COST ACCOUNTING (PART-5) LABOR COST CONTROL - 1

Transcription

1 COST ACCOUNTING (PART-5) LABOR COST CONTROL INTRODUCTION Dear students, welcome to the lecture series on cost accounting, today in this lecture we shall cover the topic labor cost control. We shall learn Meaning of labor Significance of labor Handling of labor and Total labor cost. The objective of this lecture is to control over the increased labor cost due to inefficiency of workers, ideal time, unnecessary over time so that the labor cost can be minimized and output can be enhanced and its quality can be maintained with the proper utilization of the labor force. 2. MEANING AND TYPES OF LABOR AND LABOR COST We shall learn the meaning of labor and the labor cost. The person who transforms a raw material into the finish product in a production process is known as labor For example 1. A weaver in a weaving industry 2. A tailor in the readymade industry. 1 P a g e

2 What he is doing? He is transforming the raw cloth into the garment, so they are known as labors. What is labor cost? Labor costs are all such expenditures which are being paid to the person who is putting his skills into the raw material so that it can be transformed into a new identifiable unit. Such payments are:- Basic wages Dearness allowance Production bonus It can be other benefits also like Employers contribution to PF Employer s contribution to ESI Retirement benefit plans Old age pension plans There are non pecuniary benefits like Medical facilities Hospital facilities So they all shall form the part of labor cost. 2 P a g e

3 These labor cost can be of two types. Either it can be direct labor cost or indirect labor cost. What is direct labor cost? A direct labor cost means those costs which can be directly identifiable into the product, process or operation and that helps in transforming the raw material into finish products. 3 P a g e

4 For example- Basic wages paid to the weaver in a weaving unit. What are its peculiar features:- Firstly those skills, such efforts can be traceable directly onto the product, For example A carpenter is putting his time, his skills to manufacture a chair, so we can directly identify his skills applied for transforming the wood into the chair, so this is known as direct labor cost. The treatment of direct labor cost- Direct labor cost is a part of direct cost and it shall become part of prime cost. Direct labor cost is variable cost as it varies with the volume of output. Suppose our carpenter is manufacturing 10 chairs, so the direct labor cost will be per chair, for one chair if we are paying him Rs.100 per hour and he is taking 8 hours to manufacturing one chair, so Rs.800 for one chair and for 10 chairs, this direct labor cost will amount to Rs Direct Labor cost for per hour Rs 100 per chair Carpenter is taking 8 hours to manufacture 1 chair Cost per chair= Rs.100 * 8= Rs.800 For 10 chairs= Rs.800 * 10 = Rs.8, 000 This way we shall compute the direct labor cost. Now students, we shall learn what is indirect labor cost? Indirect labor cost are those cost which cannot be directly identified into a product, process or operation, they are ancillary or helping cost for 4 P a g e

5 transforming the raw material into the finished products in a production process. Examples are other departments which are providing services in the production processes. For example labor employed in payroll department, labor employed in work study and motion study department, labors employed in cost accounting department, labors employed in marketing department, Any payment made to such labor shall form the part of indirect labor cost, so together, direct labor cost and indirect labor cost shall form the total labor cost. 3. SIGNIFICANCE OF LABOR COST Now students, we will learn the significance of labor cost, the labor cost is important in the total cost because if inefficient labor is being hired into the production processes, it will shoot up the total cost of the product, process or operation. For example if a work is required to be completed in 10 hours, if inefficient labor is employed or under qualified labor is employed, he will complete up the work in 20 hours, if the wages are paid on hourly bases, the total wage amount will go double the normal amount so it will increase the total cost of the product. Resultantly its implication will fall on the quality and the labor force. So we need to control the labor cost for improving the productivity and for minimizing the labor cost per unit because once labor is paid overly or over payment of labor is made, our production cost will shoot up and 5 P a g e

6 when we average this cost over all the units produced, per unit cost of the product will be more than the required standards. It will hamper our sales and revenue. So it is the prime factor which needs to be control while carrying out the production process. Now students we will learn the significance of labor cost Why is labor cost important? It is important because if the labor cost is in control, the total cost shall be controlled that means that labor cost forms the part of total cost so we need to ensure that the labors are paid adequately for the amount of work they are putting into the production processes and they should not be over paid on account of ideal time or on account of unnecessary over time. So our objective is to control this labor cost so that the productivity of the labors can be enhanced and maximum production can be meet by utilizing this labor force. So the significance of labor cost is that we need to control it in order to bring down the total cost per unit. What happens that once labors are paid, the labor cost shall form the part of total cost? Now when we average this total cost over all the units produced, the total cost per unit will rise on account of over payment of labors due to their inefficiency or due to the ideal time which we need to avoid at all the cost, that s the significance of labor cost. So what happens that; It is not the high wage which is important; it is the low labor cost per unit which needs to be taken into account while controlling the labor cost. Labor is important for transforming the raw material into finish goods so adequate study should be done for their time devotion to a particular job or process and the motions which they put for completing up a project, so unnecessary motions and unnecessary devotion of time to a particular 6 P a g e

