Labour is a crucial input in any production or service activity. Accurate computation and control of labour cost is essential for cost efficiency and fair employee compensation. This unit explores the classification of labour cost, wage systems, incentive schemes, and ways to manage unproductive time.
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Labour Cost – Direct and Indirect
Labour cost refers to the total payment made to employees for their services. It is divided into:
Direct Labour Cost: Wages paid to workers directly involved in production. These are easily traced to specific jobs or products.
Indirect Labour Cost: Wages paid to workers not directly involved in production, such as supervisors, maintenance staff, and security personnel. These costs are part of overheads.
Identifying and separating these costs helps in accurate product costing.
Timekeeping and Time Booking
Timekeeping refers to recording the arrival and departure time of workers, usually for attendance and payroll purposes. This is done using methods like:
Attendance registers
Time clocks or biometric systems
Time Booking, on the other hand, involves recording the actual time spent by a worker on each job or operation. Common time booking tools include:
Job cards
Daily time sheets
Together, these help ensure proper wage calculation, control over idle time, and productivity analysis.
Methods of Wage Payment
There are two primary methods of wage payment:
Time Rate System: Workers are paid based on the time they spend at work, regardless of output. It’s simple and ensures income stability but may not encourage efficiency.
Piece Rate System: Wages are based on the number of units produced. It encourages productivity but may affect quality and is not suitable when output can’t be easily measured.
Some firms also use differential piece rate systems, where different rates are paid depending on performance levels. For example, higher rates are paid for producing above-standard output.
Incentive Schemes – Halsey and Rowan Plans
To boost productivity and reward efficiency, incentive plans are introduced. Two well-known methods are:
Halsey Plan: Workers are guaranteed time wages. If they complete a job in less time than the standard, they receive a bonus equal to a percentage (usually 50%) of the time saved.
Rowan Plan: Similar to Halsey, but the bonus is calculated based on the ratio of time saved to standard time, making the bonus proportionate and controlled.
These incentive systems balance employee motivation with quality and cost control.
Idle Time, Overtime, and Labour Turnover
Idle Time: Time during which workers are paid but are not engaged in productive work. It may occur due to machine breakdowns, material shortages, or power failures. Idle time is usually classified as normal or abnormal and treated accordingly in cost accounts.
Overtime: Extra hours worked beyond normal working hours. Overtime wages are paid at higher rates and should be controlled to avoid unnecessary costs.
Labour Turnover: It refers to the rate at which employees leave and are replaced. High labour turnover increases recruitment and training costs and affects production consistency.
Identifying the causes of idle time and high turnover helps in cost control and improving workplace efficiency.