Labor costs are an important factor in costs, and labor costs are paramount for overall cost control and cost savings. Labor costs are also called labor costs. However, because it is essential to calculate labor costs in a scientific way in order to manage and reduce labor costs, appropriate systems and processes that help calculate labor costs in a scientific way, and Documentation is required. It should be remembered that labor is not material because it has a human side. Therefore, it is necessary to comprehensively study all aspects related to labor costs. After that, you can only calculate and manage. You also need to pay attention to the productivity aspect. Low productivity leads to high labor costs per unit, and high productivity lowers labor costs per unit. All these aspects of labor costs are discussed in detail in this chapter. A labor cost or labor cost survey is more appropriate to explain as follows:
The workforce is the workforce that contributes to the completion of the manufacturing process of any organization. Without manual horsepower, the machine alone cannot complete the process. Labor can be divided into two parts by him. Direct labor and indirect labor. Labor that is directly related to a manufacturing process, or that can be identified directly in a particular process, is called direct labor, but if the contribution of the labor is not associated with a particular manufacturing process or cannot be identified in a particular product or process. If so, it is called direct labor. This is called indirect labor. For example, in a ready-made garment factory, the wages paid to the tailor are direct wages.
In some cases, the distinction between direct and indirect work is very complex. A worker may be engaged in a particular job related to the manufacture of goods, and after an hour the same worker may be assigned to another job, such as time management or repair. It is treated as indirect.
According to CAS-7 (Limited Revision --2017), employee costs are paid or paid for services provided by corporate employees (including temporary, part-time and contract employees). All forms of consideration.
Labor is an important element of production. It is a human resource and participates in the process of production. Wages paid for labor are an important cost item. Labor costs need to distinguish between direct and indirect labor. Direct labor costs can be directly identified and billed by product or job, but overhead costs are less identifiable and are included in overhead costs that may be assigned to different products or departments on appropriate criteria. Labor costing has three main purposes.
1. Determining labor costs in terms of product or service costs.
2. Report labor costs for planning and management.
3. Report labor costs for decision making.
Labour costs are an important part of total production costs. Therefore, labor costs and labour costs need to be managed effectively. Various departments contribute to the efficient use of the workforce and the proper management of costs. The HR department needs to provide an efficient workforce. The engineering department maintains control over the working conditions and production methods of each job and department or process by creating plans and specifications. The time management department keeps an accurate record of the time each employee spends. Payroll preparation from the clock card, job or time ticker, or timesheet is done by the payroll department. The costing department is responsible for accumulating and classifying all data for which labor costs are one of the most important items.
Personnel costs represent human contribution. Labour costs are inherently sensitive. The reason is that labour costs are entirely based on human behaviour, labour behaviour. To manage labour costs, it is necessary to manage labour behaviour. Therefore, managers need to study human behaviour, labour performance, time and movement studies, labor turnover, and labour approaches to manage labour costs.
The workforce cannot be saved for future reference. It is very similar to the perishable nature of the material. Some materials are of poor quality and may not be used for manufacturing purposes. Such materials are wasted. Similarly, once the workforce is lost, it cannot be recovered and cannot be used effectively in the next few days.
If the work is kept idle, management will have to pay compensation or wages for such idle time. Therefore, management suffered two losses. They are lost working hours and lost money. Therefore, management is very enthusiastic about managing labor costs.
Various Aspects of Labour Cost Management
In today's competitive environment, efforts to control and reduce labor costs are essential. Planned efforts are needed to achieve this goal. The following steps will help you manage and reduce labor costs.
A. Labour cost classification:
The first step towards managing and reducing labor costs is to properly classify the same. Labor costs are divided into direct costs and indirect costs. Direct labor costs are costs that can be identified on a product-by-product basis. It can also be described as all labor costs incurred to change the structure, configuration, or condition of the product. Indirect labor costs are costs that cannot be identified on a product-by-product basis. This represents the amount of wages paid to workers.
It is not directly involved in production, but includes wages paid to workers and assistants working in departments such as purchasing, store management, attendance management, maintenance and other services and production departments. In other words, indirect wages are wages paid to workers who promote production rather than actually engaging in production. Direct labor costs can be charged directly to the job or product unit and are included in the base cost. Overhead labor costs are included in overhead costs. Direct labour costs are variable in nature and can be managed by strict adherence to the norms and standards set by management. Indirect labour costs can be managed by setting a labour budget and comparing the actual indirect labour costs with the budgeted labour costs. The differences between the two will be carefully analyzed and appropriate corrective actions will be taken.
B. Production planning:
Effective management of labor costs can be achieved with good production planning. Production planning includes activities such as planning, scheduling, routing, machine installation, product and process engineering, and work research. Always compare standard time with real time to find the difference between the two. If you find that the actual time taken always exceeds the standard time allowed for the job, you can take appropriate corrective action.
C. Labour Budget:
Budget and budget management are effective tools for cost control and cost savings. You can create a labor budget to set labor cost goals. This makes it easy to compare budget labor costs with actual labor costs.
D. Labour Standards:
You can set a standard for labor costs that can be compared with actual labor costs. Standard labor costs are the costs that should be incurred to produce a particular production volume. We will conduct a time and motion study to determine the standard labor cost and the standard time required for actual production.
E. Labour Performance Report:
We need a system for regular labor efficiency and usage reporting. These reports provide ideas on labor efficiency and productivity.
F. Incentive scheme:
Improving labor productivity is one of the key ways to reduce labor costs per unit. You can increase your productivity by motivating your employees. Providing financial and non-monetary incentives can significantly increase productivity. However, incentive scheme reports should be produced on a regular basis, as they require regular reviews of incentive schemes.
G. Personnel Expense Accounting:
You need an appropriate costing system to identify direct and indirect labor costs. Similarly, the costing department must be able to generate and maintain records of time management, time booking, idle time and overtime, the impact of incentive schemes, per unit of labor, cost by labor turnover, and other related records. It doesn't become.
