Labour Cost – Classification of Labour Cost

There are different methods used in calculating labour cost. In this article, I will talk more about the three methods which fall under the PRODUCTIVITY SCHEME – they are; Halsey Bonus Scheme, Halsey Weir Bonus Scheme, and Rowan Bonus Scheme.

Labour Cost

Labour refers to humanitarian efforts in the production or rendering of services (Both mental and physical ability). Labor cost is the cost of wage paid to workers during an accounting period on a daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits.

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Classification of Labour and Labour Cost

• Direct labor cost.
• Indirect labor cost.

Direct labor cost:

These are the labor costs incurred on the employees who are engaged directly in making the products, their work can be identified clearly in the process of converting the raw materials into a finished product.

Indirect labour cost:

These are the labour cost incurred on indirect employees who are not directly associated with the conversion process but assist in the process by way of supervision, maintenance, transportation of materials.

Items of Labour Cost

• Monetary benefits payable immediately

1. Salaries and wages
2. Other allowances
3. Production incentive or bonus

• Monetary benefit after sometimes in the future.

1. Free or subsidized food
2. Free medical or hospital facilities
3. Free or subsidized housing

Control of Labour Cost

Whereas all element of cost needs to be put under security to avoid cost not matched by productive efforts, labour appears the most sensitive. In order to keep labour cost under check, a number of measures need to be put in place:

• Set up of wages department.
• Adequate records.
• Analysis of idle time.
• Labour turnover.

Methods of controlling labor cost

1. Labour Monetary Cost Control
2. Labour Physical Cost Control

Labour monetary cost control can be achieved by controlling:

• Labour remuneration and labour turnover cost

What is Labour Remuneration

This is the monetary reward given to a worker to appreciate the worker’s effort in the production of goods and services. Labour remuneration can take either or a combination of the following;

• Basic pay
• Allowances
• Overtime pay
• Bonus pay

Basic Pay:

This means the normal remuneration made to workers for normal work done and incentives computation of basic pay will depend on the method being used by the organization. This can be computed using either;

1. Fixed Salary: This is when a fixed amount is given to a worker irrespective of the number of hours or days worked.
2. Hourly Rate: Under this method, the rate of pay of the employee is specified as an amount per hour and it is calculated as;

Wages = Number of hours worked × Rate per hour

NB: In using this method, the following hour stated below must be clearly identified and treated accordingly.

• Basic/Normal Working Hours: This is the agreed time that a worker is expected to work for.
• Time Allowed: This is the standard time a worker is expected to complete a given job. The time allowed may be higher or lower than the basic working hours.
• Time Taken: This is the actual hour(s) a worker perform or achieve a given job or work.

Advantages of Hourly Rate Method

1. Wages are simple to calculate and understood by workers.
2. Periodic earnings by employees are averagely stable.
3. It helps in the attainment of quality work.
4. It facilitates planning for labour cost.
5. It simplifies wage negotiations because of a single work.

Disadvantages of Hourly Rate Method

1. Supervision may be required to avoid idle-time.
2. Efficient and inefficient workers are paid the same rates.
3. No incentive or increase output.
4. Workers can deliberately work slowly in order to earn overtime pay to increase their earning.

Piece Rate/Output Method

Under this method, wages paid are as a function of the number of units of the product produced irrespective of the amount of time spent to produce them. This is common in certain industries like block making industries. In most cases, the number of units produce must be certified as a good unit.

• Good Unit- Basic payment would base on the good unit
• Defective Unit- Remuneration at the discretion of management.

Day Rate

This is a method whereby workers are paid on the basis of the number of days worked irrespective of the hours worked or unit produced.

Wages = Number of days × Agreed rate per day

Allowances:

When a worker’s salary is computed, there are some allowances that are paid to motivate the worker base on the company’s policies and conventions. E.g. transport, medical and housing allowance.

Overtime:

This is the payment to an employee for working more than the basic requirement. Hours of overtime are usually paid at a premium rate.

Bonus:

This is remuneration paid to a worker for working at a higher efficiency rate above the expected efficiency rate. Bonus schemes are also introduced to compensate employees for the inconvenience caused by asking them to work during unsocial hours like the public holidays, weekend etc…

Features of Bonus and Incentive Schemes.

• Employees are paid more for their efficiency and effectiveness.
• All workers should be given the same opportunity.
• The profit arising from increased productivity are shared between the employer and employees.

Basic Conditions of Good Bonus

• It should act as a motivational scheme.
• It should guarantee minimum daily wages.
• Must be properly communicated to all employees concerned.
• The rules and conditions of the scheme should be clear.
• The scheme must be fair to both employers and employees.

Types of Bonus Incentive Scheme

A bonus scheme should be renewed to meet the current economic situation in a country. The following are examples.

1. Shift bonus scheme
2. Punctuality bonus scheme
3. Productivity bonus scheme

Productivity Bonus Scheme

This is a bonus scheme based on productivity and to encourage further productiveness. Standard time is fixed for the completion of a task. There are three types of productivity bonus schemes and ways to calculate labor costs. Watch this video.

1. Halsey Bonus Scheme: Under this method, the employee and the employer share the time saved equally, i.e. the proportion of time paid is 50%. (Calculated as; ½ × Time Saved × Basic Rate).
2. Halsey–weir Bonus Scheme: Under this method, the proportion is 1/3 of time saved. (Calculated as; 1/3 × Time Saved × Basic Rate).
3. Rowan Bonus Scheme: In this case, the proportion is given by the ratio of time taken to the time allowed. This is calculated as; (Time Take divided by the Time Allowed × Time Saved ×Basic Rate).

Labour Turnover

This is used to measure the rate at which labour comes in and leaves an organization within a given period usually one year. Labour turnover is the rate of change in the number of employees during a definite period.

Reasons for labour turnover

• Redundancy
• Illness or accidents
• Retirement
• Death
• Lack of training
• Marriage and pregnancy
• Change in location

Cost of Labour Turnover

The cost of labor turnover maybe be divided into the following

1. Preventive cost
2. Replacement cost

Preventive costs

These are incurred to keep the workers satisfied and discourage them from leaving the concern and they include the following;

• Cost of medical services.
• Cost of welfare.
• Pension scheme providing security to employees.
• Maintaining good employee and employer relationship.
• Providing adequate training schemes for effective career development.

Replacement Costs

These are incurred as a result of luring new workers and they include the following:

• Cost of advert placement.
• Cost of selection.
• Cost of training.
• Cost of the interview.
• Cost of the machine breakdown.
• Decline in output due to the inexperience of new staff.

Prevention of High Labour Turnover

• Offering good training schemes.
• Proper planning so as to avoid redundancies.
• Creating a good career development structures.
• Maintaining good employees and employers relationship.
• Offering satisfactory hours and condition of work
• Paying satisfactory wages.

Reason Why Worker Leave the Organization.

• Redundancy
• Illness or Accidents
• Retirement
• Death
• Lack of training
• Marriage and pregnancy
• Change in location
• Personal reason on the part of the worker

Video Guide on Labour Costing

This video is well detailed to help you familirise with the formulas used in solving questions under Labour Costing for Halsey Bonus Scheme, Halsey-weir Bonus Scheme and Rowan Bonus Scheme. If you need further clarification, click here to chat with us via WhatsApp.