List of Departments that Deal with Labour | Cost Accounting

The following points highlight the three main departments which deal with labour. The departments are: 1. Personnel Department 2. Time Recording Department 3. Payroll Department/Wages Department.

1. Personnel Department:

Personnel department is concerned with recruitment, discharge and transfer, etc., of labour. On engaging a new worker, the personnel office will make out an employee’s ‘Record Card’. This card will show full personal detail of the employee, particulars of previous employment, wage rate payable, etc.

This department is concerned with the following activities:

I. Preparation of Employee’s Service Card:

When a worker is appointed, a service record is maintained for him by the personnel department. The record is kept on a card. Such a record is called personnel record card or employee’s card or employee’s service card or employee’s history card.

Contents of Personnel Record Card:

The personnel record card, generally, contains the following particulars:

1. Name of the worker.

2. Clock number allotted to the worker.

3. Permanent and local address.

4. Date of birth.

5. Height, weight and health.

6. Marital status.

7. Date of appointment.

8. Department to which he is allotted.

9. Education, special qualities, training and experience.

10. Category of occupation/service.

11. Efficiency rating and grade.

12. Wage scale, basic wages, dearness allowances and other allowances.

13. Promotions and transfers.

14. Regularity and punctuality in attendance leave taken, etc.

15. Information regarding previous employment, if any, and sincerity of the employee.

In order to exercise proper control on the recruitment of labour, following steps should be taken:

1. All recruitment should be made only through the personnel department.

2. The personnel manager should examine each employee placement requisition and see whether there is any possibility of transferring surplus labour from other areas.

3. Employment of casual workers should be preferred to recruitment of permanent workers if additional labour is not absolutely essential.

4. Preventive steps should be taken to reduce absenteeism and inefficiency. For this, good working conditions and many other facilities such as medical, housing and recreational facilities should be made available to the workers so that they may not leave the organisation and work at their maximum efficiency.

5. Mechanisation of operations should be considered if it is helpful in reducing labour costs.

6. Labour utilisation reports should be introduced in each department. These reports will show the extent of utilisation of available labour and percentage of efficiency attained by the labour so employed.

The submission of various reports to the top management, such as weekly reports on absenteeism, labour turnover, labour efficiency, level of activity, accidents, disciplinary action, idle time, overtime, casual workers, etc. is also considered to be the important function of a personnel department.

II. Labour Turnover:

It is a normal feature in every organisation that some workers leave their jobs and some new workers take up their places. This change in work force is known as labour turnover. Labour turnover is thus defined as “the rate of change in the composition of the labour force in an organisation.

“Labour turnover varies greatly between different trades and industries. For example – where part-time and seasonal labour is employed, the rate will be higher. Labour turnover is, usually, expressed as a rate or percentage.

Factors Affecting Labour Turnover Ratio:

The rate of labour turnover in an industry depends upon several factors.

They are:

1. Nature of the organisation (industry)

2. Size of the organisation (industry)

3. Location of the organisation (industry)

4. Composition of the labour force.

2. Time Recording Department:

The time recording department is an important part of a firm’s system of accounting and control of labour cost. The main function of this department is to accurately record each worker’s time of arrival and departure in the factory and also the time spent on different jobs or processes. There are two basic functions of this department.

They are:

1. Time Keeping:

It is recording arrival and departure time of workers for attendance purpose and for calculation of wages.

2. Time Booking:

It is recording time spent by workers on different jobs or processes for determining labour cost of jobs or processes.

Purposes of Time Recording:

The main purposes of time recording are:

1. For the preparation of pay rolls or wage sheets, where wages are paid on time basis.

2. For the implementation of the incentive plans of wage payments which are based on time combined with results.

3. For making proper distinction between direct and indirect labour costs and normal time and overtime.

4. For the ascertainment of the labour costs of jobs, products, processes or operations.

5. For the allocation of overheads, if based on labour hours or wages.

6. For ensuring discipline in attendance.

7. For having correct records of worker’s attendance for meeting statutory requirements regarding daily hours of work.

8. For internal administrative purposes.

9. For statistical analysis of labour records for determining productivity and controlling labour costs.

Time Booking:

Time booking refers to the process of recording the time spent by workers on various jobs in a factory. In other words, it is the recording of the starting time and finishing time of employees on a job. Time booking comes next in the sequence after the time keeping in respect of recording time.

