Accounting for labour
what is Accounting for labour?
what is Accounting for labour?Importance of labour cost/ importance of accounting for labour
An organization consists of people working in it. The success of an organization largely depends on the quality of person working in it. It is a difficult task for the management to deal with human beings, who are different in nature and hence difficult to control. Management tries to make the best use of available human resources and minimize the total labour cost by making them more prodeductives. On the other hand, workers try to earn more by putting lower efforts as much a possible. Due to theses contradicting interests, the task of labour management has become more and difficult in the current days. Management uses various records and method of payment of wages to keep the labour cost under control and loss also to accounts for it properly so as to calculated labour cost of production.
Labour cost refers to any remuneration paid to the employees by the organization in the form of wages, salary bonus, allowances etc. for the time and effort used in producing goods or services. In other words, monetary resources payable to the employees for their mental and physical sacrifice is called the labour cost. The institute of cost and management accountants (ICMA, London) has to be spent to retain the employees in the organization and also to keep them statistician so that they contribute their best. The labor cost can be analyzed into the following:
a. Monetary benefits: salaries and wages, dearness or other allowances, production incentive or bonus, overtime allowances, provident fund, payment for insurance scheme, old age pension, retirement gratuity, salary in lire of leave, profit linked bonus etc are benefit that are provided to the the workers in monetary forms.
b. Non-monetary benefits or fringe benefits: subsidized food and housing, subsidized or free transportation, clothing, education to employee's children, medical and recreational facilities etc. are the benefits that are provides to the workers is non-monetary forms.
Importance of labour cost/ importance of accounting for labour
Accumulation, analysis and proper control over labour cost are most importance to every manufacturing organization for the fulfillment of following purposes:
• To use direct labour cost as a basis for increasing the efficiency of workers.
• To identify direct lobour cost with product, job or process for ascertaining cost of production as accurately as possible.
• To use direct labour cost as a basis for absorption of overhead, if desired.
• To use direct labour as a basis for comparison with past labour cost and for substitution proposes.
• To determine the amount of indirect labour cost to be treated as overhead.
• To reduce the labour turnover.
Types of labour cost
Te labour cost can be classified into direct and indirect labour cost as mentioned below:
a. Direct labour cost: direct labour 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 employees who are directly connected with the manufacturing operations or the conversion of raw materials into finished products. The important characteristic of direct labour cost is that, it can be indentified with and allocated to cost centers or cost units. The example of direct labour cost is wages paid to workmen put on definite jobs or products in the factory, direct labour cost is also known as ' direct wages', productive wages', manufacturing wages, operating wages', factory wages', direct labour cost is a part of the naptime cost'.
b. Indirect labour cost: indirect labour cost: indirect labour cost is the remuneration of the employees who are not directly connected with manufacturing operations. The indirect employees are not directly associated with the conversion but assist but assist in the process by way of supervision, maintenance, transportation of materials, material handling etc. their work benefit all the items being produced and cannot be specifically identified with the individual product. These costs are accumulated and apportioned to specifically identify with to individual product. These costs are 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 supervisor, foremen, storekeeper, clerical staff, etc, are the example of indirect labour costs. Indirect labour cost is also known as ' indirect wages', 'unproductive wages' and it is treated as a part of overhead.
Differences between direct and indirect labour cost
The different between the direct and indirect labour cost are mentioned below:
Labour cost control
Concept and need of labor cost control
• To use direct labour cost as a basis for increasing the efficiency of workers.
• To identify direct lobour cost with product, job or process for ascertaining cost of production as accurately as possible.
• To use direct labour cost as a basis for absorption of overhead, if desired.
• To use direct labour as a basis for comparison with past labour cost and for substitution proposes.
• To determine the amount of indirect labour cost to be treated as overhead.
• To reduce the labour turnover.
