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Labour Cost Management: A Brief Analysis

All kinds of manufacturing units irrespective of their size and capital require a worker who is termed as labor to carry out the production activities. Labor consists of the workforce who converts raw material into a finished product. These workers operate machines and perform all the necessary tasks to produce the final output. There are two types of labor; Indirect Labour & Direct Labour. Those labors who are directly engaged in the process of conversion of raw material into a finished product are term as direct labors & those who are not directly connected are term as Indirect Labour. To minimize labor turnover, the employer should provide them with attractive incentives and a satisfactory working environment. While, dissatisfied labor results in high labor turnover, high labor costs, and low-quality output. For that purpose, there should be proper planning, accounting & controlling of labor. Read a brief analysis of Labour Cost Management.

Meaning of Labour Cost

One of the major costs of production is the Labour Cost. Labour Cost is the payment made to the workers for carrying out the production activities. In simple terms, it is the “payment made to workers in exchange for their services”Labour cost, in general, is referred to as Wages paid to workers. Wages are one of the major elements of the cost of the production unit. Labor costs include the expenses made for direct & indirect labor. Although labor cost is more than just wages paid to workers. It’s the financial benefits provided to all the workers and labors for giving their time & efforts in producing goods and services in the manufacturing unit. It is, therefore, financial compensation to compensate for their physical & mental contribution in production while converting raw material to finished product. Financial benefits include monetary & non-monetary benefits.

Monetary benefits include:

• Basic wages,
• dearness allowances,
• employer’s contribution to provident fund,
• production bonus,
• Pensions
• Profit Bonus
• Gratuity.

Non-Monetary benefits include:

• Subsidized food,
• Subsidized housing,
• Subsidized education,
• medical facilities
• Holiday leaves
• Recreational Facilities &
• Pay leaves.

Types of Labour Cost

There are the following two types of Labour Cost:

• Direct Labour Cost:

Direct Labour Cost is the amount paid to workers who are directly involved in the manufacturing process. It can be measured on per unit of output produced. Direct labor cost is allocated directly to the specific job, process or products produced. Direct Labour^[1] Costs are the part of prime cost.

• Indirect Labour Cost:

Indirect cost is the expenditure incurred by the factory on those who are not directly connected with the production process. These are the remuneration paid to those workers who assist the direct labor in completing production processes. It can’t be calculated directly on per unit of output produced. It forms the part of Overhead Cost. Payment made to sweepers, watchmen, cleaners, supervisors, is the example of such a form of cost.

• Controllable Labour Cost

Such a form of labour cost can be controlled by the management during the production period and even at the time when no production is carried on. There is a fixed standard time or time rate is fixed and the labors have to complete the job or order within such allotted time. In that case, labour cost can be controlled to some extent.

• Uncontrollable Labour Cost

Such a form of cost can’t be easily controlled by the management. The work is completed by a group of labors. The efficiency of the group differs from each other. Under this labour can utilize efficiency in full in the prevailing environment, and thus accordingly cost cannot be controlled by the management.

Labour Cost Control/Management

Labour cost is one of the major parts of the total cost of production. This cost may increase due to unnecessary wastage of material, inefficient workers, idle time, unusual overtime work and high labour turnover. Therefore, it’s the responsibility of management to control labour cost by using effective techniques & methods to ensure maximum output of best quality at lower cost by proper and full utilization of manpower.

Labour Cost Control is the methodology that makes use of system, techniques, procedure, tools, to keep the labour cost of the product as minimal as possible. Labour Cost Control consists of several techniques and activities that are carried in a coordinated manner by every department of an organization to ensure that the best employees are available along with their proper utilization. It also includes the process of analyzing and reporting the labor cost to higher management so that they can make an informed decision and plan accordingly. It’s the system that is to be followed regularly by the management to maximize quality output and minimize cost. This control includes various forms, study, evaluation, and recording of the activities and performances of the workers, calculating the correct amount of wages and distributing the same on time. Cost control is the practice of identifying and eliminating the business expenses by increasing the profits and it starts with preparing the budgeting process.

Needs of Labour Cost Control

The need for labour cost arises to fulfill the following purposes:

• With the help of such control activities, the organization can make economic utilization of labour force in production activities.
• Labour cost control helps in achieving the targets of maximum production at minimum cost.
• It helps in obtaining a better quality of production with the least efforts and time of workers.
• Labour cost control helps in reducing the per cost production of every good manufactured.

Information Required for Labour Cost Management

Following is the information required to control & managing labour cost:

• Cost of labour recruitment
• Training cost of workers
• Labour turnover
• Idle Time
• Overtime
• Shifts work
• Labour efficiency
• Number of workers
• Wastage of material during production
• Wages paid

Also, Read: Internal Control System- Analysis of Benefits & Limitations.

Steps of Cost Control

Cost control involves the following step with certain aspects of management:

• Planning:

Foremost a set of plans and targets is prepared in the form of budget, standards, and estimates.

• Communication:

The next step is to communicate the plan made in the first step to the one who is going to execute the plan.

• Motivation:

After the plan is executed, performance evaluation takes place in this stage. Costs are calculated and details about achievements are collected.

• Appraisal:

A comparison is made with the actual performances. Deficiencies if any are noted and accordingly discussions are made to overcome such Deficiencies.

• Decision making:

Finally, the reported differences and deficiencies are reported to the management for its decision making. Accordingly, corrective actions are taken and a set of remedial measures are taken.

Advantages of Cost Management

Cost control has the following advantages:

• It helps the organization to enhance its profitability & competitiveness
• Without cost control, there may be a drastic fall in income irrespective of large & increasing sales.
• It is crucial for achieving greater and high productivity.
• It helps the firm in reducing overall cost and thus accordingly reduces the price
• If the price of the firm is stable, it can maintain higher sales & also the employment of the workforce.

Also, Read: Cost Management – The Key for Business Sustainability.

FAQs

Explain the types of standard used to establish cost control.

Mainly two types of standards are established to control labour cost:

• Internal
• External

Internal standards are used to evaluate intra-firm cost elements, on the other hand, external standards are applied to compare the performances with other organizations.

What is the project cost management in the 4-step process?

• Resource Planning
• Estimation of cost
• Cost budgeting
• Cost control