Labour

Labour cost Can be classified into: 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 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 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

Earnings = Time Wages + Bonus 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 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