MPA 604: Cost and

Managerial
Accounting

Costing and Control of Labour

• Labour cost is the second important element of cost of
production. Wages, salaries and other forms of
remunerations represent a major portion of the total cost of
a product or services. The growth and profitability of the
concern depends upon proper utilization of human resources
or labour forces which in turn needs proper accounting and
control of cost. Thus, control of labour cost is a very
significant issue from the viewpoint of management.
 LABOUR COST
• It represent the various items of expenditure incurred on
workers by the employer and would include the following
A) MONETARY BENEFITS :
1. Basic wages
2. Dearness Allowance
3. Employer’s Contribution to Provident Fund
4. Profit bonus
5. Old age Pension
6. Production bonus
7. Retirement gratuity
B)FRINGE BENEFITS OR LABOUR RELATED
COSTS :
1. Subsidised Food
2. Subsidised Housing
3. Subsidised Education
4. Medical Facilities
5. Holidays Pay
6. Recreational Facilities
Types of Labour Cost: The labour cost can be classified into two types :
• (1) Direct Labour Cost.
• (2) Indirect Labour Cost.

• (1) Direct Labour Cost: 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 labours who are
actually engaged in operation or process are the examples of direct labour cost.
• (2) Indirect Labour Cost: 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 etc.
Labor cost control
• In order to achieve the effective utilization of manpower resources, the
management has to apply proper system of labour cost control. The labour
cost control may be determined on the basis of establishment of standard of
efficiency and comparison of actuals with standards. The management
applies various techniques for the effective control of labour costs as under:
• (1) Scientific method of production planning.
• (2) Use of labour budgets.
• (3) Establishment of labour standards.
• (4) Proper system of labour performance report.
• (5) Effective system of job evaluation and job analysis.
• (6) Devise a proper system of control over ideal time and unusual overtime work.
• (7) Establish a fair and equitable remuneration system.
• (8) Effective cost accounting system.
• The objectives of proper control on labour cost is effectively
achieved through the functions of various departments
responsible for controlling labour cost in an organization. The
following are the important departments for control over
labour costs:
• (1) Personnel Departments.
• (2) Engineering and Works Study Department.
• (3) Time Keeping Departments.
• (4) Pay Roll Department.
• (5) Cost Accounting Department.
Personnel 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.
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 :
• (I) Preparation of plan and specification of each job.
• (2) Maintaining required safety and efficient working conditions.
• (3) Making time and motion studies.
• (4) Conducting job analysis, job evaluation and merit rating.
• (5) Setting fair and equitable piece rate or time wage system.
• (6) Conducting research and experimental work.
• In order to maintain control over working conditions and production
methods carrying a detailed study of the following operations is
necessary :
• Method Study
• Motion Study
• Time Study
• Job Analysis
• Job Evaluation
• Merit Rating.
(a) Method Study: It is one of the important components of work study. The chief
aims of this study is to find a scheme of least wastage. Method Study is defined as
"a systematic and scientific evaluation of existing 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:
• (1) Effective utilization of material, machine and labours.
• (2) Elimination of wastage of time and labours.
• (3) Maintaining higher standards of safety and health.
• (4) Reducing unnecessary movements in order to minimize wastages.
• (5) Better design of work place layout for effective production process.
• (6) Ensure fair remuneration with job satisfaction.
• (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
• (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 :
• It is useful in classifying job and interrelationship among them.
• If facilitates forecasting of manpower requirements.
• It helps in effective utilization of manpower resources.
• Effective employee development programme can be established.
• Enables in determining performance standards of each process or job.
• (e) Job Evaluation: Job evaluation may be defined as "a process of analyzing and describing
positions, grouping them and determining their relative value by comparing the duties of
different positions in terms of their different responsibilities and other requirements." Job
evaluation is determined on the basis of job description and job analysis. The primary purpose of
job evaluation is developing appropriate wage and salary structure with internal pay equity
between jobs.
• (f) Merit Rating: Merit rating may be defined as "a systematic evaluation of an employee's
performance on the job in terms of the requirement of the job." Merit rating is a system of
measuring both qualitatively and quantitatively of an employee's capacity in relation to his job.
The following are the personal qualities of an employee which are usually considered for
determining merit and worth of labours as:
• (1) Academic qualification and knowledge.
• (2) Skill and experience.
• (3) Attitude to the work.
• (4) Quality of work done.
• (5) Initiative intelligence.
 • (6) Accuracy.
• (7) Judgement.
• (8) Leadership.
• (9) Adaptability and Co-operation.
• (10) Leadership and self-confidence.
• (11) Reliability and Integrity.
• (12) Discipline.
Importance of Merit Rating: The following are some of the important advantages of merit rating:
• It assists in determining fair rates of wages for each worker on the basis of his I her performance.
• It helps to know the suitability of the worker for a particular job.
• This method helps in removing grievances and it improves labour-management relations.
• Enables to ascertaining an employee's merit for grant of promotion or demotion or tansfer or
increment etc.
• If facilitates effective labour cost control
Distinction Between Job Evaluation and Merit Rating: The following are the
important points of differences between Job Evaluation and Merit Rating:
(1) Job evaluation is the assessment of the relative worth of jobs within a
company and merit rating is the assessment of the relative worth of the man
behind the job.
(2) Job evaluation and its accomplishments are means to setup a rational wage
and salary structure whereas merit rating provides a scientific basis for
determining fair wages for each worker based on his ability and performance.
(3) Job evaluation simplifies wage administration by bringing uniformity in
wage rates whereas merit rating is used to determine fair rate of pay for
different workers.
Timekeeping Department
This department is concerned with following two important activities : (1) Timekeeping
and (2) Time Booking
• 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.
• 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.
Pay Roll Department
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.
 COST ACCOUNTING DEPARTMENT

