Introduction, Meaning of Labour Cost

The cost of labour is the amount of all salaries paid to the workers, as well as the employee benefits and payroll taxes charged by an employer. The labour costs are broken down into direct and indirect (overhead) costs.

Direct costs include salaries for the employees who manufacture a product, including assembly line workers, while indirect costs are related to support labour, such as employees who maintain manufacturing equipment.

Direct & Indirect Cost of Labour

If a glass manufacturing company is planning the sales price for glass doors, the direct labour costs are those expenses that can be directly attributed to production. The company pays workers to run machinery that cuts glass into specific pieces for door assembly, and those expenses are direct costs.

On the other hand, the company has several employees who provide security for the factory and warehouse. Those labour costs are indirect because the cost cannot be attributed to a specific act of production.

Fixed and Variable Cost of Labour

The labour costs are also classified as fixed or variable costs. The cost of labour to run the machinery, for example, is a variable cost which varies with the production level of the firm. By increasing or decreasing output, a firm can easily increase or reduce the variable labour cost.

Fixed expenses may include fixed labour costs for long-term service contracts. A company may have a contract to perform repair and maintenance on the equipment with an outside provider, so this is a fixed expense.

The factors for Labour Cost control:

Production Planning:

The production is to be planned in a way as to have the maximum and rational utilization of labour. The product and process engineering, programming, routing and direction constitute the production planning.

Setting up of Standards:

Standards are set up with the help of work study, time study and motion study, for production operations. The standard cost of labour so set is compared to the actual labour cost and the reasons for variations, if any, are studied minutely.

Use of Labour Budgets:

Labour budget is prepared on the basis of production budget. The number and type of workers needed for the production are provided for along with the cost of labour in the labour budget. This budget is a plan for labour cost and is prepared on the basis of the past data considering the future prospects.

Study of the Effectiveness of Wage-Policy:

The point for study and control of cost is how far the remuneration paid on the basis of incentive plan matches with increased production.

Labour Performance Reports:

The labour utilization and labour efficiency reports received periodically from the departments are helpful in the managerial control on labour and exercise labour cost control.

Importance of Labour Cost Control

Like material cost, labour cost also constitutes a significant portion of total production cost. Now-a-days when wage rates are increasing and labour cost is tending to become more and more fixed, particularly in large manufacturing organisations, strict control over labour cost has assumed great significance in order to control the overall cost of production and the cost of operating a unit.

However, high wages to the workers do not necessarily mean high labour cost. In fact payment of high wages to workers is aimed to achieve more than proportionate increase in their output resulting in lower per unit labour cost.

Some other importance of labour cost control given in points:

1. As Labour is a human being, it symbolizes human contribution to a firm’s production.
2. Accounting and control over labour cost necessitates correct time keeping.
3. Proper control on the recruitment of labour is needed for the accounting and control of labour cost.
4. Labour cost is a committed cost because of the existing labour laws which give considerable protection to them.
5. Cost per unit of a product is influenced in a major way by labour cost.
6. In the case of some industries there is a shortage of skilled labour and hence it is necessary to make their effective utilization.

Techniques of Labour Cost Control:

In order to achieve the effective utilization of manpower resources, the management has to apply a proper system of labour cost control. The labour cost control may be determined on the basis of establishment of standard of efficiency and comparison of actuals with standards.

The management applies various techniques for the effective control of labour costs as under:

(1) Scientific method of production planning.

(2) Use of labour budgets.

(3) Establishment of labour standards.

(4) Proper system of labour performance report.

(5) Effective system of job evaluation and job analysis.

(6) Devise a proper system of control over ideal time and unusual overtime work.

(7) Establish a fair and equitable remuneration system.

(8) Effective cost accounting system.