4Accounting and Control of Labour Cost

M. Com. Paper I a Advanced Cost Accoun '

Idle Time, Over Time etc.

idle Time : When workers are paid on time basis, there is usually difference between the time for which they are paid and the time the actually spend on production or work. Thus, idle time is that time fr which an employer pays wages but the employer does not get attjp. production or service from the employees. In other words, it means this time for which a worker is paid for no work.

Factors responsible for idle time can be grouped as under :

(a) Productive Cause : e.g. 'machine breakdown, power failure, waiting for work because of non-scheduling or planning of work^ properly, lack of materials, tools, lack of drawings, instructions etc.(b) Administrative Causes : e.g. overexpansion of production facilities in excess of actual requirements, strikes, lockouts, non-retrenchment of workers, and under-utilisation of machinery during depression, fire etc.(c) Economic Causes : e.g. seasonal market fluctuations, intensity of competition etc.Idle-time may be normal or abnormalr Wastage of time in the routine course of manufacture and which is unavoidable is treated as normal idle-time e.g. time taken by worker to and from the gate of the factor}', from and to the place of his work, time taken for change over from one job to another, tea-breaks, personal needs etc., time spent in the setting of the machine, adjusting the tools etc. However, an attempt should be made to keep the idle-time to the minimum.

Idle time due to productive and administrative causes stated above is treated as abnormal idle time. This idle time can be avoided if sufficient care is taken. For this purpose attention must be given to timely and proper maintenance of machineries and tools, proper store control, ensure supply of required materials in time, in sufficient quantity and of standard quality by stores department. For this purpose there must be proper co-ordination between purchase department and stores department.

Treatment of Normal Idle Time

Normal idle-time can be dealt with in any of the two ways stated below :

(a) By inflating the wage rate so that allowance can be made for this loss of time e.g. if time required for a job is eight hours including idle-time of half an hour and time rate is Re. One per hour, the inflated rate will be 8 t y =1.07. If the idle time occurs en a specific job and the job is on the contract or special order basis, cost of idle time may be charged against such job or order as direct labour cost.

(b) The cost of normal idle-time is treated as a factory overhead. If such cost can be allocated to a particular department, it should be charged to the department over-head and absorbed in the production cost of that particular department.

Treatment of Abnormal Idle Time

The cost of such idle time should be excluded from cost accounts and should be charged to Costing Profit and Loss Account. It is principle of costing that all abnormal expenses and losses should not be included in costs to have meaningful comparison of cost of production at different times and of different producers. These are avoidable expenses and as such the organisation which controls such abnormal expenses and does the production with the minimum wastage of material, labour and other expenses, produces the products at the lowest possible cost. Therefore, it is not a wise policy to include avoidable expenses in cost of productions and thus increase the cost. In order to compare efficiency in production, it is not proper to include abnormal expenses in the cost of production.

Control of Idle Time : Production should be planned and supervised so that idle time is reduced to minimum. Planning of work should be done to see that no worker is required to wait for getting the work. The flow of work should be smooth and continuous. The instructions and drawings should be clearly laid down so that workers are not required to wait for instructions. Timely supply of material and proper maintenance of plants and machinery, as also of power plant ensures reduction in idle time. Daily or weekly idle time reports should be submitted to the works manager to enable him to know the causes and take timely corrective actions.

Over-time : Working hours of workers per day are fixed. However, sometimes the workers are required to work for more hours than the hours fixed. The work, thus put in for extra hours over the usual hours fixed, is termed as over-time work. The rate for over-time is higher than normal time rate, generally, it is double than that of normal time rate. As such it is likely that the workers may incline to do overtime work,, avoiding regular work to be done during the normal rime. Hence, it is necessary to keep strict control over the over-time work and it should be allowed only in exceptional cases and it should be normally discouraged.

Over-time not only increases wages, but other expenses like, lighting, cost of supervision, wear and tear of machinery etc., also increase disproportionately. During over-time, the workers cannot work with their usual efficiency as fatigue prevents the workers from doing the-work at their efficiency. As a result, job done in overtime costs more as compared to the jobs done during the normal hours. However, overtime

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cannot be totally avoided because under certain circumstances, such as rush of work, breakdown of machinery, power failure etc., overtime is required is to be done. Occasional overtime is, however, a healthy sign because it shows that factory has employed the reasonable number of workers and they are not idle. If it is found that overtime is required to be done regularly, serious thought must be given to the appointment of permanent staff. The works manager or some other high officer should authorise overtime and list of the workers required off and on for late work to cope up with the production schedule should be prepared by the foreman and Submitted to the works manager for approval.

