Labour cost is an important element of cost. It also forms significant part of prime cost and total cost. Labour costs are associated with human beings.
Labour is the most perishable commodity. Once unused it cannot be recovered and the labour cost is bound to increase cost of production.
Labour Cost: Introduction, Types, Elements, Rate, Time Keeping, Turnover and Payroll
Contents:
- Introduction to Labour Cost
- Types of Labours
- Elements of Labour Cost
- Rate or Time and Motion Study
- Time Keeping
- Labour Turnover
- Idle Time
- Overtime
- Remuneration and Incentives
- Pay Roll
1. Introduction to Labour Cost:
Labour cost is an important element of cost. It also forms significant part of prime cost and total cost. Labour costs are associated with human beings. This association makes it a significant item of cost not only because of huge wage bill of modern organization but also because labour cost has certain special features which other elements like material do not possess. The human element makes the control of labour cost difficult.
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Labour is the most perishable commodity. Once unused it cannot be recovered and the labour cost is bound to increase cost of production. At the same time labour is the only factor which has the unlimited productive capacity. In many instances labour can achieve wonders in regard to the amount and quality of work performed by them. However, labour is complex and therefore it requires systematic planning and control.
2. Types of Labours:
As in the case of materials, labour is also classified into:
(a) Direct labour and
(b) Indirect labour.
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(a) Direct Labour Cost:
It is cost of labour expended in altering the construction, composition or condition of the product. Direct labour cost is easily identified and allocated to cost units.
(b) Indirect Labour Cost:
It is the amount of wages paid to workmen who are not directly involved in altering the composition of the product. Direct labour cost forms part of prime cost, whereas indirect labour cost forms part of overheads.
3. Elements of Labour Cost:
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Labour costs represent the various items of expenditure incurred on workers by the employer and would include the following:
(a) Monetary Benefits:
(i) Basic Wages;
(ii) Dearness Allowance;
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(iii) Employer’s Contribution to Provident Fund:
(iv) Employer’s Contribution to Employees’ State Insurance (ESI) Scheme;
(v) Production Bonus;
(vi) Profit Bonus;
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(vii) Old age Pension;
(viii) Retirement Gratuity.
(b) Fringe Benefits:
(i) Subsidized Food;
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(ii) Subsidized Housing;
(iii) Subsidized Education to the children of the workers;
(iv) Medical facilities;
(v) Holidays Pay;
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(vi) Recreational facilities.
4. Rate or Time and Motion Study:
This department works in close harmony with the personnel, engineering and cost departments.
This department performs in making of:
1. Time and motion studies of labour and plant operations;
2. Making job analysis, and
3. Setting piece rates.
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1. Time Study:
Time study may be defined primarily as the art of observing and recording the time required to do each detailed element of an industrial operation. The main object of time study is to determine the proper time required to complete the job. Before studying the time required for a job, the job is divided into a number of operations which are to be studied separately and the time needed for their completion is ascertained.
Such study is conducted after the motion study because time is to be noted down for the necessary movements, which are decided by motion study. In computing the time required (or standard time) to do each operation, it is only fair to used average workers rather than exceptionally fast or slow workers. It is also fair to allow some time for fatigue and personal requirements of workers like smoking, going to urinals, drinking water and the like.
2. Motion Study:
There can be several methods of performing an operation; but the determination of the best way of performing an operation is made possible by motion study. It is a study of the movements of a worker or a machine in performing an operation for the purpose of eliminating useless, ill directed and inefficient motions in order to improve productivity. Motion study was developed by F.B. Gilbrith, an American management expert.
The definition given by him in his book “Applied Motion Study” is reproduced as below:
“Motion study consists in dividing work into most fundamental elements possible; studying these elements separately and in relation to one another and from these studied elements when timed, building methods of least waste”.
Mr. Gilbrith has proved that motion study opens up great opportunities for time saving by eliminating wasteful motions and making necessary motions less tiring.
