Labour cost: Computation and Control, Types, Methods,

 Labour cost: Computation and Control, Types, Methods, 



TYPES OF LABOURS - LABOUR COST


Labour is classified into (a) direct labour and (b) indirect labour.

(a) Direct labour cost is cost of labour expended in altering the construction, composition or condition of the product. Direct labour cost is easily identified and allocated to cost units.

(b) Indirect labour cost is the amount of wages paid to workmen who are not directly involved in altering the composition of the product. Direct labour cost forms part of prime cost, whereas indirect labour cost forms part of overheads.

Labour costs represent the various items of expenditure incurred on workers by the employer and would include the following:

(a) Monetary Benefits e.g.: 

(i) Basic Wages; (ii) Dearness Allowance; (iii) Employer’s Contribution to Provident Fund: (iv) Employer’s Contribution to Employees’ State Insurance (ESI) Scheme; (v) Production Bonus; (vi) Profit Bonus; (vii) Old age Pension; (viii) Retirement Gratuity.

(b) Fringe Benefits, e.g.: 

(i) subsidized Food; (ii) Subsidized Housing; (iii) Subsidized Education to the children of the workers; (iv) Medical facilities; (v) Holidays Pay; (vi) Recreational facilities.

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Remuneration and Incentives

Remuneration is a payment or compensation received by an employee against the services provided by him. This includes the basic salary, any bonus, allowances or other economic benefits that an employee or executives received during his employment. Remuneration paid on the basis of time rate or piece rate basis. It is fixed in nature and is constant for every employee even if they doesn't work as per standards. Remuneration is traditionally seen as the total income of an individual and may comprises a range of separate payments determined according to different rules.

Incentive is a monetary or non-monetary reward which is given to a worker for his efficiency and hard work. It is given to the workers when their actual production is more than the standard production. It is considered as a performance appraisal to the employee if he/she performs better than standard work in a way that benefits to the organization. It is variable in natures and change according to the efficiency of the workers. An incentive motivates and encourages a worker to produce more and better and help in increasing the interest of the worker in the production.

Both remuneration and incentive are labour cost. Sometimes, both the terms are used interchangeably but they are different from each other in following aspects:


Basis

Remuneration

Incentives

1. Nature

Remuneration is fixed.

Incentive is variable.

2. work

Remuneration is given to labourers, employees for their presheculded task or routine task.

incentive is provided when they perform good in their routine task.

3. Motivation

It is routine payment. It does not motivate an employee.

Incentive are ways to appreciate the employee’s performance.

 

An ideal incentive plan must possess the following features:


a)      Simplicity - The plan should be simple to understand and operate. Who should be able to calculate their wages without any difficulty?

b)      Acceptability - It should be acceptable to workers as well as the employer.

c)       Flexibility - The incentive plan should be flexible to introduce nice changes.

d)      Quality - The plan should ensure the quality of the output. Workers should be discouraged to speed up the work to earn more wages at the cost of quality.

e)      Stability - The plan should give a stable earnings over a period of time, minimum but adequate wage must be ensured.

f)       Wide coverage - It should cover the maximum number of workers. 1 direct as well as indirect worker should be covered.

g)      No restriction on earnings - The plan should not have any restriction earnings of workers. They should be allowed to earn as much as they can.

h)      Investigation and evaluation - The plan should be based on scientific investigation and evaluation to produce good result. Standard time should fix on the basis of time and motion study.

i)        Increasing output and lowering cost of production - It should aim increasing output and lowering cost of production.

j)        Motivating to earn more - The plan should motivate the workers increase their efficiency and earn more.

The success of an incentive plan depends on the mutual cooperation a understanding between employer and employees.


Methods of Wages Payment

The methods of remuneration can be classified into:

a)      Time Rate System

b)      Pieced Rate System

c)       Incentive Schemes


a)      Time Rate System: In this system, a worker is paid on the basis of attendance for the day or according to the hours of the day, regardless of the output. This system is also known as time work, day work, day age rate or day rate. The wage rate of the day worker may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed in the concern. There are two variants of this system, each differing only in so far as the fixation of the time rate is concerned. They are:

1.       Measured Day work or Graduated Time Rate

2.       Differential Time Rate

Graduated Time Rate:   Under this method wages are paid at time rates which vary according to

a.       Merit-rating of the workers, or

b.      Changes in the cost of living index.

It the cost of living goes up, the wages also go up proportionately, and vice versa. Thus the works get the real wages. Similarly, the workers having higher merit rating get higher wages, and the workers with lower rating get lower wages.

Differential Time Rate: Workers are paid rate accounting to their individual efficiency. They are paid normal rate upto a certain percentage of efficiency and the rate increases in steps for efficiency slabs beyond the standard. As the efficiency is measured in terms of output, this method does not fall strictly under the area of time rate system.

b)      Piece Rate System: The payment of wages under this system is based upon the out turn of the worker. The rate is fixed per piece of work and the worker is paid according to the pieces of work completed or the volume of work done by him, irrespective of the time taken by him in completing that work. A workman is free to earn as much as his ability, energy, or skill would allow to him to produce. The piece rate System can be classified into:

a.       Straight Piece Rate.

b.      Differential Piece Rate.

Straight Piece Rates: It is a simple method of making payment at a fixed rate per unit for the units manufactured. Earnings = Number of units X Rate per unit.

