Direct Labour Cost
Direct labour cost is the
portion of wages paid to workers who are directly engaged in the production
process and whose efforts can be conveniently identified with a specific
product, job, or process. For example, the wages of machine operators, carpenters,
or assembly line workers are treated as direct labour cost.
Indirect Labour Cost
Indirect labour cost is the portion of wages paid to
workers who are not directly engaged in the production of goods but assist the
process in an indirect manner. Their work cannot be conveniently traced to a
particular job or product. Examples include wages of supervisors, watchmen,
storekeepers, cleaners, and maintenance staff.
Importance Factors for Controlling Labour Cost
• Reduction
in Production Cost
• Prevention
of Idle Time
• Avoidance
of Overstaffing
• Fair
Remuneration
• Improved
Efficiency and Productivity
• Control
of Absenteeism and Labour Turnover
• Better
Utilization of Manpower
• Profitability
and Competitiveness
Principles of a Good Remuneration System
A good remuneration system is essential to motivate
employees, ensure fairness, and maintain organizational efficiency. The
following principles guide the design of an effective remuneration system:
1. Fairness and Equity – Employees should
be paid fairly based on the nature of work, skill, effort, and responsibility,
ensuring internal and external equity.
2. Adequacy – Remuneration should be
sufficient to meet the basic needs of employees and provide financial security.
3. Incentive and Motivation – The system
should encourage higher productivity by linking pay to performance or results.
4. Flexibility – It should be adaptable to
changes in job roles, market conditions, and economic situations.
5. Simplicity and Understandability – The
payment structure must be clear and easy for employees to understand.
6. Legal Compliance – Must comply with
labor laws, minimum wages, and statutory requirements.
7. Stability and Consistency – Payment
schedules and policies should be reliable and consistent over time.
8. Recognition of Individual Contribution
– Reward employees according to their skills, effort, and achievements to boost
morale.
9. Cost-Effectiveness – The remuneration
system should balance employee satisfaction with the organization’s financial
capability.
Time Study
Time
Study is the technique of determining the standard time required by a qualified
worker to perform a specific task at a defined level of performance. It
measures the actual time taken for each element of the job and helps in setting
work standards.
Objective:
• To
find out the standard time for a job.
• To
eliminate delays and wastage of time.
• To
plan work schedules effectively.
Motion Study
Motion
Study analyzes the movements involved in
a task to identify unnecessary or inefficient motions. The goal is to find
the best method of performing a job
with minimum effort and maximum efficiency.
Objective:
• To
simplify and standardize work methods.
• To
reduce fatigue and effort for workers.
• To
increase productivity without compromising quality.
Importance of Time and Motion Study
1. Increases Productivity
2. Reduces Labour Costs
3. Helps in Fair Remuneration
4. Improves Work Methods
5. Reduces Fatigue
6. Assists in Planning and Scheduling
7. Supports Cost Control
8. Enhances Training Programs
Time Keeping and Book Keeping
Time Keeping and Book Keeping are techniques used to record the attendance, hours worked, and
earnings of employees in an organized manner. This ensures accurate
calculation of wages and proper control over labour costs.
• Time Keeping: Refers to recording the actual time a worker
spends on duty or on a specific job.
• Book Keeping: Refers to maintaining records of wages earned,
overtime, leave, deductions, and other payroll-related details.
Objectives
1. Accurate
Wage Calculation
2. Control
of Labour Costs
3. Facilitates
Payroll Management 4. Performance Monitoring
5. Legal
Compliance:
6. Supports
Financial Accounting
7. Alright
Boss, let’s explain each concept in a
simple CA Cap-II style:
Job Analysis
Job Analysis is the process of carefully studying a
job to understand what it involves. It identifies the tasks, responsibilities,
and skills required to perform the job efficiently. This is the foundation for
recruitment, training, performance evaluation, and setting wage levels.
Essentially, it answers: “What is the
job, and what does it require?”
Job Description
Job Description is a written document that lists the
duties, tasks, and responsibilities of a specific job. It tells employees what they are expected to do, helping
managers assign work clearly and monitor performance. A good job description
also aids in recruitment and evaluation.
Job Specification
Job Specification focuses on the qualifications and personal attributes required to perform a job
successfully. It includes education, skills, experience, and physical or mental
capabilities. While the job description tells what to do, job specification tells who is suitable to do it.
Job Evaluation
Job Evaluation is a systematic process to determine
the relative worth of different jobs
within an organization. It helps in fixing fair wages, maintaining equity among
employees, and motivating staff. Essentially, it ensures employees are paid according to the value of their work.
Merit Rating (Performance Appraisal)
Merit Rating is the process of evaluating an employee’s
performance and efficiency in a systematic manner. It measures qualities such
as skill, productivity, attitude, and behavior to determine their worth to the
organization.
