Employee Cost: Notes - CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
 
 
   
 
 EMPLOYEE COST  
 
 
After studying this chapter, you would be able to- 
? State the meaning and importance of employee (labour) cost 
in an organisation. 
? Discuss the attendance and payroll procedures. 
? State the meaning and treatment of idle time and overtime 
cost. 
? Compute employee (labour) turnover discuss its meaning, 
reasons, methods of measurement and cost impacts.  
? Discuss and apply the various methods of remuneration and 
incentive system in calculation of wages, bonus etc. 
? Discuss the efficiency rating procedures. 
CHAPTER 
3 
Page 2


 
LEARNING OUTCOMES 
 
 
   
 
 EMPLOYEE COST  
 
 
After studying this chapter, you would be able to- 
? State the meaning and importance of employee (labour) cost 
in an organisation. 
? Discuss the attendance and payroll procedures. 
? State the meaning and treatment of idle time and overtime 
cost. 
? Compute employee (labour) turnover discuss its meaning, 
reasons, methods of measurement and cost impacts.  
? Discuss and apply the various methods of remuneration and 
incentive system in calculation of wages, bonus etc. 
? Discuss the efficiency rating procedures. 
CHAPTER 
3 
 
 
3.2 COST AND MANAGEMENT ACCOUNTING 
 
 
 3.1 INTRODUCTION  
To manufacture a product or to make provision for service, the role of human 
exertion is inevitable. The term used for human resources may include workers, 
employees, labourers, staffs etc. Whatsoever nomenclature may be used to denote 
them; they are required to be compensated for their exertions. The compensation 
so paid, either in monetary terms or in kind and facility is known as wages. Cost of 
paying wages to workers is popularly known as labour cost as it relates to labour 
(exertion) they put for manufacturing of product or provision of services; hence, 
employee cost is also interchangeably known as labour cost. In a nutshell, 
employee cost is wider term which includes wages, salary, bonus, incentives 
etc. paid to an employee and charged to a cost object as labour cost. 
Unlike other costs, employee costs are influenced by human behavior. Due to this 
peculiarity, divergence in employee compensation is observed across the different 
industries. Wages are determined on both quantitative and qualitative factors like 
volume of work, skills required etc. Hence, it is necessary that employees should be 
monitored, measured, and compensated appropriately to achieve economy in cost, 
efficiency in performance and effectiveness in desired output.  
 
Page 3


 
LEARNING OUTCOMES 
 
 
   
 
 EMPLOYEE COST  
 
 
After studying this chapter, you would be able to- 
? State the meaning and importance of employee (labour) cost 
in an organisation. 
? Discuss the attendance and payroll procedures. 
? State the meaning and treatment of idle time and overtime 
cost. 
? Compute employee (labour) turnover discuss its meaning, 
reasons, methods of measurement and cost impacts.  
? Discuss and apply the various methods of remuneration and 
incentive system in calculation of wages, bonus etc. 
? Discuss the efficiency rating procedures. 
CHAPTER 
3 
 
 
3.2 COST AND MANAGEMENT ACCOUNTING 
 
 
 3.1 INTRODUCTION  
To manufacture a product or to make provision for service, the role of human 
exertion is inevitable. The term used for human resources may include workers, 
employees, labourers, staffs etc. Whatsoever nomenclature may be used to denote 
them; they are required to be compensated for their exertions. The compensation 
so paid, either in monetary terms or in kind and facility is known as wages. Cost of 
paying wages to workers is popularly known as labour cost as it relates to labour 
(exertion) they put for manufacturing of product or provision of services; hence, 
employee cost is also interchangeably known as labour cost. In a nutshell, 
employee cost is wider term which includes wages, salary, bonus, incentives 
etc. paid to an employee and charged to a cost object as labour cost. 
Unlike other costs, employee costs are influenced by human behavior. Due to this 
peculiarity, divergence in employee compensation is observed across the different 
industries. Wages are determined on both quantitative and qualitative factors like 
volume of work, skills required etc. Hence, it is necessary that employees should be 
monitored, measured, and compensated appropriately to achieve economy in cost, 
efficiency in performance and effectiveness in desired output.  
 
