Labour cost is a significant element of cost specially in an organisation using more manual operations. It is the cost of human endeavour in the product and requires coordinated efforts for its control. The management objective of keeping labour cost as low as possible is achieved by balancing productivity with wages. Low wages do not necessarily mean low labour cost. Low labour cost is possible by giving substantial increase in wages against corresponding increase in productivity. The gain is reflected both in labour cost as well as in overheads expense per unit, since overheads are distributed over larger volume. Again, the productivity of labour is quite flexible. Given right type of motivation and incentive, it can reach amazing scale. It does not have any limitation like machines.
Labour cost is a vital factor not only affecting the cost of production but also industrial relations of the organization. No organization can expect to attract and attain qualified and motivated employees unless it pays them fair remuneration. Employee remuneration therefore influences vitally the growth and profitability of the company. For employees remuneration is more than a means of satisfying their physical needs. Wages and salaries have significant influence on our distribution of income, Consumption savings employment and prices. Thus employee remuneration is a very significant issue from the viewpoint of employer’s employees and the nation as whole.
Classification of Labour Cost
The total labour cost can be classified as follows:
(a) Direct labour costs;
(b) Indirect labour costs.
Direct Labour Cost
It refers to all labour expended in altering the construction, composition, conformation or condition of the product. The wages paid to skilled and unskilled workers for his labour can be allocated specifically to the particular product or the process as the case may be. In any manufacturing process or department, the workers employed may be of the following two categories:
(i) Those who are directly engaged on the production or in the carrying out of an operation or process;
(ii) Those who are assisting in the process by way of supervision, maintenance, transportation of materials, etc.
The workers coming under the first category constitute direct labour and the wages paid to them are called direct wages. In a factory, where production of a number of products is undertaken or in a jobbing concern, workers are given job cards on which they note the time devoted to each job or product. These job cards are then analysed job wise so that the wages attributable to each job can be computed.
Direct labour cost is that portion of wages or salaries which can be identified with and charged to a single costing unit. It can be easily identified with and charged to a single costing unit as there is a direct relationship with the product/process. Direct labour cost can be easily calculated and is quite significant in amount.
Indirect Labour Costs
It refers to labour expended that does not alter the construction, conformation, composition or condition of the product, but which contributes generally to such work and to the completion of the product and its progressive movement and handling up to the point of dispatch. In other words, labour employed for the purpose of carrying out tasks incidental to goods produced or services provided is regarded as indirect labour. Wages or salaries paid to foremen, supervisors, inspectors, clerks, store-keepers, managers, accountants, salesmen, directors, etc., are examples of indirect labour cost.
These costs are not easily identifiable with particular units of cost. Indirect labour cost can be classified as that expended in production departments and that in service departments. (bulk of the labour cost in a production department will be direct). The classification should enable control over such costs and codification of indirect labour accounts.
Need for distinguishing between direct and indirect labour cost:
The distinction has to be made
(a) for calculating accurate labour cost and thus provide a basis for strict control;
(b) for facilitating calculation of labour efficiency;
(c) for proper allocation of overheads;
(d) for introduction of incentive schemes;
(e) for inter-unit comparison; and
(f) for estimating total labour costs.
Characteristics of Labour as a Factor of Production
(1) Perishable in Nature
Labour is perishable in nature. This simply means that it has to storage capacity, i.e. labour cannot be stored. If a worker does not turn up to work for one shift his labour of that shift is lost completely. It cannot be stored and utilized the next day. That labour is lost permanently. A laborer cannot store his labour to use at another time. So we say labour as a factor of production is highly perishable.
(2) Labour is Inseparable from the Labourer
This means the physical presence of the laborer is compulsory. To sell his services the laborer has to be physically present at the place of production of goods or services. We cannot separate him and his labour power. So we cannot expect a welder to do his work from home, he has to present at the site of the work.
(3) Human Effort
Labour is a unique factor of production in comparison with others. It is directly related to human effort, unlike the others. So there are certain special factors we must take into consideration when it comes to labour. Fair treatment of workers, rest times, suitable work environment, idle time, etc are just some such factors.
(4) Labour is Heterogeneous
We cannot expect labour to be uniform. Every laborer is unique and so his labour power will also differ from the others. The quality and the efficiency of the labour will depend on the skills, work environment, incentives and other inherent qualities of the laborer.
(5) Labour has Poor Bargaining Power
Labour as a factor of production has a very week bargaining power with the buyer of the services. It cannot be stored, isn’t very mobile and has no standard or reserve price. So generally laborers are forced to work for whatever wages the employer offers. In comparison to the employer, the laborers have very little bargaining power.
There is also the problem that laborers do not have any other reserves to fall back on. They are usually poor and ignorant. And this labour work is their only source of income. So they accept whatever wages the employer offers.
(6) Not Easily Mobile
Labour as a factor of production is mobile, i.e. the laborers can relocate to the site of work. But there are many barriers to the movement of labour from one place to another. So we can say labour is not as mobile as some other factors of production like Capital.
(7) Supply of Labour is relatively Inelastic
At any given point in time, the supply of labour in the market is inelastic. It cannot be increased instantly to keep up with the demand. So say there is a shortage of skilled labour in India, skilled laborers cannot be generated in a day, a week or even a year.
We may be able to import some labour for a short period. But generally, the supply of labour is very inelastic, since we cannot increase or decrease it instantaneously.