Purpose:
• To
identify strengths and weaknesses of employees
• To
decide promotions, increments, and training needs\
• To
motivate employees and improve performance
Difference Between Job Evaluation and Merit Rating
|
Aspect
|
Job
Evaluation |
Merit
Rating |
|
Focus
|
Value of the job |
Performance of the employee |
|
Objective
|
Fix fair wages |
Assess efficiency & performance |
|
Basis
|
Job content and
responsibilities |
Employee’s work, behavior, skills |
|
Time
|
Done before employment /
job design |
Done periodically during employment |
Idle Time & Idle Time Wages
• Idle Time: Periods when workers are paid but not working due to factors
beyond their control, like machine breakdowns or power failure.
• Idle Time Wages: Wages paid to workers
during idle time. These are usually considered part of production cost if unavoidable.
Reasons for Idle Time
1. Machine
breakdown or maintenance
2. Power
failure or lack of materials
3. Delays
in instructions or supervision
4. Strikes,
labor disputes, or absenteeism
5. Poor
planning or scheduling
6. Natural
causes (weather, accidents, etc.)
Treatment of Idle Time in Cost Accounts
Idle Time is the
time for which workers are paid but not
engaged in productive work. Treatment depends on whether it is normal or abnormal:
A. Normal Idle Time
• Occurs
due to unavoidable or expected reasons like machine maintenance, minor delays,
or holidays.
• Treatment: Charged to production overheads since it is part
of the normal production process.
B. Abnormal Idle Time
• Occurs
due to unusual, unexpected, or avoidable reasons like strikes, accidents, or
power failure.
• Treatment: Charged to profit & loss account (written off)
as it is not part of normal production
cost.
Outworker
An Outworker is a worker employed by a firm but working outside the factory or workplace,
usually at home, to perform a specific task.
Key Points:
• Paid
wages based on piece rate or output
produced.
• Common
in industries like tailoring, handicrafts, or embroidery.
• Helps
in reducing overhead costs as the
firm does not provide a workplace.
Fringe Benefits
Fringe
benefits are additional benefits or
perks provided to employees over and above their basic wages or salary to
improve motivation, satisfaction, and loyalty.
List of Fringe Benefits:
a. Individual Monetary Fringe Benefits
•
Bonus
•
Commission
•
Overtime pay
• Profit sharing
b. Group Non-Monetary Fringe Benefits
• Health
insurance
• Retirement
benefits / Pension
• Housing
or housing allowance
• Recreational
facilities
• Education
assistance
Factors to Consider When Introducing Incentives:
1. Fairness
and equity among workers
2. Cost
to the organization
3. Impact
on productivity and motivation
4. Legal
and statutory requirements
5. Simplicity
and clarity in rules
Labour Turnover
Labour turnover refers
to the rate at which employees leave an
organization and are replaced by new employees over a period of time.
Methods of Calculating Labour Turnover:
a. Separation Method
b. Replacement Method
c. Flux Method
Where,
Equivalent Annual Labour Turnover Rate
Equivalent Annual Labour Turnover Rate expresses labour
turnover on an annualized basis,
even if the period of observation is less than a year. It allows comparison of
turnover rates across different periods.
Formula:
Equivalent Annual Labour Turnover (%)
Causes of Labour Turnover:
• Low
wages or poor remuneration
• Poor
working conditions
• Lack
of promotion or growth opportunities
• Job
dissatisfaction
• Personal
or family reasons
Effects of High Labour Turnover:
• Increased
recruitment and training costs
• Loss
of experienced workers
• Lower
productivity and efficiency
• Disruption
in work continuity
Labour Turnover Costs:
Labour turnover not only affects productivity but also
involves direct and indirect costs.
These costs can be classified into two
main types:
a. Prevention Cost
Costs incurred to prevent employees from leaving the
organization.
Purpose:
• Minimize
labour turnover
• Maintain
experienced workforce
• Reduce
future recruitment and replacement costs
b. Replacement Cost
Costs incurred when an
employee leaves and a new employee has
to be recruited and trained.
Purpose:
• Reflects
the financial impact of labour turnover
on the organization
• Highlights the importance of investing in prevention
Remedial Steps to Minimize Labour Turnover:
1. Offer
competitive wages and benefits
2. Improve
working conditions
3. Provide
opportunities for promotion and career growth
4. Strengthen
employee engagement and communication
5. Recognize
and reward good performance
6. Conduct
exit interviews to identify reasons for leaving
Methods of Wage Payments
a. Time Rate System
Wages are paid to employees based
on the time they work, irrespective
of the output produced. 
Advantages:
• Simple
and easy to calculate
• Encourages
careful work, not just speed
• Reduces
disputes over wages
Disadvantages:
• May
reduce worker motivation for higher productivity
• Idle
time still paid, increasing costs
• Does
not reward efficiency
Suitability:
• Suitable
for skilled or highly specialized
workers
• Best
for jobs where quality is more important
than quantity
b. Payment by Result
Payment is based on output
produced or results achieved, encouraging efficiency and higher
productivity.
i. Piece Rate System
Workers are paid according to the number of units produced.