 3.3 
 
EMPLOYEE COST  
 3.2 EMPLOYEE (LABOUR) COST 
Employee (Labour) cost: Benefits paid or payable to the employees of an entity, 
whether permanent, or temporary for the services rendered by them.  Employee cost 
includes payments made in cash or kind. Employee cost includes the following: 
(i)  Wages and salary; 
(ii)  Allowances and incentives; 
(iii)  Payment for overtimes; 
(iv)  Employer’s contribution to Provident fund and other welfare funds; 
(v)  Other benefits (leave with pay, free or subsidised food, leave travel 
concession etc.) etc. 
Classification of Employee (Labour) cost: Employee cost are broadly 
classified as direct and indirect employee cost. 
(i) Direct Employee (Labour) Cost 
Benefits paid or payable to the employees which can be attributed to a cost 
object in an economically feasible manner. This can be easily identified and 
allocated to an activity, contract, cost centre, customer, process, product etc.  
(ii) Indirect Employee (Labour) Cost 
Benefits paid or payable to the employees, which cannot be directly attributable 
to a particular cost object in an economically feasible manner.  
Distinction between Direct and Indirect Employee Cost:  
Direct employee cost Indirect employee cost 
1. It is the cost incurred in payment 
of employees who are directly 
engaged in the production 
process.
1. Cost incurred for payment of 
employee who are not directly 
engaged in the production 
process.
2.  Direct employee cost can be 
easily identified and allocated to 
cost unit. 
2.  Indirect employee cost is 
apportioned on some 
appropriate basis. 
3.  Direct employee cost varies with 
the volume of production and 
has positive relationship with the 
volume. 
3.  Indirect employee cost may not 
vary with the volume of 
production. 
Page 4


 
LEARNING OUTCOMES 
 
 
   
 
 EMPLOYEE COST  
 
 
After studying this chapter, you would be able to- 
? State the meaning and importance of employee (labour) cost 
in an organisation. 
? Discuss the attendance and payroll procedures. 
? State the meaning and treatment of idle time and overtime 
cost. 
? Compute employee (labour) turnover discuss its meaning, 
reasons, methods of measurement and cost impacts.  
? Discuss and apply the various methods of remuneration and 
incentive system in calculation of wages, bonus etc. 
? Discuss the efficiency rating procedures. 
CHAPTER 
3 
 
 
3.2 COST AND MANAGEMENT ACCOUNTING 
 
 
 3.1 INTRODUCTION  
To manufacture a product or to make provision for service, the role of human 
exertion is inevitable. The term used for human resources may include workers, 
employees, labourers, staffs etc. Whatsoever nomenclature may be used to denote 
them; they are required to be compensated for their exertions. The compensation 
so paid, either in monetary terms or in kind and facility is known as wages. Cost of 
paying wages to workers is popularly known as labour cost as it relates to labour 
(exertion) they put for manufacturing of product or provision of services; hence, 
employee cost is also interchangeably known as labour cost. In a nutshell, 
employee cost is wider term which includes wages, salary, bonus, incentives 
etc. paid to an employee and charged to a cost object as labour cost. 
Unlike other costs, employee costs are influenced by human behavior. Due to this 
peculiarity, divergence in employee compensation is observed across the different 
industries. Wages are determined on both quantitative and qualitative factors like 
volume of work, skills required etc. Hence, it is necessary that employees should be 
monitored, measured, and compensated appropriately to achieve economy in cost, 
efficiency in performance and effectiveness in desired output.  
 
 3.3 
 
EMPLOYEE COST  
 3.2 EMPLOYEE (LABOUR) COST 
Employee (Labour) cost: Benefits paid or payable to the employees of an entity, 
whether permanent, or temporary for the services rendered by them.  Employee cost 
includes payments made in cash or kind. Employee cost includes the following: 
(i)  Wages and salary; 
(ii)  Allowances and incentives; 
(iii)  Payment for overtimes; 
(iv)  Employer’s contribution to Provident fund and other welfare funds; 
(v)  Other benefits (leave with pay, free or subsidised food, leave travel 
concession etc.) etc. 
Classification of Employee (Labour) cost: Employee cost are broadly 
classified as direct and indirect employee cost. 
(i) Direct Employee (Labour) Cost 
Benefits paid or payable to the employees which can be attributed to a cost 
object in an economically feasible manner. This can be easily identified and 
allocated to an activity, contract, cost centre, customer, process, product etc.  
(ii) Indirect Employee (Labour) Cost 
Benefits paid or payable to the employees, which cannot be directly attributable 
to a particular cost object in an economically feasible manner.  
Distinction between Direct and Indirect Employee Cost:  
Direct employee cost Indirect employee cost 
1. It is the cost incurred in payment 
of employees who are directly 
engaged in the production 
process.
1. Cost incurred for payment of 
employee who are not directly 
engaged in the production 
process.
2.  Direct employee cost can be 
easily identified and allocated to 
cost unit. 
2.  Indirect employee cost is 
apportioned on some 
appropriate basis. 
3.  Direct employee cost varies with 
the volume of production and 
has positive relationship with the 
volume. 
3.  Indirect employee cost may not 
vary with the volume of 
production. 
 