Types of labour cost
Te labour cost can be classified into direct and indirect labour cost as mentioned below:
a. Direct labour cost: direct labour 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 employees who are directly connected with the manufacturing operations or the conversion of raw materials into finished products. The important characteristic of direct labour cost is that, it can be indentified with and allocated to cost centers or cost units. The example of direct labour cost is wages paid to workmen put on definite jobs or products in the factory, direct labour cost is also known as ' direct wages', productive wages', manufacturing wages, operating wages', factory wages', direct labour cost is a part of the naptime cost'.
b. Indirect labour cost: indirect labour cost: indirect labour cost is the remuneration of the employees who are not directly connected with manufacturing operations. The indirect employees are not directly associated with the conversion but assist but assist in the process by way of supervision, maintenance, transportation of materials, material handling etc. their work benefit all the items being produced and cannot be specifically identified with the individual product. These costs are accumulated and apportioned to specifically identify with to individual product. These costs are 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 supervisor, foremen, storekeeper, clerical staff, etc, are the example of indirect labour costs. Indirect labour cost is also known as ' indirect wages', 'unproductive wages' and it is treated as a part of overhead.
Differences between direct and indirect labour cost
The different between the direct and indirect labour cost are mentioned below:
Concept and need of labor cost control
Labour costs may be very high due to inefficiency of labour, wages of, material, idle time and unease overtime includes ion of dummy names in the pay rolls and other related factors. Inefficient uses of labour not only increase the cost of production but also adversely affects the quality of products. The primary objective of the management, therefore, is to utilize the labour as economically as possible. It is therefore necessary for the management to device a proper system of laboru cost control.
Control over labour costs required proper employment and efficient utilization of labour force. These factors affect the cost and quality of the products of any industrial undertaking and ultimately its profitability. Labour 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 labour cost control and their functions
The objective of lobar 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
a. personal department
Generally, every business organization has a recruitment policy of its own. For the execution of the recruitment policy of an undertaking, a separate 'personal 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 an efficient force and lays down goods personal policies to be followed by the entire organization.
The functions of personal department are as follows:
i. Selection and recruitment of needed worker for the organization.
ii. Maintain the detailed and up to date record of workers.
iii. Promotion, transfer and discharges of the worker after their evaluation.
iv. Development of different forms for maintaining the records of workers.
v. Provides training and conducts seminar, workshop for the worker.
The different forms by personal department are as follows:
i. Labour placement requisition:
it in any department, vacancy has been created within the allowed established; the department head or manager will send a formal written request to the personal department in the form of a 'labour placement requisition'. the specimen of a 'Labour placement requisition' is shown below:
a. personal department
Generally, every business organization has a recruitment policy of its own. For the execution of the recruitment policy of an undertaking, a separate 'personal 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 an efficient force and lays down goods personal policies to be followed by the entire organization.
The functions of personal department are as follows:
i. Selection and recruitment of needed worker for the organization.
ii. Maintain the detailed and up to date record of workers.
iii. Promotion, transfer and discharges of the worker after their evaluation.
iv. Development of different forms for maintaining the records of workers.
v. Provides training and conducts seminar, workshop for the worker.
The different forms by personal department are as follows:
i. Labour placement requisition:
it in any department, vacancy has been created within the allowed established; the department head or manager will send a formal written request to the personal department in the form of a 'labour placement requisition'. the specimen of a 'Labour placement requisition' is shown below:
On receiving the 'labour placement requisition', the personal department arranges for the advertisement in trade journal or newspapers about the requirement of workers. Formed application are received from the candidates and after proper examination and interviewed, appointments are made. On Te appointment of workers, the personal department information the department concerned about it.
ii. Employee's history card: for each person employed, the personal department proper ' employment history card' which show the particular of the employee, name and address of previous employer, cause of leaving the previous employment, previous experience, date of apartments, date of joining 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.
• Change in the wages rate.
• Promotions and transfers.
• Sickness and accidents.
The specimen of employee's history card is given below:
ii. Employee's history card: for each person employed, the personal department proper ' employment history card' which show the particular of the employee, name and address of previous employer, cause of leaving the previous employment, previous experience, date of apartments, date of joining 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.
• Change in the wages rate.
• Promotions and transfers.
• Sickness and accidents.
- Date and reasons for leaving the job.