From the above points, it is clear that labor cost management needs to be carried out by bringing together the collective strengths of each department.
Cost Accounting Department:
The department is responsible for ensuring the correct production costs.
Cost verification includes classification, collection, and calculation of output labor costs. In most organizations, cost department representatives
Posted to the manufacturing department to accumulate and categorize costs. The cost calculator oversees the work of the representative and uses the information contained in the timecard and payroll to find the labor costs of manufacturing-by-manufacturing department, operations, manufacturing instructions, and so on.
The costing department also analyses labor costs in the form of idle time and overtime. A labor cost report is also submitted to management to show the effectiveness of labor use.
Wage Accounting Documents:
(1) Clock card, job card, idle time card:
These are the basic documents for calculating labor costs for jobs, departments, operations, and jobs. Adjusting the clock card and job card is essential to reveal the idle time.
(2) Ratio of wage table and deduction chart:
These documents will help you prepare for payroll.
(3) Wage analysis or wage summary:
This is a salary analysis for various control accounts. This is a summary of the wages paid per job and the wages paid during idle hours. These totals must match the total wages paid.
The wages charged for various jobs are shown on an analysis sheet called the Wage Analysis Sheet. This is suitable if your company is small and the number of jobs running is small.
If you have a lot of work, as in a large company, the timesheet will pre-list the total labor costs and agree with a payroll overview.
The wage summary decisions are as follows:
The analysis sheet shows the labor costs for various jobs and the overhead costs charged as overhead costs.
(4) Journals and ledgers:
Posting of various transactions related to labor costs is done from payroll. Various transactions are posted to the control account in the general ledger. Various sub ledgers in the form of work in process ledgers, factory overhead ledgers, etc. are posted along with the relevant labor cost items.
This department creates payment invoices for the entire organization.
The purpose of the payroll department is to:
(1) Keep records of each worker's work, department and wage rate to reach each worker's total income, deductions and net income.
(2) Check the wages of various cost centers.
(3) Summarize the total deduction amount and post it to the relevant account.
(4) Check the total time of each cost center and calculate the labor cost and the hourly rate for management purposes.
(5) Confirmation of overtime pay and idle hourly wage.
(6) Provide an internal check system for wage payments.
A department salary or wage table is created based on the time card. A full-fledged payroll shows total wages, various deductions, and net wages. Payroll is the basis for checking wages and posting entries to various management accounts. Payroll details depend on your organization's requirements.
Below is a sample payroll.
There are two aspects to payroll preparation. One is to reach total wages paid in the form of wages, including premiums and allowances over time. The second aspect of payroll is to calculate deductions in the form of ESI, PF, income tax, mortgage and prepayment related collections. Nowadays, most companies use computers to prepare for this.
Notes on paying wages:
Various types of fraud can occur in connection with wage payments. Unless the right systems are designed to prevent these frauds, repeated losses can occur and reduce the profitability of the enterprise. Effective internal checks and specific precautions can help reduce and prevent fraud in wage payments.
Here are the detailed steps for time management, time booking, payroll preparation, and finally wage payments to reduce wage payment fraud.
(1) Time management should be performed mechanically as much as possible, and appropriate and efficient supervision is essential to avoid time management fraud.
(2) How to calculate wages, various allowances, incentives and deductions should be simple and clear so that no doubt arises.
(3) If piece work is widespread, inspect the product quickly to maintain the quality of the product and pay only for the good product.
(4) If the incentive system is operated on a time basis, a record of actual working hours and saved hours will be maintained.
(5) Overtime should be approved by the appropriate sanctions of the competent authority. We will compare actual overtime with approved overtime to identify unapproved overtime and take appropriate measures to prevent it.
(6) Introduce effective internal checks when creating wage tables. The work done by the clerk needs to be verified by another clerk to ensure accuracy and perform internal checks to prevent fraud.
(7) The cashier must not have a role when creating the wage table. Similarly, the clerk involved in creating a wage table should not be involved in creating a wage envelope.
(8) The wage table is verified by a personnel officer to detect fraudulently included dummy workers.
(9) It can be seen that the workers have been identified before the wages are handed over to each person.
(10) Payment of wages shall be made simultaneously in all departments so that workers are not present in two places.
(11) Wages for absentees due to illness shall be paid only on the basis of an appropriate approval letter.
(12) Unpaid wages are entered in a separate record kept for that purpose. Attention should be paid while paying these wages.
Overview of Statutory Requirements
All Indian companies spend a great deal of money, effort and time trying to ensure that their salaries are in compliance through proper audits. Companies are often worried about facing legal compliance-related issues such as aggressive employees, unreasonable wage demands, and trade union demands. Even if you are not willing to break the law, you can get into legal trouble without proper protection. This protection is provided in the form of statutory compliance that helps businesses avoid the risk of non-compliance. As the risk of non-compliance increases, Indian companies must comply with statutory compliance with Indian HR.
What is statutory compliance in HR?
To know the exact meaning of legal compliance in human resources, we first need to understand the meaning of the words "legal" and "compliance." Legal means "related to rules and regulations," and compliance means "commitment." Legal compliance in human resources refers to the legal framework of a company used to treat employees professionally and ethically.
What is the importance of payroll statutory compliance?
Failure of Indian companies to comply with central and state labor laws can lead to serious problems and stagnant growth. The following are some of the common risks of statutory compliance violations.
1) Stop working,
2) Loss of company dignity, reputation and credibility,
3) Cancellation and suspension of business license,
4) Distrust of company stakeholders and investors,
5) Imposition of fines,
6) Loss of customer loyalty,
7) Civil and criminal liability,
8) Negative impact on company productivity,
9) Criminal liability to company directors or officers,
10) Withdrawal of financial benefits,
11) Closure of the company when the case reaches extreme levels,
Legal compliance in human resources helps companies manage a tightly regulated environment and avoid the risk of non-compliance.