 
3.4 COST AND MANAGEMENT ACCOUNTING 
 3.3 EMPLOYEE (LABOUR) COST CONTROL  
Employee costs are associated with human beings. To control employee costs one 
has to understand human behavior. Employee cost control means control over the 
cost incurred on employees. Control over employee costs does not imply control 
over the size of the wage bill; it also does not imply that wages of each employee 
should be kept as low as possible.  
The aim should be to keep the wages per unit of output as low as possible. 
This can only be achieved by giving employees appropriate compensation to 
encourage efficiency so that optimum output can be achieved in effective manner.
A well-motivated team of employees can bring about wonders. Each concern 
should, therefore, constantly strive to raise the productivity of employee. The 
efforts for the control of employee costs should begin from the very beginning. 
There has to be a concerted effort by all the concerned departments.  
Department Functions
1. Personnel Department i) On receipt of employee requisition from the 
various departments it searches for the 
required skills and qualification. 
ii) It ensures that the persons recruited possess 
the requisite qualification and skills required 
for the job. 
iii) Arranges proper training for the newly 
recruited employees and workshops for 
existing employees.  
iv) Maintains all personal and job related records 
of the employees. 
v) Evaluation of performance from time to time 
2.  Engineering and Work 
Study Department 
i) Prepares plans and specifications for each 
job. 
ii) Providing training and guidance to the 
employees. 
iii) Supervises production activities. 
iv) Conducts time and motion studies. 
v) Undertakes job analysis.
vi) Conducts job evaluation. 
Page 5


 
LEARNING OUTCOMES 
 
 
   
 
 EMPLOYEE COST  
 
 
After studying this chapter, you would be able to- 
? State the meaning and importance of employee (labour) cost 
in an organisation. 
? Discuss the attendance and payroll procedures. 
? State the meaning and treatment of idle time and overtime 
cost. 
? Compute employee (labour) turnover discuss its meaning, 
reasons, methods of measurement and cost impacts.  
? Discuss and apply the various methods of remuneration and 
incentive system in calculation of wages, bonus etc. 
? Discuss the efficiency rating procedures. 
CHAPTER 
3 
 
 
3.2 COST AND MANAGEMENT ACCOUNTING 
 
 
 3.1 INTRODUCTION  
To manufacture a product or to make provision for service, the role of human 
exertion is inevitable. The term used for human resources may include workers, 
employees, labourers, staffs etc. Whatsoever nomenclature may be used to denote 
them; they are required to be compensated for their exertions. The compensation 
so paid, either in monetary terms or in kind and facility is known as wages. Cost of 
paying wages to workers is popularly known as labour cost as it relates to labour 
(exertion) they put for manufacturing of product or provision of services; hence, 
employee cost is also interchangeably known as labour cost. In a nutshell, 
employee cost is wider term which includes wages, salary, bonus, incentives 
etc. paid to an employee and charged to a cost object as labour cost. 
Unlike other costs, employee costs are influenced by human behavior. Due to this 
peculiarity, divergence in employee compensation is observed across the different 
industries. Wages are determined on both quantitative and qualitative factors like 
volume of work, skills required etc. Hence, it is necessary that employees should be 
monitored, measured, and compensated appropriately to achieve economy in cost, 
efficiency in performance and effectiveness in desired output.  
 