Difference between Time Keeping and Time Booking:

Time Keeping:

1. It records attendance time of employees.

2. It is the first step involved in time recording.

3. It records the time spent by the employees in the factory.

4. Time keeping is done at the time keeping office.

5. It is recorded by time keeping officer.

6. Its purpose is to enable preparation of payroll.

Time Booking:

1. It records the total time worked by employees on job.

2. It is the second step involved in time recording.

3. It records the time spent by the employees on various jobs.

4. It is done at various production departments.

5. It is recorded by foreman or by employees.

6. Its aim is to ascertain the labour cost of job.

3. Payroll Department/Wages Department:

The payroll department is responsible for the important task of computation and disbursement of wages payable to workers. It records hours worked and wages earned, makes payroll deductions, determines the net amount due, maintains permanent earnings records for each employee and provides the treasurer’s office with necessary records to make payments.

Functions of Payroll Department:

The important functions of payroll department in the accounting and control of labour costs may be listed as follows:

1. To maintain a record of job classification, department and wage rate for each employee.

2. To verify and summarise the time of each worker as shown on the daily time cards.

3. To prepare the payroll and compute the wages earned by each employee.

4. To compute the payroll deductions.

5. To maintain permanent payroll record of each employee.

6. To make wage payments.

Preparation of Wages Sheet:

The main function of payroll department is to prepare payroll sheet, also known as wages sheet. Wages sheet is a statement which lists the workers showing gross wages earned by them for a particular period and actual wages payable to them after making necessary deductions.

Time cards are the basis for the preparation of wages sheets. Departmental wages sheets are summarised in a master wages sheet which forms the basis for the preparation of the payroll vouchers entry in the general ledger in cost control accounts.

A pro-forma of wages sheet is given below:

Pay Slip:

Some companies have a practice of preparing a pay slip of each worker which may be handed over to the worker in advance of the actual payment of wages. Pay slip shows basic wages and details of various allowances like house rent allowance, dearness allowance and other payment like bonus, overtime pay, etc. and various deductions on account of P.F. contributions, I. Tax, recovery of loans and any other deduction. The net amount payable is shown after making all these adjustments.

A format of a pay slip is given below:

Casual Workers:

Casual workers are those workers who are employed casually either daily or for short periods, when there is some extra work or urgent work in the factory or when some of the regular workers of the factory are on leave. They are called casual workers, as they are not the regular workers of the concern.

The appointment of casual workers is very common source of fraud in the payment of wages. It is, therefore very important to have a proper control over their appointments, their time of work and payment of their wages. If proper control is not exercised, some bogus name may be shown as causal workers and their wages taken away.

Control of Casual Workers:

The following steps should be taken for accounting and control of casual workers:

1. The appointment of causal workers should be sanctioned by a competent authority.

2. Full records regarding appointment and discharge of casual workers should be maintained.

3 Payment of wages to casual workers should be made by a person other than one who appointed them.

4. When they are appointed as indirect workers, time sheets should be issued to them.

5. When casual workers are employed at site for some contract work, surprise visits should be made to check their number.

Out-Workers:

Out-workers are those workers, who work outside the factory premises on behalf of the undertaking.

Out workers are classified into two categories as given below:

1. Workers Sent to Site:

Some workers may be sent to site or customer’s premises for performing work. For example – some companies supplying engineering products provide after sales service and workers are sent at customer’s place when so required. Such out workers may while away their time when they go out for work. Job cards should be issued to them so that labour cost of work done can be ascertained. Surprise visits by supervisors at the place of work will have a moral effect and help in controlling such costs.

2. Workers Who Work at their Own Homes:

These workers are supplied with raw materials and they work either with their own tools or tools supplied by the concern. Such workers are usually paid on piece basis.

Control over such workers should be exercised in the following manner:

(1) All materials supplied should be accounted for and there should be no extra wear and tear of tools supplied by the concern.

(2) The delivery of work should be within the stipulated time.

(3) The quality of finished work should be carefully inspected.

Idle Time:

Meaning:

Idle time represents time lost by workers who are paid on time basis. When workers are paid on time basis, some difference between the time for which they are paid and that which they actually spend on production is bound to arise.

This difference is known as idle time. Idle time represents the time for which they are paid but no production is obtained. For example – time lost between factory gate and the department, time when production is interrupted by machine maintenance, tea breaks etc.

Causes for Idle Time:

Idle time may arise due to productive, administrative or economic causes.

They are:

1. Productive Causes:

Productive causes responsible for idle time are:

(i) Idle time due to power failure

(ii) Idle time due to machine breakdown

(iii) Idle time due to waiting for goods (raw material) and or tools

(iv) Idle time due to waiting for work

(v) Waiting for instructions

(vi) Improper production facilities

(vii) Inadequate supervision

(viii) Accident to any worker

(ix) Tea and lunch break

(x) Time taken by workers in attending to personal needs (i.e., calls of nature), and

(xi) Time taken by the workers to reach their departments from the factory gate.

2. Administrative Causes:

Administrative causes include the following:

(i) Improper planning.

