECTING COST OF LABOUR
Assessment of Man Power Requirement: Correct assessment of manpower requirement will decrease
the cost of labour because they are actually we need, if laborers are more than these numbers, its excess
cost will be suffered by the company and overall cost of labour will increase. To assess of manpower
requirement, is the duty of personnel department. So, it should be do its duty with best way.
Time and Motion Study: In this study, supervisor records time spent on each job and correct record
will reduce excess paid for overtime to workers.
Control over Idle Time and Overtime: Idle time is time when worker is not doing any production
activity due to delay of receiving the material or electricity cut or any other things. This is loss of
business and it will increase the cost of labour. By continuing supply of raw material, review and
repair of machines and continue supply of electricity can reduce idle time loss. But some time, these
factors are also not under our own control. So, we have to depend on others. Overtime cost also can
be optimized by providing good amount for this.
Wage System: Wages should be at competitive price. High and low rate of wages will disturb workers
and increase cost of labourers. It also is on the basis of time or unit produced.
Control over Labour Turnover: Labour turnover means losing of laborers due to not providing good
wages or incentive or any other reason. It will increase the cost of training of new workers and also
errors in production. So labour turnover should minimize as soon as revealed.
82
Fig 3.5: Employee Remuneration and Impact on Performance
3.6 METHOD OF REMUNERATION
There are two basic methods of wages payment
Under time wage system, wages are paid on the basis of time spent on the job irrespective of the amount of
work done. This is known as Time Rate or Day Wage System. The unit of time may be a day, a week, a fortnight
or a month. Under piece wage system, remuneration is based on the amount of work done or output of a worker.
This is known as “Piece Rate System” or “Payment by Result.” Thus, a workman is paid in direct proportion
to his output.
A variety of bonus and premium plans have been designed to overcome the drawbacks of two basic methods
of wage payments.
A system of incentive plans also takes into consideration the primary principles of these two basic plans known
as Incentive or Bonus or Premium Plan.
Following are the important methods of remuneration which may be grouped into:
1 Time Rate Systems
2 Piece Rate Systems
3 Bonus System (or) Incentives Schemes
4 Indirect Monetary Incentives.
These may be further classified as under:
(1) Time Rate System:
(a) At Ordinary Levels
(b) At High Wage Levels
(c) Guaranteed Time Rates.
(2) Piece Rate System:
83
(a) Straight Piece Rate
(b) Piece Rates with Guaranteed Time Rate
(c) Differential Piece Rates : (i) Taylor’s Differential Piece Rate System, (ii) Merrick
Differential Piece Rate System
(iii) Gantt Task and Bonus Plan.
This is also termed as “Day Wage System” or “Flat Rate System”. Under this system, wages are paid to the
workers on the basis of time spent on the job irrespective of the quantity of work produced by the workers.
Payment can be made at a rate per day or a week, a fortnight or a month. The formula for calculation of
payment of time rate of ordinary levels is as follows:
conditions:
Where the units of output are difficult to measure, e.g. watchman.
Where the quality of work is more important e.g., artistic furniture, fine jewellery, carving etc.
Where machinery and materials used are very sophisticated and expensive.
Where supervision is effective and close supervision is possible.
Where the workers are new and learning the job.
Where the work is of a highly varied nature and standard of performance cannot be established.
Advantages
It is simple and easy to calculate.
Earning of workers are regular and fixed.
Time rate system is accepted by trade unions.
Quality of the work is not affected.
This method also avoids inefficient handling of materials and tools.
84
Disadvantages
No distinction between efficient and inefficient worker is made and hence they get the same
remuneration.
Cost of supervision are high due to strict supervision used for high productivity of labour.
Labour cost is difficult to control due to more payment may be made for the lesser amount of
work.
No incentive is given to efficient workers. It will depress the efficient workers.
There are no specific standards for evaluating the merit of different employees for promotions.
Under this system, efficient workers are paid higher wages in order to increase production. The main object of
this method designed to remove the drawbacks of time rate at ordinary levels. This system is simple and easily
understandable. When higher rate of wages are paid, it not only reduces labour turnover but also increases
production and efficiency.
Under this method the wage rate is calculated by considering to changes in cost of living index. Accordingly,
the wage rate is varied for each worker according to the change in cost of living index. This system is suitable
during the period of raising prices.11
This is also known as “Piece Wage System” or “Payment By Result.” Under this system, wages of a worker
are calculated on the basis of amount of work done or output of a worker. Accordingly, a worker is paid in
direct proportion to his output.