• The cost accounting department is responsible for

the accumulation and classification of all labour
costs . This department uses time cards , job
cards and pay rolls for the calculation of the
labour cost of various jobs, work orders,
processes etc.
Factors that affects labour costs
There are many factors that need to be considered by a business when deciding how much to pay
employees. The starting point will always be the amount that is paid by other businesses in the area
for similar grades of employees but, at the same time, the wider economic implications of supply
and demand will affect wage rates. The factors to consider include:
• wage rates paid by other local businesses
• comparisons with national average wage rates
• the national living wage rate imposed by government
• any government incentives to take on additional employees, such as young people or the long-
term unemployed
• local employment conditions – high unemployment in the area will drive down wage rates;
conversely low unemployment, and especially a shortage of skilled labour, will increase wage rates
• housing and transport costs in the locality
• the impact of interest rate changes, and exchange rates
• for a new business, it might be prudent to choose to locate in an area of high unemployment – in
addition to lower wage rates, there may be government incentives in the form of reduced rents
and rates, training and other grants
Labour payment methods
• Direct labour cost is the wages paid to those who work on a
production line, are involved in assembly, or are involved in
the output of a service business.
The three main payment methods for direct labour are:
• Time rate: Time rate, or basic pay, is where the employee is
paid on the basis of time spent at work. Overtime is often paid
for hours worked beyond a standard number of hours, or for
work carried out on days which are not part of the working
week.
• Piecework rate: The employee is paid an agreed sum for each task
carried out or for each unit of output completed. Units of output can
be based on an agreed output per hour, which is referred to as
‘standard hour produced’. In some cases, employees may have a
guaranteed minimum wage.
• bonus systems: The employee is paid a time rate and then receives a
bonus if output is better than expected when comparing the time
allowed with the time taken. The bonus is calculated as an agreed
percentage of the time saved multiplied by the time rate. Bonus
systems base employees’ earnings on a combination of time taken and
• work
Most done.
other employees, e.g factory supervisors, sales staff, office staff,
are usually paid on a weekly or monthly basis. Such wages and
salaries – classed as indirect labour costs – may be increased by bonus
payments; for example, a production bonus for factory supervisors,
commissions for sales staff, a profit-sharing scheme for all employees.
Qualities of a good labour payment
method
These include:
• reward should be related to effort and fair to all staff
• the method should be easy to manage and administer, and cheap and
efficient to run
• it should be easy for employees to understand how pay is calculated
• payment should be made at regular intervals and soon after the
event, e.g employees on piecework should be paid in the week after
the production has been achieved
• the principles of the scheme should remain constant, but there
should be flexibility to deal with changes in production techniques