What is Accounting for labor?
What is Accounting for labor? Types of labor cost,Direct labor cost and indirect labor cost?
Introduction
Every organization consists of people working in it. The success of organization depends to a large extent upon the quantity of person working in it. It is difficult task for the management
Meaning of labor cost
Labor cost or wages is a main element of cost. Labor refers to any remuneration paid to the employees by the organization in the form of wages, salary bonus, allowances etc. for their time and effort used in producing goods or services. Any financial compensation, given to the employees working in the organization to achieve the common goal, is called labor cost. In other words, it is the remuneration paid to the workers or employees for their physical and mental contribution towards the organization. The institute of cost and management accountants of U.K. has defined labor cost as "the cost of remuneration of the employees of and undertaking". A significant expenditure has to be incurred to keep the employees in the organization and also to keep them satisfied so that they contribute their best. The labor cost can be analyzed into the following:
• Monetary benefits: salaries and wages, dearness or other allowances, production incentive or bonus, overtime allowances, employer's contribution to provident fund, payment for insurance scheme, old age pension, retirement gratuity, salary in lieu of leave, profit linked bonus, etc.
• Non-monetary benefit (fringe benefits): subsidized food and housing, subsidized or free transport, subsidized or free clothing, subsidized or free education to employee's children, medical and recreational facilities, etc.
Types of labor cost
Direct labor cost
Direct labor cost is that portion of wages and salary which can be identified and charged to a single costing unit. It is the remuneration of the employs who are directly involved with the manufacturing operations or the conversion of raw materials into finished products. The manufacturing operations or the conversion of raw materials into finished products. The important characteristic of direct labor costs is that, it can be identified with and allocated to cost centers or cost units. This cost is incurred for converting raw materials into finished goods. The example of direct labor cost is also known as 'direct wages', 'productive wages', 'manufacturing wages', 'operating wages', 'factory wages'. Direct labor cost is a part of 'prime cost'.
Indirect labor cost
Indirect labor cost is the remuneration of the employees who are not directly involved with manufacturing operations. The indirect employees are not directly associated with the conversion process but assist in the process by way of supervision, maintenance, transportation conversion process but assist in the process by way of supervision, maintenance, transportation of materials, materials handling etc. their work benefit all the items being produced and cannot be specifically identified with the individual products. These costs will be accumulated and apportioned to different cost centers on equitable basis and absorbed into product cost by applying the overhead absorption rate. Wages or salaries paid to the supervision, foremen, storekeeper, clerical staff, etc. are the examples of indirect labor cost. Indirect cost is also known as 'indirect wages', 'unproductive wages' and it is treated as a part of 'overhead'.
Importance of labor cost
Accumulation, analysis and proper control over labor costs are most important to every manufacturing organization for the fulfillment of following purpose;
i. To use direct labor cost a basis for increasing the efficiency of workers.
ii. To identify direct labor cost with product, job or process for ascertaining cost of production as accurately as possible.
iii. To use direct labor cost as a basis for absorption of overhead, if desired.
iv. To use direct labor cost as a basis for comparison with past labor cost and for substitution purposes.
v. To determine the amount of indirect labor cost to be treated as overhead.
vi. To reduce the labor turnover.
Labor cost control and its need
Labor costs may become unduly high due to inefficiency of labor, wastage of materials due to improper supervision, idle time and unusual overtime work, inclusion of dummy name is the pay rolls and other related factors. Inefficient use of labor not only increased the cost of production but also adversely affects the quantity of products. The primary objective of the management, therefore, is to utilize the labor as economically as possible. It is therefore necessary for the management to device a proper system of labor cost control.
Control over labor costs required proper employment and efficient initialization of labor force. These factors affect the control and quantity of the products of any industrial undertaking and ultimately its profitability. Labor cost control involves employment of efficient workers, proper training of workers, proper time keeping and time booking and proper accounting for the wages paid to them.