All labor and tax laws in India are subject to legal compliance. All Indian companies are required to enforce these laws that change at the national and state levels. If a company does not comply with these regulations, it may face legal issues such as fines, penalties and even complete closures. To avoid these risks, companies must spend sufficient resources to ensure legal compliance with human resources. Companies need to understand all Indian labor and tax laws in order to stay up to date on the changes that need to be incorporated into their organization. The rules keep evolving from time to time and the law is very dynamic.
India's next labor law requires legal compliance.
1) Child labor (prohibition and regulation law), 1986
2) Interstate Migrant Workers (Employment Regulations and Conditions of Work) Act, 1979
3) Same Compensation Act of 1976
4) 1972 Thanksgiving payment method
5) 1970 Contract Labor (Regulation and Abolition) Act
6) Bonus Payment Act, 1965
7) The 1961 Apprenticeship Act
8) Employment Exchange Act 1959 (Forced Notification of Vacancy) Act
9) 1952 Employees Provident Fund and Miscellaneous Provisions Act
10) Factory Act of 1948
11) Minimum Wage Act, 1948
12) Employee National Insurance Act of 1948
13) Industrial Dispute Act 1946
14) 1946 Industrial Employment Continuation Order Act
15) 1936 Wage Payment Act
16) Trade Union Act of 1926
17) 1923 Workers' Accident Compensation Act
Minimum Wage Act, 1948
The Minimum Wage Act sets the minimum wage rate for Indian companies, where both the state and central governments determine these rates. The minimum wage rate is declared at the occupation, sector, state, and country levels. These wages can be established in any sector, profession, or region. Living expenses determine the minimum wage. The minimum wage may be set for different work classes with different or the same scheduled employment. The frequency of salary is either monthly, hourly, or daily. The state and central governments will notify prospective employers of the revision of the minimum wage rate.
There are two ways to amend or amend the minimum wage:
1) Committee method
This method is a method of changing the minimum wage after the government has set up committees and subcommittees for making recommendations and advisories.
2) Notification method
In this way, the government's proposals on people who may be affected by the change in the minimum wage are published in the official bulletin. Recommendations will be considered on the specified date.
The Government will amend or amend the minimum wage for certain prospective employment after considering the advice of all representatives and committees. The final decision will be made three months after the declaration date.
List of legal compliance documents by Staruphroolkit
- Outline of laws and regulations
- 1936 Wage Payment Act
- Minimum Wage Act, 1948
- 1965 Bonus Payment Act
- Tax withholding (TDS)
- Professional tax
- Amendment of the 1961 Birth Benefit Act
- 1976 Same Compensation Act
- Store and Business Law
- 1948 Employee State Insurance Act (ESIC)
- 1972 Thanksgiving Payment Method
- Labor Welfare Fund Act 1965
- Labor Law Annual leave and holidays
- Labor law compensation
- Labor Law Fair treatment
- Labor Law Safety and Health
- Labor Law Labor Union
Overtime, Idle time and Incentives
Employees are expected to work on a fixed schedule of day or week. If they work beyond it-overtime is called overtime. In other words, work that is done beyond normal time is called overtime.
The Indian Factory Act provides for overtime pay twice as much as usual. If a worker works more than 9 hours a day or more than 48 hours a week, he or she will be treated as overtime and will be paid twice as much as usual. Wages are calculated at the normal rate of up to 9 hours and at twice the normal rate of working more than 9 hours a day, or at a single rate of up to 48 hours and over 48 hours It is calculated at twice the normal rate.
Causes of overtime
It may be caused by the following circumstances:
- To work for the seasonal rush.
- For the time lost due to unreasonable conditions.
- To complete the work according to the customer's request.
- To work for policy making, for example, when there is a shortage of workers and there is extra pressure from existing workers.
Treatment of overtime pays in cost accounting, if overtime is done according to the customer's wishes, the full amount of overtime, including freedom of overtime, must be charged directly to the work.
This is due to the pressure of common work to increase insurance production, and overtime may need to be charged for common overheads.
If the cause is the negligence or delay of a worker in a particular department, the relevant department may be charged.
If the cause is an uncontrollable situation that may be charged to the costing P & L account.
Disadvantages of overtime
- Labor costs will be higher.
- It also reduces productivity.
- At what time in the middle of the night, the cost of lighting, which is electricity, increases?
- It affects the health of customers.
- Leads to fatigue.
- Improves productivity.
- The number of defective products is increasing.
- Workers may be disappointed when work is unevenly distributed.
Procedures for managing overtime
- Overtime should be approved after investigating the reason.
- Overtime must be in the relevant department.
- If overtime is a normal function, consider hiring more men.
- Overtime is due to a lack of plants, machinery, or other resources, and the steps to be taken to increase the amount of machinery.
- Machines can be used, if possible, to fix caps for each category of overtime.
The additional amount paid to a worker for overtime work is called overtime premium.
Overtime is not recommended as it increases production costs for the following reasons:
(1) Overtime is paid twice as much as usual.
(2) Overtime is done after normal hours at midnight, when fatigue may occur and workers' efficiency may not reach the required level.
(3) In order to work enough for overtime, workers may not be able to reach their full potential during normal hours.
(4) It is necessary to bear additional expenses for overtime work such as electricity bill, plant maintenance, wear and tear, and supervision.
Each of the above push’s costs up, so unless there is a demand for output that revenue justifies additional costs, it is not desirable over time.
Regular wages form part of labor costs directly, but there is controversy over the treatment of overtime pay. Work done during normal hours has to bear a single rate, and work done over time is twice as expensive, creating "unfairness". To eliminate this, regular wages will be raised to include overtime pay, and regular hours or overtime work will bear the same costs.
However, if overtime is done under pressure from a particular customer, that customer will be charged for overtime. If overtime is due to an unusual reason, such as a machine failure or power outage, overtime will be charged directly to the income statement as an extraordinary cost.
Overtime has many disadvantages and should be avoided and maximized control.
The following measures have been proposed.
(1) All normal work must be completed in normal time so that there is little room for overtime.