For conducting motion study, workers are studied at their jobs and all their movements and motions are noted. Each movement is known as therblig. Time spent on each therblig involved in an operation is collected by the use of a stop- watch. All motions are carefully studied to find out the motions which are very much needed to perform operation.
The purpose of such study is to determine the best way of performing an operation involved in a job which every worker is supposed to follow. Motion study is also known as Methods Study because it aims at finding out the best methods of completing the work.
3. Job Analysis:
Job analysis is defined as the process of determining, by observation and study and reporting pertinent information relating to the nature of a specific job. It is the determination of the tasks which comprise the job and the skills, knowledge, abilities and responsibilities required of the worker for successful performance and which differentiates the job from all others.
Job analysis with its two immediate products can be represented briefly as follows:
4. Job Evaluation:
Job evaluation is the process of studying and assessing the relative values of jobs within an industry, to ascertain their comparative worth.
In addition to indicating relative wages value, job evaluation serves the following varied purposes:
(a) It helps to know whether workers are placed in jobs best suited to them and to the advantage of employers.
(b) It assists the personnel department in recruitment of workers by indicating the responsibilities, requirements and condition of work and qualities required for each job.
(c) Job evaluation forms the basis for training schemes.
5. Merit Rating:
Merit rating aims at evaluating the performance of workers. Main objective of merit rating is to reward employee on the basis of efficiency and merit. Merit rating brings out the comparative worth of workers.
The traits generally considered for determining merit and worth of workers are as under:
i. Education Qualification and knowledge
ii. Skill and experience
iii. Attitude to the work
iv. Quality of work done
v. Efficiency
vi. Regularity
vii. Integrity
viii. Reliability
ix. Qualities like leadership, initiative, self-confidence and sense of judgment
x. Discipline
xi. Co-operation
The above traits are allotted with points and total points scored on all traits determine the worth of workers. The employees may be rated individually as per the pints they score and they may be put in groups based on their common scores of points.
Importance of Merit Rating:
Merit is a valuable tool considered to be important for human resource measurement.
Merit rating has the following advantages:
i. It helps to know the individual worker’s worth and traits; this helps the supervisor to assign the tasks in which the worker is proficient.
ii. It points out traits in which the workers are not proficient. The workers will have an opportunity to improve by suitable training.
iii. It helps in increasing wages and promotion opportunities.
iv. It helps to stimulate the self-confidence of workers as it recognizes the merit and worth of workers.
5. Time Keeping:
This department is concerned with maintenance of attendance time and job time of workers. Attendance time is recorded for wage calculation and job time or time booking is considered for computing time spent for each department, job, Operation and Process for calculating labour cost department wise, job wise and of each process and operation.
Essentials of a Good Time-keeping System:
i. Good time keeping system prevents ‘proxy’ for one another among workers
ii. Time-keeping has to be done for even piece workers to maintain uniformity, regularity and continuous flow of production.
iii. Both the arrival and exit of workers is to be recorded so that total time spent by workers is available for wage calculations.
iv. Mechanised methods of time keeping are to be used to avoid disputes.
v. Late arrival time and early departure time are to be recorded to maintain discipline.
vi. The time recording should be simple, quick and smooth.
vii. Time recording is to be supervised by a responsible officer to eliminate irregularities.
Time Booking:
Time spent by the worker on different jobs and works is called time booking. This is the productive time of workers.
The following are the objectives of time booking:
i. It ensures that the time paid for, as per time keeping is properly utilized on jobs and orders.
ii. It enables the cost department to ascertain the labour cost of each job or work order.
iii. It helps in allocation and apportionment of wages among different departments where labour hour rate method is used as basis.
iv. It helps to calculate idle time.
v. It is helpful when incentive schemes are in operation in the factory by revealing the time spent by the workers on different jobs.
vi. Time booking also helps in measuring the efficiency of workers by comparing standard time for the jobs with actual time.
