ACC 203: LABOUR COSTING

Labour is a human resource whose effort is used to convert materials into finished goods.
Labour can be divided as direct labour and indirect labour. Direct labour is that labour which is
directly engaged in the production of goods or services and which can be conveniently allocated
to the job, process or unit. Indirect labour is that labour which is not directly engaged in the
production of goods and services but which indirectly helps the direct labour engaged in
production.

Labor cost is an important value that finance and accounting professionals calculate to
determine the direct and indirect price that a company pays for labor. Direct Labour cost is that
cost which can be identified with and allocated to cost centres or cost units. For example, labour
engaged in making the bricks, carpenter for making furniture. The direct labor cost includes the
cost of wages and benefits for employees who are directly involved in producing the product or
service commodity.

Feature of direct labour:

1. Direct labour is a part of prime cost;

2. It can be attributed to finished goods;

3. Its cost can be identified with total cost of production;

4. It varies with change in output;

5. It can be controlled.

Indirect labour cost is the cost other than direct wages cost. For example, mechanics,
supervisors, chowkidars, watchmen, sweepers, foremen etc.

Features of indirect labour:

1. It is as importance as direct labour;

2. Its cost cannot be allocated but can only be apportioned;

3. It cannot be identified with the finished product;

4. It does not vary with the change in production;

5. It cannot be controlled; Its cost is treated as overheads.

Differences between direct labour and indirect labour:

Labour Cost:
Labour cost is a second major element of cost. Research has shown that in majority cases labour
cost constitute about 40% to 50% of total cost of production. It includes monetary benefits like
basic wage, DA; deferred monetary benefits like pension, gratuity; non-monetary benefits (fringe
benefits) like canteen, housing; etc.

Control of Labour costs:

Control of labour cost is not as easy as that of materials cost. The human element in labour
makes difficult the control of labour. Labour Laws are such that one can’t dispense with the
labour even if one does not need it for some reason. Moreover, it is a perishable commodity and
can’t be store like materials. Labour, once lost, cannot be recouped and is bound to increase the
cost of production. The main aim of the control over cost is to keep labour cost per unit of out as
low as possible. Labour costs can be controlled by proper employment and there afterwards
efficient utilization of labour force. Inefficiency of labour is also a cause of excessive materials
and overhead costs. There are a number of departments in big industries which influence labour
cost. The coordinated efforts of all such departments will be needed to control labour cost. These
departments are:

1. Personnel Department
2. Engineering Department
3. Time & Motion study Department
4. Time Keeping Department
5. Payroll Department &
6. Cost Accounting Department.

Labour Remuneration

Remuneration is the amount of consideration paid for services rendered by an employee. The
major part of remuneration is in the form of wages and salaries but it also includes perquisites
and other benefits. Remuneration is a way of rewarding the people for their contribution to the
organisation. Labour is one of the factors of production.

Table: Factors of Production

Factor of Production Rewards

Land Rent

Labour Wages and Salaries

Capital Interest

Entrepreneur Profit
Each factor of production is entitled for its rewards. Similarly, labour is entitled for wages and
salaries as a reward. The term remuneration covers the total monetary earnings of an employees.
It includes wages and other financial incentives.

Recording of labour time and wages computations

The following methods are used to determine when an employee is at work and the time he spent
on various activities.

I. Gate time-keeping- this is done to enable us know the period of time for which they
were at work.
a. Check or disc method – Metal discs bearing the workers numbers are placed on
hooks on a board kept at the entrance of the department. The worker, on entering
removes his disc and places it in a box provided. The box is removed at starting
time and another late box is substituted. In some organizations, the worker takes
his disc to the department in which he works where there are a series of drawers
under the supervision of the departmental foreman. The worker puts his disc in
the next available drawer, which may be locked successively by the foreman as
time elapses.
b. Clock cards – This refers to a staff card that is inserted into a clock at the gate and
the time of insertion stamped. Each employee has his own clock card which he
has to clock in on arrival at work and clocks out when he leaves the premises. It is
used to determine the time spent by employee for at least a week.
II. Clock Numbers – this is a number given to an employee on joining the organization
and he is identified by this number. It is used to identify who does what job or duty.
III. Time Sheets – this could be daily or weekly. These are records, filled by the worker
and countersigned, which shows how he spent his time during the day or week. It is
basically to reconcile all the time recorded on the clock card with time bookings
either to jobs or operations. Weekly time sheets should be used only where the
number of jobs worked in a week is small and strict supervision is available to ensure
accuracy.
IV. Job Cards – it is a card created for each job which are meant to be filled by each
employee who works on the job. On completion of the job, the card will contain a full
record of the times and quantities involved in the job.
V. Job Tickets – it is an instruction to the worker as well as a means of booking his time.
They are normally prepared for each operation to be carried out on every order. They
are issued from the foreman’s office and a clerk marks out the time of issue. On
completion of each job, the worker returns the card to the office where the time
finished is entered and that for the next job issued to him.
VI. Idle Time Card – this is used when a worker is engaged on non-productive work and
it is to ensure that the total recorded time balances with the attendance clock cards.
The main causes of idle time are: machine breakdown, power failure, seasonal
 fluctuation in demand, unforeseen drop in demand, shortage of raw materials, absence
from work of key employees.