(2) Long-term justification should be supported by substantive interests, and long-term justification should be approved by the competent authority.
(3) The upper limit of time must be fixed for each worker.
(4) Frequent and regular reports should be prepared and forwarded to management regarding overtime hours and their costs. This allows management to take corrective action.
Attendance time must match work time. In general, it doesn't happen for many reasons. Examples-Time required to walk from the factory gate to the department, materials, tools, time lost to wait for instructions, loss due to machine failure, power outages, etc. This wasted time is called idle time. .. The idle time card is provided to check the idle time. The idle time card shows the reason for the idle time, so you can take action to prevent avoidable idle time.
A sample idle time card is shown below.
Idle time type:
Idle time can be divided into two categories based on the cause or reason for its occurrence.
(A) Normal idle time.
(B) Abnormal idle time.
(A) Normal idle time:
This is unique to all types of employment and cannot be avoided. The cost of this time is borne by each job or product or department.
An example of normal idle time is shown below.
(1) The time it takes for a worker to walk from the gate to the department.
(2) Time required to receive tools, change clothes, and receive work instructions.
(3) The time it takes to change from one job to another.
(4) Personal needs and time required for tea.
(5) Wait time for the machine to be ready for production work (called setup time).
Normal idle time processing:
There are two ways to charge your production environment during normal idle time:
(1) Normal idle time costs will be factory costs and will be collected as indirect costs.
(2) Normal idle time costs are charged directly to production as direct wages.
(B) Abnormal idle time:
Abnormal idle time is the avoidable idle time caused by preventable conditions.
The reasons why the idle time is abnormal are as follows.
(1) Time lost due to machine failure,
(2) Time lost due to a power outage.
(3) Loss of time due to lack of materials.
(4) Wasted time because there is no instruction. And
(5) Time lost due to strikes and lockouts.
Handling of abnormal idle time:
The basic principle of costing is to eliminate the impact of all anomalous losses and profits on a job or process or operation by transferring all anomalous costs and profits to the income statement. They should not form part of the production cost. Wages paid for abnormal idle time are charged to the costing profit and loss account.
Idle time control:
It is necessary to analyse the reasons for idle time and take measures to prepare for all contingencies, such as preventive maintenance of machines, proper arrangements to provide sufficient materials, preparation of work instructions in advance, and avoidance of strikes. There is. Even normal idle time can be controlled by efficient management planning and supervision.
This is usually the difference between the time paid to workers and the time spent on production. The loss of time that an employer faces but does not benefit directly is called ideal time.
Cause of idle time
The causes of idle time can be classified into the following groups:
- According to their control ability.
- Depending on the function
- According to controllability, the causes are:
- Normal idle time, including gate-to-work time, lunch breaks, breaks, tea time, loot setting time, and machine adjustment time.
- Abnormal idle time due to failure, shortage, known availability of raw materials, neglect of strike or lockout.
Depending on the function:
- Productive cause,
- Administrative causes,
- Economic cause.
- The productive causes are:
- Machine failure,
- Unused manpower,
- Waiting for work,
- Power outage,
- Waiting for tools / raw materials,
- Waiting for instructions.
2. The following are the ideal primes caused by the administrator:
- Inadequate planning,
- Delayed or inappropriate instructions,
- Unused capacity due to administrative decision.
3. The idle time caused by economic causes is as follows:
- Lack of demand,
- Lockouts and strikes,
- Non-dismissal of off-season workers.
Idle time control
- The ideal time is caused by a normal or abnormal cause and needs it appropriate planning to avoid these causes.
- Idle time can be eliminated or minimized by performing the following steps:
- Production should be properly planned
- Machine maintenance required
- Effective use of manpower
- Materials to buy in time
All idle time managers need to be identified and corrective action taken.
Incentives are additional wages paid to workers to improve employee efficiency and motivation. Various incentive plans are available to suit the needs and aptitudes of your organization. These plans also help overcome loopholes in both types of wage-paying plans, whether pay-as-you-go or hourly.
Factors before the introduction of the incentive plan
The main factors to consider before introducing an incentive system are:
Strict quality control measures: In order to implement a production-based incentive plan, strict quality control measures must be implemented within the organization. Workers should be paid on an hourly basis if quality assurance is not possible with existing systems No incentive plans should be introduced.
Strict quantification techniques: We cannot provide incentive schemes if you cannot accurately measure the amount of work done.
Fixed Performance Standards: Performance standards must be accurately determined by management and communicated appropriately to employees before implementing incentive plans. Incentive schemes can be quite expensive if this requires a large amount of spending.
Prohibition of Discrimination: With the introduction of incentive plans, employees should not feel discriminated against. For example, if an incentive scheme allows unskilled workers to earn high wages, then the wage rate of skilled workers should also be increased (if paid on an hourly basis) to avoid dissatisfaction with skilled workers. In that case, the incentive scheme may raise labor costs rather than lower them.
Cost-Benefit Analysis: Incentive plans should be analyzed in terms of the costs and benefits your organization receives before it can be implemented. The benefits incurred by the enterprise must be greater than the costs incurred in its implementation.
- Labor is an important element of production.
- Labor costs can be categorized as follows.
- Calculate Labour Cost
- Work study is the study of the technical aspects of production.
- Job analysis is the process of determining the list of qualifications a worker has to do the job effectively.
- Job valuation is the process of investigating and assessing the relative value of jobs within the industry and confirming their comparative value.
- Merit assessment is a valuable tool that is considered important for measuring human resources.
- Attendance time is recorded for wage calculation.
- Time cards are assigned to each worker for a week.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions.
- Employers can significantly reduce worker turnover, thereby saving labor costs.
- If a person works longer than normal working hours, the extra time the person worked is known as overtime.
- The loss of time that an employer faces but does not benefit directly is called ideal time.
- The idle time that is not available remains merged into the job or automatic transfer that the worker was hiring.
- It should be remembered that the wages allowed will ultimately lead to a more economical use of machinery, tools, materials, and time.