The -treatment of over-time wages depends upon the merit of the particular case as shown below :

(a) When the over-time is required to be done on insistence of customers for early-work and the customers agree to bear the overtime charge entirely, it should be charged to that particular job or work order as direct cost.

(b) When the over-time work is required to be done due to any fault of management or any unexpected development or any abnormal conditions like flood etc., overtime cost should be charged to Costing Profit and Loss Account.

(c) When over-time is caused due to seasonal pressure, its cost should be treated either as general overhead or as deferred expenditure for absorption equitably over the entire production.

Control Over the Overtime Work

It is necessary to control overtime work, especially, the overtime caused due to abnormal causes. The following steps may be taken in this regard.

(a) It should be ensured that the workers do their job efficiently during the normal working hours and as far as possible the work assigned is completed during the normal working hours.

(b) A statement of overtime work should be prepared giving the reasons for overtime. Sanction for overtime should be obtained in advance from the competent authority.

(c) Actual rate of output 'per hour achieved during the overtime period and normal rate of output per hour should be compared to ensure that rate of output has not decreased during the overtime period.

(d) Monthly or Quarterly Overtime Report should be prepared and submitted to the top management to ascertain whether the overtime is justified, and if not, necessary steps to be taken to eliminate it, or at-least to keep it to the minimum possible extent.Holiday Pay and Leave Pay

For the weekly holidays and other compulsory holidays under the Act, the workers are paid wages. Similarly, workers are entitled to various types of leave such as medical leave, earned leave, causal leave etc. either with full-pay or half-pay as the case may be. Thus, it is a payment for the days on which no work is done by workers concerned.

There are three methods of treatment of this cost.

1. Wages are charged to cost as and when incurred and actual expenditure of every month is apportioned over the production of that month either separately as a percentage of direct labour cost or as a part of general overheads. Even distribution of leave and holidays is an essential factor for this system, otherwise there will be disparity in the cost of production per unit from month to month.

2. Wages are charged to production through annual reserve calculated at a percentage of total wage bill. This system is more practicable and can be applied under any set of circumstances. The system provides for uniform and equitable distribution of the expenditure over the production of the whole year irrespective of charges to the extent of expenditure actually incurred from month to month.

3. Under this method it is treated as a direct element of cost and charged straight to the jobs or products.

Labour Turnover

In every concern, some workers leave their job for some reason or the other and some new workers are appointed. This change in labour force is termed as Labour Turnover. Thus, the labour turnover is the ratio of the average change to the average strength of the labour force during a particular period. The extent of labour turnover varies according to industry, structure of employment in the country, physical conditions in a particular organisation, proportion of male and female workers.

Effect of Labour Turnover

Normal labour turnover is unavoidable and it is not a matter of iety for the management. But a high labour turnover is detrimental to organisation. It results into low productivity and increased cost of uction. The new workers are required to be trained and they take e to become proficient in their jobs. This results in reduction of action and increase in the cost of production. As the new workers not conversant with their jobs, time and material are wasted and Ity handling of machinery and tools results in stoppage of work. This the flow of work. Accidents are likely to be increased. Money j?S spent on the training of workers leaving the job are wasted.

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Reduction of Labour Turnover

In order to avoid high labour turnover the management should be very careful in selecting the workers. The policy 'right man for right job' should be followed. The workers should be given fair and equal, treatment, fair remuneration, good working conditions, cordial relationship between management and workers, provision of nonmonetary benefits, educational and accommodation facilities, healthy atmosphere etc. Effective communication throughout the business firm will help to control the high rate of labour turnover. In short, it is necessary to create a feeling in the minds of the workers that the organisation belongs to them; and if they safeguard the interest of their organisation, their interest, in turn, is safeguarded. Management must motivate the workers. Motivated employees stay in the organisation and they do not entertain the thought of leaving the organisation.

Cost of Labour Turnover

The cost of labour turnover is the monetary value of the loss of output and cost of services involved in dealing with labour turnover and labour replacement. It is classified as :

1. Preventive &osts, and

- 2. Replacement Costs.

1.Preventive Costs : These costs include all those costs which areincurred to keep the workers satisfied so that they are prevented fromleaving the organisation. The expenses incurred in respect of thefollowing items fall under this category :

(a)Provision of safety measures to avoid accidents.

