Labour Cost Control Meaning

12th May 2021 1 By indiafreenotes

Labor cost covers one of the major portion of the total cost of a product or job. It may increase unnecessarily due to inefficiency of workers, wastage of materials by workers, idle time, unusual overtime work and high labor turnover. Hence, the management should devise effective techniques for controlling labor cost to ensure maximum outputs of better quality at low cost through proper utilization of the labor force.

Basically, management is concerned with controlling labor cost. Labor cost control involves such systems, procedures, techniques and tools used by the management in order to keep the labor cost of the product or job as minimum as possible. Labor cost control consists of a number of such regular activities which are carried on by various departments of the organization in a coordinated manner to ensure the availability of the best employees and their optimum utilization. It is the system followed by the management to maximize quality output at a minimum cost. Labor cost control includes the process of developing various forms, studying and recording the activities and performance of workers, calculating the correct amount of wages and making payment in time. It also include the process of analyzing and reporting labor cost to the management for planning and decision making.

Importance of labour cost

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.

Importance

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

Factor affecting

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

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:

  • Scientific method of production planning.
  • Use of labour budgets.
  • Establishment of labour standards.
  • Proper system of labour performance report.
  • Effective system of job evaluation and job analysis.
  • Devise a proper system of control over ideal time and unusual overtime work.
  • Establish a fair and equitable remuneration system.
  • Effective cost accounting system.