Accounting & Control of Labour Cost - Cost Accounting | Cost Accounting - B Com PDF Download

Accounting and Control of Labour Cost

Accounting for labour by a manufacturer usually involves three activities:

1. Time keeping;
2. Computation of total payroll; and
3. Allocation of payroll costs.

These activities must be performed before the payroll is recorded in the accounting records. In a large organisation, the control of labour cost involves the coordinated efforts of the following departments :–

(a) Personnel department — This department is responsible for manpower planning, recruitment, training, maintaining records of staff and workmen and reporting to chief inspector of factories and to top management on performance, overtime, absenteeism, leave, etc. 

(b) Industrial engineering department — This department prepares plans and specifications of each job, supervises production activities, undertakes time and motion studies, performs job-analysis, etc.

(c) Time-office — This department is primarily responsible for collection of data relating to attendance, time spent on jobs or process by the workmen, and providing information on attendance and leave to Payroll department.

(d) Payroll department — This department is responsible for computing total and net earnings of each worker, preparation of payroll and maintenance of various records relating to payroll.

(e) Cost department — This department collects and classifies all cost data relating to labour utilisation by departments, and allocates them to respective job or process as per available documents.

Time Recording

Recording of time has two purposes - time-keeping and time-booking. It is necessary for both type of workers: direct and indirect. It is necessary even if the workers are paid on piece basis. Time-keeping is necessary for the purpose of recording attendance and for calculating wages. Time-booking means a record from the utilisation point of view; the purpose is cost analysis and cost apportionment. Record keeping is correct when time-keeping and time-booking tally.

Time-Keeping

The purpose of time-keeping is to provide basic data for:

(i) pay-roll preparation;

(ii) finding out the labour cost of a job/product/service;

(iii) attendance records to meet statutory requirements;

(iv) determining productivity and controlling labour cost;

(v) calculating overhead cost of a job, product or service;

(vi) to maintain discipline in attendance;

(vii) to distinguish between normal and over-time, late attendance and early leaving; and

(viii) to provide internal check against dummy workers.

The time-keeping office records the attendance of workers. Depending on the number of workers, a separate department may be established or it may form part of the personnel department.

Wages paid on the piece rate basis also require that attendance be recorded for the following reasons:

(a) Records of attendance is necessary for statistical purposes.

(b) If overhead rates are based on labour rates, time recording is necessary.

(c) Output will decrease if attendance is unchecked. There may be more idle time and production schedules may not be followed.

(d) Some workers may not be punctual. This will affect the morale of the workers.

(e) It is necessary to ensure that production hours have been properly utilised.

(f) It provides data for calculating bonus and overtime.

(g) Labour costs can be allocated on this basis.

(h) For calculating dearness allowance, it is necessary.

(i) For ascertaining payment under certain schemes of benefits, e.g., P.F., Pension, etc.

(j) For calculating leave with pay, etc.

Methods of Time Keeping

Various methods of time keeping are available, which may be grouped under manual and mechanical methods, as under:

(1) Manual methods:

(a) Attendance register method: An attendance register is kept at the entrance of the factory gate in this method. The in and out timing are noted, either by the worker himself or by a staff of the time office. Later, entries are made to the individual attendance records of the workmen

(b) Disc method: Under this method, metal discs bearing employee’s numbers allotted by the personnel department are placed on hooks on a board provided either at the gate or at the entrance of the department. On entering the factory, the worker removes the disc bearing his number from the board and places it in a box kept for this purpose. The box is taken away as soon as normal reporting time is over. A worker coming late will pick up the disc and put it in the “Late” box provided in the department. Such late box is normally changed every half an hour upto the maximum late attendance time allowed. The timekeeper records the attendance in the register on the basis of these discs.

(2) Mechanical methods:

The attendance cards are used in time clocks installed at the entrance of the factory. On entering the factory, the worker takes his card from ‘OUT’ racks and press it inside the clock, which will print arrival time in ‘IN’ column. He then places it in ‘IN’ rack of the department where he reports for duty. Late attendance is normally reported in red ink. Similarly, when the employee leaves the factory, he collects the card from the ‘IN’ rack and punches the time in the clock and keeps it in the ‘OUT’ rack. It is necessary that the timekeeping staff are present at the time of punching the cards to supervise the procedure. The clock cards are Collected by the timekeeping staff daily or weekly for recording in Statutory Attendance Register. Correct recording of attendance time is very important where wages are paid on the basis of time worked. Where payment is made by results, such as, by piece rate method, it would still be necessary to record correctly the ‘in’ and ‘out’ timings.