 3.3 
 
EMPLOYEE COST  
 3.2 EMPLOYEE (LABOUR) COST 
Employee (Labour) cost: Benefits paid or payable to the employees of an entity, 
whether permanent, or temporary for the services rendered by them.  Employee cost 
includes payments made in cash or kind. Employee cost includes the following: 
(i)  Wages and salary; 
(ii)  Allowances and incentives; 
(iii)  Payment for overtimes; 
(iv)  Employer’s contribution to Provident fund and other welfare funds; 
(v)  Other benefits (leave with pay, free or subsidised food, leave travel 
concession etc.) etc. 
Classification of Employee (Labour) cost: Employee cost are broadly 
classified as direct and indirect employee cost. 
(i) Direct Employee (Labour) Cost 
Benefits paid or payable to the employees which can be attributed to a cost 
object in an economically feasible manner. This can be easily identified and 
allocated to an activity, contract, cost centre, customer, process, product etc.  
(ii) Indirect Employee (Labour) Cost 
Benefits paid or payable to the employees, which cannot be directly attributable 
to a particular cost object in an economically feasible manner.  
Distinction between Direct and Indirect Employee Cost:  
Direct employee cost Indirect employee cost 
1. It is the cost incurred in payment 
of employees who are directly 
engaged in the production 
process.
1. Cost incurred for payment of 
employee who are not directly 
engaged in the production 
process.
2.  Direct employee cost can be 
easily identified and allocated to 
cost unit. 
2.  Indirect employee cost is 
apportioned on some 
appropriate basis. 
3.  Direct employee cost varies with 
the volume of production and 
has positive relationship with the 
volume. 
3.  Indirect employee cost may not 
vary with the volume of 
production. 
 
 
3.4 COST AND MANAGEMENT ACCOUNTING 
 3.3 EMPLOYEE (LABOUR) COST CONTROL  
Employee costs are associated with human beings. To control employee costs one 
has to understand human behavior. Employee cost control means control over the 
cost incurred on employees. Control over employee costs does not imply control 
over the size of the wage bill; it also does not imply that wages of each employee 
should be kept as low as possible.  
The aim should be to keep the wages per unit of output as low as possible. 
This can only be achieved by giving employees appropriate compensation to 
encourage efficiency so that optimum output can be achieved in effective manner.
A well-motivated team of employees can bring about wonders. Each concern 
should, therefore, constantly strive to raise the productivity of employee. The 
efforts for the control of employee costs should begin from the very beginning. 
There has to be a concerted effort by all the concerned departments.  
Department Functions
1. Personnel Department i) On receipt of employee requisition from the 
various departments it searches for the 
required skills and qualification. 
ii) It ensures that the persons recruited possess 
the requisite qualification and skills required 
for the job. 
iii) Arranges proper training for the newly 
recruited employees and workshops for 
existing employees.  
iv) Maintains all personal and job related records 
of the employees. 
v) Evaluation of performance from time to time 
2.  Engineering and Work 
Study Department 
i) Prepares plans and specifications for each 
job. 
ii) Providing training and guidance to the 
employees. 
iii) Supervises production activities. 
iv) Conducts time and motion studies. 
v) Undertakes job analysis.
vi) Conducts job evaluation. 
 
 
 3.5 
 
EMPLOYEE COST  
3. Time-keeping 
Department 
i) Concerned with the maintenance of 
attendance records i.e. time keeping and 
ii) Time spent by an employee on various jobs 
i.e. time booking etc. 
4.  Payroll Department i) The preparation of payroll of the employees. 
ii) It disburses salary and wage payments. 
5. Cost Accounting 
Department 
i) Accumulation and classification of employee 
costs.  
ii) Analysis and allocation of costs to various 
cost centres or cost objects 
3.3.1 Important Factors for the Control of Employee Cost 
To exercise an effective control over the employee costs, the essential requisite is 
efficient utilisation of employee and allied factors. The main points which need 
consideration for controlling employee costs are the following: 
(i) Assessment of manpower requirements. 
(ii) Control over time-keeping and time-booking. 
(iii) Time & Motion Study. 
(iv) Control over idle time and overtime. 
(v) Control over employee turnover. 
(vi) Wage and Incentive systems. 
(vii) Job Evaluation and Merit Rating. 
(viii) Employee productivity. 
3.3.2 Collection of Employee Costs 
The task of collecting employee costs is performed by the Cost Accounting 
Department which record separately wages paid to direct and indirect employee. It 
is the duty of this department to ascertain the effective wages paid per hour in each 
department and to analyse the total payment of wages of each department into: 
(i) the amount included in the direct cost of goods produced or jobs completed;  
(ii) the amount treated as indirect employee cost and thus included in overheads; 
and