Labor

Module - III
 Introduction
• Labor is an important element of cost and for overall cost control and cost
reduction of labor cost is of paramount importance.
• However, for control and reduction of labor cost, it is essential to compute
the labor cost in a scientific manner and hence there should be proper
systems of systems and processes and documentation, which will help
computation of labor cost in a scientific manner.
• It should be remembered that labor is not like material as there is a human
aspect involved in it.
• Therefore, there should be a comprehensive study of all related aspects of
labor cost and then only computation and control over the same will be
possible.
• Attention should also be paid to the productivity aspect.
• Low productivity results in higher labor cost per unit while higher
productivity will reduce the labor cost per unit.
Control of Labor Cost
Steps useful in controlling and reducing labor
costs
• Classification of labor costs
• Production Planning
• Labor Budget
• Labor Standards
• Labor Performance Report
• Incentive Schemes
• Labor Cost Accounting
Departments involved in Labor Cost Control

• Personnel Department
• Time Keeping
• Work Study
• Pay Roll
• Cost Accounting
 Time Keeping
• Time Keeping plays an important role in labor cost control
through maintaining record of each worker’s time in and
time out during regular working period and reporting the
time of each worker for each department, operation or
production order.
• Thus, this department is responsible for recording the
attendance time of each worker accurately.
• This ensures punctuality and discipline in the company and
has a positive impact on the morale of each worker.
• Time keeping is a statutory requirement and therefore
accurate recording of time should be ensured.
 Role of Time Keeping in controlling Labor
Cost
• It shows the total number of hours worked by each workman and so the calculation of
his wages becomes possible. This is applicable where the workers are paid wages as per
the time rate.
• Time keeping promotes punctuality and discipline amongst the workers. In the absence
of the time keeping system, there will be not only indiscipline amongst them but the
workers who are otherwise punctual and disciplined will be frustrated.
• Certain benefits like pension, gratuity, leave with pay, provident fund, promotion, and
salary scale are linked with the continuity of service. Attendance records in this regard,
can be helpful in computation of these benefits.
• Computation of labor hours becomes possible through time keeping records. This will be
useful in overhead apportionment and absorption, which may be made on the basis of
labor hours.
• Time keeping is a statutory requirement under labor laws.
• The time keeping records can be used for further analysis like for fixation of standard
time and finding out idle time as well as the efficiency of labor. It can be used by
researchers as well as by Government Authorities for various purposes.
 Time Booking
• In time keeping we have seen that the basic objective of time keeping is to mark
the attendance time, i.e. time in and time out.
• Time keeping aims at keeping a check on the number of hours spent by a worker
in the factory. However, it do not record the productive time of the workers.
• It means the time keeping methods do not provide information about how the
time is spent by the workers in the factory.
• For example, the time keeping record will show that the worker has reported for
duty at 8 am and left at 6 pm, thus, he has spent 10 hours in the company. But
the analysis of these 10 hours is not provided by the time keeping. In view of this
there is a need to have a system, which will tell about the productive time spent
by the workers in the factory.
• The method, which supplies this information, is known as ‘Time Booking
Methods’ and the recording the time spent by a worker in each job, process or
operation is known as ‘Time Booking’.
 Role of Time Booking in controlling Labor
Costs
• To determine the productive time spent by the
worker on the job or operation.
• This helps in finding out the idle time and control
the same.
• To determine the quantity and value of work done.
• To determine earnings like wages and bonus,
which depend on the time taken by a worker in
performing job or jobs in a factory.
• To determine the efficiency of workers.
Idle Time
 Concept
• Idle time cost represents the wages paid for the
time lost during which the worker does not work.
• This happens because due to various causes for
which the worker is not responsible, the worker
remains idle but full wages are paid to him.
• Even for workers who are paid on the basis of
output, idle time payment may be required to be
made.
 Categories of Idle time
I. Time lost between gate and place of work, break for tea, time
interval between one job and another, time for tool setting,
adjustment of machine, etc.
II. Normal idle time such as waiting for jobs, tools, materials, or
instructions, power failures, breakdown of machines and tools, and
atmospheric conditions.
III. Abnormal idle time such as those arising due to breakdown for
considerable period, non – availability of raw materials, slack
supervision, strikes or lock-outs, fire, flood, storm, etc.
IV. Concealed idle time such as manipulation of job booking, wastage of
time due to under-employment, i.e. unnecessary work like cleaning,
grass cutting and gardening to employ idle workers, and employment
of skilled workers on unskilled jobs.
 Treatment
• Idle time falling under Category I would be for insignificant periods.
In cost accounts, this is treated by neglect i.e. the idle time is
allowed to remain merged in the Production Order or Standing
Order Number on which the worker was otherwise employed.
• Normal idle time is booked to factory or works overhead. For the
purpose of effective control, each type of idle time is allotted a
separate Standing Order Number.
• Abnormal idle time would usually be heavy in amount involving
longer periods and would mostly be beyond control of the
management. Payment for such idle time is not included in costs
and is adjusted the Costing Profit and Loss Account.
• Tendency to conceal idle time should be discouraged.
Overtime
 Concept
• The Factories Act provides for payment of overtime
wages at double the usual rates of wages.
• Even when the Act is not applicable, the practice is
to pay for overtime work at higher rates usually in
accordance with a standing agreement between
Employer and the Workers.
• Payment of Overtime consists of two elements
– Normal amount (Usual)
– Extra Payment (Premium)
 Treatment
• The normal payment is allocated to the Production Order, Standing
Order Number, or cost unit on which the worker is employed.
• The amount of premium is booked to overhead unless overtime is
ordered specially for a job. For example, when desired by a customer
and chargeable to him in which case it is booked to that job.
• Cost of overtime worked for a capital order, project, or contract is
allocated to the cost of the capital order, project, or contract
concerned.
• If overtime is required to cope with the general production program
or for meeting urgent orders the amount should be treated as
overhead costs of the particular department or cost center which
works overtime.
 Continued…
• If overtime is worked in a department due to the fault of
another department the overtime premium should be
charged to the later department.
• When overtime is worked due to seasonal pressure, the
overtime wages should be taken either as general
overhead or as deferred expense for absorption equitably
over the production of the entire business cycle.
• Overtime worked on an account of abnormal conditions
such as flood, earthquake, etc. should not be charged to
cost but to Costing Profit and Loss account or Profit and
Loss Account if integrated accounts are maintained.