LABOUR COST- ACCOUNTING AND CONTROL

LABOUR COSTACCOUNTING ANDCONTROL

OVERVIEWO INTRODUCTIONO DIRECT AND INDIRECT LABOURO ORGANISATION FOR ACCOUNTING ANDCONTROL OF LABOUR COSTO LABOUR TURNOVERO TIME KEEPINGO TIME BOOKINGO OVERTIMEO IDLE TIMEO FRINGE BENEFITS

INTRODUCTIONO LabourOOOOrepresent human resources used inproduction.After material cost, labour cost is the second majorelement of cost.Role of labour is very significant as productivity ofall other resources depends on the productivity ofhuman resources.In other words, higher efficiency of labour helps inlowering the cost per unit of productionTherefore, there is a special need for properorganisation for accounting and control of labourcost.

DIRECT AND INDIRECT LABOURO DIRECT LABOURO Directly engaged in production workO Can be conveniently identified orattributed wholly to a particular job,process or cost unitO Examples- wages of a machine operator,wages paid to a tailor in a factorymanufacturing readymade garments

O INDIRECT LABOURO Wages paid to those workers who arenot directly engaged in converting rawmaterials into finished products.O Such costs cannot be convenientlyidentified with a particular job. Productor cost unitO Examples- supervisors, inspectors,clerks, instructors, peons, watchmenand cleaners

ORGANISATION FOR ACCOUNTING ANDCONTROL OF LABOUR COSTThere are mainly five departments in anorganisation which deal with labour Personnel DepartmentO Recruitment and selection of workersO Training of workers and development ofhuman resourcesO Placement of workers according to theirabilitiesO To plan for efficient use and control oflabour

Engineering DepartmentO Specification of jobsO Makes job analysisO Conducts time and motion studiesO Makes provision for safe workingconditions, andO Supervises production activities

Time-keeping DepartmentO Recording of time put in by the workersfor the purpose of attendance, wagecalculation, cost analysis andapportionment of labour cost overvarious jobs.

Payroll DepartmentO Maintains a record of jobclassification and wage rate of eachemployeeO Preparation of payroll or wage sheetfor the computation of wages payableto employeesO Responsible for disbursement ofwages

Cost Accounting DepartmentO Accumulates and classifies all costdataO Analyses the payroll and preparesroutine and special labour costreports for submission tomanagement

LABOUR TURNOVERO In all business organisations, it is a commonfeature that some workers leave theemployment and new workers join in place ofthose leaving.O This change in work force is known as labourturnover.O Labour turnover varies greatly betweendifferent trades and industries.O For example, where part time and seasonallabour is employed, the rate will be higher.

MEASUREMENT OF LABOUR TURNOVER1) Separation MethodThis method takes into account only thoseworkers who have left the organization during aparticular period.LTR No. of workers left during a periodX 100Average No. of workers during the periodAverage Number No. of workers in thebeginning No. of workers at theend of the period2

2) Replacement MethodThis method takes into account only thosenew workers who have joined in place ofthose who have left.LTR No. of workers replaced during a period X 100Average No. of workers during the period

3) Flux MethodThis method shows the total change, in thecomposition of labour force due toseparations and replacement of workers.LTR No. of workers left No. of workersreplacedAverage No. of workersX 100

MEASUREMENT OF LABOUR TURNOVERQ- Calculate Labour Turnover Rate by applying(a)Separation Method(b)Replacement Method(c)Flux MethodNo. of workers on the payroll:At the beginning of the month900At the end of the month1100

During the month, 10 workers left, 40persons were discharged and 150workers were recruited. Of these, 25workers are recruited in the vacancies ofthose leaving, while the rest wereengaged for an expansion scheme.

MEASUREMENT OF LABOUR TURNOVERO Solution:Average No. of workers 900 1100/2 1000No. of workers left 10 40 50(a)Separation Rate 50/1000*100 5%(b)Replacement Rate 25/1000*100 2.5%(c)Flux Rate 50 25/1000*100 7.5%

CAUSES OF LABOUR TURNOVERO Avoidable CausesO Redundancy due to seasonal fluctuations,contraction in the market or lack of properplanningO Dissatisfaction with the job, remuneration orworking conditionsO Strained relationship with supervisors orfellow workersO Lack of proper amenities like medical andother facilities, recreational centres, etc.O Other factors like lack of proper trainingfacilities, inadequate security and retirementbenefits.

O Unavoidable CausesO Change of service for personal bettermentO Retirement due to old age and ill healthO DeathO In case of women employees, domesticresponsibilities, pregnancy or marriageO Discharge on disciplinary grounds orcontinuous long absence

COST OF LABOUR TURNOVERO Preventive CostsCosts which are incurred by a firm to keep thelabour force contented so that excessivelabour turnover may be prevented.ExamplesO Cost of personnel management- formaintaining good relations betweenmanagement and workers

O Cost of welfare activities and services-canteen meals, educational and transportfacilities, housing schemes, etc.O Cost of medical servicesO Pension schemesO Extra bonus and other perquisites

COST OF LABOUR TURNOVERO Replacement CostsIncludes all such losses and wastagesarising because of the inexperienced newlabour force replacing the existing ones aswell as the cost of recruitment andtraining of the new workersO Loss of output due to some time taken inobtaining new labour

O Loss of output and quality due toinefficiency of new labourO Cost of training of new employeesO Cost of tools and machine breakagesO Cost of excessive scrap and defectiveworkO Cost of accidents

CONTROL OF EXCESSIVELABOUR TURNOVERO An adequate and satisfactory wage systemO A sound personnel policy for recruitment,induction and training of labourO A satisfactory level of amenities andwelfare measures like canteen facilities,medical services, recreation, etc.