(b)Maintenance of good relationship between management andworkers, and between workers and workers.

(c) Welfare Measures : These measures include provision of medical benefits to the workers and their families, facilities like sport, education to the children, transport, housing, canteens, co-operative stores etc.(d) Wage and Retirement Benefit : These include attractive wage rates, provisions for pension, provident fund, gratuity, bonus, incentive schemes etc.(e)Selection and training on scientific basis.

2.Replacement Costs : These costs arise from replacement ofworkers who left the organisation.

(a) Recruitment : Cost of advertisement, selection, training of candidates etc.

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(b) Inefficiency : New recruits are not conversant with the work assigned tr_them and as a result production is affected. Further, losses arise from higher spoilage of materials, outputs.and time.

f{c) Mishandling of Machines and Tools : Due to mishandling of machines frequent breakdowns of machines occur, resulting in stoppage of work.

(d) Increase in Overhead Costs : Wastage, spoilage, production of inferior goods etc. result in increase in overhead costs.

Methods of Determining the Costs of Labour Turnover

The following methods are adopted to determine the costs of labour turnover :

(1) Separation and Replacement method, (2) Profit foregone method.

1. Separation and Replacement Method : The specific cost applicable to separate and their replacements are accumulated. Separation costs include severance pay, gratuity and other social security benefits. On replacement, a company has to incur the costs on (i) recruitment, (ii) selection and training.

2. Profit Foregone Method : The actual profit for the period is compared with the estimated profit that would have been obtained had no labour turnover occurred. The difference between the-actual profit and estimated profit is, thus, treated as lost profit due to labour turnover.

LABOUR TURNOVER REPQRT

Date : .

Month Cumulative'since Last year beginning of the year

Avoidable Reasons

Total Percentage:

Unavoidable Reasons

Total Percentage:;

Total number of,:

Replacement Percentages Average Labour Force

Prepared by

M. Com. Adv. Cost A/cing (P.U.)...12

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For the purpose of control of labour cost, labour turnover report occupies an important place among other labour reports. The report should analyse the causes as controllable and uncontrollable. It should show the current as well as last month's (or year's) labour turnover positions. Sometimes an analysis is made under different categories such as men, women old and new skilled and unskilled Workers.

Treatment of Labour Turnover Cost

Labour turnover cost are usually treated as factory overhead. The preventive costs should be distributed among different departments on the basis of workers in each department. The replacement costs are to be ' Shared by the departments affected by the labour turnover on the basis of number of workers replaced.

Control Over Labour Costs

Next to material, labour is the other significant element of cost. Therefore, proper recording of time and collection of cost data are prerequisites of any system of labour cost control. Labour costs may be excessively high due to following reasons :

1. Inefficient Labour,

2. Tendency on the part of workers to avoid the work, to do the work carelessly and lack of supervision over the working of the workers.

3. Wastage of material by workers.

4. Idle time and unusual over-time work.

5. High labour turnover.

6. Inclusion of dummy workers in the pay roll.The primary concern of the management, therefore, is to select the proper persons, give them training and to utilise the labour as economically as possible, so that not only the production is increased and production cost is minimised, but the labour force is suitably rewarded, for increased efficiency.

Management is interested in the accumulation and analysis of labour ' costs for the following purposes :

(a) To use direct labour cost as a basis for increasing the efficiency ; ' of workers.

(b)To identify direct labour cost with product, job or process for ascertaining the cost of production as accurately as possible. < (G) To use direct labour cost as a basis for adsorption of overhead, if ^-.V desired.

gv(A)To use direct labour as basis for comparison with past labour ws swt and for substitution purposes, and

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(e) To determine-the amount of indirect labour cost to be treated as .overhead.

The management has; therefore, to device a proper system of labour t control. The techniques used for the effective control of labour costs luded :

(i)Production Planning.

(ii)Use of labour budgets and labour standards. Actual performance compared with predetermined standards to enable management to takerrective steps.

(iii)Labour performance reports.

(iv)Suitable system of wage payment coupled with variousncentive schemes so that the production is increased to the maximumxtent resulting in reduction in cost of labour pelhunit of production.

abour Cost Ratesv\

Labour cost includes basic wages, dearness allowance,-..employer's contribution'to provident fund, contribution to EmployeSs^State Insurance, production bonus, holiday pay and other allowances like city allowance, special allowance, house rent allowance etc. such expenses. When wages including these expenses are divided by effective hours worked, we get the labour cost per hour and a job should be charged with the amount which is arrived at by multiplying the hours worked with such a figure.

