Unit 4 Accounting For Labour
Unit 4 Accounting For Labour
Unit 4 Accounting For Labour
Objectives:
Accounting for Labor
Calculation of direct and indirect cost of Labor
Understanding different remuneration methods
Labor Turnover Ratio, Overtime, and idle time
Labor efficiency, capacity and volume ratios
Learning Outcome:
Solve problems relating to Time Measurement, Cost Control, and calculation of Labor Ratios.
4.1 Introduction
Labor costs are a significant part of the budget, especially in companies which are labor
intensive. It is the price of human effort in the product, and its control necessitates
collective effort. The total amount of wages paid to workers, as well as related expenses, is
referred to as labor cost. It covers the workers' hourly or piece-rate compensation. It may
be high due to labor inefficiencies, high idle time and overtime payments, increased
spoilage, wastage, and defective manufacturing due to a lack of supervision and inspection,
and other factors. As a result, it is evident that labor cost control is vital in any organization
in order to reduce production costs and improve labor efficiency.
The cost of labor affects not only the cost of production but also the organization's industrial
relations. Without fair wages, no firm can hope to recruit and retain talented and motivated
staff. Employee remuneration thus has a significant impact on the company's growth and
profitability.
Therefore, a proper cost accounting system should be in place to identify direct and indirect
labor costs. Similarly, the cost accounting department should be able to generate and
maintain records for timekeeping, time booking, idle and overtime, the impact of incentive
schemes, per unit of labor, labor turnover costs, and other related records.
Calculate the direct/indirect labor hours: The number of direct labor hours required to
create one unit of a product is referred to as direct labor hours. Deduct the total time
spent on holidays, sick leaves, training or seminars per year This is derived by multiplying
the total number of finished goods by the total number of direct labor hours required to
make them.
Total direct/indirect labor hours/ Total units produced = Direct/Indirect Labor hours per
unit
Example: If it takes 100 hours to make 1,000 things, it takes one hour to make 10 products
and 0.1 hours to make one unit.
Calculate the per-unit direct/indirect labor cost: Multiplying the direct labor hourly rate
by the time required to complete one unit of a product gives the labor cost per unit.
Labor hours taken per unit* Labor hourly rate = Labor cost per unit
Example: If the hourly rate is Rs.20, and one unit of a product takes 0.1 hours to make, the
direct labor cost per unit is Rs.2 (Rs.20 x 0.1).
Situation Treatment
If the overtime is resorted to at the desire The entire amount of overtime including
of the customer overtime premium should be charged to
the job directly.
If it is due to a general pressure of work to The premium as well as overtime wages
increase the output may be charged to general overheads.
If it is due to the negligence or delay of It may be charged to the concerned
workers of a particular department department.
If it is due to circumstances beyond control Tt may be charged to Costing Profit & Loss
Account.
Machine breakdown,
Strike of the labor.
Electricity problem leading to stoppage of production.
Shortage of raw materials
lock-outs
poor supervision
fire, flood, etc.
Treatment
The salaries paid for abnormal idle time is not considered part of the cost and is therefore
excluded from cost accounting, instead, it is immediately charged to the Costing Profit and
Loss Account.
Idle time ratio
Idle hours/ Total budgeted/standard hours *100
Illustration: Zeta product is made by an organization. Idle time is expected considering
the nature of the manufacturing process, and the normal amount of idle time is
anticipated to be 20% of total hours worked. One unit of product zeta takes 0.36 hours
to be created on average. The hourly rate for labor is Rs.10.
Answer: The Labor time required including the idle time =
(0.36/80) *100 = 0.45 hours per unit
Labor cost per unit = 0.45 hours*Rs.10 = Rs.4.5
Idle time = 0.45 - 0.36 = 0.09 hours
Idle time cost = 0.09 hours*Rs.10 = Rs.0.9
Idle time ratio = 0.9 hours/0.45 hours = 0.2 or 20%
Results Interpretation
100% No Variance
Above 100% Favorable Variance
Below 100% Unfavorable Variance
Illustration: Product Alpha takes 8 hours and Product Beta takes 12 hours to finish.
800 units of Alpha and 800 units of Beta were manufactured in a month of 25 effective
days of 8 hours per day. The production department employs 70 workers, with a total of
1,50,000 hours planned for the year. Calculate the control ratios.
Answer: Labor Cost Control Ratios are:
Particulars Hours
Standard/budgeted labor hours 150000 hours
Standard/budgeted labor hours for one 12500 hours
month = (150000 hours/12 months)
Standard hours for Actual Output
Product Alpha (800 units*8 hours) 6400 hours
Product Beta (800 units*12 hours) 9600 hours
Total Standard Hours for Actual Output 16000 hours
Actual Hours worked 14000 hours
(25 days*8 hours per day*70 workers)
4.10 Conclusion
Labor costs refer to remuneration paid to the employees by the business in the form of
wages, salary bonus, allowances etc. for their time and effort.
They are usually split into direct and indirect labor costs, based on the worker’s contribution
to the production process. While direct labor comprises work done on certain products or
services, indirect labor is employee work that can’t be traced back or billed to services or
goods produced.
The payroll is a record which shows details of the gross wages earned by each worker in a
particular period, the deductions made and the net wages payable.
Indirect labor is a component of conversion cost. It is classified as an overhead and refers to
the costs that cannot be traced directly to specific products or services
Indirect labor is a component of conversion cost. It is classified as an overhead and refers to
the costs that cannot be traced directly to specific products or services
Idle time is the unproductive time that company spends without producing anything. It is
the cost that spend without providing any benefit to the company or customers. Idle time is
bound to occur due to setting up of tools for various jobs, time interval between two jobs,
time to travel from factory gate to work place.
The proportion of workers leaving compared to the average number of workers is referred
to as labor turnover.
Labour turnover reduces the labour productivity and increases costs. Hence, it should be
kept at a minimum level.
A sound wage system helps to attract qualified and efficient worker by ensuring an
adequate payment.
If the worker finishes the work in half the time fixed for it, the result under Rowan and
Halsey plan will be same.
4.11 Glossary
Direct Labor Cost: It refers to all labour expended in altering the construction,
composition, conformation or condition of the product.
Indirect Labor Cost: It refers to labour expended that does not alter the construction,
conformation, composition or condition of the product, but which contributes generally
to such work and to the completion of the product and its progressive movement and
handling up to the point of dispatch.
Time-Keeping: Time-keeping is necessary for the purpose of recording attendance and
for calculating wages.
Time-Booking: Time-booking means a record from the utilisation point of view and the
purpose is cost analysis and cost apportionment.
Job Cards: Job Card is a method of recording details of time with reference to the jobs or
work orders undertaken by the workers.
Payroll: The payroll is a record which shows details of the gross wages earned by each
worker in a particular period, the deductions made and the net wages payable.
Overtime: Overtime refers to the situation when a worker works beyond his normal
working hours.
Idle time: The loss of time for which the employer pays but obtains no direct benefit is
termed as idle time.
Labor Turnover: Labour turnover is the ratio of the number of persons leaving in a
period to the average number employed.