THREE RULES FOR

SAFETY FROM COVID

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STAY SAFE!!!

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 UNIT – 1

L – 11 -14
Labour Cost: Basic and Practical

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 Labour Cost
1. Human efforts used for conversion of materials into finished products or
doing various jobs in the business are known as labour.
2. Payment made towards the labour is called labour cost.
3. It can also be direct and indirect.

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 relation relations of the
organisation.

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No organization can expect to attract and attain qualified and motivated
employees unless it pays them fair remuneration.
Employee remuneration therefore influences vitally the growth and
profitability of the company.
For employees, remuneration is more than a means of satisfying their
physical needs. Wages and salaries have significant influence on
distribution of income, consumption, savings, employment and prices.
Thus. employee remuneration is a very significant issue from the
viewpoint of employers, employees and the nation as whole.

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Direct Labour
Direct labour is all labour expended and directly involved in
altering the condition, composition or construction of the
product.
The wages paid to skilled and unskilled workers for manual
work or mechanical work for operating machinery, which
can be specifically allocated to a particular unit of
production, is known as direct wages or direct labour cost.

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Example of direct labour
 Machine operator
• Shoe-maker
• Carpenter
• Weaver
• tailor

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Indirect Labour
 Indirect Labour is a labour which is not engaged in
converting raw materials into finished output.

Indirect Labour cannot be allocated but can be apportioned

to, or absorbed by , cost centres or cost units.

• Example: Salary paid to the driver of the delivery van used for
distribution of the product.

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Examples of Indirect Labour
 • Supervisor
• Inspector
• Cleaner
• Clerk
• Peon
• watchman
• Store – Keepers
• time – Keepers

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Organisation for Labour Control
There are mainly five departments in an organization which deal with
labour . These are as follows:

 Personnel department : Department is responsible for recruitment ,

training discharge , transfers etc. and maintaining their records. Main
Function is Selection and Recruitment
 Engineering department : This department is mainly concerned with
preparing the plans Job specification, job analysis, time and motion
studies, safe working conditions and supervision of the production
process.

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 Time-keeping department : This department is concerned with recording
of workers attendance and calculation of wages for the purpose of analysis
and apportionment of labour cost.

 Payroll department : The responsibility of the payroll department is

calculation of wages payable to employees. The functions performed by
payroll department includes maintenance of wage record of each worker,
verifying the time shown by the time card, calculate the amount payable to
each worker, compute the deductions required for tax purposes, provident
fund etc., and to send payrolls to cash department for payment of wages
and cost accounting department for making entries.

 cost accounting department : This department is concerned with the

accounting of all labour costs. In other words it accumulates and classifies all
the cost data relating to labour and prepares the cost reports for the use of
management in order to exercise necessary control.

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Labour Cost
1. Attendance and Payroll Procedures
2. Overtime
3. Idle Time
4. Labour Turnover
5. Remuneration System/ Wage System
6. Incentive Schemes

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 Payroll Policy
Payroll is a list of employees who get paid by the company. Payroll also refers to the
total amount of money employer pays to the employees. As a business function, it
involves:
1. Developing organization pay policy including flexible benefits, leave encashment
policy, etc.
2. Defining payslip components like basic, variable pay, HRA, and LTA
3. Gathering other payroll inputs (e.g., organization’s food vendor may supply
information about the amount to be recovered from the employees for meals
consumed)
4. The actual calculation of gross salary, statutory as well as non-statutory
deductions, and arriving at the net pay
5. Releasing employee salary
6. Depositing dues like TDS, PF, etc. with appropriate authorities and filing returns

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 Overtime and Overtime
Premium
In India, the Factories Act provides for payment of overtime wages at
double the usual rate of wages. If a worker works for more than 9 hours
on any day or for more than 48 hours in a week, he is treated to be
engaged on overtime and is given wages at double the basic hourly rate
for the overtime put in by him.

