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Labour CostSystem of wagesPiece Rate or Piece WorkWhy Control labour costs?Idle Time CostTypes of incentive wage plansHalsey premium method and Rowan’s methodMerrick Differential Piece Rate SystemMeasuring workforce performanceLabour turnoverTurnover and costingCalculation MethodsLabour productivity
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Labour Cost
• Wages paid to workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits (if any).
The Manager’s Thought
Prime cost of concern for the HRD
Important part of production
process
Decides price of product
LABOUR COST IS:
Labour Costs
Direct
That portion of wages or salaries which can be
identified & charged to a single costing unit
Indirect
Cannot be correlated with production of specific goods, applicable to mfg activities
generally (paid to foreman,stockkeeper,clerical
staff)
CLASSIFICATION
Other Benefits
• Employees contribution to PF, production & profit bonus, holiday & vacation bonus, old age pensionFinancial
• Subsidised food & housing, transport to the workplace,employee’s children education , recreational facilities etc.
Non-financial
System of wages
• Should satisfy employees & employer
System of wages
Time Wage or Day Rate
Piece Rate or Piece Work
Time Wage or Day Rate system • Wages to worker are paid on time basis irrespective of
quantum of production• Wage measured on basis of unit of time, i.e., hourly, daily,
weekly or monthly• Formula:
SUITABILITY :Volume of production is not within the control of labor. E.g. Oil Refinery
• The nature of work is such that there is no basis for incentive plan. E.g. Night watchman
Hrs worked X Rate per Hr
Piece Rate or Piece Work• Remuneration of work is paid on the basis of production
and not time taken by to perform the work• Simple and most commonly used incentive schemes• Formula:
SUITABILITY : • If the productivity is closely related to skill & efforts• The unit cost can be easily determined • If it is possible to fix a fair and acceptable piece rate
Units Produced X Rate per Unit
Why Control labour costs?
• Inefficiency of labor• Wasting material due to improper supervision• Idle time – normal & abnormal causes.• Unusual overtime work• Inclusion of dummy names in payrolls, etc
Controlling accomplished by:Personnel department
Rate or time & motion study
Production planning
Budgeting
Engineering department
Time - keeping
Cost accounting department
Payroll department
OTHER COSTS
• Idle time • Overtime• Bonus & premiums• Incentive wage plans• Group bonus schemes• Co –partnership schemes
Treatment of Idle Time Cost• Treatment of normal idle time cost (i) Treated as direct wages (ii) Treat as an item of factory expenses and recover as
indirect charges• Treatment of abnormal idle time cost
(i) Does not form part of cost of production(ii) Directly transferred to Costing Profit & Loss
Account without disturbing the normal costs
ELIMINATE ABNORMAL CAUSES & MINIMIZE NORMAL ONES
Overtime & its treatment
• Time spend over & above the normal working hours on the job
• In India, if worker works more than 9hrs a day or 48 hrs a week.
I. Direct cost- customer pays due to urgencyII. P/L A/c- to makeup any shortfall in production due
to some fault of management or due to abnormal causes like floods
III.General overhead- when handling seasonal pressures
Bonus and premium schemes
•To increase the production and productivity
•To raise the morale•To retain the services of good
workers•To establish better labor-
management relations
Group bonus schemes•To develop team spirit •Where output is more dependent
upon the efforts on the group rather than the individual worker.
• METHODS•Equally by all workers in the
group.•Pro rata on the time rate basis. •Predetermined percentage
basis.•Specified proportion basis
depending upon the different skills of the workers.
Co-partnership / shares•Provide an opportunity to
workers to share the prosperity of the company by not only being the wage earner but also the partner of the undertaking.
•The profits to be distributed are determined through the negotiation between the employer and the employee.
•Normally it is paid in cash, but it may be in the form of shares of the undertaking.
Types of incentive wage plans
1. Halsey premium plan2. Halsey- weir premium system3. Rowan plan4. Bedaux point premium system5. Taylor’s differential piece rate system6. Merrick differential piece rate system7. Gantt task & bonus plan8. Emerson efficiency system
TYPES OF INCENTIVE WAGE PLANS
Halsey Premium Plan
• The worker is paid a % of the time saved over the standard rate per piece.
• Standard time is fixed for each job/operation• If the labour completes at standard time or more he is given the
standard price.• If time saved- wages given for actual hours saved as a bonus.
Time taken* rate + %(standard time-time taken)* rate
Cont…
Rowan System
The bonus hours are calculated as the proportion of the
time taken which the time saved bears to the standard time allowed
Time taken* rate + standard time – time taken* time taken* rateStandard time
Question ???
Time allowed (standard time): 60 hrs.Rate of wages: Rs10 per hour
Factory A
Halsey PlanRowan Plan
Factory B
Time taken =48hrsTime taken =36hrs
Required: Total earnings according to both the systems
The formula of calculating wages by Halsey premium method and Rowan’s method are as follows:
Time taken* rate + %(standard time-time taken)* rate
Time taken* rate + standard time – time taken* time taken* rateStandard time
Wage at location A: 36 *10= 360 RsWage at location B: 48 * 10=480 Rs
Bonus : 60-36 * 36 *10= 144 Rs 60
Location A
Bonus : 50% time saved * rate per hr=50% (60-48) * 10=60 Rs
Location B
‘A’(Rowan’s method)
Rs.
‘B’(Halsey’s method)
Rs.Wages:Bonus:
360144
48060
Total: 504 540
Merrick Differential Piece Rate System
• Has 3 categories for payment
• Daily wages are not guaranteed.
20% above Normal rate
Above 100%
10% above Normal rate
Up to 100%
Normal rateUp to 83%
Price rate applicable
Efficiency
Methods of measuring workforce performance
– Labour turnover
– Labour productivity
– Absenteeism
Labour turnover• Labour turnover (staff turnover) can be
defined as the rate of change in a firm’s labour force.
• look at labour turnover over a period of 1 year.
Turnover and costing
Labour turnover( High / Low )
Preventive costsCosts incurred to keep turnover as low as possible
Replacement costs
Costs due to replacement of
employees
Calculation Methods
1.Separation method:• no.of separations in a period/avg total no.of
workers in a period * 1002.Flux or separation cum replacement method:• No. of separation+ no.of replacement/ avg total
no.of workers in a period *1003.Replacement method:• No.of workers replaced during a period/avg total
no.of workers* 100
Labour productivity
Output per worker
=Total value of Output Total Number of workers
• Look at labour productivity over a period of time e.g. 1 year
Cost per unit
= Total Labour Cost Number of units produced
THANK YOU
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