IN THE NAME OF ALLAH WHO

IS THE
MOST BENEFICENT
&
EVER MERCIFUL

Report
on
Cost Accounting
of
Planning and
Controlling for Labor

SUBMITTED TO:

Sir Bilal Khan

BUSINESS ADMINSTRATION DEPARTMENT

DATE OF SUMISSION:
January,18 2016

COURSE TITLE:
Cost Accounting

GROUP MEMBERS:
FARHAN MUSHTAQ

58

SHEHZAD MALIK

68

SALMAN NAAZ

69

HAYAT RAUF

81

SHARIQ HAIDER

82

M.SHOAIB SHAKEEL

96

DEDICATION:
We like to dedicate this report to all business students who want to
become great business professionals and want to be on the height of the
business world.
We hope that they would be satisfied from our task.
At this point we shall not forget the fruitful efforts of our teacher
Sir Bilal Khan. Without whom we would have been unable to
prepare this report.

ACKNOWLEDGEMENT:
Thanks and again thanks to Allah Almighty, who pulled us through the times
when every stone was turned against us.
Without His consent, nothing is possible.
Thank you Allah Almighty
Thanks to our most respected teacher Sir Bilal Khan for her untiring efforts,
her valuable guidance and precious advices are rare assets for us.

Concept and Meaning of Labor and Labor Cost

Concept and Meaning of Labor
Like materials, labor is also one of the prime inputs of production system. All manufacturing
concerns require the labor for carrying out their production activities. The labor consists of
workers who are essential to convert materials into finished products. The workers operate
machine

and

perform

other

tasks

to

help

convert

materials

into

final

outputs.

The labor can be either direct or indirect. The labor who is directly engaged in the conversion
process is called direct labor and who is not is called indirect labor. The labor, however, should
be properly utilized and satisfactorily paid in order to minimize labor turnover and labor cost.
Unlike materials, labor is complex to deal with. Dissatisfied and discontented labor always
results in high labor costs and low quality outputs. Therefore there should be proper
planning, accounting and controlling of labor.

Contribution

Managers

Market Stock

Stock Market

Concept and Meaning of Labor cost

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, and
employers contribution to provident find, production bonus, pension and gratuity. Fringe
benefits include subsidized food, subsidized housing, subsidized education, medical facilities and
holiday pay.

Concept and meaning of labour cost control

Labor cost covers one of the major portion of the total cost of a product or job. It may increase
unnecessarily due to inefficiency of workers, wastage of materials by workers, idle time, unusual
overtime work and high labor turnover. Hence, the management should devise effective
techniques for controlling labor cost to ensure maximum outputs of better quality at low cost
through proper utilization of the labor force.
Basically, management is concerned with controlling labor cost. Labor cost control involves such
systems, procedures, techniques and tools used by the management in order to keep thelabor
cost of the product or job as minimum as possible. Labor cost control consists of a number of
such regular activities which are carried on by various departments of the organization in a
coordinated manner to ensure the availability of the best employees and their optimum
utilization. It is the system followed by the management to maximize quality output at a

minimum cost. Labor cost control includes the process of developing various forms, studying
and recording the activities and performance of workers, calculating the correct amount of wages
and making payment in time. It also include the process of analyzing and reporting labor
cost to the management for planning and decision making.

Importance of labor cost

Proper study, analysis and control of labor costs are important to all manufacturing concern
because of the following reasons.
* Labor cost is main element of cost which covers one of the major portions of the total cost of a
product or job.
* Labor cost is more difficult to control as compared to material cost due to the involvement of
human element.
* Labor cost is affected due to a change in government policy and requirement of trade union.
* Labor cost is adversely affected due to dissatisfaction, irregularity, inefficiency, idle time, high
labor turnover, lack of interest and negative attitude of the workers.
* Labor cost is important from the fact that the direct labor cost is taken as the basis of
estimating the amount of factory overheads while determining the product cost.

Importance and needs of labor cost control

The need of labor cost control arises to fulfill the following purposes.
* Labor cost control is important to make economic utilization of labor force in production
process.
*Labor cost control is important to obtain maximum quantity of output with the least amount of
materials and other resources.
* Labor cost control helps to obtain better quality output with the least effort and time of
workers.
* Labor cost control reduces the cost of production of products manufactured or services
rendered.
*

Labor cost

control ensures

the

satisfaction

of

the

workers

by

creating

a good

working environment in the factory.

* Labor cost control is helpful in minimizing wastage of materials by workers , idle time and
unusual overtime work.
* Labor cost control is helpful to maintain safety working environment.
* Labor cost control is important to keep complete records of the employees and to supply
information to the management regarding availability, efficiency, utilization and absenteeism of
the workers.
* Labor cost control is very useful to increase the profitability and competitiveness of the
organization

Types of labor cost

1. Direct Labor Cost
Direct labor cost is the amount spent by the factory for those workers involved directly in
the manufacturing process. It can be measured conveniently and accurately on per unit of
output basis. Direct labor cost can be identified and allocated to the specific job or
process or product. It forms a part of the prime cost. The examples of direct labor
costs are the payments made to the workers engaged in making table, printing a book and
constructing a dam etc.

