LABOUR COST ACCOUNTING

SOUMENDRA ROY
 Labour Cost

• Labour cost is one of the important elements of

production.
• Wage, salaries and other incentives of employee
remuneration constitute a very large component of
operating costs.
• Remuneration of employees is a vital factor not only
affecting the cost of production but also industrial
relations of the organization.
 Objectives of an Ideal Wage System
• The wage system should establish a fair and equitable
remuneration.
• A sound wage system helps to attract qualified and efficient worker
by ensuring an adequate payment.
• It assists to improve the motivation and moral of employees which
in turn lead to higher productivity.
• It enables effective control of labour cost.
• An Ideal wage system helps to improve union-management
relations. It should reduce grievances arising out of wage inequities.
• It should facilitate job sequences and lines of promotion wherever
applicable.
• An ideal system seeks to project the image of a progressive
employer and to comply with legal requirements relating to wages
and salaries.
 Principles of an Ideal Wage System
• Differences in pay should be based on differences in job
requirements.
• Follow the principle of equal pay for equal work.
• The scheme should be based on work study, and the work
contents of various jobs should be stabilized.
• Recognize individual differences in ability and contributions.
• The scheme should not be very costly in operation.
• The scheme should be flexible.
• The scheme should encourage productivity.
• The scheme should not undermine co-operation amongst the
workers.
• The scheme should be sufficient to ensure for the worker and his
family reasonable standard of living.
 Method of Remuneration
1. Time Rate Systems:
– At Ordinary Levels
– At High Wage Levels
– Guaranteed Time Rates.
2. Piece Rate Systems:
– Straight Piece Rate
– Piece Rates with Guaranteed Time Rate
– Differential Piece Rates:
• Taylor's Differential Piece Rate System
• Merrick Differential Piece Rate System
• Gantt Task and Bonus Plan.
 Method of Remuneration
3. Bonus System or Incentive Schemes:
– Halsey Premium Plan
– Halsey-Weir Premium Plan
– Rowan Plan
– Barth Variable Sharing Plan
– Emerson Efficiency Plan
– Bedaux Point Premium System
– Accelerating Premium Plan
– Group or Collective Bonus Plans.
4. Indirect Monetary Incentives
5. Non-Monetary Incentives:
 Comparison between Time Rate and Piece Rate System
Time Rate System Piece Rate System

(1) Under this system earnings of a worker (1) In this system earnings of a worker are
are calculated on the basis of time spent calculated on the basis of number of units
on the job produced.
(2) In this system, minimum guaranteed time (2) Under this system, no guarantee of
rate is paid to every worker. minimum payment to every worker.
(3) Under time rate system, remunerations (3) Remuneration of workers directly linked
are not directly linked with productivity. with productivity.
(4) Under this system emphasis is on high (4) Under piece rate system there is no
quality of work. consideration for the quality of work
(5) Under time rate system, strict supervision (5) In this system, close supervision is not
is essential. required.
(6) This method may lead to trade unions to (6) Under this method the attitude of trade
support it. unions is not to co-operate with the
schemes.
(7) More idle time arises in time rate systems. (7) Compared with time rate system there is
no change of idle time in piece rate
schemes.
 Time Wage System
• Time Rate at Ordinary Levels
 Remuneration or Earnings = Hours Worked X Rate
Per Hour
• Time Rate at High Levels
 Under this system, efficient workers are paid higher
wages in order to increase production.
• Guaranteed Time Rates
 Under this method, the wage rate is calculated by
considering to changes in cost of living index.
 Piece Rate System
• Under this system, wages of a worker are calculated
on the basis of amount of work done or output of a
worker.
• Three types of Piece Rate System
(a) Straight Piece Rate
 Straight Piece Work Earnings = Units Produced x
Rate per Hour
(b) Piece Rates 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.
 Piece Rate System
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.
 Types
– Taylor's Differential Piece Rates System.
– Merrick's Differential Piece Rates System.
– Gantt Task Bonus Plan.
Taylor's Differential Piece Rates System
• 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.
• Higher piece rate is applicable for standard and
above the standard performance.
• Lower piece rate for those workers with below the
standard performance.
Merrick Differential Piece Rate System
Performance Differential Piece Rate

(1) Less than 83% Normal Piece Rate (or)

Basic Piece Rate
(2) From 83% to 100% 110% of Normal Piece
Rate
(3) More than 100% 120% of Normal Piece
Rate
 Gantt's Task Bonus Plan
Performance Earnings
(Output)
(1) Output Below Standard Time Rate (Guaranteed)

(2) Output at Standard Wages of Time Rate plus

Bonus of 20% of the Time
Rate
(3) Output at Above High Piece Rate on
Standard worker's output
 Bonus or Incentives Schemes
• Halsey Premium Plan
 Total Earning = Guaranteed Time Wages + Bonus of
50% of Time Saved
(or)
Total Earnings = T x R + 50% (S - T) R
• 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.
Total Earnings = T x R + 30% (S - T) R
 Bonus or Incentives Schemes
• Rowan Plan
Total Earnings = Time Taken x Hourly Rate +
Time Saved
---------------------- x T x R
Standard Time
Time Saved = Standard Time – Time Taken
Time Wages = Time Taken x Hourly Rate
 Bonus or Incentives Schemes
• Emerson's Efficiency Sharing Plan
 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.
• Barth Variable Sharing Plan
 Earnings = Rate per hour x √Standard Time x Time
Taken
 Bonus or Incentives Schemes
• Bedaux Point Premium System
 Under this plan, standard time fixed for each
operation or job is expressed in terms of Bedaux
point or 'S.' For example, a standard time of 360 B
means the operation or job should be completed
within 360 minutes.
 Total earnings = S x R + 75% of R (S - T)
 Group or Collective Bonus Plan
• It is not the individual worker who produces 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 be
introduced. Bonus is calculated for a group incentive
scheme.
• The following are the important types of group incentive
bonus plans:
– Budgeted Expenses Bonus Plan
– Priest Man Bonus Plan
– Towne's Gain-sharing Plan
– Scanlon Plan
 Indirect Monetary Incentives

• Profit Sharing

• Co-partnership

• Non-Monetary Incentive Schemes