UNIT I- Labour Cost and Control

(20 Marks)
Introduction to Cost Accounting
Cost Accounting
• Cost Accounting is a method of accounting
wherein all the costs involved in performing any
process, project or product are noted and
analyzed.

• Such analysis helps the management in taking

strategic decisions.

• Cost accounting uses various techniques to make

an organization cost effective.
How is cost accounting different
from financial accounting?
• In traditional accounting, the profit and loss is
derived by deducting expenses from income
whereas in cost accounting the motive is to be
cost effective by reducing costs of process,
production or project.

• Financial accounting views an organization in

entirety whereas cost accounting segregates the
organization into various processes, projects or
production units.
• Financial accounting is used to present the
position of the organization to its stakeholders
whereas cost accounting is used for internal
review of costs.

• Financial accounting is uniform across various

businesses, however, cost accounting methods
vary based on the type of business.
Which are the elements of cost in
general?
• For a standard manufacturing unit the various
costs involved can be segregated into the
following :
• Material
• Labour
• Other expenses

• These can be further segregated into the

following:
• Direct
• Indirect
Illustration
• Say a toy manufacturing unit procures plastic as
a raw material.
• The cost of plastic is direct material cost.
• The costs incurred in the packing and
transportation of the same is the indirect
material cost.
• Similarly, the labour cost for the production of
toys is the direct labour cost whereas the
salary of the production supervisor will be
indirect labour cost.
What is Labour cost?

• Labour cost represents human contribution. Labour cost

is sensitive in nature. The reason is that the labour cost
is fully based on the human behavior i.e. labour
behavior.

• The payment made to the labor in exchange for its

service is called labor cost, which constitutes a major
part of the total cost of production.

• Labor cost is also commonly called wages. Labor cost or

wages is one of the major elements of cost. Labor cost
represents the expense incurred on both direct and
indirect labor.
• However, labor cost is more than just wage as it includes
the total amount of financial benefits given by the
concern to all its workers and employees for their time
and effort used in producing goods and services.

• It is, in fact, the financial compensation provided to the

workers for their physical and mental contribution for
converting raw materials into finished outputs.

• Labor cost includes monetary and non-monetary (fringe)

benefits.

• Monetary benefits include basic wages, dearness

allowance, employer's contribution to provident find,
production bonus, pension and gratuity. Fringe benefits
include subsidized food, subsidized housing, subsidized
education, medical facilities and holiday pay.
• The control of labour costs requires the control
of the labour behavior.

• Therefore, the management should study human

behaviour, performance of labour, time and
motion study, labour turnover, labour approach
in order to control the labour cost.

• Labour cannot be stored for future reference. It

is very much similar to the perishable nature of
materials.
• If labour is kept idle, the management should
pay remuneration or wages for such idle time.

• The management incurred two losses. They are

loss of labour working hours and monetary loss.

• Hence, the management is very keen in the

control of labour cost.
Classification of Labour Cost
• The labour cost may be classified in the
following ways.

• 1. Direct Labour Cost

• Direct Labour cost is that portion of salary or
wage, which can be identified with and charged
to a single unit cost of production.
Characteristics of Direct Labour Cost:

• The direct labour cost has the following

characteristics.

1. It has direct relationship with the product or

process or cost unit.
2. It can be measured quantitatively.
3. It is sufficiently material in amount.
• 2. Indirect Labour Cost
• It is not identifiable within the production of
goods and services even though directly
incurred. These costs are incurred in the
production place.

• Sometimes, some cost center may render

service to the production departments or
production activities. Such as cost centers
purchase, engineering and time keeping.
• 3. Controllable Labour Cost
• A labour cost can be controlled by the
management during production period and even
during absence of production.

• A standard time and time rate may be fixed and

request the labour to complete the job or order
within such time. If so, the labour cost can be
controlled to some extent.
• 4. Non-Controllable Labour Cost
• A labour cost, which cannot be easily controlled
by the management.

• A job or order can be completed by a group of

labourers. The efficiency of such group of
labourers differ in nature.

• A labour can use his/her efficiency in full as per

the prevailing environment in the product place.
If so, the cost cannot be controlled by the
management.
Information required for Labour cost
control
• The following information is required for labour cost
control effectively
• 1. Cost of recruitment of labour.
• 2. Training cost of workers.
• 3. Labour Turnover.
• 4. Idle Time.
• 5. Over Time.
• 6. Shift Work.
• 7. Labour Efficiency.
• 8. Number of workers.
• 9. Wastage.
• 10. Spoilage.
• 11.Wages Paid.
Time Keeping
• Time-keeping department is concerned with the
recording of time of each worker engaged in the
factory.