7 job can be avoided, with this we have learn how significant it is to put control over the labor cost so that per unit labor cost comes minimum. 4. MANAGEMENT OF LABOR We shall learn how the labor is handled in an organization that is how the labor is managed, what the requirements of labor in an organization are and how the organization is going to meet the expectation of labor in the organization. We know that labor is very complex and delicate part of the organization, so we need to handle them in a very sophisticated manner, proper remuneration is utmost important but other factors should also be kept in mind so that our labor can be a satisfactory force and their needs can be fulfilled. So these factors are as follow: 1. Selection of the labor- The labor should be selected as per the requirement of the job. He should have adequate skills and qualification to take up that particular job. 7 P a g e

8 For example in a finance department, the role of accountant should be given to the person who is having the skills and knowledge of commerce and can work on accounting software and he should also have interest in that job. 2. Proper training- The labor should be given proper training to accomplish his task and duties. For example if in the finance department only, we are hiring the accountant he should know when to prepare MIS reports, how to prepare them, how to make the balance sheets, how to collect data, the step by step training should be given to him so that he can go up well on the job. 3. The working condition Working Conditions should be proper that means proper ventilation, proper temperature and proper cleanliness should be maintained. There are certain norms fixed by the BPO industries in the present scenario where they required keeping the lighting and the temperature on fixed parameters, this way the organization should follow all these working condition requirements in a proper way. 4. Incentive- The labor should be given a good incentive for their work, if they are working above the expectation of the management, they should be rewarded for their work, like we can give them a bonus or a incentive, it could be based on the piece basis or time basis, which we will learn later on and negative reward can also be given by which we can curtail the further work or specialized work to them and they can be provided only routine activities. These are the essentials which have to be fulfilled for keeping the labor force happy and satisfactory. 5. CONTROLLING THE LABOR COST Now students, we will learn how to exercise control over the labor cost. Labor cost needs to be control at all the stages of production that is from the point of the induction into the organization till they become part of the production process and transforms the material into a finish good. 8 P a g e

9 We need to control the cost incurred on them so that their productivity can be enhanced and our total cost per unit of the products so manufactured comes down, for that there should be concentrated efforts of so many departments involved in the organization. So we need to coordinate with all the departments so that labor cost can be minimized and control at each stage that is at the time they were appointed, till they have started transforming the raw material. Now let s learn what are the departments involved in the labor cost control procedure. 1. The Personnel department, 2. Engineering and work study department 3. Time keeping department, 4. Payroll department and 5. Cost accounting department. These are the departments which are accountable for controlling the labor cost, now how they are controlling the labor cost, we will learn their functions one by one. First comes the Personnel department It is also known as human resource department, so there role starts from the recruitment of the labor force, they are responsible for selecting the right personal for the right job. Then they have to provide training, so training cost should be incurred in such a way that finally the labor becomes productive for the organization, induction cost needs to be bear by this department, so recruitment, selection, training, development, induction of the labor. 9 P a g e

10 They are responsible for these functions. and they are required to keep the records of the person so hired. Next comes the engineering and work study department It s the most important department in an organization because it performs the critical functions of time study and motion study. It is the prime responsibility of this department to work out job descriptions, job specifications and job evaluations Which are necessary to hire the proper labor force? 10 P a g e

11 Now let s learn its functions in detail, 1. Preparation of plan and specification of each job- It means that what are the requirements of a job. For example there are production units running in an organization, if production unit A requires the engineer requiring digging or drilling of the oil, so all the parameters which are required for drilling the oil should be properly specified and this technical work is being done by engineering and work study department. 2. Supervision of production activities within the production department- A close supervision of the production activities are to be done that is unnecessary wastage of time, unnecessary motions that is movement of labors from one point to another whether they are required or not, these sorts of supervisions are required to be turned by the engineering department. 3. Maintaining safety and official working condition- it means that the engineering and work study department has to ensure whether proper safety measures are being taken care of. For example- Fire extinguishers are being placed in an organization, emergency doors are there in the case of disaster, proper disaster recovery plans are being implemented, education is being provided to the employees for using the emergency doors etc. 4. To conduct time and motion study- time study is necessary so that they can record the time required to complete a task in a given job by the employees of normal and reasonable skills. Motion study means studying the moments of the employees or labor force from one job to another or from one point to another in the production process. We can minimize these motions so that time can be saved on each job and resultantly the cost can be minimized, for example if we place the departments nearby, the store department and the production department can be placed in 11 P a g e

