elementsof cost

8/7/2019 elementsof cost

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LABOUR COSTS It is the compensation paid to the employees engaged in

production related activities.

It is more complex to manage labour costs:1. It is a major conversion cost , hence regular monitoring

required

2. Labour psychology

3. Labour cannot be stored


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TYPES OF LABOUR Direct labour : directly involved and traceable to the final

product

Indirect labour : facilitates production such as time-keepers

salary, supervisors salary. Casual labour : recruited on temporary basis, not on companys

payroll

Contract labour : Hired temporarily through contractors/ agents,no direct payments to labourers

Out workers : site labourers.


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ASPECTS OF LABOUR COSTS

1. Time keeping2. Time booking

3. Idle time

4. Labour Turnover


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1. Time keeping

(Attendence Record) 2 purposes :

1. Keeping attendance records foradministrative and payment purposes

2. Maintaining job cards for costing

Time recording methods : Manual andmechanical


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Manual methods1. Hand written record or register :

person at the gate records the in andout time of each worker with sign.Useful for small cos.

2. Check token or Disc method : token

discs are put into a box by eachworker on arrival. Manipulationpossible.


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Mechanical methods1. Card time recorder : Alloted cards are taken from in and out

rack and and inserted in a time recording clock by pressing alever to record time on the card.

2. Time clock method : allotted number is dialed into a clockwhich automatically records the time and details on a form.

3. Electronic card system : plastic card allotted which is insertedinto a time clock


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2. TIME BOOKING Apart from the attendance, time spent on

each job is to be recorded especially to

control productivity and avoid idle time.

The start time and end time on each job,

hours worked normal and overtime arerecorded for each worker by daily or weeklytime sheets or Labour cost cards.


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Employee Nature of work.Shift.. Units completedJob Number.. DepartmentDate.. Approved by..

Time started Time stopped Hours worked Rate Amount

Labour job ticket


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3. IDLE TIME Time for which payment is made but no output is generated.

Reasons :

1. Productive causes :Machine breakdowns, Power failures,waiting for work, waiting for instructions or tools or materials,frequent machine adjustments.

2. Administrative causes : strikes, maintaining trained workers,improper planning and scheduling, underutilization of capacityin recession

3. Economic causes : seasonal market fluctuations, intensity ofcompetition.


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.

Types :

1. Normal Idle time : Unavoidable such as time taken by workerto reach dept from gate, for changing, normal chatting etc.Try to maintain it at the min level possible.

Treatment : Cost of normal time is adjusted in total cost ofproduction as a factory o/h

2. Abnormal Idle time : resulting due to productive andadministrative causes. Can be reduced by proper mgt.

Treatment : Not to be absorbed in the cost of production butcharge to P & L a/c.


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4. Labour Turnover Rate of change in the composition of labour force.

Effects :

1. Increased cost due to selection, training, recruitment ofnew workers.

2. Production loss due to inefficiency of new workers

3. Problems of wastage, damage of machines, accidents due

to inexperienced worker4. Lower employee morale and motivation due to job

instability.

5. Negative publicity to the image of the co.


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CAUSES OF LABOUR TURNOVER

I. Avoidable causes

a) Low wage rates and earnings

b) Unsatisfactory working conditions/relations with others

c) Unfair methods of promotions

d) Lack of conveyance, housing and other facilities

II. Unavoidable causes

a) Change for better jobs

b) Retirement and death

c) Domestic/family responsibilities/constraintsd) Dismissal due to negligence and inefficiency

e) Seasonal nature of job

f) Retrenchments// layoffs


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COST OF LABOUR TURNOVER Preventive costs :

1. Medical , housing,recreational and education facilities

2. Benefits like pension, gratuity, bonus

3. Better working conditions and welfare facilities

Replacement costs :

1. Personnel dept expenses of new recruitment, selection,

training and development.2. Production dept expenses of low efficiency, accidents and

spoilage by new workers.

Large costs, so mgt should try to reduce labour turnover


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METHODS TO COMPUTE LABOURTURNOVER Separation rate method

= No. of separation in a period x 100

Avg. No. of workers in that period

Replacement rate method

= No. of replacement in a period x 100


Flux method= No.of separation + No.of replacementx 100



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OVERHEADS

All costs which cannot be traced

to individual units i.e. all indirectcosts.


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Classification of overheadsBASED ONNATURE

BASED ONVARIABILITY

BASED ONCONTROL

BASED ONFUNCTION

BASED ONNORMALITY

1 Indirectmaterial

2 Indirectlabour

3 Indirectexpense

1 Fixed2 Variable

3 Semi -variable

1 Controllable2 Uncontrollable

1 Production o/h2 Admin o/h

3 Selling o/h

4 Distributiono/h

1 Normal2 Abnormal


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PROCEDURE OF ALLOTING

OVERHEADS Allocation

Apportionment Absorption


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Cost allocation

Allotment of whole items of cost tocost centres / units.

Process involves 3 basic activities :1. Accumulating the costs on the basis of dept,

division or product

2. Identifying the cost objects or recipients of theallocated costs

3. Selecting a method to relate costs to the costobject.


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Cost ApportionmentAllotment of common cost to cost centres on

the basis of benefit received.

OVERHEADS ALLOCATED ON BASISOF

Labour - related No. of employees,directwages, labour hours

Machine- related Machine hours, Number

of machinesSpace related Area occupied by each

dept.

Service related Quantum, time taken,


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COST ABSORPTION Allocation of o/h to units/dept by

means of an overhead applicationrate.

A good absorption rate should be

fair and equitable.


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METHODS OF ABSORPTION1. Production Unit method

2. Percentage method % of direct materal

% of direct labour

% of prime cost

3. Hourly rate method

Direct labour hour rate

Machine hour rate


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Under absorption and Over

absorption of o/h Overheads are charged on the basis of pre-

determined or estimated rates

Hence there may be a difference betweenabsorbed and actual o/h.

Over absorption = Actual < absorbed Under absorption = actual > absorbed


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Reasons : Actual output more than estimated

Changes in technique of production Seasonal fluctuations

Trade cycle


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Treatment Use of supplementary rates : positive or

negative

Write off in costing P & L a/c

Carry fwd to next year.

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