The specimen of employee's history card is given below:
On the reverse side card, columns re provides to give information as to details of holding taken by the workers.
b. Engineering department of Accounting labour
In order to ensure proper utilization of labour 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 methods for each job, departments or process by performing the following functions:
i. Preparation of plan 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 completed.
iv. Conducting research and experimental workers before undertaking new job.
v. Maintaining safety and efficient working conditions so that there may be minimum possible accidents and conducive environment to health and efficiency of workers.
c. Rate or time and motion study department in accounting for labour
The department that primary concerned with the task of making of time and motion studies of labour and plant operation, job analysis and setting wage rates is called the rate or time and motion study department.
While performing job or work or a machine has to make movements. The motion study is the study of movements of the workers as well as machine while performing an operation. It is 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 worker 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.
b. Engineering department of Accounting labour
In order to ensure proper utilization of labour 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 methods for each job, departments or process by performing the following functions:
i. Preparation of plan 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 completed.
iv. Conducting research and experimental workers before undertaking new job.
v. Maintaining safety and efficient working conditions so that there may be minimum possible accidents and conducive environment to health and efficiency of workers.
c. Rate or time and motion study department in accounting for labour
The department that primary concerned with the task of making of time and motion studies of labour and plant operation, job analysis and setting wage rates is called the rate or time and motion study department.
While performing job or work or a machine has to make movements. The motion study is the study of movements of the workers as well as machine while performing an operation. It is 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 worker 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.
The following are some importance advantages of time and motion studies:
i. These studies help in determining proper speed of work by eliminating unnecessary movements.
ii. They help in fixation of suitable wages rates and introduction of wages plans.
iii. The efficiency of workers gets increase because they are asked to follow correct procedures and methods of work 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 increasing output by a greater efficiency and less human fatigued.
vi. They help in assessing the correct labour requirements of an organization.
vii. They facilitate labour cost budgeting and labour cost control.
Wages rates are determined on the basis of requirements of a job. Job analysis is breaking up a job into basis elements or operations and studying them in detail to find out the duties, responsibilities and skill involved in it. It is a process of determining the contents and characteristics of a job, the conditions under which performance is to be carried on, the qualifications required in the worker, methods and techniques used performance is to carried on, the basis objective of job analysis is to ascertain the relative worth of each job through and objective evaluation so that suitable remuneration can be fixed for each job.
d. Time-keeping department of labor
For efficient labour organization, it is necessary that all workers including those who are paid on piecework basis should be punctual. Late arrival or early department of a works 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 departure of works whether they paid in the basis of time or piece work. For the purpose of exercising control over arrival and departure of workers, a separate time-keeping department is set under the headship of a time keeping.
The following are the functions of time-keeping department.
i. It maintains up to date attendance of workers.
ii. It finds out time idle time of each worker to control and minimized it.
iii. It keeps the record of time spend by each worker including records of normal and overtime works.
iv. It also keeps the detail records of the workers' arrival and departure time in the work place.
e. Pay roll department of labour
The pay roll department is set up for computation and disbursement of wages in a business concern. Pay-roll department is connected with the computation of gross wages of the workers and making necessary adjustments with a view to ascertain the net amount of wages payroll to them. It is concerns with how much employees have earned during a period and involves computation of gross and net amount payable to each employees.
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 shown by the daily time card.
iii. To calculate the amount of wages earned each worker.
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 deductions made from the gross wages.
• The net amount of wages payable for each worker.
v. To maintain permanent pay roll records to each worker.
vi. To make the disbursement of wages and salaries to the workers.
The payroll department prepares a wages sheet to record the gross wages earned by each worker during a particular pay period.
When wages are paid on the basis of time, the wages sheet is prepared on the basis of time cards or clock cards. But when the workers re paid on the basis of output, the wages sheet is prepared on the basis of piece work cards. Wages sheets are prepared department-wise, and its prepared is the responsible of the wages officer (pay roll department), which is under the control of costing department.
After their completing, the wages sheets are passed on to the cashier for the payment of wages to the workers.
d. Time-keeping department of labor
For efficient labour organization, it is necessary that all workers including those who are paid on piecework basis should be punctual. Late arrival or early department of a works 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 departure of works whether they paid in the basis of time or piece work. For the purpose of exercising control over arrival and departure of workers, a separate time-keeping department is set under the headship of a time keeping.