Illustration 2 : The management of In and Out Ltd. are worried about their increasing labour turnover in the factory and before analysing the causes and taking remedial steps, they want to have an idea of the profit foregone as a result of labour turnover in the last year.

Last year sales amounted to Rs. 83,03,300 and the P/V ratio was 20 per cent. The total number of actual hours worked by the direct labour force was 4.45 lakhs. As a result of the delays by the Personnel Department in filling vacancies due to labour turnover, 1,00,000 potentially productive hours were lost. The actual direct labour hours included 30,000 hours attributable to training new recruits out of which half of the hours were unproductive .

The costs incurred consequent on labour turnover revealed on analysis the fallowing :

Settlement Cost due to leavingRs. 43,820

Recruitment CostsRs. 26,740

Selection CostsRs. 12,750

Training Costs.Rs. 30,490

Assuming that the potential production lost as a consequence of Labour urnover could have been spld at prevailing prices, find out the proiit foregone year on account of labour turnover

M. Com. Paper I Advanced Cost Accountin

The normal working hours for a month are 200. Overtime is paid for at double the normal wage plus D. A. Employer's contributions to E.S.I. and P.F. are at equal rate of that of employee. The month contains 25 working days and one paid holiday.

The two workers were employed on jobs in the following proportion :

XYZ

A403030

B502030

Overtime was done on job Y.

(Aits.: Earnings A Rs. 175 (including Overtime) B Rs. 165 (including idle lime)

Labour cost per job : X = Rs. 139.90, Y = Rs. 93.36 & 2 - Rs. 93.54.) 2. Calculate the normal and overtime wages payable to a workman from the following data.

Hours worked

Monday8

Tuesday10

Wednesday9

Thursday11 *

Friday9

Saturday4

Normal working hours a day8

Normal Rate Rs. 0.50 per hour Overtime ~ upto 9 hrs. a day at single rate and over 9 hrs. at double rate

OR

Upto 48 hrs. in a week single rate and over 48 hrs. at double rate, whichever is more beneficial to a worker.

(Ans.: Rs. 27 in both the cases.)

JOB EVALUATION & MERIT RATING

8

JOB EVALUATION

Job evaluation represents the assessment of the nature and volume of work that a job involves. Each organisation has to carry out different types of jobs. They require different types of knowledge and expertise to perform them. Job evaluation is useful not only in deputing the right type of men to carry out every operation but also to determine the labour time and cost it is likely to incur for completion.-

Job evaluation may be defined as the rating of various jobs according to the responsibility and skill required for them. The important principle behind job evaluation is that jobs which are similar in duties and responsibilities must carry same wages.

Job evaluation is an orderly and systematic process of determining the wages (worth) for the job in relation to other jobs. It is a process of rewarding the job after it has been analysed. Each should be paid (or priced) according to its real value i.e. a high value job should receive higher wages and low value job should receive lower wages. Job evaluation seeks to provide for a fair and equitable wage structure based on the assumption that each job should be paid according to its worth.

Definitions

According to Filppo, "Job evaluation is a systematic and orderly process of determining the worth of a job in relation to other jobs"

According to Kimball and Kimball "Job evaluation represents an effort to determine the relative value of every job in plant to determine what the fair basic wage for such a job should be". Wendell French says "Job evaluation is a process of determining the relative worth of the various jobs within the organisation, so that differential wages may be paid to jobs of different worth. According to the British Institute of Management, "Job evaluation is the process and analysis and assessment of job to ascertain reliably their relative importance using the assessment as a basis for balanced wage structure."

Thus, the job evaluation is an orderly process of determining the

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fair wages for an individual job taking into account some common factors such as skill, responsibility, effort, working conditions etc.

Job evaluation is the rating of job and not the man doing the job. Prerequisite of Job-evaluation Programme

The following points should be considered before starting job evaluation programme :

1. Jobs must be thoroughly examined and clear cut job descriptions and job specifications must be available for selecting factors to be evaluated for job-evaluation purpose.

2. Comparison of jobs should be made to decide the grades and to arrange them in order of their worth.

3.Jobs should be classified as hourly paid jobs and salaried jobs.

