Labour Cost

Personnel-Recruitment; training; placement Work Study-job specifications; job analysis;

Labour Departments

supervision; R & D; Safety; Time and motion studies; job evaluation and grading Time Keeping- Attendance and time records; job time records Pay-master’s-Records job classification; verifies & summarize time; Computes wages; Prepares pay roll; makes deductions; maintains perm. pay roll; disburses salary and wages Cost Accounting- separates direct & indirect costs; analyzes; reports on loss of labour time, wastage, inefficiencies; Calculates variances against standards; shows causes

Time Keeping and Time Booking

Methods of Remuneration- Factors
 Mutual Benefit- fair and equitable  Easily understood  Minimum Wage  Simple operation  Flexibility 

Time Wage System
Suitable where strict supervision is possible, quality is

more important , not possible to measure work done, Delays unavoidable. Simple-easily understood Stable- sense of security- assured Quality Production- no haste Unity of labor- favored by unions Economy- of adm overheads , care, quality.

Time Wage System- Demerits
No distinction Makes workers lazy Soldiering- lengthening work increasing cost Idle time goes up Close supervision needed May lead to employer employee conflict

Piece Wage System
Individual and group piecework Merits Recognizes merit – more equitable Promotes hard work- reduces COP Accurate ascertainment of labor cost Workers benefitted by saving time Deficiencies of material and plant removed  

Piece Wages- Demerits
Haste leads to waste Losses from rough and careless handling No wage guarantee May be injurious to workers health Slow workers may resent Workers may be exploited Fixing equitable piece rate difficult Best suited to work of repeatitive nature 

Balance of Debt System
Worker paid on piece rate but when earnings fall

short of time rate , time rate is paid. Extra payment considered debt and is recovered in future when piece rate exceeds time rate.

Incentive Plans
Combine advantages of time and piece wages Minimum wages guaranteed to all workers Bonus etc. given to efficient workers Worker expected to complete work within standard

time. Employer employee both benefit Cost benefit ratio should favor firm Should be comparable in industry Workers should be properly educated Should be practical

Halsey & Halsey- Wier Plan
Hourly wage paid for time worked Bonus paid for finishing before standard time Amount of bonus 50% of time save in Halsey and

30% in Halsey-Weir. Total earning=TxR +(S-T)xRx50%(or 30%) =time taken x hourly rate + time saved x rate x 50% ( or 30%). System easy to operate benefitting both employer and employees. Workers may how ever object as they do not get fully compensated for the time saved.
 

Rowen Plan-modified Hasley
Same as Hasleyexcept that the amount of bonus is

that proportion of wages of actual time taken which time saved bears to standard time. Rate x actual time x ( standard time- actual time)/standard time. However the amount decreases beyond 50% . Thus the bonus may be same for 4 hours as for 16 hours as the time taken !

100% Bonus Plan
100% of time saved is paid to worker as bonus.

Different from piece rate system as here it is standard time ( not std rate). Total earning = time take x hourly wage+ time saved x hourly wage. Most equitable.

Taylor’s Differential Piece System
Low piece rate ( 83%)to inefficient workers and high

rate ( 175 %) to efficient workers. Beneficial to both. But can No minimum wage.

Merrick multiple piece rate has several

and not just two piece rates. Thus Upto83% efficiency ordinary piece rate 83% - 100% 110 % of ord. piece rate Over 100% 120% “ “ “

Emerson’s Efficiency Plan
Combines minimum day wage with differential rate.

Emerson used 32 rates. Minimal bonus at 2/3 rd of standard. Only time wage below that. 4% at 80%; 10% at 90%; 20% at 100%. Above 100% efficiency- finishing job in the allotted time, worker gets time wage+20% of such wage + wage for the time saved. Thus at 120% bonus is 20% and compensation for time saved 20% and worker gets time wage + 40%.

Gnatt task and bonus system
Workers get bonus for completing work before

standard time. Generally @ 20%. In addition to full standard time wage. Thus if std hrs =10 and wage @ 2/hr. those completing work in 12, 10 and 8 hrs get the same =24. Bedeauxor Point Scheme- B = work done in 1 min. 1 hr=60 Bs. Bs accumulated over one week compared with actual. Worker get actual time wage. For time saved worker and foreman get wages in ratio of 3:1.

Hayne’s Plan & Barth Scheme
Standard set in minutes. MAINTS. If work repetitive time saved shared with foreman 5:1 If non repetitive shared also with employer.5:4:1 Worker get time wage. Assured.

Barth Scheme Earnings= hourly wage+_/ std. Hours x hours worked Applied to new workers Rate of increase in bonus very slow Accelerated Premium Bonus Plan @ increasing rate

Priestman’s Plan and Group Bonus schemes
Standard Output for group set beforehand. Excess over standard paid proportionate to increase Shared by all workers in the group. Merits of group bonus- Team spirit; healthy

competition between groups; interesting to supervise ; Less accounting . Group dynamics to be handled.

Profit Sharing
Basis- Fixed % after interest and transfer to reserves. Departmental profit may be the basis. Profit computed per unit of output. A % to workers. Profit may be disbursed in cash. Provident and pension funds may be credited. Bonus shares issued to workers. Copartnership. Merits: More efforts; low labor turnover ; High

morale; Team spirit; greater care; better efficiency Limitations: Difficult to determine ; No direct relationship; Time lag; Fair weather Plans.