- Incentives are additional wages paid to workers to improve employee efficiency and motivation.
Labor turnover rate:
Labor turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period. This is the number of workers who quit their jobs during the period relative to the average workforce during the period. It is a factor that affects labor efficiency and thus labor costs.
Definition: Turnover can be defined as the overall change in the number of people employed by an entity during a particular time period. This takes into account the number of employees leaving, new subscribers, and the total number of employees listed on salary at the end of a given period.
High turnover rates are considered unfavourable for organizational stability and can even lead to temporary closures and strikes. Therefore, entities take human resources as an integral part of their business. It means the rate of change in the composition of the workforce.
There are three ways to measure it:
- Calculating Labour Turnover by Separation Method
Labour Turnover = No. of workers left or separated during a period / Average number of workers on role during that period x 100
Average No.of. Workers = (No. Of workers at the beginning of the period + No. Of workers at the end of the period) / 2
2. Calculating Labour Turnover by Replacement Method
Labour Turnover = No. Of workers replaced during a period / Average number of workers on role during that period x 100
3. Calculating Labour Turnover by Flux Method
Labour Turnover = No. Of workers separated in a period + No. Of workers replaced in the same period) / Average number of workers on role during that period x100
Turnover rate due to new hires: Workers who participate in a business to expand their business do not generate a turnover rate. Some cost activists believe that newly hired workers are responsible for changes in the composition of the workforce. The turnover rate of new workers is as follows.
- A high turnover rate is bad because it indicates that the worker will not stay long. When they go, they bring their experience with them. New workers must be engaged and trained. Aside from the cost of hiring and training new workers, their quality is expected to decline. Therefore, the turnover rate of workers is very costly for employers, but when workers take a break from work or get a job that is not suitable for them, they also lose.
- Both worker turnovers and shifts are costly, but most of the turnover costs usually occur during shifts. Separation is the cause of sales and the exchange continues.
- There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers. However, research shows that actual sales are unnecessarily high in most industries.
Causes of turnover:
Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers. Therefore, the cause may be unavoidable.
The avoidable causes of turnover are:
(1) Redundancy due to seasonal fluctuations, material shortages, project completion, etc. The efficiency and foresight of senior management can eliminate sales from these causes.
(2) Boring work,
(3) Bad working conditions,
(4) Low wages,
(5) Unstable employment,
(6) There are few opportunities for promotion,
(7) Unfair treatment,
(8) Labor dispute.
The unavoidable causes are as follows:
(1) Difficulty of housing,
(2) Personal improvement,
(3) Domestic responsibility,
(4) Illness and accident,
(5) Leave the district,
(6) Discharged because it was judged to be inappropriate,
(7) Discharge due to disciplinary action,
Employers can significantly reduce worker turnover, thereby saving labor costs.
Labor turnover cost:
It is a good idea to calculate the labor turnover cost individually.
It consists of:
(A) Recruitment costs for additional men engaged due to excessive turnover.
(B) Training costs for additional men engaged. And
(C) Loss due to reduced production quantity and quality due to sales, represented by lack of recovery of hourly wages and fixed costs.
(D) Costs of lost time, wasted, scrap, defective work and tools, and machine damage due to inefficiencies of new employers.
(E) Cost of products lost due to delayed acquisition of new workforce.
(F) Frequency of accidents due to lack of experience of new employees.
Impact on labor turnover
When an employee leaves the organization, it affects the work of some or even the entire entity.
This effect can be both constructive and destructive to the organization. When workers leave the company in groups, the impact is even greater and productivity is reduced.
First, let's talk about the negative effects of turnover within an organization.
- Impede productivity: When an employee quits a job, production is temporarily stopped or slowed down until a new employer joins the organization.
- Demoralization: Colleagues lose motivation when they find that a retired employee is retiring for a better opportunity.
- Increased production costs: During the training or learning phase of a new employee, the cost increases due to reduced productivity and high waste.
- Training Costs: Wages paid to trainees, new employees, and mentors during unproductive training periods are a significant expense to the organization.
- Replenishment Costs: Recruiting new staff to fill the position of retired employees includes advertising, employment, and training costs.
Labor turnover also has several benefits for the organization. This is explained in detail below.
- Improve your organizational culture: Turnover means the entry of new people with different values, ideas and beliefs to enrich your organizational culture.
- More talented people: New hires are more efficient, knowledgeable, sensitive and active than existing employees.
- Cheaper Resources: Due to continuous price increases and promotions, existing workers will cost more than alternative cheap trainees.
- Injecting Fresh Ideas: New resources bring innovative ideas and ways of doing things. This is very beneficial to the organization.
- Better Skills and Qualifications: Evolving courses and skill training allow organizations to acquire new graduates with better abilities.
Types of turnovers
Turnover can be distinguished based on employee spontaneity and its impact on the organization. Below are four basic types of her.
- Voluntary: When an employee voluntarily leaves the organization, that is, when the person resigns from work for some reason, it is called voluntary turnover.
- Involuntary: In the case of involuntary turnover, the worker is excluded from the job by management. It may be due to reasons such as non-compliance with the norms.
- Functional: Being functional means improving the efficiency of your organization.
- Dysfunction: Dysfunctional labor shifts occur when highly efficient and skilled employees quit their jobs by interfering with the overall functioning of the organization.
Strategy to reduce turnover
Turnover is an unavoidable aspect of business. However, you can control it by taking timely actions and improving existing HR policies.
Let's look at other ways to reduce the number of exits.
Management must make constant efforts to promote good relationships with healthy employees within the organization. Wage and incentive plans should be reviewed and upgraded annually to ensure fair wages for workers.
Another way is to change your personnel policy according to the guidelines set by government and corporate behavior. In addition to fair wages, we can maintain employee employment by providing a variety of incidental benefits such as insurance, medical facilities and transportation.
Retirement interviews provide a definitive reason for turnover, so do it to get an idea of all the things you need to improve. Workplace facilities such as adequate ventilation, lighting, drinking water and cleanliness must be maintained.