Advantages
Disadvantages
85
Temporary delays or difficulties may affect the earnings of the workers.
Piece Rate System is suitable where
There are three important methods of paying labour remuneration falling under this type : (a) Straight Piece
Rate (b) Piece Rates with Guaranteed Time Rates and (c) Differential Piece Rates.
(a) Straight Piece Rate: Under this system workers are paid according to the number of units produced at a
given rate per unit. Thus, total earnings of each worker are calculated on the basis of his output irrespective of
the time taken by him. The following formula is used for measuring piece work earning:
(b) Piece Rate with Guaranteed Time Rates: Under this method, the worker earning from piece work less
than the guaranteed minimum wage, will get the fixed amount of guaranteed time rate. A guaranteed rate
would be paid per hour rate or day rate or week rate.
(c) Differential Piece Rates: This system is designed to provide for variation of piece rates at different levels
of output. Accordingly increase in wages is proportionate to increase in output. Under this system efficient
workers get ample reward and at the same time inefficient workers are motivated to earn more. The following
are the important types of differential piece rates :
Taylor’s Differential Piece Rates System: F.W. Taylor, who is the father of scientific management,
introduced this plan. Under this system, two piece rates are applicable on the basis of standard
of performance established. Accordingly one is high rate and the other one is lower rate. Thus
high piece rate is applicable for standard and above the standard performance. Lower piece rate
for those workers with below the standard performance.
Merrick’s Differential Piece Rates System: Under this method, three piece rates are applied with
different levels of performance accordingly.
Gantt’s Task Bonus Plan: This system is designed by Henry
L. Gantt. Under this system standard time for every task is fixed through time and motion study. The main
feature of this system is a good combination of time rate, differential piece rate and bonus. In this system day
wages are guaranteed to all workers.
Incentive Scheme of wage payment is also known as Premium Bonus Plans. Introduced in order to increase
production with ensuring proper industrial climate. Wage incentive plans may be of two types :
(A) Individual Incentive Plans and (B) Group Incentive Plans.
86
Incentive
Plans
Individual Group
Incentive Incentive
Plans Plans
Scanlon
Priestm
Time Output
's Plans
Plans
an
based based
Plans Plans
Differe
Hasley'
Taylor'
s Plan
Piece
ntial
Plan
rate
s
Multipl
Rowan'
e Piece
Merric
s Plan
Plan
rate
ks's
n's Plan
Gantt's
Emerso
Task
Plan
Bedeau
x's Plan
Under individual incentive plans, remuneration can be measured on the performance of the individual worker.
In the case of the group incentive scheme earnings can be measured on the basis of the productivity of the
group of workers or entire work force of the organization. Various types of incentive schemes are combinations
of time and piece rate systems. The following are the important individual incentive plans discussed below :
(1) Halsey Premium Plan: This Plan was developed by F.A. Halsey. This system also termed as Split Bonus
Plan or Fifty-Fifty Plan. Under this plan, Standard time is fixed for each job or operation on the basis of past
performance. If a worker completes his job within or more than the standard time then the worker is paid a
guaranteed time wage. If a worker completes his job within or less than the standard time, then he gets a bonus
of 50% of the time saved plus normal earnings. Under this method, the total earnings is calculated as follows:
Total Earning = Guaranteed Time Wages + Bonus of 50% of Time saved (or)
- T) R
Where T = Time Taken; R = Hourly Rate
Merits:
It is simple to understand.
Total earnings of each worker can be easy to calculate.
Both employer and employee get equal benefit of time saved.
This system not only benefits efficient worker but also provides average worker to get guaranteed
minimum wages.
This system is based on time saved and it can reduce the labour cost.
87
Demerits:
Lack of co-operation among the employees.
Under this system establishment of standard is very difficult.
Earning are reduced at high level of efficiency.
(2) The Halsey-Weir Scheme: Under this system the worker gets the bonus of 30% of the time saved instead
of 50% of time saved under Halsey Plan. Except for this, Halsey Plan and Halsey-Weir Systems are similar in
all other respects.
(3) Rowan Plan: This plan was introduced by James Rowan of England. It was similar to the Halsey Plan in
many respects except that it differs in calculation of bonus. Under this system, bonus is determined as the
proportion of the time taken which the time saved bears to the standard time allowed.