(ii) Decision of the management to curtail production without retrenchment of workers.

(iii) Decision of the management to keep the surplus productive capacity unutilized.

3. Economic Causes:

Economic causes refer to those causes connective with the general economic conditions.

They include:

(i) Trade depression and the consequent fall in demand for the products.

(ii) Stoppage of production due to non-availability of materials in the market.

(iii) Intermittent nature of work.

(iv) Seasonal nature of the industry.

4. Other Causes:

The other causes include:

(i) Strikes and lockouts.

(ii) Fire, floods, storm, earthquake, etc.

Classification of Idle Time:

From the point of view of treatment in cost accounts, idle time can be classified into two categories:

1. Normal Idle time.

2. Abnormal Idle time.

1. Normal Idle Time:

Normal Idle time refers to the idle time which occurs normally or regularly. It is almost an implied condition of production. In other words, it is that wastage of labour time which cannot be avoided and has to be borne by the employer.

Generally, it arises due to the following causes:

(i) Time taken by the workers to reach their departments from factory gate.

(ii) Time taken by the workers in setting up tools, equipment and machines.

(iii) Time taken by the workers in moving from one job to another.

(iv) Time taken by the workers in attending their personnel needs (calls of nature).

(v) Time taken by the workers for tea and lunch.

(vi) Time lost when machines are stopped for making the necessary adjustments.

(vii) Time lost due to minor accident to any worker.

2. Abnormal Idle Time:

Abnormal Idle time refers to the idle time which arises, not usually, but unusually or abnormally. It may be due to avoidable or unavoidable causes.

It arises due to the following causes:

(1) Major break down of machinery.

(2) Power failure due to external causes.

(3) Major accident to workers.

(4) Deliberate underutilization of productive capacity.

(5) Curtailment of production during depression.

(6) Improper planning by the management.

(7) Non-availability of materials in the market.

(8) Fall in demand for products.

(9) Strike and lock-outs.

(10) Fire, floods, storm, earthquake, etc.

Treatment of Idle Time:

The treatment of cost of idle time depends upon the nature of idle time and the causes responsible for idle time.

The various ways of treating the cost of idle time are as follows:

1. If the Idle Time is Normal and it cannot be Controlled:

Under this case idle time can be treated in any one of the following two ways:

(a) It can be charged to production as a general factory overhead.

(b) It can be treated as direct wages and spread over the effective working hours during the period by inflating proportionately the wage rate to be charged to jobs. For example – if the total time shown by the time card is 48 hours, but the job card shows only a working time of 40 hours, and if the hourly rate of wages is Rs. 5, the hourly rate of wages to be charged to jobs may be inflated to Rs. 6 [i.e. (48 x 5)/40] to cover the cost of 8 hours of idle time.

It is true that the cost of normal idle time which cannot be controlled can be treated in any one of the above two ways. But the second method is not considered desirable, because, if the cost of idle time is not dealt with separately, and is absorbed directly in the direct wages, the management will find difficult to control the idle time. So, it is preferable to follow the first method and apportion it among the various jobs on an equitable basis.

2. If the Idle Time is Normal but it cannot be Controlled:

Under this case, the cost of idle time should be treated as a general factory overhead and apportioned among the various jobs on an equitable basis, or should be treated as departmental overheads, if any particular department is responsible for such idle time.

3. If the Idle Time is Abnormal:

The cost of idle time which is of abnormal nature should not be treated as a cost of production and charged to production. It should be excluded from the cost of production, and charged to costing profit and loss account as a loss.

Control of Idle Time:

For the idle time, the workers are paid. That means idle time involves cost. Further, during the idle time the plant, machinery, equipment, etc. also remain idle and the fixed costs continue to be incurred. As such, idle time should be controlled as far as possible.

For controlling idle time, the following steps may be taken:

i. Idle time card should be issued for ascertaining idle time. After knowing the idle time and its reason, steps should be taken to remove it.

ii. Effective supervision by the foreman.

iii. Proper planning in respect of production.

iv. Effective material control.

v. Provision of necessary tools.

vi. Provision of necessary instructions to the workers.

vii. Proper maintenance of power plant.

viii. Tendency to conceal idle time should be discouraged.

ix. Setting up of standard idle time etc.

Overtime:

Meaning:

Overtime is the work done by a worker over and above the normal working hours in a day or a week. In India, under the Factories Act 1948, if a worker works more than 9 hours in a day or more than 48 hours in a week, there is overtime work done by him.

Causes of Overtime Work:

There are many causes of overtime work.

Some of the causes of overtime work are:

1. To complete a rush order at the requests of customers.

2. To complete the delayed work.

3. To increase production to meet the increased demand.

4. To make up any short fall in production due to bad management and some fault in any department.

5. To make up any short fall in production due to the break-down of machinery.

6. To make-up the short fall in production caused by factors beyond the control of management, such as fire, floods, earthquakes, strike, lock-out, etc.

