Labour
Labour cost

Can be classified into:
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
Direct
Indirect
Direct labour cost

The portion of wages and salaries which
can be identified and charged to a
single cost unit
Indirect labour cost


Cannot be directly related with the
production of specific goods or service
Foreman, storekeeper, clerical staff etc.
are examples of indirect labour cost
Method of remuneration


Remuneration on time basis
Remuneration on piece work
Remuneration on time basis
Remuneration on time basis


The wages is measured on the basis of
unit of time i.e. hourly, daily, weekly or
monthly
The formula is as follows:
Earnings = Hours worked * rate per hour
Example

If a worker is paid $10 per hour and
has spent 300 hours during a particular
month in a factory, his wages will be
300*$10 = $3000
Advantages




It is simple and easy to calculate
It provides a regular and stable income
to the worker and thus creates a sense
of security
It is beneficial to the average as well as
the below average workers
It avoids many complex negotiations in
case of most of the incentive schemes
Disadvantages


This leaves no incentive for an efficient
worker. An inefficient as well as efficient
workers are paid the same wages under
this method
In absence of incentives and schemes,
a stricter supervision becomes
necessary for ensuring the required
level of output from the workers

Since the orders are certain about their
wages they may consume more time for
producing the same quantity. It means
a higher level of labour cost and a
higher level of overhead
Time rate is suitable where


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The quality of work is more important than
quantity
The nature of work is such that it is difficult
to measure e.g. cleaners, supervisors
The work is not repetitive in nature
The volume of production is not within the
control of workers
The amount of output cannot be measured,
counted or standardised
Remuneration on piece work
Remuneration on piece work


Under this system, wage are paid on
the basis of production
The formula is as follows:
Earnings = number of unit produced * rate per unit
Example

If a worker is paid $15 per unit and he
produces 20 units in 7 hours the total
wages will be calculated as 20*$15 =
$300
Advantages




The system encourages greater
efficiency
No payment is required for the idle time
The fixed overheads are reduced with
the increase in output
The work is completed more quickly
and time wasting is discouraged
Disadvantages



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The quality of work may deteriorate
The overwork on the part of workers is likely
to result in ill-health
This may not be fair when the production is
halted because of shortage of materials,
machinery breakdown
More rigid control may be needed and then
increase cost of supervision
Piece rate system is suitable
where:



The amount of work can easily be
determined and measured
The nature of work is repetitive
The productivity is closely linked to the
skill and effort of the worker
Premium bonus plan
Premium bonus plan

It is to pay to the workers a basic time
rate plus a portion of the wages
equivalent of the time saved as related
to the agreed/allowed time for the work
Features of the scheme

Time rate is guaranteed and the worker
receives the guaranteed wages
irrespective of whether he completes
the work within the time allowed or
takes extra time for its completion

If the fob is completely in less than the
standard time prescribed, worker is paid a
bonus of 50% of the time saved computed on
the basis of the prescribed time rate, in
addition to the normal time wage.
Earnings = Time Wages + Bonus
= (hours worked * hourly rate)+1/2 (time allowed –
time taken)*hourly rate
Example


If a factory the normal hourly rate is $5.
Time allowed for job is 10 hour. Mr A
takes 8 hours to complete the job
His total earnings will be calculated as:
Earnings = 8*5+1/2(10-8)*5=$45
Advantages



The bonus encourages the workers to save as
much time as possible because the higher the
saving of time, the higher is the bonus
Morale may be improved if extra effort is
reward
Both the firm and the employer should
benefit from the introduction of an incentive
scheme. Employees should receive an
increase in wages arising from the increased
production. The firm should benefit from a
reduction of fixed overhead per unit
Disadvantages



Incentive schemes can be complex and
difficult to administer
Establishing performance levels leads to
frequent and continuing disputes
The quality of the output may decline