Time-Booking

The objectives of time-booking are:

(i) to apportion overheads against jobs;

(ii) to calculate the labour cost of jobs done;

(ii) to ascertain idle time for the purpose of control;

(iv) to find out that the time during which a worker is in the factory is properly utilised;

(v) to evaluate labour performance, to compare actual and budgeted time;

(vi) to determine overhead rates of absorbing overhead expenses under the labour hour and machine hour methods;

(vii) to calculate wages and bonus provided the system of payment depends on the time taken.

Method of Time-Booking

Different methods used for time booking are:

1. Daily Time Sheets
2. Weekly Time Sheets
3. Job Cards

Daily Time Sheets 

Under this method, a daily time sheet is provided to each worker on which time spent by him on various work orders is mentioned. This method can be conveniently used if the worker works on various jobs of short duration like in maintenance jobs. But this method is disadvantages also as it involves considerable paper work.

Weekly Time Sheets

In this method time is recorded for all the jobs done during the week instead of recording the work done for a day only. One sheet is allotted to each worker. It involves less paper work. These types of weekly time sheets are useful for intermittent types of jobs like construction work.

Job Card

Job Card is a method of recording details of time with reference to the jobs or work orders undertaken by the workers. This method facilitates the computation of labour cost with reference to jobs or work orders. Job cards may be of two types, one, which is a job order cost card, and contains information regarding material consumption as well as time spent by operators. The other one is, in effect, a job ticket, which is issued to an operator by the supervisor and contains only the operation details. When the operator starts the work, he records the time either manually or through time recording clock on the card.

Attendance and Payroll Procedure

Preparation of Payrolls

The payroll is a record which shows details of the gross wages earned by each worker in a particular period, the deductions made and the net wages payable. The payroll can be prepared at weekly, fortnightly or monthly periods. It can be prepared departmentwise or shiftwise.

The payroll records contain information regarding:

1. Department
2. Wage period
3. Workers’ ticket number
4. Workers name
5. Normal hours worked
6. Overtime
7. Output in the period
8. Rate of wages/hour
9. Rate of wages/unit
10. Total basic wages
11. Dearness Allowance (DA)
12. Bonus
13. Deductions from Wages
14. Net wages

The labour cost charged to costs is the gross wages of the worker and the employer’s contribution to the Provident Fund and ESI etc.

The preparation of payroll involves three steps, viz.

(a) Collection of basic data;

(b) Determining the wages payable;

(c) Preparing the actual payroll. 

The attendance of time-rated workers can be verified from the clock cards. Production can be verified from piece work tickets and job card for piece rated workers.

The cost department checks the particulars and calculates the gross wages, the deductions to be made and the net wages payable.

A wage ticket is then prepared for each worker. This enables the worker to verify the amount of wages and also acts as an identification at the time of payment.

A denominational analysis of the money required by different departments or shifts is prepared. The required amount is withdrawn in the required denominations.

The wages of each worker is put in an envelope and paid in the concerned department in the presence of the departmental manager.

Some companies have a practice of preparing a pay slip of each worker, which may be handed over to the worker in advance of the actual payment of wages. The pay slip shows basic wages and details of various allowances like house rent allowance, dearness allowance and other payments like, overtime, bonus etc. and various deductions on account of P.F. contributions, income-tax, recovery of loans, and any other deduction. The net amount payable is shown after making all these adjustments.

Overtime

Overtime refers to the situation when a worker works beyond his normal working hours. The overtime rate is always higher than the normal rate and is usually double the normal rate. The Factories Act and Shops and Establishments Act have fixed the normal working hours, defined what constitutes overtime, the rate of overtime and maximum hours of overtime.

Overtime consists of two elements viz. the normal cost and the extra payment or premium. The premium is known as overtime cost. The normal cost is allocated to the Production Order or cost centre/unit on which the worker is working. The treatment of overtime cost varies according to the circumstances.

Causes of Overtime

Overtime arises due to the following circumstances:

1. for working due to seasonal rush;
2. for making up time lost due to unavoidable reasons;
3. for completing a job or order within a specified period as requested by the customer;
4. for working due to policy decisions, i.e. when there is general pressure of work and labour shortage etc.