Advantages:
• Motivates
workers to produce more
• Easy
to link wages with productivity
• Reduces
idle time
Disadvantages:
• May
affect quality if workers focus only on quantity
• Not
suitable for complex or skilled jobs
• Requires
accurate measurement of output
Suitability:
• Best
for factory workers, production line
jobs, repetitive tasks
Types of Piece Rate System:
1. Straight Piece Rate System
Worker is paid a fixed rate per unit produced,
regardless of output level.
2. Piece Work with Guaranteed Minimum Daily Wages
Ensures the worker gets a minimum wage, even if output is low. If
production earns more than minimum, higher wage is paid.
3. Taylor’s Differential Piece Rate System
Provides higher rate
for output above standard, lower rate below standard. Encourages workers to
exceed standard output.
➢ Efficiency
less then 100% Piece Rate = 80%
or 83% of Normal Piece Rate
➢ Efficiency
100% or more Piece Rate = 120% or 125% of Normal Piece Rate
4. Merrick Differential Piece Rate System
Uses a graduated rate
system. Rate per unit increases in steps as output rises above certain
levels, unlike Taylor’s which has only two rates.
➢ Efficiency
up to 83.33% Piece Rate = 100% of Normal Piece Rate
➢ Efficiency
above 83.33% - 100% Piece Rate = 110% of Normal Piece Rate ➢ Efficiency above 100% Piece Rate = 120% of Normal Piece
Rate
💡
Quick Tip:
•
Straight:
One rate, simple
•
Guaranteed:
Minimum wage protection
• Taylor: 2 rates (below/above standard) • Merrick: Stepwise increasing rates
ii. Incentive Schemes
Additional payments made to workers to reward higher efficiency or output above standard.
1. Halsey System
• Concept: 50% of the time saved is
shared with the worker as a bonus.
• Formula:
Earning = (Time
Taken * Hourly Rate) + 50% of (Time Saved * Hourly Rate)
Time Saved =
Standard Time – Actual Time
2. Halsey-Weir System
• Similar
to Halsey but uses a worker’s share 30%.
• Formula:
Earning = (Time
Taken * Hourly Rate) + 30% of (Time Saved * Hourly Rate)
3. Rowan System
• Bonus
proportional to time saved relative to
standard time.
• Formula:
• Earning = (Time Taken * Hourly Rate) +
(Time Taken / Time Allowed) (Time Saved * Hourly
Rate)
4. Barth System
The Barth System is an incentive
wage system where wages depend on time
allowed for the work and actual time
taken, designed to reward efficiency while ensuring minimum pay.
Formula:
5. Emerson Efficiency System
• Incentive
increases progressively as efficiency rises above 66.6%.
• Formula (generalized):
➢ Efficiency
up to 66.67% = Only Guaranteed Time Wages
➢ Efficiency
above 66.67% - 100% = (Actual Hours * Hourly Rate) + Bonus as per step bonus
plus plan which can go up to 20% of basic wages.
➢ Efficiency
above 100% = (Actual Hours * Hourly Rate) + 20% of Basic Wages + Additional 1%
for every 1% increase in efficiency above 100%.
6. Gantt Task System
• Combination
of time and piece rate system. It guarantees the day wages to the worker.
➢ Output
below Standard = Guaranteed time rate
➢ Output
at standard = 120% of Time Rate
➢ Output
above 100% = 120% of piece rate or high wages
7. Bedeaux System (B System)
The Bedeaux System is
an incentive wage system where
workers are paid a time rate for actual
hours worked plus a bonus based on
“B units” of time saved. One B unit usually equals 1/60 of a standard working day.
• B
unit is also called point
Earning = (Time Taken * Hourly Rate) + 75% of (Point Saved *
Hourly Rate)/ 60
8. Group Bonus System
A group incentive
scheme where a team or group of employees is rewarded collectively based on
overall performance, productivity,
or efficiency. The bonus is then shared
among all members.
Key Features:
1. Encourages
teamwork rather than individual
performance.
2. Bonus
is linked to collective output or
efficiency.
3. Helps
reduce conflicts and competition
among employees.
4. Usually
applied in factories, workshops, or departments where output depends on group effort.
Night Shift Allowance (NSA)
Night Shift Allowance is extra
payment made to employees who work during night hours, compensating for
inconvenience, fatigue, and potential health effects of working outside normal
hours.
Key Features:
1. Paid
in addition to normal wages.
2. Usually
calculated as a fixed amount per hour
or a percentage of basic wages.
3. Encourages
employees to accept night or rotational
shifts.
4. Helps
maintain productivity during night
operations.
💡 Quick Tip for Exams:
•
Time Rate
→ Paid for hours worked
•
Piece
Rate / Payment by Result → Paid for output
produced
•
Incentive
Schemes → Extra for efficiency or
exceeding standard