Overtime premium is paid to the workers for the extra time worked
than the normal working hours specified in the Factories Act, 1948 or
work agreement with the union. The extra time is paid at a higher rate
than the normal time rate, for example, if a worker works beyond 8
hours in a day or 48 hours in a week, he is paid with double the wages
for the extra time worked.

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Idle Time
Idle time means the amount of time the workers remain idle in a normal
working day.

In other words, idle time is the difference between the time shown by the
time card and job card.

The idle time is usually caused by a sudden fault in machine or equipment,

power failure, lack of orders for the product, inefficient work scheduling,
defective materials and shortage of raw materials etc.

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TYPES OF IDLE TIME
◦ NORMAL IDLE TIME
Normal Idle time is inherent in any work situation and cannot be eliminated.
This represents the time, the wastage of which cannot be avoided and,
therefore, the employer must bear the labour cost of this time. But every effort
should be made to reduce it to the lowest possible level. 

◦ ABNORMAL IDLE TIME

Normal Idle time is inherent in any work situation and cannot be
eliminated. This represents the time, the wastage of which cannot be avoided
and, therefore, the employer must bear the labour cost of this time. But every
effort should be made to reduce it to the lowest possible level. 

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 Causes of Idle Time
Normal Idle Time Abnormal Idle Time
Travelling time from one job or department to Temporary lack of work,
another.

The distance covered between the factory gate Machine breakdown,

and actual place of work.

Elapse of time between finishing one job and Power failures,

starting another job.

Time spent to overcome fatigue. Shortage of raw materials,

Tea and lunch breaks. Waiting for tools,
Machine or job setting-up time etc. Waiting for jobs due to unplanned production,

Stoppage of work due to managerial policy

decisions,

Strikes and lockouts, and Floods

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Labour Turnover
Labour turnover refers to the rate at which employees leave
employment. Labour turnover can be evaluated by relating the number
of employees leaving their employment during a period of time to the
total or average numbers employed in that period.
It may also be defined as engagements and losses in the working force
as related to the total number of employees who were on the pay roll at
the beginning of the period in question.

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Measurement of Labor
Turnover
 It is essential for any organization to measure the labor turnover. The
following methods are available for measurement of the labor turnover:

1.Separations Method: In this method, instead of taking the number of

employees added, number of employees left during the period is taken
into consideration. The method of computation is as follows:
Labour Turnover = Number of separations During the Period X 100
Average number of workers during the period

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2. Replacement Method: In this method neither the additions nor the
separations are taken into consideration. The number of employees
replaced is taken into consideration for computing the labour turnover.
Labour Turnover = Number of replacements During the Period X 100
Average number of workers during the period

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Flux Method: Under this method labor turnover is computed by taking
into consideration the additions as well as separations. The turnover
can also be computed by taking replacements and separations also.
Computation is done as per the following methods:

Labor Turnover = Number of Separations + No. of Replacement X 100

Average Number of Workers in the Period

Labor Turnover = ½ [Number of additions Number of separations]

/Average number of workers during the period X 100

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Practical Examples : 1
Ques 1. At the beginning of the month- 800
At the end of the month- 1,200
During the month, 15 workers left, 35 workers were discharged and 160
workers were recruited. Of these, 25 workers are recruited in the
vacancies of those leaving, while the rest were engaged for an
expansion scheme.

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Solution 1

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Practical Example : 2
Number of workers at the beginning of Year 3800
Number of Workers at the End of the Year 4200

During the Year 40 workers leave while 160 workers are discharged.
600 workers are required during the year , of these 150 workers are
recruited because of leavers and the rest are engaged in accordance
with an expansion scheme. Calculate labour turnover rate and Labour
Flux Rate.

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Practical Example :3
The Following Data provided, find out the labour turnover rate by
applying :
A) Flux Method
B) Replacement Method
C) Separation Method
No. of workers on the payroll – At the Beginning of Month : 500
At the End of the Month : 600
During the Month, 5 workers left, 20 persons were discharged and 75 workers
were recruited. Of these , 10 workers were recruited in the vacancies of those
leaving , while the rest were engaged for an expansion scheme.

