1. Meaning of Labour Cost & Labour Cost Control.
2. Control Over Labour Cost and Labour Cost Control Departments.
3. Causes & Measurement of Labour Turnover.
4. Methods of Wages Payment.
5. Types of Labour.
6. Importance and Factors of Labour Cost Control.
- Meaning of Labour Cost -
Labour cost, representing the human contribution to production is an important cost factor which require constant control, measurement and analysis.
Human effort used for conversion of materials into finished product or doing various jobs in the business are known as labour. Labour is the most perishable commodities and as such should be effectively utilised immediately. Therefore, efficient and effective utilisation of labour is an important need of the modern business. Payment made towards the labour is called labour cost. Labour cost is the significant element of the total cost of production.
The cost which is incurred toward the labour is known as the labour cost. Labour is one of the most important factor of production and so the labour cost forms key constituent for any product or service. Thus, labour cost is basically the money spent on manpower for those who are engaged in the production process.
Before an entrepreneur indulges in industrial activities, he has to ascertain the labour cost to know the viability of the project, as the success and failure of the project depends on it. It gives an insight on the total labour cost and helps to identify the extent to which further labour welfare expenses can be carried out.
- Meaning of Labour Cost Control -
Just like material cost, labour cost also contribute to a major portion of the product cost. With inflation in the labour cost it it somewhat getting fixed in nature. In case of large industries, controlling the labour cost is of paramount importance as it contributes to maximum expenditure incurred by the company.
- Control Over Labour Cost -
Labour cost control aims at the control of the labour cost per unit of the production. control of labour cost is an important objective of management. For labour cost control following factors keep into mind :
1. Determination and payment of wages
2. Labour cost analysis
3. Control over production methods
4. Labour records
5. Appointment and selection of employees
6. Control over arrival and departure time of the employees.
- Labour Cost Control Department -
Following are the departments of labour cost control :
1. Personnel Department -
The main function of the personnel department are recruitment and selection of workers, providing them training and placing them to the job they are best fitted.
2. Engineering Department -
This department maintains control over the production method and working condition for a job department or process.
3. Time Keeping Department -
Time keeping means recording the arrival and departure time of each worker. Time record is divided into two parts time keeping and time booking.
4. Payroll Department -
The payroll department is responsible for making payment of wages or salary to each employee. It maintains all the functions related to the wages and salaries of the employees.
5. Cost Accounting Department -
The cost accounting department is responsible for the collection and classification of all labour cost with the time cards, job cards, labour cost and various jobs, work orders etc.
- Labour Turnover -
Labour turnover denotes the percentage change in labour force of an organisation. High percentage of labour turnover denotes the labour is not stable.
Labour turnover ratio is calculated by the following formula :
Replaced worker
LTR = ----------------------------------- x100
Total no. of workers
- Causes of Labour Turnover -
Causes of labour turnover are as follows :
1. Personal Causes -
- Family problem
- Death
- Dislike for the job
- Marriage of women workers
- Retirement
- Health
2. Unavoidable Causes -
- Due to insubordination
- Due to lack of attention to duty
- Due to Immoral character
- Due to accidents
3. Avoidable Causes -
- Lack of job security
- Lack of proper training facilities
- Lack of promotion opportunities
- Lack of medical facilities
- Measurement of Labour Turnover -
Measurement of labour turnover is an following basis :
1. Replacement method -
Number of workers
Replaced during a period
LT = --------------------------------------------x 100
Average number of employees
During a period
2. Separation Method -
Number of employees
Left during a period
LT = ---------------------------------------------x 100
Average number of employees
During a period
3. Flux Method -
Number of separations +
Number of additions
LT = ---------------------------------------------x 100
Average number of employees
During a period
- Methods of Wages Payment -
Methods of payment of wages are as follows :
1. Time Wage Rate System -
In this system the workers are paid on the basis of time spent in the factory irrespective of the amount of work done.
The total earning are calculated as :
Total earnings = hours worked x rate per hour
2. Piece Wage Rate System -
In this system, workers are paid on the basis of work done irrespective of time taken by the worker.
Total earning is calculated as :
Total earning = no. of units x rate per unit
3. Incentive Wage Rate System -
In incentive wage rate system each worker get not only wages at normal rate but also receives bonus or premium for his efficiency. This system include the worker to produce more and earn more.
There are two types of incentive wage rate system :
Individual bonus plan
Group bonus plan
- Types of Labour -
Mainly there are two broad categories of labour, which are explain as follows :
1. Direct Labour -
When in a particular job or work the labour content can be distinetly identified it is known as direct labour. It includes the following :
a) Labour that is directly involved in transformation process, i.e. conversion of the raw material into the finished product in a particular job.
b) Further any other type of labour that is directly attributable to a particular job or a contract.
Examples of direct labour are :
Bekar in baking unit, labour employed on construction contract, weaver in weaving unit, Chef in hotel, teacher in school, priest in temple, carpenter in furniture unit, tailor in readymade wears unit, hair dresser in a beauty parlour and washer in dry cleaning unit.
2. Indirect Labour -
The labour that is not separately identifiable in a specific work for a job is known as the indirect labour. All those labour that are not directly attributable for the conversion of raw material into finished goods is called as indirect labour.
Examples of indirect labour are :
Finance executive in finance department, engineer in engineering, work study department, staff in customer care, clerical staff in bank and insurance companies, Salesman in shops, labour in construction work, workers in manufacturing company, housekeeping staff in hotels, conductor im buses and back office staff in companies.
- Importance of Labour Cost Control -
Following are the importance of labour cost control.
1. Labour cost control puts proper time keeping of labour.
2. Significance is placed on the requirement of the right labour for the cost reduction.
3. Skilled labour always observes so it should be used properly.
4. Labour cost influences the cost per unit of the product to a large extent.
5. As labour i.e. human is one of the, factor of production, it signifies contribution of the human in the production.
6. Due to the different laws available for the protection of the labour it is a committed cost.
- Factors for Labour Cost Control -
Following are the factors for labour cost control.
1. Setting up of Standards -
Standards should be setup with regard to the production operations and the labour should be constantly motivated to achieve those standards. The actual results should be constantly compared with the standard and the deviations should also be timely corrected.
2. Production Planning -
None of the labour should be kept idle. Production planning should be in such a manner that the optimum utilisation of the resources are done.
3. Study of the Effectiveness of wage Policy -
Different system of wage payment are present. So such a system should be adopted which meets the increased level of production.
4. Use of Labour Budgets -
On the basis of production budget labour budget is also prepared. The quanium and the type of the labour for the production process are decided in advance and suitable measures are taken so that the actual does not exceed the budgeted.
5. Labour Performance Reports -
Direct labour for months sheets should be regularly prepared and reviewed to exercise the labour cost control.