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1
LABOUR COSTS
Presented By:
7.Darpan Batra
21.Rikita Gujral
23.Sonika Gupta
38.Devang Mehta
39.Anand Menon
41.Upasana Nagpal
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′lā·bər ′köst
• Wages paid to workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits (if any).
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The Manager’s Thought
Prime cost of concern for the HRD
Important part of production
process
Decides price of product
LABOUR COST IS:
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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
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Other Benefits
• Employees contribution to PF, production & profit bonus, holiday & vacation bonus, old age pension
Financial
• Subsidised food & housing, transport to the workplace,employee’s children education , recreational facilities etc.Non-
financial
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System of wages
• Should satisfy employees & employer
System of wages
Time Wage or Day Rate
Piece Rate or Piece Work
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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
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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
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Avg Labour cost/manday worked
(state wise)2003-04
Chandigarh : Rs.592.16 Jharkhand: Rs 567.99 Manipur : Rs.77.69
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Labour costs ( industry wise)2003-2004
Rs.1080.84
•Manufacture of refined petroleum products
Rs.888.7
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•Manufacture of motor vehicle
Rs.87.65
•Agriculture and animal husbandry activities
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Advantage India
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CALCULATION OF WAGES RATES FOR COSTING PURPOSES
Q: Calculate labour cost per man- day of 8 hours from the following particulars:
(i) Basic Salary Rs. 4 per day
(ii) Dearness Allowance 25 paise per every point over 100 cost of living index for working class. Current cost of living index is 500 points
(iii) Leave Salary 10% of (i) and (ii)
(iv) Employer’s contribution to provident fund
8% of (i), (ii) and (iii)
(v) Employer’s contribution to E.S.I
2.5 % of (i),(ii) and (iii)
(vi) Expenditure on amenities to labour
Rs. 20 per head per month
(vii) Number of working days in a month
25 days of 8 hours each
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Solution:
Calculation Rs.
(i) Basic Salary = 4.00 4.00
(ii)Dearness Allowance(cost of living index- 500 points for a month of 25 days)
= 400 × 0.25= 100=> 100/25= 4 4.00
(iii) Leave Salary( 10% of (i) and (ii))
= (10/100) × (4+4)= 0.1 × 8= 0.80
0.80
(iv)Employer’s contribution to provident fund( 8% of (i), (ii) and (iii))
= (8/100) × (4+4+0.80)= 0.08 × 8.80 = 0.704 0.70
(v) Employer’s contribution to E.S.I( 8% of (i), (ii) and (iii))
= (2.5/100) × (4+4+0.80)= 0.025 × 8.80
0.22
(vi) Expenditure on amenities to labour ( Rs.20 per head per month)
= 20/25 = 0.80 0.80
Total 10.52
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 urgency
II. 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
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Q: Calculate the normal and overtime wages payable to a
workman from the following data:
DaysHours
worked
Monday 8 hours Normal working hoursNormal rate:
8 hours per day ,Re 0.50 per hour. Up to 9 hours in a day at single rate and over 9 hrs a day at double rate or upTuesday 10 hours
Wednesday 9 hours
Thursday 11 hours Overtime Rate: 48 hours in a week at single rate and over 48 hours at double rate , whichever is more beneficial to workman Friday 9 hours
Saturday 4 hours
51 hours
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DayNormal
Working Hours
Total Normal Rate
Overtime
Single Rate
Double Rate
Monday 8 8 8
Tuesday 8 10 8 1 1
Wednesday 8 9 8 1
Thursday 8 11 8 1 2
Friday 8 9 8 1
Saturday 8 4 4
48 51 44 4 3
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Normal wages on time rate = 44 hours x Rs.0.50 = Rs.22.00
Overtime wages: Single Rate = 4 hours x Rs. 0.50 =Rs. 2.00
Double Rate = 3hours x Re 1.00 = Rs. 3.00
Total wages = Rs. 27.00
If payment is made on weekly basis, then:
Hence, in both the cases total wages payable to the worker = Rs. 27.00
Normal Wage for 48 hours = 48 hours x Rs. 0.50 = Rs. 24.00
Overtime payable at double rate ( 51 hours- 48 hours) = 3 hours x Re. 1.00 =Rs. 3.00
Total Rs. 27.00
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 plan
2. Halsey- weir premium system
3. Rowan plan
4. Bedaux point premium system
5. Taylor’s differential piece rate system
6. Merrick differential piece rate system
7. Gantt task & bonus plan
8. 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
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Methods of measuring workforce performance
– Labour turnover
– Labour productivity
– Absenteeism
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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.
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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
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Calculation Methods
1.Separation method:• no.of separations in a period/avg total no.of
workers in a period * 100
2.Flux or separation cum replacement method:• No. of separation+ no.of replacement/ avg total
no.of workers in a period *100
3.Replacement method:• No.of workers replaced during a period/avg total
no.of workers* 100
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QUESTION :The personnel dept has supplied the following info:
June 1st 2008 – 1900
June 30th 2008 – 2100
During the month, 60 persons were discharged and 20 left the company. During the month 200 workers were engaged out of which only 40 were appointed against the vacancy caused by the number of workers separated and the remaining on account of an expansion scheme of the company.
Calculate labour turnover rate & equivalent rate under diff. schemes.
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Avg no. of workers = 1900 + 2100 / 2 = 2000
Separation method
• LTR = 80 * 100 / 2000
• = 4 %• Eqvlnt annual
turnover rate = 4 * 365 / 30 =48.67 %
Flux method
• LTR= 80 + 40 / 2000 * 100
• = 6%• Eqvlnt annual
turnover rate = 6 * 365 /30
• = 73 %
Replacement method
• LTR = 40 * 100 / 2000
• = 2%• Eqvlnt annual
turnover rate = 2 * 365 /30 = 24.33 %
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Labour Productivity
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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
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Labour Absenteeism
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Absenteeism
• Defined as the number of staff who miss work as a proportion of the total number of staff
Number of staff absent per time period x 100
Total number of staff days worked per time period Look at absenteeism over a period of time e.g. 1 month
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Preparation of Pay Rolls or Wage Sheets
• Responsibility of The wages or payrolls department
• Wages are calculated from any of the previous methods.• The wage sheets are prepared department-wise as they
help in budgeting
Collection of basic data
Calculation of wages payable
Preparing an actual payroll
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• Prepared either fortnightly or monthly.• Main purpose is to classify the labor cost into direct or indirect and for each job or cost center.
.
.
Cost accounting
dept
Cost Analysis sheet
Wages abstract
Wages analysis
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PEPE Jeans Co. Ltd.Wages Abstract
Period Ending:.............
Department or Shop
Production Order no.
Job Card No.
Hours or Pieces
Rate per hour/ piece
Labor Cost
PEPE Jeans Co. Ltd.Wages Analysis
Period Ending:…….
Department
Total Wages
Direct Wages
Factory Overhead
Adm. Overhead
S&D Overhead
Deductions
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THANK YOU