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Wage Rate System
Wage Payment System is the way of giving financial compensation to
the workers for the time and effort invested by them in converting
materials into finished products.
In other words we can say that, it is a method adopted by
manufacturing industry to remunerate workers.

1. Time Based : Time Rate System

2. Output Based : Piece Rate System
3. Incentive Scheme

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Time Rate System
 In this system the workers are paid on the basis of time spent in the
factory irrespective of the amount of work done. The total earnings are
calculated as……….

( TOTAL EARNINGS = HOURS WORKED X RATE PER HOUR )

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Piece wage rate system
In this system , workers are paid on the basis of work done irrespective
of time taken by the worker.

TOTAL EARNINGS IS CALCULATED AS…….. (

TOTAL EARNINGS = NO. OF UNITS X RATE PER UNIT )

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 Incentive wage rate system
 In incentive wage rate system each worker gets , not only wages at
normal rate but also receives bonus or premium for his efficiency. This
system induces the worker to produce more and earn more.

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Remuneration and incentive
system
 1. Halsey Premium Plan
2. Rowan Premium Plan
3. Taylor’s Differential Piece Rate Plan
4. Gantt Bonus Plan
5. Emerson’s Efficiency Plan
6. Merrick’s Multiple Piece Rate Plan
7. Bedeaux Point Premium Plan
8. Barth Variable Sharing Plan

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Earnings vary less proportionately
than the output
1. Halsey Premium Plan
2. Rowan Premium Plan
3. Bedeaux Point Premium Plan
4. Barth Variable Sharing Plan

The common thing in all the plan is time used as measure of output and
bonus is paid on the time saved that is the difference between the
standard time set for the job and time actually taken.

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Halsey Premium Plan
The worker is paid for a %(30% to 90% but usually 50%) of the time saved over
the standard rate per piece.
• Standard time is fixed for each job/operation and rate per hour is determined.
• If the labor completes at standard time or more he is given the standard price.
• If time saved- wages given for actual hours saved as a bonus.

TOTAL EARNINGS = (HOURS WORKED X RATE PER HOUR) + 50% (TIME SAVED X
RATE PER HOUR)

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 Example
Standard Time Fixed : 20 Hrs
Time Taken : 16 hrs
Hourly Rate = Rs 2 per hr
The Total Earnings Under Halsey Plan is =
Minimum Wage = Time Taken X Hrly Rate = 16 X Rs 2 = Rs 32
Amount of Bonus =Time saved X Rate X 50%
= (Std Time – Actual Time) X Rate X 50 %
= 20 -16 ) X 2 X1/2 = 4

Total Earnings = Rs 32 +Rs 4 = Rs 36

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Rowan premium plan
 Wages are paid on time bases.
• If worker takes standard time or more time he is paid for the actual
time taken.
• If worker takes less than the standard time , then he is paid a bonus.

Wages = Normal Wages + Bonus*

Normal Wages = Time Taken X Hourly Rate
Bonus = Time Saved/Standard Time X Time Taken X Hrly Rate

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Solution

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Continue….

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Example 1
The Three workers Govind, Ram and shyam produced 80,100 and 120
pieces of a product X on a particular day in May 2009 in a factory. The
time allowed for 10 units of Product X is 1 hour and their hourly rate is
Rs 4
Calculate for each of these three workers the following :
(i) Earnings for the day
(ii) Effective rate of earnings per hour under :
a) Piece Rate plan
b) Halsey Premium bonus plan (50% sharing)
c) Rowan Premium bonus plan of the labour remuneration

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Solution
Standard Production per hour = 10 units
Hourly Rate = Rs 4
Piece rate per unit = Rs 0.40
Normal Production per day of 8 hrs = 8 X 10 units = 80 units

i) Earning per day under time wage system = 8 hrs X Rs 4 per hr = Rs 32

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ii) Effective rate of earning per hr

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Practice
Standard Time for a job is 90 hrs. The hourly rate of guaranteed wages is
Rs 50. Because of the saving in time a worker A gets an effective hourly
rate of wages of Rs 60 under Rowan premium bonus system. For the
same saving in time, calculate the hourly rate of wages a worker B will
get under Halsey premium bonus system assuring 40% to worker.