Organizations should not underestimate labor welfare and take appropriate steps to empower their talent. Corporate compensation and compensation planning must be progressive to motivate and evaluate talented employees.
Ground-level employee ideas can prove beneficial to the organization. Therefore, they should be encouraged to share their views. Resolving conflicts and addressing the dissatisfaction and problems of workers in the workplace creates a healthy environment for all.
Managers and supervisors need to be open-minded about their subordinates in order to deepen their ties and understanding. All employees are looking forward to the growth prospects that the organization offers. Therefore, it is very advantageous to give employees the opportunity to be promoted.
Turnover is usually high in private organizations where many workers engage in day-to-day tasks that do not require expertise.
However, skill-based organizations are trying to maintain low turnover rates. This is because if their valuable resources leave the company, they will have to bear the cost of fairly high sales.
Although a small factor, employees tend to stay in the organization for longer if the employee orientation process is prominent.
- Labor turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions.
- Employers can significantly reduce worker turnover, thereby saving labor costs.
- When an employee leaves the organization, it affects the work of some or even the entire entity.
- Turnover is usually high in private organizations where many workers engage in day-to-day tasks that do not require expertise
- Management must make constant efforts to promote good relationships with healthy employees within the organization.
- Wage and incentive plans should be reviewed and upgraded annually to ensure fair wages for workers.
- Turnover can be distinguished based on employee spontaneity and its impact on the organization.
- Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers.
- There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers.
Utilisation of labour
Most companies are continually trying to improve efficiency. One way companies analyze efficiency is to look at expenses such as salaries and decide whether to make changes. If a particular payroll calculation is not satisfactory, the company may change its policy.
About labor utilization
Labor costs are usually one of the biggest costs for a company, so most companies want to make sure that labor costs contribute to revenue generation. The direct labor utilization calculation shows what portion of total salary expenditure a company pays for direct work, that is, work directly related to income-generating projects. The remaining salary costs are usually indirect labor costs such as training, marketing, management, paid leave, and taxes.
To calculate the direct labor utilization rate of salary, divide the amount of salary paid for direct labor by the total salary cost for the period. For example, if you spend $ 3,000 on salary during a payroll period, of which $ 2,000 is paid directly as labor costs, the direct labor utilization rate for that period is 66.7% ($ 2,000 / $ 3,000 = 66.7).
The direct labor utilization rate of most companies is about 65%. The higher the direct labor utilization rate of a company, the more efficient the company operates. Companies with a large amount of paid training and paid leave have lower rates of direct work than companies with less paid training and paid leave. These taxes have little effect on the interpretation of direct labor utilization, as all companies pay the same percentage of payroll tax.
Things to consider
Many companies directly monitor labor utilization on a monthly basis to assess the efficiency of their business operations. If the company determines that the utilization rate of direct labor is too low, it will make efforts to increase the ratio by reducing indirect labor costs. However, companies may try to reduce indirect labor costs as much as possible, and some of these costs are needed for successful business operations.
Direct and Indirect Labour
Classification of labor costs
Labor costs can be categorized as follows.
1. Direct labor costs
Direct labor costs are part of salary or wages and can be identified and billed by a single unit price of production.
Characteristics of direct labor costs:
Direct labor costs have the following characteristics.
- It has a direct relationship to the product, process, or cost unit.
- It can be measured quantitatively.
- A sufficient amount of material.
2. Indirect labor costs
Even if it occurs directly, it cannot be identified in the production of goods or services. These costs are incurred at the production site. Some cost centers may serve production departments or production activities. These cost centers are responsible for purchasing, engineering, and time management.
3. Manageable labor costs
Labor costs can be managed by managers during production and even when there is no production. Standard hours and hourly rates are fixed and workers can be required to complete a job or order within such time. That way, labor costs can be reduced to some extent.
4. Uncontrollable labor costs
Labor costs that management cannot easily control. Jobs and orders can be completed by a group of workers. The efficiency of such labor groups is inherently different. Workers can maximize their efficiency according to the general environment of the product location. If so, costs cannot be controlled by management.
Direct labor refers to salaries and wages paid to workers who are directly involved in the manufacture of a particular product or the implementation of a service. The work performed must be related to a particular task. In the business of providing services to customers, direct labor is the work performed by workers who provide services directly to customers, such as auditors, lawyers, and consultants.
Wages paid are considered indirect if the work performed is not associated with a particular employee. If you want to track the total costs incurred in a particular project, you need to add direct labor costs as they can make up the majority of the project.
How to measure direct labor
Direct work includes the cost of regular working hours and the cost of overtime hours. This includes related payroll taxes and expenses such as social security, Medicare, unemployment tax and worker employment insurance. Companies must include contributions to the pension plan as well as health insurance costs. Some companies may include employee training and development costs incurred during the hiring process.
When calculating labor costs directly, the company must include all cost items incurred in maintaining and hiring employees. In addition to what you pay your employees, the company must consider the costs of retaining employees, such as payroll tax burdens, insurance premiums, and benefits.
Most companies have standard hourly rates that estimate the expected direct labor costs under normal conditions. For example, suppose you have a direct labor cost of $ 10 per hour to assemble stroller seats, and your company expects to spend 0.5 hours assembling each car seat. If the company produces his 1,000 units, the standard direct labor cost would be $ 5,000 ($ 10 x 0.5 x $ 1,000).
What is Indirect labor?
Indirect labor costs are labor costs that are not directly related to the production of goods or the provision of services. This refers to the wages paid to workers who perform duties that allow others to produce goods and provide services.
Unlike direct labor costs, indirect labor costs are not easily associated with a particular unit. Employees in this group include managers and managers such as supervisors, accountants, security guards, and cleaners.
What is indirect labor?
The workforce is defined as the total workforce and expertise needed to complete a job. It can be divided into direct labor and indirect labor.
Overhead is a category of overhead and refers to employees who directly support overhead in performing their work. It is not directly involved in the service or production process.
