Labour Cost — Accounting and Control


After studying chapter 8, you should be able to:

Organization for accounting and control of labour Cost.

  • Major functions of personnel department. `r. Labour turnover — meaning, causes and effect.
  • Methods study and work measurement. ••• Methods of time keeping and time booking. )-• Preparation of wage sheet and various frauds in the payment of wages.
  • Idle time and overtime and their accounting treatment. Wages analysis sheet. Requisites of a satisfactory system of labour remuneration.
  • Time rate and piece rate systems.
  • Principles of a good incentive plan.

Various incentiv. e plans for individual workers.

  • Group Bonus Plans.


In most of the manufacturing undertakings, labour cost is the second major element of cost, the first being material cost. Proper accounting and control of labour cost, therefore, constitutes one of the most important functions of management. In controlling labour cost, the problem is complicated by human element. Moreover, unlike materials which are durable and can be stored for use as and when required, labour is perishable in the sense it cannot be stored and once lost cannot be recouped. Thus any inefficiency and carelessness in the management of labour is bound to increase the labour cost.

Proper control over labour cost involves the following:

I. Satisfactory systems for recruitment and selections, training and placement of workers to jobs.

  • 2.        Satisfactory methods of labour remuneration.
  1. Healthy working conditions, consistent with legal requirements and competing undertakings.
  2. Methods of assuring efficient labour performance.                  •

    Like materials, labour cost is also divided into direct and indirect.

    Direct labour is the cost of that labour, which is expended in altering the construction, composition or condition of the product. It is directly engaged in production work and can be conveniently identified or attributed wholly to a particular job, process or cost unit. Wages of

    a machine operator is a direct labour cost. Similarly, in a factory manufacturing ready made garments, wages paid to a tailor is direct wages.

    Indirect labour cost, on the other hand, is the wages paid to those workers who are not directly engaged in converting raw materials into finished products. Such costs cannot be conveniently identified with a particular job, product or process. Supervisors, work checkers, instructors, peons, watchmen are examples of indirect workers.


    There are mainly five departments in an organization which deal with labour. These are: Personnel Department — This is a service department and is mainly concerned with the

    proper selection and training of workers and placing them to jobs for which they are best suited.

    Engineering Department — This department prepares plans and specifications of jobs,

    makes job analysis, conducts time and motion studies, makes provision for safe working conditions and supervises production activities.

    Time-keeping Department — This department is concerned with recording of workers time. The recording of time put in by workers is required not only for attendance and wage

    calculation purpose but also for the purpose of cost analysis and apportionment of labour cost over various jobs.

    Payroll Department — This department maintains a record of job classification and wage rate of each employee and performs the function of computation of+wages payable to them by preparing payroll or wage sheet. It is also responsible for disbursement of wage payments.

    Cost Accounting Department — This department accumulates and classifies all cost data of which labour is one important element. It analysis the payroll and prepares routine and

    special labour cost reports for submission to management so that proper control may be exercised on labour cot.

    The functions and scopes of these various departments have been discussed in detail in this chapter.


    This department is concerned with recruitment, discharge and transfer etc. of labour. Requisition for new personnel are made to this department. On receipt of duly authorized requisitions, the personnel officer arranges to recruit persons for employment from various

    sources like employment exchange, technical and educational institutions, advertising in newspaper, etc.

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