12 such a way that whatever requisite or material is needed for the production, it can be collected with minimum moments from one point in a unit to another. 5. Conducting job analysis- all the requisite parameters related to a job are to be analyzed, they have to be specified and coming as the byproducts of job analysis are job evaluations, job specifications and merit rating which this department has to finish up. With all this studies, the department is required to set the piece rate, piece rate means the amount of wages paid for producing a particular unit, 1 unit = Rs. 10 That s called the piece rate which is determined after taking into account all these techniques such as time and motion studies, job evaluations, job specification. With this we have learn the role of engineering and work study department. Next department is the time keeping department Time Keeping Department is one which is helpful in controlling the labor cost; it performs the following functions, 1. Recording of the arrival time and departure time of each worker, it uses certain techniques as Stop clock or tickets or disc etc. 2. Recording time spend on each job by the workers, certain techniques can be use to record such times. 12 P a g e

13 The next department is payroll department, Payroll department looks after the maintenance of records of the employees; they work out the pay slips of the employees and disburse the wages and salary to the labor. Next one is and it s the last department which is required to exercise control over the labor cost, it is known as cost accounting department. It classifies the data given, then it collects all the data related to labor from all the respective departments that is from personal department, payroll department where its charge the labor cost to the concern department, for example production A, production B, production C, there are three production units running in an organization, so cost accounting department will transfer the cost related to particular unit by a appropriate and equitable bases to that particular department. Next is it allocates the cost to the concern department, it also apportion the common labor cost on a equitable bases and finally the cost accounting department analyses the labor cost reports such as ideal time report, over time report, reliance from budgeted labor cost so that they can take the corrective actions and reduce the labor cost which is being spend on ideal time or on over time, with this we have learn the roles of various departments for controlling the labor cost. 6. JOB ANALYSIS, JOB DESCRIPTION AND JOB EVALUATION Now students we will learn another important aspect for controlling the labor cost and it initiates from the time the requirement of a job is generated in an organization, this is known as job analysis, this work is being carried out by engineering and work study department. Now what is job analysis? Job analysis is the gathering of information and data in relation to a job, under job analysis, the task responsibilities and duties are associated with a job are analyzed, 13 P a g e

14 What s the purpose of doing the job analysis? The purpose is, it helps in recruitment process, placement process, selection, training and development of the employees, it helps in job evaluation, it helps in job specification, it also helps in conducting the merit rating of the employees, How it shall help because it s the primary work which an organization has to perform for hiring the employee. There are three outcomes of job analysis which are categorized in three parts, first one is job description, second one is job specification and third one is job evaluation What is job description? Job description means it s a written description of the roles and responsibility of each element of the task to be performed by a employee in his particular job, for example a finance manager is recruited so the job description for his job will be what he has to do and how he has to do that means what sort of listening he has to maintain with other departments, how he has to conduct his work, what are the time limits in which he has to conduct the work, this is known as job description where each and every duty related to the job is being mentioned, it s something like offer letter given to the new hirer, what s the utility of job description, the utility of job description is it describe the job to the potential candidate, it is a guideline to the hired employee and for specifically he has to do and it provides a point of comparison in upraising whether actual duties assign are being done, the job description is very 14 P a g e

15 helpful at the time of appraisal because it forms the base for the evaluation of the work done by the employee. Now next comes the job specification, Job specification specifies minimum acceptable qualifications required by the individual to perform a task in a efficient manner, for example in case of a hospital if the specialist are appointed so the minimum qualifications are being given in the job specification, for examples MD s required, so it will be specifically be mentioned in the job specification, what sort of qualities he needs to posses, in case of small organization, the jobs are so divided and also specified so as a proper person is recruited on a proper post, where there is a requirement of under graduate, under graduate is appointed, if its requirement of post graduate person, that will be appointed in a particular job, so job specification is the basic document which will be required so that proper allocation of the labor force can be done across the organization. Next concept is job evaluation, Job evaluation means it provides the relative value of each job in an organization, relative value means we have comparing the jobs in a particular organization, that means how fruitful it is to hire a person on a particular job whether it is generating revenue or it s a cost center, whether there is requirement of that job into the organization or not. 15 P a g e