• The recording of time is for two purposes, i.e., for

Time-keeping and Time Booking

• Timekeeping is the process of tracking and reporting

work and leave time. Everyone is responsible for
accurate timekeeping:
• Employees report leave and approve their time on
their timecards
• Supervisors review and approve their employees’
timecards
• Timekeepers sign off on their units’ timecards
Purpose of Time-keeping
• 1. Preparation of Pay Rolls in case of time-paid
workers.

• 2. Meeting the statutory requirements.

• 3. Ensuring discipline in attendance.

• 4. Recording of each worker’s time ‘in’ and ‘out’ of

the factory making distinction between normal time,
overtime, late attendance and early leaving.

• 5. for overhead distribution when overheads are

absorbed on the basis of labour hours.
 Contd…
• It controls idle time.
• It identifies the late comers.
• It helps to create a healthy environment in the
factory.
• It maintains a record of the job performed by
labor.
• It enables implementation of various incentive
schemes.
Methods of Time Keeping
• There are two methods of time-keeping.

• They are the manual methods and the mechanical

methods.

• The choice of a particular method depends upon the

requirements and policy of a firm.

• But whichever method is followed, it should make a

correct record of the time incurring the minimum
possible expenditure and should minimize the risk
of fraudulent payment of wages.
•
• Methods of Time Keeping | Labour Cost |
Cost Accounting
• Broadly speaking there are two methods used for
time keeping: 1. Manual Method 2. Mechanical
Method.

• 1. Manual Method:
• Under this method the attendance time of
employees are recorded either by the time
keeping officer or by employees themselves.
• The manual methods of time keeping are
as follows:
• i. Attendance Register Method:
• Under this method, an attendance register is
maintained for recording the attendance time.
This method is followed in small sized concerns.

• The attendance time can be marked by the time

keeping officer by calling out the name of every
employee or alternatively the attendance register
may be signed by every employee.
• Merits:
• This method has the following merits:
• (1) It is simple to maintain attendance register.
• (2) It is an economical method in comparison to other
methods.

• Demerits:
• (1) This method is not suitable for medium and large sized
businesses.
• (2) Where the attendance is marked by calling out the names
of employees, there will be hold-ups near the factory gate.
• (3) Dishonest employees may mark the attendance of
absentee employee.
• (4) Time keeping officer may show step motherly treatment to
his friends and this will defect the purpose of time keeping.
• (5) It involves additional work for posting the entries into the
individual working record.
• ii. Token or Disk Method:
• Under this method, each worker is allotted an
identification number and that number is suitably
painted on engraved on a round metal to ken (or disk)
with the hole in it. All such token are hung in a serial
order on a board at the factory gate.

• As the worker arrives he takes his token from the board

and puts it in a box kept nearby, which is specially kept
for this purpose. After the fixed time the second board is
removed. Those coming late have to hand over their
token personally at the time office so that exact time of
their arrival can be noted.

• The time office records attendance on the basis of token

in the box. The absentees are indicated by the missing
tokens. Similar procedure is followed at the departure
time in the evening.
• Merits:
• (1) It is simple to operate.
• (2) It does not involve heavy investment.
• (3) It suits to a factory which employs more number
of employees.

• Demerits:
• (1) Dishonest practice of inserting a disc of an
absentee worker by another employee may take
place.
• (2) It involves more clerical work to prepare an
attendance record with the help of disc, where any
mistake is committed in recording attendance time
on the basis of disc and in case of any disputes
between an employee and time keeping officer, disc
cannot offer any proof.
• 2. Mechanical Method:
• In modern age, mechanical methods of time keeping
are used to save time and ensure greater accuracy.

• The machines record the exact time of the arrival

and departure of employees.

• Thus, they avoid possible disputes and difference of

opinions between employees and time keeping
officers.

• Mechanical methods are used in medium and large

sized industries as small sized concerns cannot
afford to invest more capital on such equipment.
• Following are the important mechanical
methods of time recording:
• i. Dial Time Recorder:
• This method consists of a large dial on which
there are about 150 holes corresponding to the
number of workers. A clock is fitted within the
circles of the dial together with a dial arm which
operates from the centre of the circle.

• The worker while entering into the gate turns the

dial arm. He then presses the button
corresponding to his clock number. The time of
his arrival is recorded on a sheet of paper kept
inside the machine.
• The same procedure is followed before the
employee leaves the factory gate.
• Merits:
• (1) Time is recorded strictly according to pay roll
order.
• (2) Provision can also be made out not only to
record time but also to calculate wages.