(4) Emerdon’s Efficiency Sharing Plan: Under this plan, earning of a worker is by combining guaranteed
day wages with a differential piece rate. Accordingly the level of efficiency is determined on the basis of
establishment of standard task for a unit of time. If the level of worker’s efficiency reaches 67% the bonus is
paid to him at a normal rate. The rate of bonus increases in a given rate as the output increases from 67% to
100% efficiency. Above 100% efficiency, the bonus increases to 20% of the wage earned plus additional bonus
of 1% is added for each increase of 1% in efficiency.
(5) Bedaux Point Premium System: This plan was introduced by Charles E. Bedaux in 1911. Under this
plan, standard time fixed for each operation or job is expressed in terms of Bedaux point or ‘B’. For example,
a standard time of 360 B means the operation or job should be completed within 360 minutes. The chief
advantage of this plan is that it can be applied to any kind of job. Under this system, worker is paid at the time
for actual hours worked and 75% of the wages for the time saved are paid as bonus to the worker and 25% to
the foremen, supervisors etc. Following is the formula for calculation of total wages of a worker:
- T)
(6) Accelerating Premium Bonus Plan: Under this plan, bonus is determined on the basis of time saved
unlike a fixed percentage under Halsey Plan and as decreasing percentage under Rowan Plan. The bonus is
paid to workers at an increased rate. This provides increasing incentives to efficient workers.
The incentive schemes explained so far are applicable to individual performance depending directly on
production. However it is not the individual workers who produce the goods or services (operation) alone but
group of several other workers are required to jointly perform a single operation. It is, therefore, essential that
a group incentive scheme should be introduced. Bonus is calculated for a group incentive scheme. The bonus
is calculated for a group of workers and the total amount is distributed among the group of workers on anyone
of the following basis:
(a) Equally by all the workers of the group.
(b) Pro rate on the time rate basis.
(c) Pre-determined percentage basis.
(d) Specified proportion basis.
Following are the important types of group incentive bonus plans:
(1) Budgeted Expenses bonus plan
(2) Priest Man bonus Plan
88
(3) Towne’s Gain-sharing Plan
(4) Scanlon Plan
(1) Budgeted Expenses Bonus Plan: Under this method, bonus is determined on the basis of savings in actual
expenditure compared with total budgeted expenditure.
(2) Priest man Bonus Plan: Under this plan standard performance is fixed by the management and committee
of works. The group of workers get bonus when actual performance exceeds the standard performance
irrespective of individual’s efficiency or inefficiency.
(3) Towne’s Gain-sharing Plan: Under this plan, bonus is calculated on the basis of savings in labour cost.
The group of workers get bonus when actual costs is less than the standard costs, one -half of the savings is
distributed among workers including foremen in proportion with the wages earned.
(4) Scanlon Plan: Scanlon Plan is designed with the chief aim of reducing the cost of operations in order to
increase the production efficiency. This plan is generally applicable in industries where the operation cost is
high. Under this scheme, bonus is determined on the basis of standard costs or wastages and percentage of
the reduction in operation cost.13
Indirect schemes are regarded beneficial to both employers and workers. In this regard, under indirect monetary
incentives by giving them a share of profit and introducing co-partnership scheme or as they have become
partners in the business in order to make a very profitable enterprise.
Profit Sharing: Profit Sharing and bonus is also known as Profit sharing Bonus. Under this scheme, there is an
agreement between the employer and employee by which employee receives a share, fixed in advance of the
profits. Accordingly profit sharing bonus refers to the distribution of profit on the basis of a certain percentage
of one’s monthly earnings. The amount to be distributed depends on the profits earned by an enterprise. The
proportion of the profits to be distributed among the employees is determined in advance.
Co-partnership: This system provides not only a worker to become partner in the business but also to share in
the profit of the concern. There are different degrees of partnership and share of responsibilities allowed to
the workers to take part in its control. Non-monetary incentives are free education for children, rent free
accommodation, medical facilities, canteen facilities, welfare facilities, and entertainment facilities etc.
3.7 CONCLUSION
Labor costs accrue directly and indirectly for a business. A direct labor cost refers to employees actively
engaged in product manufacturing or project completion. An indirect labor cost refers to workers engaged in
business activity, but not in the direct manufacture of products or services. A process cost system using labor
costing includes direct and indirect labor to paint an accurate picture of employee budgetary needs. Failing to
do so can result in shortfalls of cash to pay worker wages.
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