Departments involved in labor cost control and their functions
The objective of labor cost control is achieved through the intensive and coordinated efforts of various departments. These departments are:
a. Personnel department
b. Engineering department
c. Rate or time and motion study department
d. Time-keeping department
e. Pay-roll department
f. Cost accounting department
Personnel department
Generally, every business organization has a recruitment policy of its own. For the execution of the recruitment policy of an undertaking, a separate 'personnel department' is set up under the headship of a 'personnel manager'. The main functions of this department are recruitment and selection, training, transfer, discharge, promotion and fixation of wages and salaries of employees. This department is responsible for providing and efficient labor force and lays down good personnel policies to be followed by the entire organization.
The functions of personnel department are as follows,
i. Selection and recruitment of needed workers for the organization.
ii. Maintain the detailed and up to date record of workers.
iii. Promotion, transfer and discharges of the workers after their evaluation.
iv. Development of different forms for maintaining the records of workers.
v. Provide training and conduct seminar, workshop for the worker.
Engineering department
In order to ensure proper utilization of labor force in an industrial undertaking, it is necessary to make the use of proper production methods and to provide healthy working conditions to the workers. For this, an engineering department is set up. This department helps in maintaining control over working conditions and production method for each job, departments or process by performing the following functions:
i. Preparation of plans and specifications for each job scheduled for production.
ii. Supervision of production activities within production departments.
iii. Inspection of jobs after they are completed to ensure that they are satisfactorily competed.
iv. Maintaining safety and efficient working conditions so that there may be minimum possible accidents and conducive environment to health and efficiency of workers.
Rate or time and motion study department
The department that is primarily concerned with the task of making of time and motion studies of labor and plant operations, job analysis and setting wages rates is called the rate or time and motion study department.
While performing a job or work a worked or a machine has to make movements. The motions study is the study of movements of the workers as well as machine while performing and operation. It is mainly done for the purpose of eliminating useless motions.
Time study is done to determine the required time for performing the operation; it is conducted after the motion study. For determining a standard time various methods are used under time study. An average worker is taken as model and basis or standard time is fixed for a job or operation giving allowances of time to the workers for smoking, drinking water and so on.
i. These studies help in determining proper speed of work by eliminating unnecessary movements.
ii. They help in fixation of suitable wage rates and introduction of wages plans.
iii. The efficiency of workers gets increased because they are asked to follow correct procedures and methods of works by avoiding useless motions thus save time and energy.
iv. They help in increasing output by a greater efficiency and less human fatigue.
v. They help in assessing the correct labor requirements of an organization.
vi. These studies help in reducing cost of production per unit and increasing total earnings of workers.
vii. They facilitate labor cost budgeting and labor cost control.
Time-keeping department
For efficient labor organization, it is necessary that all workers including those who are paid on piecework basis should be punctual. Late arrival or early departure of a worker causes disturbance even as regards to the work of others. It is, therefore, necessary to have a good system of recording the time of arrival and department of workers whether they are paid on the basis of time or piece work. For the purchase of exercising control over arrival and departure of workers, a separate time-keeping department is set under the headship of a "time-keeper".
The following are the functions of time-keeping department.
i. It maintains up to date attendance of workers.
ii. It finds out the idle time of each worker to control and minimize it.
iii. It keep the record of time spend by each worker including records of normal and overtime works.
iv. It also keeps the details records of the workers' arrival and department time in the work place.
Pay roll department
The payroll department is set up for computation and disbursement of wages in a business concern. Pay-roll department is concerned with the computation of gross wages of the workers and making necessary adjustments with a view to ascertain the net amount of wages payable to them. It is concerned with how much employees have earned during a period and involves computation of gross and net amount payable to each employee.
The main functions of pay-roll department are:
i. To maintain the record of the job classification, department and wages rate for each worker.
ii. To verify and summaries the time of each worker as shows by the daily time card.
iii. To calculate the amount of wages sheet for each department showing.
iv. To prepare the pay roll or wages sheet for each department showing:
• The total amount of wages earned by each worker during a given period.
• The deduction made from the gross wages.
• The net amount of wages payable to each worker.
• To maintain permanent pay roll records for each worker.
v. To maintain permanent pay roll records for each worker.
vi. To make the disbursement of wages and salaries to the workers.