• Demerits:
• (1) A worker can record the time of an absentee
worker.
• (2) Time of arrival and departure are separated out
in two different sheets of paper which require
additional clerical work.
• (3) A worker cannot see the time he has booked and
disputes may arise afterwards.
• ii. Card Time Recorder:
• This is a machine which is fitted with a clock on each
side of which there is an ‘in’ and ‘out’ rack which
contains the cards of the employees.

• The worker who enters the gate takes his and from
the ‘in’ rack, inserts it in the machine.

• On pressing a lever the time of arrival is recorded on

the card. Then the card is placed in the ‘out’ rack.

• At the time of departure from the factory the worker

removes his card, inserts it in the machine to record
the time of departure and finally places it in the ‘in’
rack.
• Merits:
• (1) For each and every worker’s time is recorded
individually.
• (2) The absence of worker can be checked by a
mere look at the ‘out’ rack.
• (3) This can be taken as a basis for wage
calculation.

• Demerits:
• (1) An employee can record the time of absentee
worker.
• (2) Controlling and checking of cards becomes
difficult.
• iii. Autograph or Signature Type Time Recorder:
• This type of machine is most commonly used in small
sized business enterprise where supervision for time
recording does not arise.

• Its features can be summarised as follows:

• (1) It is a machine which is fitted with a clock and is
connected to a printing mechanism on a roll of paper.
• (2) To operate the machine, the employee opens the
shutter by pressing a lever which is at the side of the
machine. This enables to uncover a small signature
window.
• (3) The employee signs in this signature window and as
he signs, the day and time is automatically recorded.
• (4) When the lever is released, the paper roll inside the
machine is advanced, the shutter slides back over the
signature window, and the machine is ready for the
signature of the next worker.
• Merits:
• (1) Recording of time is automatic and accurate.
• (2) Employees cannot see the recorded time.

• Demerits:
• (1) The worker’s name does not appear as per
the pay roll order.
• (2) Breakdown in the machine leads to stoppage
in the recording of attendance time.
Importance of Time Keeping
Definition of Time-Booking:

• Time booking signifies the time spent by a

worker on each job, process or operation. It is
more important in case of direct workers as
compared to indirect workers.
Purpose of Time Booking
• Time booking is necessary for:

• 1. Ascertaining labour cost of every job.

• 2. Providing time basis for apportionment for

overhead expenses

• 3.Having control over wastage of time – idle time.

• To ensure that the time spent by the employees is

utilized effectively for productive purpose.
Objectives of Time-Booking:
• The objectives of time-booking are:

• (i) To calculate the labour cost of jobs done;

• (ii) To apportion overheads against jobs;
• (iii) To evaluate performance of labour and to make
comparison of actual labour time with budgeted
time;
• (iv) To ascertain idle time for the purpose of control;
• (v) To determine overhead rates for absorbing
overhead expenses under labour hour and machine
hour methods; and
• (vi) To calculate bonus and wages provided the
system of payment of wages depends on the time
taken.
Methods of Time-Booking:

• (i) Daily time sheets:

• It gives in detail the activities of the worker and
the time spent in each job.

• One sheet is allotted to each worker and a daily

record is made therein.

• It is suitable for small organization where the

number of employee and job is small.
• This sheet consists of the following
particulars:
• i. Workers name
• ii. Worker’s identification number
• iii. Name of the department
• iv. Machine Number
• v. Date of work done
• vi. Job number
• vii. Nature of work performed
• viii. Starting and finishing time on the job.
• ix. Actual, normal or overtime hours of work
done.
• x. Signature of time booking authority.
• Merits:
• (1) It is simple to operate.

• (2) It enables the foreman to know-how much

of work is done by employee each day.

• (3) The record shows accurate information as it

is checked by the foreman every day.

• (4) This method is particularly useful where more

number of jobs are to be performed on the same
day

• (5) The daily time sheets can be kept much cleaner,

as each sheet is handled for only one day and by only
one worker.
• (6) As the daily time sheets are handed over to
the wages office every day, there is no chance
of any sheet getting lost.

• (7) As the daily time sheets are handed over to

the wages office every day, there will be no
delay in making entries.

• (8) It facilitates the reconciliation of time

spent on work with the time spent in the factory.
This reconciliation is helpful in ascertaining and
controlling the idle time.
• Demerits:
• (1) It involves more of clerical work by way of
consolidation of all the daily time sheets for one
full month.
• (2) It is not suitable for large business
concerns.