Differential Piece Rates: Under this system, efficient workers are paid wages at a lower rate. A definite standard of efficiency is set for each job and for efficiency below or above the standard different piece rates are paid according to different levels of efficiency. The following two methods of wage payment are studied under this system:

a.       Taylor Differential Piece-rate Method, and

b.      Merrick Differential Piece rate Method

Taylor Differential Piece-Rate: F.W. Taylor thought to improve the efficiency of workers by suggesting two rates of payment of wages: A higher rate to the workers who product equal to or more than the standard fixed for production during the day (120%), and a lower rate to the workers who do not achieve the standard (80%).

Merrick Differential Piece-rate: In the Taylor Method, the effect on the wages is quite sharp in the marginal cases. To remove this defect Merrick suggested three piece rates for a job as follows:

Percentage of Standard Output                Payment under Merrick Method

Upto 83%                                                            Normal piece rate

Above 83% and upto 100%                          110% of normal piece rate

Above 100%                                                       120% of normal piece rate


c)       Incentive Schemes: Under this heading, we study the following methods:

a.       Halsey Premium Scheme;

b.      Rowan Premium Scheme;

The Halsey premium plan: This system is known as fifty-fifty plan. It was introduced by F.A. Halsey, an American engineer. Under this method a standard time is fixed for the performance of each job; worker is paid for actual time taken at an hourly rate plus 50% of time saved as bonus. Total wages under this scheme is calculated with the help of the following formula:

Earnings = Time taken x Rate per hour + 50% (Time saved x Rate per hour)

Principles/Features of Halsey Premium Scheme: Under this plan,


a)      Time rate is guaranteed and the worker gets the guaranteed irrespective of whether he completes the job within the time also takes more time to do it.

b)      Standard time and standard work are fixed for the job or operation in advance;

c)       The workers producing more than the standard, or the workers completing the work in less than the standard time fixed, get bonus in addition to the ordinary time wage.

d)      The bonus or the premium, by whatever name called, is 30 to 70 percent of the wages of time saved, the usual percentage being 50%,

e)      Workers who fail to reach the prescribed standard get the time wages.

f)       Labour cost per unit of output decreases. The employer also shares the benefit of efficiency which induced him to improve the method and equipment.

The advantages and disadvantages of this premium plan are mentioned below:

Advantages

(i) The plan is simple to understand and easy to operate.

(ii) It creates a feeling of security among workers as the plan assures a minimum hourly rate or guaranteed wage.

(iii) The efficient workers are rewarded by way of payment of bonus, whereas the inefficient workers are not penalised.

(iv) Earnings of workers increase and productivity increases since the workers are motivated.

(v) The employers also gain since direct labour cost and overheads cost per unit decline.

Disadvantages

(i) The workers do not get the full benefit of their efforts since the employee gets a share of the wages of the time saved.

(ii) More wastage of raw materials may result due to over-speeding.

(iii) The quality of work may decline as the workers want to rush through the work.

Rowan System or Rowan Plan: The scheme was introduced in 1901 by David Rowan of Glasgow, England. The wages are calculated on the basis of hours worked where as the ‘bonus is that proportion of the wages of time taken which the time saved bears to the standard time allowed’. Total wages under this scheme is calculated with the help of the following formula:

Earnings = Time taken x Rate per hour + Time saved / Standard time (Time taken x Rate per hour)

The main principles/features of Rowan plan are:


a)      Time rate is guaranteed and the worker gets the guaranteed irrespective of whether he completes the job within the time also takes more time to do it.

b)      Standard time and standard work are fixed for the job or operation in advance;

c)       The workers producing more than the standard, or the workers completing the work in less than the standard time fixed, get bonus in addition to the ordinary time wage.

d)      Bonus is based on that proportion of the time wages which the time saved bears to the standard time.

e)      Workers who fail to reach the prescribed standard get the time wages.

f)       Labour cost per unit of output decreases. The employer also shares the benefit of efficiency which induced him to improve the method and equipment.

g)      Wages per hour increases but in the same proportion as the output.

The advantages and disadvantages of Rowan plan are as follows:

Advantages

(i) The plan assures a minimum hourly rate.

(ii) The quality of output is protected since the bonus declines after the worker has reached a given level of efficiency.

(iii) Labour cost per unit and fixed overhead cost per unit are reduced with increase in production.

Disadvantages

(i) The plan is not easily followed by most of the workers.

(ii) Efficiency beyond certain point is not rewarded. It fails to distinguish between a very efficient worker and a worker with a little more than average efficiency.

(iii) Since the employer gets a share of the wages of the time saved, the workers do not get the full benefit of their efforts.


Difference between Halsey and Rowan premium plan


Basis

Halsey Premium Plan

Rowan Premium Plan

Rate of bonus

Rate of bonus is fixed in case of halsey premium plan.

Rate of bonus is not fixed. Rate of bonus in this case will be percentage of time saved on time allowed.

Amount on which bonus is calculated

Bonus is calculated on the wages saved by employees.

Bonus is calculated on time wages.

Efficiency reward

Under Halsey System, the less efficient worker get less bonus and more efficient worker get more bonus.

Under Rowan System, the less efficient worker and highly efficient worker can get the same bonus.

Earning per hour

Under Halsey plan when time saved is more than 50% of standard time, earnings per hour are higher.

Under the Rowan plan when time saved is less than 50% of standard time, earnings per hour is higher.

Quality of output

The quality of work is affected under halsey plan as the bonus increases with increase in level of efficiency and the workers prefer to rush work.

The quality of work is not affected much under Rowan plan as the bonus increases at a decreasing rate at higher levels of efficiency and the workers do not prefer to rush work.

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