Disadvantages of Overtime

1. Output is not proportionate to the extra time taken. Hence, there is decrease in productivity.
2. It increases labour cost.
3. If overtime is done during night, it increases lighting cost.
4. Go slow tactics may be adopted during normal working hours to necessitate overtime.
5. Workers may treat overtime wages as a part of normal wages and resist discontinuance of overtime.
6. If the work is distributed unevenly, the workers may feel discontented.
7. It affects the health of workers.
8. Overtime over a long period leads to fatigue and increase in defective products.

Overtime is helpful in clearing backlog of work and in emergencies or when it is necessitated by uncontrollable causes. Existing resources are fully utilised.

Treatment of Overtime premium in Cost Accounting

In cost accounting the treatment of overtime premium will be as follows:

1. If the overtime is resorted to at the desire of the customer, then the entire amount of overtime including overtime premium should be charged to the job directly.
2. If it is due to a general pressure of work to increase the output, the premium as well as overtime wages may be charged to general overheads.
3. If it is due to the negligence or delay of workers of a particular department, it may be charged to the concerned department.
4. If it is due to circumstances beyond control, it may be charged to Costing Profit & Loss Account.

Steps for Controlling Overtime

Important steps for controlling overtime work are as follows :

1. Entire overtime work should be duly authorised after investigating the reasons for it.
2. Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.
3. If overtime is a regular feature, the necessity for necessity for recruiting more men and adding a shift should be considered.
4. If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resort to sub-contracting.
5. If possible an upper limit may be fixed for each category of workers in respect of overtime.

Idle Time

When workers are paid on time basis there is usually a difference between the time for which the workers are paid and the time actually spent by them in production. The loss of time for which the employer pays but obtains no direct benefit is termed as idle time. In other words, Idle time cost represents the wages paid for the time lost, i.e., time during which the worker was idle.

Causes of idle time

The causes of idle time can be classified into the following groups:

1. According to controllability
2. According to functions.

(i) According to the controllability classification, the causes are: 

(a) Normal idle time such as time lost between gate and place of work, time interval between one job and another, rest pauses, tea break, tool setting time, time taken to adjust machines etc.

(b) Abnormal idle time due to break downs, scarcity, non-availability of raw materials, negligence of supervision, strikes or lockouts.

The idle time may be due to avoidable causes i.e., the causes can be controlled and due to unavoidable causes, i.e., the causes beyond control.

Normal idle time occur due to unavoidable causes and abnormal idle time occur due to avoidable causes.

The classification according to functions, the functional causes of idle time are analysed as the treatment depends on the causes affecting idle time. The causes can be classified as follows:

1. Productive causes;
2. Administrative causes; and
3. Economic causes.

(a) The productive causes can be listed as follows:

1. machine breakdown;
2. unutilised manpower;
3. waiting for work;
4. power cuts;
5. waiting for tools/raw materials;
6. waiting for instructions.

Time lost due to the causes mentioned above can be controlled internally. Proper planning helps control.

All engineering organisations should prepare a report showing lost and setting time. The departments in which time was lost can be identified and effective remedial measures taken. It is charged as an item of departmental overhead.

(b) Idle time arising due to administrative causes are:

1. Poor planning,
2. Delayed/unproper instructions,
3. Unutilised capacity due to management decisions.

Idle time arising due to these uncontrollable causes can not be controlled. It is recovered as a part of general works overhead.

(c) Idle time arising due to economic causes are:

1. lack of demand resulting in unutilised capacity,
2. lock outs and strikes,
3. non-dismissal of workers in the off-season in the case of seasonal industries.

Such idle time is not a part of cost of production. It is directly transferred to Costing Profit and Loss Account. 

Accounting Treatment of Idle Time

Idle time cost arising due to normal and unavoidable causes should be charged as overheads and those due to abnormal causes should be charged to Costing Profit and Loss Account. Normal idle time such as loss in tool setting etc. can be charged at inflated rate. Jobs are charged at inflated rate.

Control of Idle Time

Idle time arising due to normal and controllable causes can be controlled by proper planning but those arising due to abnormal causes cannot be controlled. Idle time is bound to occur due to setting up of tools for various jobs, time interval between two jobs, time to travel from factory gate to work place.

Idle time can be eliminated/minimised by taking the following steps:

(i) Production should be properly planned in advance;

(ii) Purchasing/requisitioning of materials in time;

(iii) Proper maintenance of machines;

(iv) Utilising man power effectively.

Responsibility for controlling idle time should be properly defined and fixed. The different causes should be properly analysed by a detailed break up under each head.

Person/department responsible for the idle time should be identified and remedial steps should be taken.