6. Labour Turnover:
Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
Methods of Measurement of Labour Turnover:
There are three methods of measuring labour turnover which are explained below:
(i) Labour Turnover under Separation Method:
The basis of calculating labour turnover under this method is the number of employees discharged during a period. It does not consider surplus labour being discharged by the firm (retrenchment).
(ii) Labour Turnover under Replacement Method:
The number of employees recruited during a period is taken as basis for calculating labour turnover. This does not consider expansion programmes.
(iii) Labour Turnover under Flux Method:
This method takes into account the number of employees who left the organization and those recruited by the organization during a period.
Causes of Labour Turnover:
The causes for labour turnover can be broadly classified under three heads:
(i) Personal Causes:
Some of the employees may leave the organization on account of personal reasons as given below:
(a) Circumstances of family.
(b) Retirement on reaching the prescribed age.
(c) Change in material status in case of women employees.
(d) Dislike for the job or place.
(e) Death of the employee.
(f) Employee getting recruited in a better job.
(g) Permanent disability due to accidents.
(h) Involvement of employee in activities of moral turpitude.
(ii) Unavoidable Causes:
In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency.
(b) Discharge of workers on account of irregularity or long absence.
(c) Retrenchment of workers by the company on account of shortage of work.
(iii) Avoidable Causes:
Some of the employees may leave the organization account of the following reasons:
(a) Non availability of promotion opportunities.
(b) Dissatisfaction with incentive schemes.
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure.
7. Idle Time:
When workers spent their whole time at different jobs, then the time booked for jobs must with the gate time. Ordinarily the time booked for jobs does not agree with the gate time. It so happens, because of reasons like, waiting for materials, machine breakdown, waiting for instruction, power failure etc. Reconciliation of gate time with time booked is facilitated by preparing an idle time card.
Causes of Idle Time:
Idle time arises because of:
(i) Power failure
(ii) Waiting for work
(iii) Waiting for instruction
(iv) Waiting for tools
(v) Machine breakdown
(vi) Bad Planning of work
(vii) Accidents, strikes etc.
(viii) Time wasted in changing from one job to another
(ix) Season nature of industry
(x) Time taken to reach the department, from gate
Control of Idle Time:
Following steps are suggested to control idle time:
(i) Vigilance must be exercised to control and eliminate idle time.
(ii) The instructions to the workers should be given in advance so that workers need not wait.
(iii) Plant and machine should be maintained properly so that their breakdown can be avoided
(iv) The causes of the idle time should be found out and the root cause must be removed.
(v) Regular and timely supply of raw materials must be made available through a good system of storing materials.
8. Overtime:
When a worker works above his normal working hours, he is said to be working overtime. And according to Factories Act, 1948, overtime has to be paid at double the normal rate. If a worker works more than 9 hours on any day or 48 hours is a week, the worker is entitled for overtime payment.
A work is asked to do overtime, when he finishes his normal hours. The extra amount payable to a worker over and above the normal rate is an overtime premium. The factories Act says that a worker is to be paid twice his ordinary rate. If the Factory Act does not apply, Establishment Act will apply. This Act follows 11/2 times his ordinary rates.
However, overtime work may be avoided, because:
1. When a worker, after his normal hours of work is asked to do overtime, the quality of the output is affected.
2. Double rate has to be given (a loss to the firm).
3. Workers are tempted to earn more amounts without completing a job in normal working hours.
4. Overhead expenses will also increase.
At the same time, overtime may be allowed:
i. During seasonal rush.
ii. When there is failure of power or breakdown of machines.
iii. To finish a job in time.
iv. When there is more demand for the products.
9. Remuneration and Incentives:
Total wages earned by the employees is termed as remuneration. Time wages or piece wages earned plus other financial incentives constitute the earning of employees. Productivity depends mainly on labour and, other things like better equipment, production planning are contributory factors to higher productivity Good wage system along with effective incentive system will encourage the labour force to give their best to the employer.