• Suitability of the Method:

• (1) When size of the business is small.
• (2) Where the workers has to attend the more
jobs instead of few jobs on the same day.
2. Weekly Time Sheet System:
• Under this system, each worker is provided with a time
sheet every week for recording the particulars of time
spent by him on the various jobs during the week.

• The weekly time sheet contains the name of the worker,

his identification number, the various jobs.

• The weekly time sheet may be written up by the worker

himself or by the foreman or by the time recording clerk.

• If it is written up by the worker himself, it is required to

be countersigned or certified by the foreman.

• At the end of the week, it is handed over to the cost office

for making entries.
• Advantages:
• (1) This system is more convenient and
economical.

• (2) When compared to daily time sheet system,

weekly time sheet system involves less paper
work.

• (3) It is quite suitable for intermittent job and

contracts, such as building construction, interior
decoration, etc.
• Disadvantages:
• (1) There is the possibility of some of the weekly
time sheets missing where the number of
sheets is large.

• (2) As the weekly time sheets are handed over to

the cost office only at the end of the week, the
ascertainment of the labour cost of a job is
delayed.

• (3) It is very difficult to compute the labour cost

of a particular job, because the time spent on a
particular job has to be compiled from a number
of weekly time sheets.
3. Job Cards or Job Tickets:
• Under this method a card is made used of for
recording the time spent by workers on various jobs
instead of sheets of paper.

• Each employee will be given a card which contains

the particulars of work to be performed by him.

• This card is to be filled in by employees by noting

down the starting time and finishing time of the job
which he attends to when a worker completes a job
he will be given a separate job card to book the time
on such job.
• Merits:

• (1) It provides information relating to the job to

be performed by the workers. Thus it serves as
an authority to start the work, besides recording
the total time spent by workers on jobs.

• (2) It provides correct and clear information for

costing department.
• Demerits:

• (1) It involves more paper work when worker

performs several jobs every day.

• (2) Reconciliation of attendance time and time

booked on job becomes difficult when idle time
is not properly recorded.
4. Combined Time and Job Card:
• This document contains two parts. The first part
is to be filled in as attendance time and the
second part, the total time spent on jobs.

• This facilitates reconciliation of gate time with

the work time and the extent of idle time can be
easily detected.

• This method fulfills the objectives of both time

keeping and time booking.
• Merits:
• (1) It combines the merit both attendance time
and time booking.
• (2) Compared to maintaining time keeping and
time booking separately, it is more economical.
• (3) The idle time is properly accounted for.

• Demerit:
• (1) This method is not suitable for large sized
undertakings.
5. Labour Cost Card:
• A labour cost card is used to record the time spent by all the
workers on various operations of the job.

• In other words, the time spent by a group of workers

attending on a job is recorded in labour cost card. This card is
meant for a job instead of workers.

• As when a worker records time spent on the job, it shall be

passed on to the workers.

• This record, thus, shows the total time spent on a job and the
wages to be charged to that job. As this card shows the total
labour cost of a particular job it is termed as labour cost card.
6. Piece Work Card:

• The card shows the number of units produced by

the workers and the time spent in manufacturing
the units.

• This method is adopted where piece rate system

of wage payment is adopted.

• A separate card is prepared and used by every

worker to record the number of units produced
and the total time spent by him.
A pro-forma of piece work card is
shown below:
• Though piece workers are paid on the basis of
units produced and not on the basis of time
taken, recording their time spent on different
jobs in essential, particularly where overheads
are absorbed on the basis of labour hours.

• Moreover, it ensures that piece workers do not

cause any interruption in production by their
late arrival or early departure.
Definition of Payroll Accounting
• Payroll accounting involves a company's
recording of its employees' compensation
including:
• Gross wages, salaries, bonuses, commissions,
and so on that have been earned by its
employees
• Withholding of payroll taxes such as federal
income taxes, social security taxes, medicare
taxes, state income taxes (if applicable)
• Withholding for the employees' portion of health
insurance premiums, employees' contributions to
savings plans, garnishments of salaries and wages,
employees' contributions to united way, etc.

• Employer's portion/expense for social security

taxes, medicare taxes, state and federal
unemployment taxes

• Employer's portion/expense of fringe benefits such

as health and dental insurance, paid holidays,
vacations and sick days, pension and savings plan
contributions, worker compensation insurance, etc.
Example of Payroll Accounting
• If a company's employees are paid weekly based
on hours worked, the payroll processing is likely
done during the first few days following the work
week.

• If the company's accounting periods are

calendar months , the company will have
to accrue for the wages and benefits earned by
the hourly paid employees (which are not yet
paid or recorded in the general ledger accounts)
as of the last day of each month.