Cost accounting department
Cost accounting department is responsible for the accumulation, classification and analysis of cost data in a business concern following the cost accounting system. Labor cost is one of the important elements of total cost. In a large business concern, representatives of the cost accounting department are involved in production department in order to make proper accumulation, classification and analysis of labor cost. These representatives work under the direct supervision and control of the cost accountant. They assist the cost accountant in computing the labor cost of production by departments, processes, operations, production orders, jobs etc.
The functions of cost accounting department are as follows:
i. To collect all types of information about cost and reporting to management with analysis.
ii. To determine the cost of each work.
iii. To calculate labor cost by using the time card, job card and payroll.
Forms related with labor cost control
There are different forms which are used for labor cost control. Some of them are mentioned below.
Labor placement requisition
If in any department, vacancy has been caused within the allowed establishment, the department head or manager will send a formal written request to the personal department in the form of a 'Labor placement requisition'. The specimen of a 'Labor placement requisition' is show below:
On receiving the 'labor placement requisition'. The personnel department arranges for the advertisement in trade journals or newspaper about the equipment of workers. Formal applications are received from the candidates and after proper examination and interviews, department concerned about it.
Employee's history card
For each person employed, the personnel department prepares 'employees history card which shows the particulars of the employee, name and address of previous employer, cause of leaving the previous employment, previous experience, date of appointment, date of joining and wages rate at commencement. The details of the following particulars are also recorded in this card.
• Change in the name or address.
• Changes in the wage rate.
• Promotions and transfers.
• Sickness and accidents.
• Date and reasons for leaving the job.
Piece card
In a factory where the workers are paid on the basis of piece work, a piece work card is issued to each worker. On the piecework card, a worker gets recorded the quantity of output done and the time spent upon it. The piecework inspector puts his signature on the piecework card. The specimen of such card is given below.
Time card
The card that aims to record the incoming and outgoing time of the workers Is called time card. Such card is prepared on weekly or monthly or monthly basis as per requirement. The personal of time keeping department maintain such card.
Departments involved in labor cost control and their functions
The objective of labor cost control is achieved through the intensive and coordinated efforts of various departments. These departments are:
a. Personnel department
b. Engineering department
c. Rate or time and motion study department
d. Time-keeping department
e. Pay-roll department
f. Cost accounting department
Personnel department
Generally, every business organization has a recruitment policy of its own. For the execution of the recruitment policy of an undertaking, a separate 'personnel department' is set up under the headship of a 'personnel manager'. The main functions of this department are recruitment and selection, training, transfer, discharge, promotion and fixation of wages and salaries of employees. This department is responsible for providing and efficient labor force and lays down good personnel policies to be followed by the entire organization.
The functions of personnel department are as follows,
i. Selection and recruitment of needed workers for the organization.
ii. Maintain the detailed and up to date record of workers.
iii. Promotion, transfer and discharges of the workers after their evaluation.
iv. Development of different forms for maintaining the records of workers.
v. Provide training and conduct seminar, workshop for the worker.
Engineering department
In order to ensure proper utilization of labor force in an industrial undertaking, it is necessary to make the use of proper production methods and to provide healthy working conditions to the workers. For this, an engineering department is set up. This department helps in maintaining control over working conditions and production method for each job, departments or process by performing the following functions:
i. Preparation of plans and specifications for each job scheduled for production.
ii. Supervision of production activities within production departments.
iii. Inspection of jobs after they are completed to ensure that they are satisfactorily competed.
iv. Maintaining safety and efficient working conditions so that there may be minimum possible accidents and conducive environment to health and efficiency of workers.
Rate or time and motion study department
The department that is primarily concerned with the task of making of time and motion studies of labor and plant operations, job analysis and setting wages rates is called the rate or time and motion study department.
While performing a job or work a worked or a machine has to make movements. The motions study is the study of movements of the workers as well as machine while performing and operation. It is mainly done for the purpose of eliminating useless motions.