More over attractive ‘pay package’ will reduce labour turnover. In addition to monetary incentives non-monetary incentives also encourage employees to improve their productivity. Non-monetary incentives include, promotional opportunities training schemes, etc. The remuneration system should serve the twin objectives of reducing the labour cost and at the same time the workers are to be compensated adequately for their work.
Essential of a Good Wage System:
The features of good wage system are listed below:
(i) The wage system has to be fair to employees and the employer.
(ii) The workers are to be assured of minimum guaranteed wages irrespective of work done.
(iii) Workers are to be compensated on the basis of their relative efficiency.
(iv) The wage system should be flexible to incorporate future changes.
(v) The wage system should encourage higher productivity and reduce labour turnover.
(vi) The wage system should be as per the labour policy of the government and follow the legislations applicable.
(vii) The wage system should equate with industry wage levels.
(viii) The method of computation of wages, wage rates and incentive system should be simple and easy for workers to understand.
Methods of Remuneration:
The remuneration paid to employees should reduce labour turnover, increase productivity of employees and improve the quality of output.
There are two basic methods of wage payment:
(i) Payment made on the basis of time spent by the workers in the factory irrespective of output produced.
(ii) Payment of wages on the basis of production or work done irrespective of time taken by the worker.
The methods of wage payment are respectively called time wages and piece wages.
1. Time rate system:
Under this method the workers are paid on he basis of hourly daily, weekly or monthly rate.
There are five variations of time wages which are as follows:
i. Flat Time Rate:
Under this method workers are paid at a single rate on the basis of the time they are employed. The flat rate may be per hour, per day or per week or on monthly basis. The earnings of employees depend on total time they spend in the factory. The flat rate id decided on the basis of rates prevailing in the locality where the industry is situated. This flat rate is suitable for highly skilled workers, unskilled workers and apprentices.
It is suitable is the under mentioned types of work:
(a) Where high quality goods are being produced
(b) Where production is mechanized and involves high speed.
(c) Situations where output cannot be measured.
(d) Where effective and close supervision is possible.
(e) Where incentive schemes cannot be introduced as the workers may not be directly involved with the final output.
To conclude the flat time rate does not recognize effort and it is not helpful in increasing output.
ii. High Day Rate:
This method is introduced to attract skilled workers by offering the highest wages in the industry. This method also intends to remove the draw backs of flat time rate which does not provide incentive from efficiency. High rate is paid to employees to achieve present targets of output.
The target or standard output fixed is at high level which only a skilled worker can achieve. When high rate of wages are paid, overtime work is not permitted. High day rate reduces the labour cost and over-head cost per unit with the help of high output. This method will be successful only if efficient workers cooperate in achieving high standards of output.
iii. Measured Day Rate:
Under this method of time wages the workers are given a particular work to be performed and the rate is fixed on the basis of the level of performance of specified work. This gives incentive to workers to get paid at high rate for high performance. The main drawback of measured day rate is that the workers are not paid any additional remuneration for any improvement in the level of performance originally specified.
iv. Graduated Time Rate:
Under this method the wage rate is fixed by linking it with cost of living index. The rate of wages goes on changing with change in cost of living index. During the period of rising prices the workers find it helpful as they are compensated for increased prices.
v. Differential Time Rate:
This method recognizes individual efficiency and skill. The workers in the same group will be paid at different rates. High rates are paid for efficient workers and lower rates are paid for inefficient workers. There is positive incentive offered for improvement of performance.
2. Piece Rate System:
This is also called ‘payment by results’. The workers are paid on the basis of output produced by them. The earnings of the workers depend on the number of units of output produced and the wage rate per unit received by the worker. The payment by results system is successful only if the work is of repetitive nature.
The effect of piece rate is that the remuneration is at constant rate and labour cost per unit remains stable throughout the range of output. The total cost per unit decreases considerably on account of reduction in the fixed overhead per unit for increased volume of production.
Variation of Piece Wages:
There are four variations of piece wages.
They are as under:
(I) Straight Piece Rate System:
Under straight piece rate system workers are paid according to the number of units produced at a fixed rate per unit.