Indirect labor cannot be traced back to a particular product or service, so the associated costs cannot be charged to the goods produced or the services provided. This represents the business overhead required to support operational levels.
What is an example of indirect labor?
Imagine you are the owner of a construction company. Consider both direct and indirect work when considering a contract. Direct labor costs are easy to understand. This refers to expenses, including wages and other benefits, incurred by employees directly engaged in projects such as workers, riggers, foreman and pipe fitters.
Indirect work refers to employees who are not involved in planning or construction projects. However, they are involved in running their day-to-day business. This includes human resources, management, accounting, customer service and more.
Examples of indirect labor include:
Computation of Labour cost
How to Calculate Labour Cost: Per Hour, Per Unit, Techniques and Formula
Techniques for managing labor costs can be effectively used by coordinating the activities of various labor-related departments.
(A) Human Resources Department,
(B) Engineering and Operations Research Division,
(C) Timekeeping department,
(D) Payroll department and,
(E) Cost accounting department,
The capabilities of these departments in reviewing and managing labor costs are described in detail below.
(A) Human Resources Department:
The Board of Directors has policies regarding recruitment, training, placement, transfer and promotion of employees. The Human Resources Manager of the Human Resources Department must implement these policies. The main functions of this department are recruitment, training, and placement of workers in the right jobs.
The Human Resources department recruits workers when it receives employee placement requests from various departments.
(I) Employee placement request:
This is a document initiated by a department that needs employees. Upon receipt of the job, the Human Resources Department will take action to appoint a worker by receiving the application, scrutinizing the application, interviewing the applicant, and finally selecting the appropriate candidate.
Incentive methods of wage payment— Halsay, Rowan & Taylor differential premium plan
There are the following types of incentive wage systems:
1. Halsey Premium Plan.
2. Rowan Premium Plan.
3. Taylor Differential Peace Rate System.
4. Gantt Bonus Plan.
5. Emerson Efficiency Plan.
6. Bedo Point Premium.
7. Merrick Differential Wage Multi-Piece Rate Plan.
8. 100% bonus plan.
Halsey Premium Plan:
This plan was introduced in 1891 by American engineer F. A. Halsey. Recognize your personal efficiency and pay bonuses based on the lime saved. In this way, workers are paid at the rate of the hours they actually worked and are also paid a bonus if they can complete the work in less time than the time allotted to do the work.
Bonuses are paid at a fixed percentage of the time saved, usually 50% (although the percentage varies from 30% to 70% of the time saved). The remaining 50% of the time saved will be shared by the employer.
Total revenue = T.T. × H.R. + 50% (T.S. × H.R.)
Here, T.T. = Time required
H.R. = hourly wage
T.S. = Time saved
The main advantages of this method are:
(I) the method is simple to operate and easy to understand.
(II) Late workers are not punished because hourly wages are guaranteed.
(III) Provide incentives for more efficient workers.
(IV) Worker efficiency means reducing costs per unit.
(V) The benefits of time savings are shared equally between employers and employees.
The main drawbacks of this method are:
(I) many employee organizations do not like to share the benefits of time savings equally.
(II) Attracting bonuses reduces the quality of work.
(III) Poor quality means more waste, potential for corruption, defects and failures, and more oversight costs.
(IV) Not as attractive as peace rate payments.
(V) There are few incentives for workers compared to other incentive plans.
(VI) This can lead to higher bonuses if the time rate is not fixed properly.
Halsey-Weir Premium Scheme:
This scheme was introduced by Weir Ltd. In Glasgow around 1900. This scheme is similar to the Halsey scheme, except that employees get 33⅓% (often 30%) of the time saved as a bonus and the remaining 66⅔% is paid to the employer. ..
Total revenue = T.T. × H.R. + 33⅓% (T.S. × H.R.)
Here, T.T. = Time required
H.R. = hourly wage
T.S. = Time saved
Grames Rowan first introduced this plan in Glasgow in 1898. In this scheme, like the Halsey scheme, workers receive a guaranteed hourly wage for actual working hours. However, premiums are calculated differently here.
If a worker can complete a job in less time than allowed, his bonus is to his hourly wage for that percentage of the time saved to endure the allowed time. Will be equal.
Therefore, the bonus is calculated as follows:
And total revenue = T.T x H.R. + (T.T. × H.R.) × T.S. / T.A.
Here, T.T. = Time required
H.R. = hourly wage
T.S. = Time saved
T.A. = Allowable time
The main advantages of this scheme are:
(I) It provides incentives for learners and slow workers.
(II) Premiums are proportional to the time saved, so employers are protected if they are not properly fixed.
(III) From the employer's point of view, the Rowan scheme is safer than the Halsey scheme.
(IV) With up to 50% of the time saved, the bonus for this scheme will be higher than the bonus for the Halsey scheme.
(V) As the bonus increases at a rate of decrease. Employees are not in a hurry to complete their work quickly, reducing the possibility of waste.
(VI) Due to the high output, the fixed overhead per unit is low.
The main drawbacks are:
(I) the method is complicated.
(II) Incentives are low at high production levels.
(III) Employees are willing to share their time savings with their employer.
Comparison of Halsey and Rowan schemes:
(1) With savings of up to 50%, premiums will be the same for the two schemes.
(2) In the Rowan scheme, the bonus rises faster than in the Halcy scheme until the job runs in half the standard time.
(3) However, if the work takes less than half the standard time, both the Halsey system premium and the total income will be higher than the Rowan system premium.
(4) On the other hand, if the work time exceeds half of the standard time, both the bonus and total income of the Rowan scheme will be larger than that of the Halsey scheme.
(5) The Halsey scheme provides more incentives to speed up production, but after certain stages there is an automatic check under the Rowan scheme.
(6) The Halsey scheme turns out to be costly if more than half the time is saved, while the Rowan scheme is costly if less than half the standard time is saved.