CLASSIFICATION OF LABOUR COSTS

a. Basic pay of direct workers – this is a direct labour cost to the unit, job or process
b. Basic pay of indirect workers – this is an indirect cost to the unit, job or process
c. Overtime premium – payment made for the extra hours put in by an employee above the
normal working hours agreed upon. They are indirect cost except when it is at customers’
request.
d. Bonus payment – this is to encourage workers to put in extra efforts on the job in order to
ensure timely completion of jobs at hand. It is an indirect cost.
e. Idle time of direct workers – this is the time spent on non-productive job. It is an indirect
cost.
Methods of Labour Remuneration

Piece rate Bonus Indirect Non-monetary

Time rate Systems Monetary Incentives
Systems Systems Incentives
f.

At ordinary levels
At high Wage Levels
Guaranteed Time Rate

(a) Individual Bonus Systems

a. Straight Piece Rate
(i) Hasley Premium Plan
b. Piece Rate with
(ii) Hasley – Weir Premium Plan
Guaranteed Day Rates (iii) Rowan System
c. Differential piece Rates (iv) Barti Variable Sharing Plan Piece
(i) Taylor differential (v) Emerson Efficiency Bonus System
Piece rate system (vi) Bedaux Point Premium System
(ii) Merrick differential (vii) Accelerating Premium Plans
Piece Rate system (b) Group Bonus System
(iii) Gantt Task Bonus
 LABOUR REMUNERATION METHOD

The basic type of remuneration schemes are:

A. Non Incentive Schemes: They do not offer any incentive to employees to be more
efficient and productive. There are two of such
I. Monthly salary payment- this is based on one-twelveth of a fixed annual salary.
Day rate – this is also known as time rate. It is calculated as clock hours worked X rate
per hour.
It is applicable where
The nature of work makes it difficult to identify a specific item or output e.g. cleaners, night
guards.
The output level is not within an employees’ control e.g. PHCN workers.
Advantages include:
i. it is very simple to understand and operate
ii. the wages negotiation procedures are made easy since only one rate need be used.
Disadvantages are:
i. no incentives to encourage higher levels of output
ii. employees in the same grade level are paid the same rate not minding the degree of
performance
iii. it requires regular supervision, which may increase cost of operation.
EXAMPLE 1: An employees’ hourly rate of pay is N80. He worked for 8 hours Monday to
Wednesday and 12 hours Thursday and Friday. Using the data above calculate the time rate pay
of the worker for the week.

Solution: Earnings = Actual hours worked X Rate/hour

48 x 80 = N3,840

Example 2: Hours worked = 50hours

Rate per Hour = N2,000
Gross wage =N2,000 x 50hours = N100,000

II. INCENTIVE SCHEMES:

i. High day rate – this is a modification of the day rate system. Employees are paid
a high hourly wage rate in the expectation that they will work more efficiently
than similar employees on a lower hourly rate in a different company
Advantages
- Simple to calculate and easy to understand
- Guarantee the employees’ a regular and consistent high wage
- It attracts high grade workers
Disadvantages
- Employees cannot earn more than hourly rate for their extra effort.
- Problems occur when the original target of production figures are not met.
- It may cause other local employers to raise their rates to attract the better workers, thus
nullifying the original effect.
ii. Piecework Method or Payment by Result Method of Remuneration

Under this method, the amount earned by the employee is based on the number of units
produced. Piece rates can be examined under three headings, namely:
Straight Piece Rate
Differential Piece Rate
Piece Rate with guaranteed time Rate
the employer pays a money price for each unit of output and the whole wage will
then vary according to production
Earnings = No of Units x Rate/unit