(II) Differential Piece Rates:
This is an improvement over straight piece rate to increase the performance of both efficient and inefficient workers. Two or more rates are offered to workers. Higher performance is paid at a higher rate and lower performance is paid at lower piece rate. In other words the increase in wages is in proportion to increase in production.
There are three types of differential piece rates:
A. Taylor’s Differential Piece Rate System:
The ‘Father of Scientific Management’ F.W. Taylor has introduced this method.
There are two different piece rates applicable to the workers:
(a) Lower piece rate for the workers with below standard performance. The lower piece rate applicable is 80% of straight piece rate.
(b) Higher piece rate for the work with performance above the standard or at the standard. The higher piece rate applicable is 120% of straight piece rate.
B. Merrick’s Multiple or Differential Piece Rate System:
This method is an improvement over Taylor’s method. This method has three rates for different level of performance. Wages are paid at ordinary piece rate to those workers whose performance is less than 83% of standard output; 110% of the ordinary piece rate is given to workers whose level of performance is between 83% and 100% of the standard and 120% of the ordinary piece rate is given to workers who produce more than 100% of the standard output.
C. Gantt’s Task and Bonus Plan:
Under this method a standard time is fixed for a task to be performed by workers. Actual time taken is compared with the standard time and efficiency is ascertained.
(1) Time wage are paid to the workers whose performance is below 100%, i.e., those who take more than the standard time.
(2) Time wages and 20% of time wages as bonus are paid to those workers who take standard time to complete the job (whose performance is at 100%)
(3) Wages at high piece rate on the whole output are paid to the workers who take less than standard time (whose efficiency is above 100%).
Some authors have provided for 20% bonus over and above high piece rate for above standard workers. But an overwhelming majority of authorities concur with the rates given above and are used here.
Premium Bonus Schemes:
Premium plans are introduced to enhance the individual performance of workers. The workers are induced to show efficiency by performance of job in less than the standard time.
Under the premium plans, a standard time is fixed for a specific job or operation and the worker is paid for the actual time taken by him at hourly rate plus wages for a portion of the time saved as bonus. “A premium and bonus plan” is called “incentive plan” because the worker is provided incentive to earn more wages by completing the work in less time.
A. Premium Bonus Systems:
(1) Monetary Bonus:
The following are some of the popular monetary premium bonus systems:
i. The Halsey premium plan:
This system is known as fifty fifty plan. It was introduced by F.A. Halsey, an American engineer. Under this method a standard time is fixed for the performance of each job; worker is paid for actual time taken at an hourly rate plus 50% of time saved as bonus;
Total earnings
= Hours worked × Rate per hour + (5C/100) Time saved × Rate per hour
= T × R + 50% (S-T)R
ii. Halsey-Weir Scheme:
Under this method the worker gets a bonus at 30% of time saved unlike 50% under Halsey plan. Except for this change, Halsey and Halsey-weir plans are similar.
iii. Rowan System or Rowan Plan:
The scheme was introduced in 1901 by David Rowan of Glasgow, England. The wages are calculated on the basis of hours worked whereas the ‘bonus is that proportion of the wages of time taken which the time saved bears to the standard time allowed’.
Total Earnings under Rowan plan
iv. Barth’s Variable Sharing Plan:
Under this scheme wages are not guaranteed. The earnings in calculated by multiplying the rate per hour by the geometric mean of stander hour and actual hours worked. Thus
Earnings = Rate per hour √Standard time × Actual time
v. Emerson’s Efficiency Plan:
Under this plan, a standard time is fixed for every job or work. Worker’s output is measured as a percentage of the standard fixed. When a worker’s efficiency reaches 662/3% of the standard, he becomes eligible to get bonus at given rate. The rate of bonus increases gradually when efficiency percentage goes up from 67% to 100% of the basic time rate. For every additional 1% efficiency beyond 100%, additional bonus is 1% of the time rate.