4. All workers who are going to affect with the job evaluation plan should be allowed to participate in the plan. The plan should be explained to the concerned employees.5. Each element of the job, such as responsibility, skill, effort, working condition etc. should be evaluated separately.6. Supervisors should be given training in advance about job evaluation methods, and they should be convinced of the job evaluation programme.7. Fix salary or wage to be paid according to the total number of points and other factors governing wages.

8.Note the prevailing working conditions.

9.Identify the personal demands which a job makes on an individual.Principles of Job Evaluation

Job evaluation is an art and not an exact science. As such, no rigid and set principles can be laid down. However, following are the general principles which should be followed :

1. Rating of the job should be done rather than the rating of man doing the job.

2. The factors selected for evaluation of job should be skill, effort, responsibility and working conditions. In addition to these, any other factors are considered to be necessary they may be studied. However, the number of factors should be small. Each factor should be precisely defined.

3. Since the job evaluation is executed by the mutual co-operation of management and workers, the plan must be acceptable to all the employees involved.

4. The value or weightage given to each of the factors of the job while evaluating should not be disclosed to the foreman or supervisor.5. Conclusions and final appraisal of jobs should not be formalized until the judgement of different raters agree.6. The factors such as the size and type of organisation must be thoroughly considered before a job evaluation process is set up.

7. The use of different forms in job evaluation process shall be made only when the different terms utilised by these forms have been completed and explained before the work actually starts.

8. The objectives of job evaluation process may be determined and explained to all the parties likely to be affected by the programme.

9. In the initial stages of installation of job evaluation programme, short-term, over payments may be made so as to foster employee's faith in the system and minimize the chances of labour problems.

10. The level of wage rates for the jobs to be evaluated must be in conformity with the jobs prevailing in the company and in the industry.

11. The foreman of the concerned department should participate in the job evaluation.

Objectives of Job-evaluation

1.The main objective of job-evaluation is to have consistency inwages structure. Jobs which are similar in duties and responsibilitiesmust carry same salaries. It is a logical plan for job grading as well asfor their mutual comparison.

2.To avoid disputes arising out of inconsistency in wages.

3.To fix maximum and minimum wages throughout theorganisation for each position.

To introduce standardisation in wage differentials.

Selection of proper persons. Advantages of Job Evaluation

Job evaluation is the basis of scientific system of job rating as well as developing a sound and satisfactory wage structure. There is a common saying that "we pay for job and not for men". Job evaluation seeks to provide for a fair and equitable wage structure based on the assumption that each job should be paid according to its contribution to the value of the finished product and to the long-term success and progress of the organisation.

The main advantages of job evaluation are as follows :

1. Helpful in removing inconsistencies in Wage Structure : "Equal pay for equal job" is the principle. Hence, it helps in avoiding the disparities in wages. The workers get no chance to have a dispute on this point.

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2. Good Industrial Relations : Generally the main cause of labour unrest is wages. Job evaluation brings uniformity and justice in wage rates. It provides such wage-rates which are easily acceptable to the employees. Any dispute relating to wages can be easily settled by referring it to the job evaluation committee.3. Helpful in wage administration : Good wage payment plans, well administered, have a salutary effect on the entire industrial organisation. Employees are happier in their work, morale is higher, output is up and quality of production is better. With technological changes, job contents also change. Job evaluation reviews the job rates.4.Pricing of New Jobs : Wages for new jobs can be settled.

5. Various Uses of Job information : For job evaluation the work of job analysis is done and job descriptions are prepared. Hence, the informations collected at that time are useful for the comparative studies of jobs, selection, transfer and promotions.6. It provides a sound base for bonus schemes and helps in job classification and work simplification.

Limitations of Job Evaluation

Though the job analysis has many advantages, the management should not place too much reliance on it as it has certain limitations and the management must bear in mind these limitations while making use of job analysis. These limitations are :

1. Though it is considered to be a scientific method, actually it is not so, because all the factors cannot be measured accurately and some of them are based on judgement.

2. Factors applied, though presumed to be independent, overlap each other.

3. Jobs of equal contents are not equally attractive to the employees as is presumed under the system. There are other factors and the employees prefer one to the other. Naturally wage, rates cannot be maintained equal for both the jobs of equal contents.

4. It introduces inflexibility in wage structure. It does not place the right deal of emphasis on the wage rates in the industry as a whole. The demand and supply of labour is responsible for wage differentials to a great extent.5. As it is time consuming and costly, it cannot be made use of by small concerns.6. It limits