Labour Cost

Introduction

Accounting for cost refers to the classification of cost. In other words, it involves grouping them according to their characteristics. It allows managers to control costs, improve efficiency and effectiveness, of operations.

Labour Cost 

From a company’s point of view labour are paid workers who make products or provide a service.

Labour costs refers to cost that can be traced directly to a particular product e.g. Wages paid to carpenters for making a wooden box and salaries of other staff within the business, not directly involved in the production process e.g., a supervisor is not directly involved in making anything and may be responsible for a number of products/product lines.

For that reason, salary will need sharing across all of these units. These costs are also classified as manufacturing costs – ie, those which are incurred during the production process which cannot be traced directly to a particular product or service.

Typical factors affecting the price paid for labour

  • General economic climate
  • Government policy
  • Profitability of the firm
  • Availability of skilled workers
  • Nature of the job – is it dangerous?
  • Local and national wage rates

Performance/output related

  • Relate payment to output
  • Many schemes in operation
  • Both employees and employers may benefit
  • Employee – extra income
  • Employer – reduced overheads per unit of increased production

Requirements

  • Pay reflects effort
  • No delay to payment
  • No artificial limits
  • Contingency if problems arise

High Day Rate System

  • Incentive built into hourly rate which is well above basic rate
  • Above average performance is required
  • Agreement required between workers and managers for expectations
  • Typically used for assembly line operatives in car industry

Piecework

  • Agreed rate paid regardless of output
  • May set time allowance per piece
  • May have guaranteed day rates attached to safeguard earnings

Differential Piecework

  • Higher pay for higher production levels
  • Rates may raise progressively EG,

Up to 100 = 10p each

101 – 199 = 15p each

200 – 299 = 20p each

200+ = 30p each