The following are the functions of time-keeping department.
i. It maintains up to date attendance of workers.
ii. It finds out time idle time of each worker to control and minimized it.
iii. It keeps the record of time spend by each worker including records of normal and overtime works.
iv. It also keeps the detail records of the workers' arrival and departure time in the work place.
e. Pay roll department of labour
The pay roll department is set up for computation and disbursement of wages in a business concern. Pay-roll department is connected with the computation of gross wages of the workers and making necessary adjustments with a view to ascertain the net amount of wages payroll to them. It is concerns with how much employees have earned during a period and involves computation of gross and net amount payable to each employees.
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 shown by the daily time card.
iii. To calculate the amount of wages earned each worker.
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 deductions made from the gross wages.
• The net amount of wages payable for each worker.
v. To maintain permanent pay roll records to each worker.
vi. To make the disbursement of wages and salaries to the workers.
The payroll department prepares a wages sheet to record the gross wages earned by each worker during a particular pay period.
When wages are paid on the basis of time, the wages sheet is prepared on the basis of time cards or clock cards. But when the workers re paid on the basis of output, the wages sheet is prepared on the basis of piece work cards. Wages sheets are prepared department-wise, and its prepared is the responsible of the wages officer (pay roll department), which is under the control of costing department.
After their completing, the wages sheets are passed on to the cashier for the payment of wages to the workers.
f. Cost accounting department
Cost accounting department is responsible for the accumulation, classification and analysis of cost data in a business concern following the cost accosting systems. Labour 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 labour costs. These representatives work under the direct supervision and control of the cost accountant. They assist the cost accountant in computing the labour cost of production by department, processes, operations, production orders, job etc.
The features of cost accounting are as follows:
i. To collect all types of information about cost and reporting to management wit analysis.
ii. To determine the cost of each work.
iii. To calculate labour cost by using the time card, job and payroll.
Frauds in wages payment
If the wages are determined more than the actual to be paid or the wages is paid less than the actual to be paid, it is regarded as the fraud in wages for committing fraud in wages payment are as follows:
• Showing the absent workers as present workers.
• Showing the dummy workers.
• Showing the standard time for the early as well as late comers.
• Showing the fake extra time.
• Showing the dividend that is not under provision.
• Changing the rate of remuneration or wages.
• Committing fraud while paying cash to the workers.
Prevention of fraud in the wages payment
Since the fraud in wages payment increases the total labour cost. It must be prevented for which an effective system is required. The following are some of the ways to prevent the fraud in wages payment.
• Effective use of the job card, idle time card and piece work card.
• In case of the piece wages systems, the comparison has to be made between the actual production unit and the units produced by the workers.
• The verification of overtime by authorized personnel.
• Payment of the wages to the concerned workers only.
• Payment of wages to casual workers in the presence of the authorized personnel.
Cost accounting department is responsible for the accumulation, classification and analysis of cost data in a business concern following the cost accosting systems. Labour 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 labour costs. These representatives work under the direct supervision and control of the cost accountant. They assist the cost accountant in computing the labour cost of production by department, processes, operations, production orders, job etc.
The features of cost accounting are as follows:
i. To collect all types of information about cost and reporting to management wit analysis.
ii. To determine the cost of each work.
iii. To calculate labour cost by using the time card, job and payroll.
Frauds in wages payment
If the wages are determined more than the actual to be paid or the wages is paid less than the actual to be paid, it is regarded as the fraud in wages for committing fraud in wages payment are as follows:
• Showing the absent workers as present workers.
• Showing the dummy workers.
• Showing the standard time for the early as well as late comers.
• Showing the fake extra time.
• Showing the dividend that is not under provision.
• Changing the rate of remuneration or wages.
• Committing fraud while paying cash to the workers.
Prevention of fraud in the wages payment
Since the fraud in wages payment increases the total labour cost. It must be prevented for which an effective system is required. The following are some of the ways to prevent the fraud in wages payment.
• Effective use of the job card, idle time card and piece work card.
• In case of the piece wages systems, the comparison has to be made between the actual production unit and the units produced by the workers.
• The verification of overtime by authorized personnel.
• Payment of the wages to the concerned workers only.
• Payment of wages to casual workers in the presence of the authorized personnel.
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