Treatment of Special Labour Costs | Employees

In this article we will discuss about the treatment of special labour costs.

Cost of Apprentice:

The costs incurred on apprentice and training are treated as Production Overhead since these costs are a part of the normal industrial activity.

Employee Welfare Costs:

In an organization some of the expenses are incurred on canteen, hospital, recreation, transport etc. for the welfare of the employees. These expenses are separately recorded and accumulated as Welfare Department Costs. These welfare department costs are again apportioned to other cost centres on suitable basis like total wages or number of employees of each cost centre.

Fringe Benefits:

The employees are paid additional benefits like leave with pay, contributions to the schemes like provident fund, E.S.I., medical reimbursement, subsidized canteen facility, leave travel concession, group insurance, etc. These benefits are called ‘fringe benefits’.

If these benefits are provided for the factory personnel, they are treated as Production Overhead and are apportioned to all cost centres, including both production and service cost centres on the basis of number of employees in each centre. The fringe benefits provided to the office staff, sales staff and distribution staff should be treated as Administration, Selling and Distribution Overheads respectively.

Bonus:

If bonus is paid to the workers on the basis of their productivity, such bonus is treated as Production Overhead and allocated to different cost centres on the basis of actual payments made to the workers.

If the bonus is a profit sharing bonus, payable compulsorily under the Payment of Bonus Act, depending on the profits earned by the organization, a minimum bonus of 8.33% is payable irrespective of the profit or loss of the concern, and this is to be included in direct labour cost.

Any amount of bonus payable in excess of the minimum requirement under the statute is considered as an appropriation of profit and it may be charged to Profit and Loss Account. The total amount of bonus is allowed as a charge against profit and it may also be treated as a Direct Labour Cost and it is allocated to different cost centres as Production Overhead.

Gratuity:

The amount of gratuity payable to the employees depends on the wages and the period of service in the organization. It is not an appropriation of profit and hence it should be treated as part of Production Overhead.

Incentive to Indirect Workers:

In some organizations where the work of indirect workers will have impact on the efficiency of direct workers. In order to improve the overall efficiency, an incentive will also be given to the indirect labour. For example, incentives to stores department staff, inspection staff, maintenance staff, material handling staff etc. The incentive paid to the indirect workers is treated as Production Overhead.

Indirect Incentive to Direct Workers:

The indirect incentives that are generally paid to the direct labour include the following two types:

(a) Monetary incentives like profit sharing, co-partnership etc.

(b) Non-monetary incentives like medical and canteen facilities, free uniform, comfortable working conditions.

Distinction between Incentive to Indirect workers and Indirect Incentive to Direct workers:

Incentive to Indirect Workers:

1. It is paid to indirect workers.

2. The incentives are in the monetary form payable immediately.

3. It is paid to assist the direct workers in performance of duties and to improve overall efficiency of the firm.

4. It is not possible to set any time standards in fixing this incentive.

5. It is treated as production overhead.

Incentive to Direct Workers:

1. It is paid to direct workers.

2. The incentives would be in monetary form payable in some future period or in non-monetary form (fringe benefits).

3. It is specifically meant for improving the productivity of direct labour.

4. It can be linked to time standards and productivity of the organisation.

5. It is treated as welfare expenses and can be apportioned to cost centres and absorbed into product cost.

Casual Worker and Out Worker:

A ‘casual worker’ is engaged for a short period to carry out the work on temporary basis and he is paid wages on daily or weekly basis. His name is not entered on the rolls of the personnel. He is not allowed of any benefits that a permanent or regular worker gets.

An ‘out worker’ is one who does work not in the factory premises but works at his home or at site of the factory. The raw materials and other necessary tools for carrying the work are provided by the employer. The out workers are employed in certain specialized jobs and contracts. Generally the payment for the out worker is on the basis of output or jobs completed.