Labour Cost

Labour cost is a significant element of cost specially in an organisation using more manual operations. It is the cost of human endeavour in the product and requires coordinated efforts for its control. The management objective of keeping labour cost as low as possible is achieved by balancing productivity with wages. The object is often achieved by paying higher wages to limited satisfied workmen with high productivity. Low wages do not necessarily mean low labour cost. In recent labour agreements, it has been found that substantial increase in wages has been granted against corresponding increase in productivity, thereby reducing labour cost per unit.  The gain is reflected both in labour cost as well as in overheads expense per unit, since overheads are distributed over larger volume. Again, the productivity of labour is quite flexible.  Given right type of motivation and incentive, it can reach amazing scale. It does not have any limitation like machines. Lastly, in India, under existing regulations, wages may be considered as fixed cost or committed cost rather than discretionary cost.  In a large organisation, the control of labour cost involves the coordinated efforts of the following departments:–

• Personnel department — This department is responsible for manpower planning, recruitment, training, maintaining records of staff and workmen and reporting to chief inspector of factories and to top management on performance, overtime, absenteeism, leave, etc.
• Industrial engineering department — This department prepares plans and specifications of each job, supervises production activities, undertakes time and motion studies, performs job-analysis, etc.
• Time-office — This department is primarily responsible for collection of data relating to attendance, time spent on jobs or process by the workmen, and providing information on attendance and leave to Payroll department.
• Payroll department — This department is responsible for computing total and net earnings of each worker, preparation of payroll and maintenance of various records relating to payroll.
• Cost department — This department collects and classifies all cost data relating to labour utilisation by departments, and allocates them to respective job or process as per available documents.

Labour cost may be classified into direct and indirect labour. Direct labour refers to the time spent in altering the construction, composition, conformation or conditions of the products manufactured. Thus, the time spent by a worker, identifiable with a particular job or process or operation is a direct labour and is considered directly variable with the output. All other labour hours spent for the running of the factory in general, and cannot be directly identified with a job or process or operation is treated as Indirect labour. Examples of indirect labour are salaries and wages paid to Inspectors, supervisors, maintenance staff, assistants in purchase, stores and offices, security staff, etc. Again, workers- of production department engaged in productive job or process are called direct workers. Labour hours of direct workers, which cannot be identified with a job or process, such as idle time, waiting time, etc. shall be treated as Indirect labour.