Treatment of Bonus
Statutory 8.33% Payment of Bonus Act Min. bonus added to wage rate. Excess to production

overhead. Most appropriate. For indirect workers min bonus - overhead. Excess excluded from Costing. Whole amount may also be treated as overhead

Labor Cost Control

Idle Time
Time for which employer pays for no direct benefit. Causes-Production- machine breakdown; power

failure; waiting for work; waiting for tools/ raw material; waiting for instructions; Tea breaks Adminstrative –under utilization, recession; benching; Economic- seasonality of work Abnormal- strikes ; lock outs; Major breakdowns. Normal and controllable- charged to factory OH Normal but uncontrollable- ignored or rate increased

In India double the rate for work beyond 9 hours on

work day or more than 48 hours in a week. Factories Act. Can be taken as direct or indirect as identified. If paid to increase production charge to works OH When paid for a specific job charge direct to that job. Abnormal OT charged to P&L a/c Night shift allowance also treated as overtime.

Labor Turnover
Rate of displacement of employees due to resignations,

retirement or retrenchment. Factors – Unavoidable- personal betterment; illness; death; retirement ; discharge ; marriage ; Locational change; seasonality; shortage of raw material etc. Avoidable- Lack of congenial and healthy atmosphere ; of proper facilities ; Low wages ; redundancy ; relationship with fellow workers. Turnover Rate- No. of separations/Av no. of workers No. of replacements/ av no. of workers -% Flux rate- (No. of separations+ No. of replacements)/2/ av no. of workers

Direct and Indirect Expenses
Costs other than material and wages Direct expenses are incurred specifically for a product

or service Indirect are common expenses attributable on suitable basis Some are too small to be directly assigned viz. nuts, screws, thread, glue etc.

Direct Expenses
Royalties if charged at rate per unit Hire charges of plant if used for a specific job Sub contract or outside work Salesman’s commission if based on units sold Freight whose charges can be related to units sold Travelling, hospitality incurred for a specific job Cost of design and pattern for a specific job Cost of special process like water proofing for canvas In cost a/c direct expenses a/c is credited and contract a/c

is debited. Controlled by fixing standards.

Indirect Expenses
Expenses other than direct expenses viz. Rents, rates and insurance of factory and office Depreciation , repairs and maintenance of P&M, F&F Power, fuel, lighting, air-conditioning Advertising, legal charges, audit fees, bad debts The following are not included in costsPurely financial- interest recd or paid, dividend recd profit

or loss on sale of investments or property Appropriation of profit . Income tax paid , dividend paid, transfers to reserves and sinking fund, goodwill or other fictitious assets written off. Notional expenses like rent for owned premises

Indirect material + indirect labor + indirect expenses Classification -Function- wise  Manufacturing  Administration  Selling and Distribution  Manufacturing Overheads
Indirect material  Lubricants, cotton waste, stationery, repair material  Indirect Labor  Salary and wages of supervisor, foreman, inspectors, works executives, clerks and subordinates, security , welfare etc.

Overhead Expenses
Production/ Works/ Factory overheads expenses include Rents, Rates, building tax, insurance Power, Lighting and heating Depreciation, repairs and maintenance of plant and

machinery, furniture, fixtures and building Welfare expenses like canteen, medical and recreation

Administration may also incur such costs. Additionally it

may incur legal expenses and audit fee etc. Sales and Distribution may not have much office expenses but bear costs on advertising , after sale service, customer service, discounts and bad debts etc.

Fixed , Semi Variable and Variable Overheads
Fixed OH do not vary with changes in output level . It

is fixed within specified limits of time and activity Variable OH vary proportionately with output Semi variable OH are partly fixed and partly variable and can be split up in two parts- fixed and variable Using regression we may calculate variable rate -b b=∑ xy/ ∑ x² x,y -deviations from means. Fixed cost=‾Y-mean expenses-(b x ‾X(mean output) Like constant a in Y= a + b X

Treatment of Factory Overheads
Collection and accumulation of OH expenses Give standard order No.1.2.3 etc. Allocation of OH to production , service departments. Apportionment of OH which can not be allocated Reappointment of service department OH to production

departments Calculate the OH rate

Basis of Apportionment
 Overhead  Factory rent, rates, taxes  Depreciation and insurance  Basis  Floor area or capital value  Capital Value

on owned bldg., Plant and machinery  Heating, lighting  Power  Supervision  Stores  Material handling  Audit fee  Delivery expenses

   No. of light points  HP of machinery/hours  No. of employees  Value/weight  Weight  Sales or total cost  Weight/ volume/kms etc.

Secondary apportionment
Service Dept. Costs Maintenance department Personnel Time keeping Stores keeping Welfare Internal Transport Building service Power house Basis Hours worked in each No.of employees Direct labor hours Qty/ value / requisitions No.of employees Truck hours/mileage/ton Area Floor area

Allocation and Absorption

Under/Over Absorption

Marginal Costing



Key Factor

PV Ratio

Margin of Safety

Absorption vs Marginal Costing

Applications of MC technique

CVP Analysis

Differential Costing

Standard Cost

Standard Hour

Standard Cost Sheet

Cost Variances-Material



Budgetary Control

Budgeting- Objectives,Merits

Fixed and Flexible Budgets

Types of Budgets

Cost Reduction and Control

Techniques of Cost Reduction

Cost Audit

Cost Ratios

Target Costing

Transfer Pricing

Cost Benefit and Value Analysis

Responsibility Accounting

Activity Based Costing

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