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LABOUR COSTS It is the compensation paid to the employees engaged in
production related activities.
It is more complex to manage labour costs:1. It is a major conversion cost , hence regular monitoring
required
2. Labour psychology
3. Labour cannot be stored
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TYPES OF LABOUR Direct labour : directly involved and traceable to the final
product
Indirect labour : facilitates production such as time-keepers
salary, supervisors salary. Casual labour : recruited on temporary basis, not on companys
payroll
Contract labour : Hired temporarily through contractors/ agents,no direct payments to labourers
Out workers : site labourers.
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ASPECTS OF LABOUR COSTS
1. Time keeping2. Time booking
3. Idle time
4. Labour Turnover
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1. Time keeping
(Attendence Record) 2 purposes :
1. Keeping attendance records foradministrative and payment purposes
2. Maintaining job cards for costing
Time recording methods : Manual andmechanical
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Manual methods1. Hand written record or register :
person at the gate records the in andout time of each worker with sign.Useful for small cos.
2. Check token or Disc method : token
discs are put into a box by eachworker on arrival. Manipulationpossible.
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Mechanical methods1. Card time recorder : Alloted cards are taken from in and out
rack and and inserted in a time recording clock by pressing alever to record time on the card.
2. Time clock method : allotted number is dialed into a clockwhich automatically records the time and details on a form.
3. Electronic card system : plastic card allotted which is insertedinto a time clock
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2. TIME BOOKING Apart from the attendance, time spent on
each job is to be recorded especially to
control productivity and avoid idle time.
The start time and end time on each job,
hours worked normal and overtime arerecorded for each worker by daily or weeklytime sheets or Labour cost cards.
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Employee Nature of work.Shift.. Units completedJob Number.. DepartmentDate.. Approved by..
Time started Time stopped Hours worked Rate Amount
Labour job ticket
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3. IDLE TIME Time for which payment is made but no output is generated.
Reasons :
1. Productive causes :Machine breakdowns, Power failures,waiting for work, waiting for instructions or tools or materials,frequent machine adjustments.
2. Administrative causes : strikes, maintaining trained workers,improper planning and scheduling, underutilization of capacityin recession
3. Economic causes : seasonal market fluctuations, intensity ofcompetition.
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.
Types :
1. Normal Idle time : Unavoidable such as time taken by workerto reach dept from gate, for changing, normal chatting etc.Try to maintain it at the min level possible.
Treatment : Cost of normal time is adjusted in total cost ofproduction as a factory o/h
2. Abnormal Idle time : resulting due to productive andadministrative causes. Can be reduced by proper mgt.
Treatment : Not to be absorbed in the cost of production butcharge to P & L a/c.
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4. Labour Turnover Rate of change in the composition of labour force.
Effects :
1. Increased cost due to selection, training, recruitment ofnew workers.
2. Production loss due to inefficiency of new workers
3. Problems of wastage, damage of machines, accidents due
to inexperienced worker4. Lower employee morale and motivation due to job
instability.
5. Negative publicity to the image of the co.
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CAUSES OF LABOUR TURNOVER
I. Avoidable causes
a) Low wage rates and earnings
b) Unsatisfactory working conditions/relations with others
c) Unfair methods of promotions
d) Lack of conveyance, housing and other facilities
II. Unavoidable causes
a) Change for better jobs
b) Retirement and death
c) Domestic/family responsibilities/constraintsd) Dismissal due to negligence and inefficiency
e) Seasonal nature of job
f) Retrenchments// layoffs
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COST OF LABOUR TURNOVER Preventive costs :
1. Medical , housing,recreational and education facilities
2. Benefits like pension, gratuity, bonus
3. Better working conditions and welfare facilities
Replacement costs :
1. Personnel dept expenses of new recruitment, selection,
training and development.2. Production dept expenses of low efficiency, accidents and
spoilage by new workers.
Large costs, so mgt should try to reduce labour turnover
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METHODS TO COMPUTE LABOURTURNOVER Separation rate method
= No. of separation in a period x 100
Avg. No. of workers in that period
Replacement rate method
= No. of replacement in a period x 100
Avg. No. of workers in that period
Flux method= No.of separation + No.of replacementx 100
Avg. No. of workers in that period
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OVERHEADS
All costs which cannot be traced
to individual units i.e. all indirectcosts.
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Classification of overheadsBASED ONNATURE
BASED ONVARIABILITY
BASED ONCONTROL
BASED ONFUNCTION
BASED ONNORMALITY
1 Indirectmaterial
2 Indirectlabour
3 Indirectexpense
1 Fixed2 Variable
3 Semi -variable
1 Controllable2 Uncontrollable
1 Production o/h2 Admin o/h
3 Selling o/h
4 Distributiono/h
1 Normal2 Abnormal
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PROCEDURE OF ALLOTING
OVERHEADS Allocation
Apportionment Absorption
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Cost allocation
Allotment of whole items of cost tocost centres / units.
Process involves 3 basic activities :1. Accumulating the costs on the basis of dept,
division or product
2. Identifying the cost objects or recipients of theallocated costs
3. Selecting a method to relate costs to the costobject.
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Cost ApportionmentAllotment of common cost to cost centres on
the basis of benefit received.
OVERHEADS ALLOCATED ON BASISOF
Labour - related No. of employees,directwages, labour hours
Machine- related Machine hours, Number
of machinesSpace related Area occupied by each
dept.
Service related Quantum, time taken,
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COST ABSORPTION Allocation of o/h to units/dept by
means of an overhead applicationrate.
A good absorption rate should be
fair and equitable.
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METHODS OF ABSORPTION1. Production Unit method
2. Percentage method % of direct materal
% of direct labour
% of prime cost
3. Hourly rate method
Direct labour hour rate
Machine hour rate
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Under absorption and Over
absorption of o/h Overheads are charged on the basis of pre-
determined or estimated rates
Hence there may be a difference betweenabsorbed and actual o/h.
Over absorption = Actual < absorbed Under absorption = actual > absorbed
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Reasons : Actual output more than estimated
Changes in technique of production Seasonal fluctuations
Trade cycle
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Treatment Use of supplementary rates : positive or
negative
Write off in costing P & L a/c
Carry fwd to next year.