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Solution

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Solution

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Practice
A worker produced 200 units in a week’s time. The guaranteed weekly
wage payment for 45 hrs is Rs 81. The expected time to produce one
unit is 15 minutes which is raised further by 20% under the incentive
scheme. What will be the earnings per hour of that worker under
Halsey (50% sharing) and Rowan bonus schemes?

GIVEN : Total output in Week = 200 Units

Weekly wage = Rs 81
Actual Time Taken = 45 hrs
Expected time to complete task = 15 minutes + 20%

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Solution

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Solution

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Taylor’s differential piece rate
system :
This system was introduced by F. W. Taylor. The main features of this
incentive plan are as follows:
1)Day wages are not guaranteed, i.e. it does not assure any minimum
amount of wages to workers.
2)A standard time for each job is set very carefully after time and motion
studies.
3)Two piece rates are set for each job- the lower rate and the higher rate
. –The lower piece rate is payable where a worker takes a longer time
than the standard time to complete the work. INEFFICIENT – 83%
–Higher rate is payable when a worker completes the work within the
standard time. EFFICIENT = 175%

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Continue…
- Standard Time is already Fixed
- if the Worker is completing task allotted within the std time than he
will be paid higher wages else lower wages.

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 Gantt task bonus plan
(Task+Time)
1. Gant’s task and bonus plan is based on careful time and motion
study.
2. A standard time is fixed for doing a particular task, worker’s actual
performance is compared with the standard time and his efficiency
is determined.
3. If a worker takes more time than the standard time to complete the
task (i.e., his efficiency is below 100%), he is given wages for the
time taken by him and if a worker takes the standard time to
perform the task (i.e., efficiency is 100%), he is given wages for the
standard time and a bonus of 20% on the wages earned.

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Emerson’s efficiency bonus
plan:
 Under this plan,
 Below 66.67% efficiency – no bonus , only guaranteed time rate
wages paid
 From 66.67% to 100%efficiency – rate of bonus increased gradually
 At 100% rate of bonus is 20% of normal wage rate
 Above 100% -- 1% of increase in bonus for 1% increased in efficiency

TOTAL EARNINGS =(HOURS WORKED X RATE PER HOUR) + {(EBP/100)

X HOURS WORKED X RATE PER HOUR}

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 Merrick’s multiple piece rate
plan 
LEVEL OF EFFICIENCY PIECE RATE
Up to 83% Ordinary piece rate 0.05 Paise
83% to 100% 110% of piece rate 0.05 X 1.10 =0.055
Above 100% 120% of piece rate 0.05 X 1.20

Std -20
Three Categories : Beginners 22 Leanings/ INEfficient
Average Workers 19 Middle Std 0.05X110%
First Class Workers 16 Efficient 120%

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Bedeaux point premium plan
 Under this plan, Standard time is divided into Standard minutes. Each
minute of standard time is called Bedeaux point or B's. B's are indicated on
each job ticket. Time wages are paid until 100% efficiency is reached. Bonus
is paid on the basis of number of Bedeaux Points saved. Bonus at 75% of
wages of Bedeaux saved is paid to the worker and 25% is paid to the
foreman

 TOTAL EARNINGS =(HOURS WORKED X RATE PER HOUR) + 75% {(BEDEAUX

POINT SAVED/60) X RATE PER HOUR}
Std 20 hrs
Act time 14
Saved 6

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