Time study is done to determine the required time for performing the operation; it is conducted after the motion study. For determining a standard time various methods are used under time study. An average worker is taken as model and basis or standard time is fixed for a job or operation giving allowances of time to the workers for smoking, drinking water and so on.
i. These studies help in determining proper speed of work by eliminating unnecessary movements.
ii. They help in fixation of suitable wage rates and introduction of wages plans.
iii. The efficiency of workers gets increased because they are asked to follow correct procedures and methods of works by avoiding useless motions thus save time and energy.
iv. They help in increasing output by a greater efficiency and less human fatigue.
v. They help in assessing the correct labor requirements of an organization.
vi. These studies help in reducing cost of production per unit and increasing total earnings of workers.
vii. They facilitate labor cost budgeting and labor cost control.
Time-keeping department
For efficient labor organization, it is necessary that all workers including those who are paid on piecework basis should be punctual. Late arrival or early departure of a worker causes disturbance even as regards to the work of others. It is, therefore, necessary to have a good system of recording the time of arrival and department of workers whether they are paid on the basis of time or piece work. For the purchase of exercising control over arrival and departure of workers, a separate time-keeping department is set under the headship of a "time-keeper".
The following are the functions of time-keeping department.
i. It maintains up to date attendance of workers.
ii. It finds out the idle time of each worker to control and minimize it.
iii. It keep the record of time spend by each worker including records of normal and overtime works.
iv. It also keeps the details records of the workers' arrival and department time in the work place.
Pay roll department
The payroll department is set up for computation and disbursement of wages in a business concern. Pay-roll department is concerned with the computation of gross wages of the workers and making necessary adjustments with a view to ascertain the net amount of wages payable to them. It is concerned with how much employees have earned during a period and involves computation of gross and net amount payable to each employee.
The main functions of pay-roll department are:
i. To maintain the record of the job classification, department and wages rate for each worker.
ii. To verify and summaries the time of each worker as shows by the daily time card.
iii. To calculate the amount of wages sheet for each department showing.
iv. To prepare the pay roll or wages sheet for each department showing:
• The total amount of wages earned by each worker during a given period.
• The deduction made from the gross wages.
• The net amount of wages payable to each worker.
• To maintain permanent pay roll records for each worker.
v. To maintain permanent pay roll records for each worker.
vi. To make the disbursement of wages and salaries to the workers.
Cost accounting department
Cost accounting department is responsible for the accumulation, classification and analysis of cost data in a business concern following the cost accounting system. Labor cost is one of the important elements of total cost. In a large business concern, representatives of the cost accounting department are involved in production department in order to make proper accumulation, classification and analysis of labor cost. These representatives work under the direct supervision and control of the cost accountant. They assist the cost accountant in computing the labor cost of production by departments, processes, operations, production orders, jobs etc.
The functions of cost accounting department are as follows:
i. To collect all types of information about cost and reporting to management with analysis.
ii. To determine the cost of each work.
iii. To calculate labor cost by using the time card, job card and payroll.
Forms related with labor cost control
There are different forms which are used for labor cost control. Some of them are mentioned below.
Labor placement requisition
If in any department, vacancy has been caused within the allowed establishment, the department head or manager will send a formal written request to the personal department in the form of a 'Labor placement requisition'. The specimen of a 'Labor placement requisition' is show below:
On receiving the 'labor placement requisition'. The personnel department arranges for the advertisement in trade journals or newspaper about the equipment of workers. Formal applications are received from the candidates and after proper examination and interviews, department concerned about it.
Employee's history card
For each person employed, the personnel department prepares 'employees history card which shows the particulars of the employee, name and address of previous employer, cause of leaving the previous employment, previous experience, date of appointment, date of joining and wages rate at commencement. The details of the following particulars are also recorded in this card.
• Change in the name or address.
• Changes in the wage rate.
• Promotions and transfers.
• Sickness and accidents.
• Date and reasons for leaving the job.
Piece card
In a factory where the workers are paid on the basis of piece work, a piece work card is issued to each worker. On the piecework card, a worker gets recorded the quantity of output done and the time spent upon it. The piecework inspector puts his signature on the piecework card. The specimen of such card is given below.
Time card
The card that aims to record the incoming and outgoing time of the workers Is called time card. Such card is prepared on weekly or monthly or monthly basis as per requirement. The personal of time keeping department maintain such card.
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