O A satisfactory security scheme like familypension,providentfund,accidentcompensation, etc.O A satisfactory policy for transfers andpromotionsO Effective grievance redressal procedureO Labour participation in management andjoint consultation scheme

TIME KEEPINGTwo functions of TimeKeeping DepartmentO Time-keeping i.e.recording time forattendance purpose andfor calculation of wagesO Time-booking i.e.records time spent ondifferent jobs orprocesses fordetermining labour costof jobs/processes.

TIME KEEPING3 Methods of recording attendance of workers1) Attendance Register: In this method, attendance of each worker isrecorded in the register maintained for thispurpose. This register provides sufficient number ofcolumns for attendance of each worker. Entries in the arrival and departure columnsmay be made by the worker himself. This method can be used only when thenumber of workers is small.

3 Methods of recording attendance ofworkers2) Token or Disc Method: Each worker is allotted an identificationnumber and that number is suitablypainted or engraved on a round metaltoken with a hole in it. All such tokens are hung in a serial orderon a board placed at the factory gate.

As the worker arrives, he removes histoken from the board and puts it in abox kept nearby or hangs it on anotherboard which is specially kept for thispurpose After the fixed time, the box or thesecond board is removed Those coming late have to hand overtheir tokens personally at the timeoffice so that exact time of their arrivalcan be noted.

3 Methods of recording attendance of workers3) Time Recording Clocks Mechanicalmethodofrecordingattendance and proves quite useful whenthe number of workers is fairly large. Each worker is allotted a Clock Cardwhich bears his identification number,name, department, etc. These cards are kept in a rack in a serialorder.

There are usually two racks, an In rackand an Out rack. On arrival, the worker will pick up hiscard from the ‘Out’ rack, put it in theslot of the clock, press a button and theexact time is printed on the card. After this the card is put in the ‘In’ rack. An inspection of the ‘Out’ racks willreveal absentees.

TIME KEEPINGBiometric Time Recording ClockO New generation technique which is fastreplacing the old type of time recordingclocks.O Biometric time recording clock is anelectronic device to record attendance ofworkers.O Under this, the worker simply places hisfinger or hand on the Fingerprint ReadingSensor and his attendance is recorded inthe machine.

TIME BOOKINGO In addition to recording workerstime of arrival and departure, it isnecessarytorecordtheparticulars of work done byworkers and the time spent oneach job or process.O Recording of workers’ time spenton different jobs is known as timebooking.

O ObjectivesO To ensure that the time for which aworker is paid is properly utilized;O To ascertain the labour cost of work doneO To provide a basis for apportionment ofoverheads; andO To ascertain the idle time so as to controlit.

OVERTIMEO Overtime occurs when a worker worksbeyond normal working hours as laid downin the Factories Act.O Accordingly, any worker working for morethan 9 hours per day or more than 48hours per week is entitled to overtimepayment.O The Factories Act also provides for paymentof overtime wages at double the normalrates of wages.

O DisadvantagesO Leads to excessive labour costO Puts an extra strain on plant and machineryO During overtime hours, labour productivity isdecreased because of diminishing labourefficiency.O Bad effect on the health of workersO Certain overheads, like lighting cost, increasebecause of work in the evening.O Workers may develop a tendency to work inovertime and take overtime wages as a partof their normal earnings.

OVERTIMETreatment of overtimePayment for overtime consists of two elements(a) Normal amount of wages, and(b) Additional amount paid for overtime work, i.e.,overtime premiumO The normal amount is charged to the cost unitor production order on which the worker isworking.O The difficulty lies in the treatment of overtimepremium.

OVERTIMEThe overtime premium is chargeddifferently under different circumstancesas stated belowO Charge to jobs as direct cost: Whenovertime is worked at the request of thecustomer due to urgency of work and thecustomer agrees to bear the entirecharge of overtime, it should be chargeddirect to the job or work orderconcerned.

O Charge to overheads: when overtime ispayable due to general pressure of work orseasonal nature of production, it should becharged as overhead.O Charge to Costing Profit and Loss Account:overtime required due to abnormal factorslike flood, fire, earthquake, etc. or due tofactors like defective planning or faultymanagement, it should not be charged tocost but to Costing Profit and Loss Account.

IDLE TIMEO Represents the time for which workers arepaid but no production is obtained.O For example, time lost between factory gateand department, time when production isinterrupted by machine maintenance, teabreaks etc.O Idle time may occur owing to:a) Productive causesb) Administrative causesc) Economic causes

IDLE TIMEa) Productive causes Machine breakdown Power failure Waiting for tools and/or raw materials Waiting for instructionsb) Administrative causes Caused by administrative decisions like decisionof not to utilize the surplus capacity duringdepression Such idle time arises out of abnormal situationsand is generally not controllable

C) Economic causes Caused by fall in demand of products, say, dueto severe competition, seasonal nature ofcertain industries like woolen goods, icecream industry, etc., where production cannotbe evenly distributed throughout the year In such cases, it is not possible to get rid ofworkers during slack season.