Payment for Overtime Work:

For overtime work, a worker is paid at a rate higher than the normal rate. Usually, for overtime work, a worker is paid at a double the normal rate. In India also, a worker is paid at double the normal rate for overtime work. It is done so as to give sufficient incentive to the worker who does the overtime work during the late hours, when he is tired, sacrificing the time otherwise available for relaxation.

Treatment of Overtime Payment in Cost Accounts:

Payment for overtime should be treated in Cost Accounting as follows:

1. If the overtime work is done to complete a rush order of the customers, it should be treated as direct wages.

2. If the overtime work is done due to increase in general pressure of work, it should be treated as general works overhead.

3. If the overtime work is done due to failure of power supply, shortage of materials, break down of machinery, it should be treated as general works overhead.

4. If overtime work is done due to shortage of labour, it should be treated as direct wages.

5. If overtime work is done due to bad planning and fault of the management, then it should be charged to costing Profit and Loss Account as loss.

6. If overtime work is done due to abnormal factors, then it should be charged to costing Profit and Loss account as loss.

Leave with Pay:

According to the Factories Act, workers are entitled to annual leave with full pay for a specified number of days in a year. This may include casual leave, medical leave, special leave etc.

The cost of paid leave cannot be charged to any work order since no work is done during this period. It is, therefore, treated as indirect labour cost and charged to overheads. Alternatively leave wages may be treated as direct labour cost in which case the labour rate is inflated.

Holiday with Pay:

Workers are also untitled to certain holidays like Diwali, Id, Republic Day, Independence Day, etc. like leave wages, payment of wages for these holidays is also unproductive in the sense that no production work is done on these days. Payment for such holidays should, therefore, be treated in the same way as leave with pay.

Cost Accounting Department:

The cost accounting department collects and analyses all costs relating to labour. For this purpose it makes use of clock cards, job cards, daily or weekly time sheets, payroll sheets, etc.

The cost accounting department is also responsible for presenting clear and well-designed reports on labour. Each report should furnish information in the most particular manner. Such reports relate to normal and abnormal idle time, overtime, department labour costs, variances from budgeted labour costs, etc. Special reports may be prepared to inform the management of the effectiveness of labour policies and steps to be taken for proper control of labour costs.

Wages Abstract or Wages Analysis:

This analysis of labour cost is made on a document known as Wages Analysis sheet or Wages Abstract.

Under this analysis, total labour cost is analysed into direct and indirect. In the wages analysis sheet, amount appearing against job number constitutes direct labour cost of jobs. The indirect labour cost has been given separately. The total of the direct and indirect labour cost is reconciled with the total wages as per the wage sheet of the period.

A form of wages analysis sheet is given below:

Labour Remuneration:

The term ‘remuneration’ is used to cover the total monetary earnings of employees. And the remuneration payable to labour factor of production is known as wages. Remuneration includes wages according to time or piece basis and other financial incentives.

One of the major issues confronting the management of every factory is the determination of a satisfactory wage structure. This issue has been further complicated by the fact that many direct components of a wage structure have social and psychological implications.

From the point of view of the employer, the selection of a particular system of wage payment determines the future earning capacity of the factory. From the point of view of the employees choosing the appropriate wage plan will play a prominent role in determining employee’s satisfaction, productivity, morale and turnover.

Therefore, the management of every factory must determine how much of wages and salaries are to be paid to employees. The determination of wages payable to employees is based upon a thorough analysis of all factors affecting such remuneration.

Essentials of a Sound Wage System:

The following are the essential characteristics of a sound system of wage payment:

1. The wage system must be agreed upon by both the employer and the employee.

2. It should be such as to reduce labour turnover.

3. It should lead to industrial peace.

4. The system should be such as to improve the morale of the workers.

5. It should provide suitable incentive for hard work.

6. The cost of operation of the system must be low.

7. Wage system must be flexible and capable of being adjusted in case of need.

8. Wage system should be consistent with government policy.

9. Wage system must be based on the earnings of the factory.

10. It should guarantee a minimum amount of wages.

11. The earnings of the workers should not be affected by matters beyond their control. They should not be made responsible for power failure, machine break down etc.

12. The system should be such as will produce the best quality and quantity of work.

13. There should be certain amount of stability in the system.

14. It should suit the requirements of job/work.

15. It should aim at increased productivity.

16. There should be certainty and regularity in wage payment.

17. It should be carefully worked out on the basis of scientific time and motion study.

18. It should be simple enough to be easily understood by the workers.

19. It should find favour with the workers and the workers union.

20. It should be economical.