Emerson’s plan is beneficial to the workers as they are guaranteed with time wages and also are entitled to get bonus. Even average workers can earn bonus since it starts at 662/3 % of the standard. When workers attain and cross the standard by reaching and surpassing 100% efficiency level, bonus also accelerates.
vi. Bedeaux’s Point Premium System:
It is a combination of time and bonus schemes. Standard tie for a job is determined by time study. Standard production per hour is fixed and the unit of measurement is ‘minute’. An hour is taken as sixty minutes. Each minute at standard time is called a point- Bedaux point or ‘B’.
The number of points has to be determined in respect of each job. If actual time is more than the standard time the worker is paid on hourly basis. Excess production is counted in points, for which a bonus of 75% is allowed to the worker and remaining 25% goes to the foreman, which itself is a novel feature.
Where
B.S. = Number of points saved, i.e., number of points actually earned less the standard number of points for the job.
R.H. = Basic Rate per hour.
vii. Accelerating Premium Plan:
Under this premium plan bonus increases at a faster rate as output increases. The plan offers a higher incentive to the workers. The efficiency is determined on the basis of time saved or increased output. The plan is a complex one. It goads and forces the workers to increase production. Beyond a limit, workers may find the strain is intolerable.
B. Group Bonus Systems:
Premium bonus schemes are meant for individual incentive where their output can be measured. In some cases individual output cannot be measured. Under such circumstances group bonus schemes take the place of individual bonus plans. The total bonus can be shared between workers of different skills in different specified proportions, the latter being commonly based on the individual time rates although agreed percentage allocations may be used.
The main group bonus schemes are:
(i) Budgeted expenses bonus,
(ii) Cost efficiency bonus,
(iii) Priest may system
(iv) Towne’s Gain sharing system and
(v) Waste reduction scheme.
C. Indirect Monetary Incentives:
The prosperity of business firms depends on employees. The employees are given a share in the profits based on the prosperity of the concern. Thus, co-partnership and profit sharing schemes fall under the category of indirect monetary incentives.
(a) Profit Sharing:
In this scheme there is an agreement between the management and employees, whereby the employer pays them a predetermined share of the profits of the undertaking in addition to wages.
(b) Co-Partnership:
In co-partnership or co-ownership employees are allotted shares of the company and they are to receive profits in proportion to their capital. In certain cases employees are given loan to buy the shares of the company and minimum period of service to be rendered is prescribed to get the shares allotted. This reduces labour turnover. This scheme increases morale of the employees to a great extent if the company is profitable. Example; the stock option schemes in software companies.
D. Non-Monetary Incentives:
The employees are provided better facilities, instead of additional monetary payments. This is done to attract the efficient workers.
Non-financial incentives include the following:
(1) Favourable working conditions
(2) Free health care
(3) Providing rent free accommodation.
(4) Free education facilities for children
(5) Free transport facilities
(6) Free holiday facility
(7) Providing subsidized food
(8) Welfare facilities
(9) Opportunities for advancement
(10) Protective clothing, liveries, uniforms, etc.
Advantages of non-monetary incentives:
(1) Attracting efficient and skilled labour force.
(2) Increasing the morale of employees
(3) Reduction labour turnover
(4) Establishment of goodwill for the company
(5) Reduction in absenteeism.
10. Pay Roll:
The pay roll is detailed information of the gross income and net income of each worker. The accuracy of the pay roll should be verified with the relevant records, in order to avoid errors of omission. After the preparation of wage sheet, is duly verified and sent to the each section, where cash is drawn and disbursed to the employees. From the gross income of each employee, certain deductions are made to arrive at the net wages payable.
For instance, the Payment of Wages Act 1936 authorizes deductions and some of them are:
(i) Fines and deductions for absence from duty;
(ii) House rent and supply of amenities;
(iii) Deductions for recovery of advance;
(iv) For damages or loss of goods or money expressly entrusted to the employed person;
(v) Provident Fund contribution, Employees state Insurance contribution;
(vi) Dues to the co-operative societies; and
(vii) Income Tax deduction etc.