Taylor's Differential Peace Rate System:
This system was first introduced by F.W. Taylor, the father of scientific management. This system does not provide a minimum guaranteed hourly wage.
However, in this system, the two-piece rates are fixed.
(A) Workers are paid a low peace rate for substandard production
(B) Higher fees are paid to workers who produce above the standard. Therefore, this system penalizes inefficient workers and rewards efficient workers.
Worker efficiency can be determined as one of the following percentages:
(I) from the time allowed for the job to the time actually taken, or
(II) From the actual output within the specified time to the standard output.
- Most companies are continually trying to improve efficiency. One way companies analyze efficiency is to look at expenses such as salaries and decide whether to make changes.
- The direct labor utilization rate of most companies is about 65%.
- The higher the direct labor utilization rate of a company, the more efficient the company operates.
- Even if it occurs directly, it cannot be identified in the production of goods or services.
- Wages paid are considered indirect if the work performed is not associated with a particular employee.
- Indirect labor costs are labor costs that are not directly related to the production of goods or the provision of services.
- Techniques for managing labor costs can be effectively used by coordinating the activities of various labor-related departments.
Compensation is the sum of the employee's financial income. It consists of income based on working hours or piece work and includes other financial incentives.
Incentives are the stimulation of effort and effectiveness by providing financial or additional equipment.
Incentives are monetary or non-monetary. Financial incentives include wage payments, premiums, bonuses, prizes, and return on investment that exceed the wages paid to hourly workers. Non-monetary incentives include providing the right facilities and background conditions to get the full benefits of personnel for all grades, including promotion plans and training schemes.
Benefits of incentives: -
- To increase production.
- Improve or at least maintain product quality.
- To reduce production costs.
- Increase employee morale, increase efficiency, and ultimately satisfy
In general, the wages a worker receives depends on the supply and demand of that working class.
The following factors should be considered when determining compensation in a particular industry:
The impact of compensation levels on the country's economy.
- Wages paid to employees of similar organizations in the region.
- Employer's ability to pay.
- Employee needs for living standards
Incentive system factors: -
Production: --If you are more productive, your production costs will be lower and your employer will ultimately benefit significantly.
Impact on workers: -The wage system should be clear and simple. It must be able to obtain maximum cooperation and should not increase labor turnover.
Fixed Overhead Incidence: --You need to consider the fixed overhead incurred rate for production. As production increases, variable costs per unit remain the same, but fixed costs per unit decrease. Therefore, the increased production efficiency lowers the total cost of production.
Principles applicable to all incentive schemes:-
- Compensation must be associated with the efforts involved and must be fair to both employers and employees.
- The scheme is clearly defined and needs to be fully understood by the worker. It needs to provide valuable and achievable goals.
- There should be no limit on the amount of additional income.
- The scheme should be reasonably permanent, should not be modified with the approval of the workers, and should include indirect workers if possible.
- This scheme should be combined with proper inspection routines to ensure that workers are paid only for good production.
- The system should be simple and operational without any extra clerical work.
The main purpose of the scheme is to influence the morale of workers.
- Wages are based on time or production.
- When an employee is paid on an hourly basis, it's called an hourly rate.
- When wages are calculated on the basis of production, it is called volume.
The reward system is categorized as follows:
1) Hourly charge:
a) Normal level.
b) High wage levels.
c) Gradual time rate.
a) Volume payment rate
b) Volume payment with guaranteed date rate.
c) Different piecework payments.
3) Bonus system: a) Individual bonuses for direct workers. b) Group bonus for direct workers. c) Bonus for indirect workers. 4) Indirect financial incentives: a) Profit sharing b) Joint partnership. 5) Non-monetary incentives: Usually related to working and welfare conditions such as health and safety, sports.
1) Normal level time rate:
This is a time, day, week, or other agreed time method, regardless of output. However, in most industries it is customary to pay extra for overtime and there is actually a legal obligation. Employers can get all the benefits of increasing productivity under time rates.
Revenue = working hours x rate per hour.
a) Easy to understand.
b) Quality improvement
a) We do not provide financial incentives.
b) Higher production costs.
2) High wage level hourly wages: -
Under this scheme, employees are paid on an hourly basis, which is significantly higher than normally paid in the industry or region.
Overtime is basically not allowed here.
High wages are characterized by providing incentives not found in regular hourly wages, while maintaining the benefits of simplified management and low prices. Attract and maintain the highest quality labor.
3) Gradual time rate: -
The system may pay at rates tailored to general or specific economic conditions or to the various personal qualities of the worker.
Hourly wages under this system will fluctuate due to changes in the Cost of Living Index.
This scheme favors both employers and employees, but it is difficult to determine an appropriate wage index
1) Straight piece-rate payment type
Under this system, workers receive a flat wage per unit of output, regardless of how long it takes.
An individual's revenue depends on the number of units completed at that rate.
a) If you know the rate per unit: --Revenue = Number of units x Rate per unit.
b) If you know the standard hourly wage: --Stand. Production working hours x rate For each stand time
Flat-rate and resulting payments can only be applied if the work is repetitive enough to allow a clear piecework setting.
The effect of payment by this method is that the compensation is directly proportional to the worker's efforts and the labor cost per unit is constant within the output range.
Advantages and disadvantages
- The piece-rate payment system is simple and has a high incentive effect.
- Being productive distributes the overhead load and reduces unit costs.
- There is no incentive for special efforts.
- Workers' negligence and inefficiency can reduce their compensation.
- Due to the old saying that each system has its own strengths and weaknesses, the incentive system confirms the effectiveness of the incentive scheme and its impact on production costs, and that the productivity of concerns can be significantly improved.
- Therefore, the incentive scheme is developed according to the organization "Model Standing Order".
- Compensation is the employee's total monetary income. It consists of income based on working hours or piece work and includes other financial incentives.
- Incentives are the stimulation of effort and effectiveness by providing financial or additional equipment.
- Incentives can be monetary or non-monetary
Author(s): CBSE Research and Development Unit
Cost Accounting Course Material
University Of Calicut