2. Indirect Labor Cost

Indirect labor cost is the amount spent by the factory for those workers who are not
directly engaged in the production process. Indirect labor cost refers to the expenses
incurred in remunerating such workers who assist the direct labor to complete the
manufacturing processes. It cannot be identified and measured accurately on per unit of
output basis. It is incurred for the benefits of a number of cost centers. It forms a part of
the overhead costs. Payment made to the sweepers, watchmen, cleaners, supervisors and
accounting personnel are the examples of indirect labor cost.

Steps to Control Labor Costs

In these steps, you will learn how to cut labor costs for controlling labor cost. There is
mixture of many techniques where we control misuse of our resources in labor in the
form of idle time or any other things. After this, we can reach a stage where our
overall labor cost may reduce.

Steps to Control Labor Costs

1 In first step, we have to make good working system in which day and night labor
time is recorded and total overtime and idle time is counted and try to include all
workers in this system. Main aim of first step is to reduce idle cost.

In second step, we provide labor incentives under good incentive technique. It

will be inspiration for employee to do work more fastly. It will reduce the cost of labor
indirect way.

in third step, we review above two steps and change above system of working

and incentive system, if the new system is more efficient and effective for reducing
cost of labor.

In fourth step, we provide training of employees from experts for reducing the

loss due to ignorance of production process or working with wrong manner or unsafe
work.

In fifth step, we have to praise for employees' achievements. In this, we have to

pay nothing, but only speak good words for recognizing the good performance of
employees. After this, employees' efficiency will increase and they will do better for
reducing labor cost.

Factor affecting cost of labor

1 Assessment of man power requirement

Correct assessment of manpower requirement will decrease the cost of labor because they are
actually we need, if laborers are more than these no., its excess cost will be suffer by co. and
overall cost of labor will increase. To assess of manpower requirement is the duty of personnel
department. So, it should be do its duty with best way.

2 Time and motion study

In this study, supervisor records time spent on each job and correct record will reduce excess
paid for overtime to workers.

3 Control over idle time and overtime

Idle time is time when worker is not doing any production activity due to delay of receiving the
material or electricity cut or any other things. This is loss of business and it will increase the cost
of labor. By continuing supply of raw material, review and repair of machines and continue
supply of electricity can reduce idle time loss. But some time, these factors are also not under our
own control. So, we have to depend on others. Overtime cost also can be optimized by providing
good amount for this.

4 Wage system
Wages should be at competitive price. High and low rate of wages will disturb workers and
increase cost of laborers. It also is on the basis of time or unit produced.

5 Control over labor turnover

Labor turnover means losing of laborers due to not providing good wages or incentive or any
other reason. It will increase the cost of training of new workers and also errors in production. So
labor turnover should minimize as soon as revealed.

What is Incentive Wage Plans?

Incentive wage plans are extra wages in the form of monetary and non-monetary ways for
increasing the efficiency of employees and workers. It is also known as bonus to workers.

Types of Incentive Wage Plans:

Two types or kinds or methods of incentive plans

1) Individual incentive plan

2) Group incentive plan
1) Individual incentive plan: it may either be time based or production based. Under time
based plan a standard time is fixed for doing the job. A worker is said to be efficient if he
completes the job in time and he is given the reward for his efficiency.
a) Halsey plan
b) Rowan plan

2) Group incentive plan: under this method group bonus is given instead of individual bonus.
The bonus is distributed among all the employees of the organization on the different basis which
are as follows:

a) Priestmans plan: under this method Bonus is increased in proportion to increase in output.
Increased production/standard production*100
b) Profit sharing method: under this method increased profit is shared among the workers and
management as agreed between both the parties.

c) Scanlon plan: under this method bonus is paid in proportion to the production 1% bonus if
1% increases in production.

What are things included in Incentive Wage Plans?

In incentive wage plans, free house facility, free education of children of workers, free medical
treatment and other excess money gifts.

How to calculate incentive wages in it?

There are about 10 incentive wage plans and these plans were made by experts of management
fields. But we are taking first three plans in this part of tutorial for calculation.

1. Halsey Premium Plan

This incentive plan was made by F.A. Halsey in 1891. It formula is given below

Total Wage = Taken Time x Standard Rate +( Saved Time x Standard Rate)x50/100

Example: Calculate the wage with incentive of a worker from following

information.
Standard time to produce units 250 hrs.
Time taken to produce the units 220 hrs.
Hour rate of wages Rs. 4 /Method of payment Halsey premium plan

Solution:

Wage = Taken Time X Standard Rate = 220 X 4 = Rs. 880

Incentive Wage or bonus = Time saved X Standard Rate X 50% = 30 X 4 X 50/100 = 60
Total wage = Rs. 880 + Rs. 60 = Rs. 940

2. Rowan Plan
This incentive wage plan was made by James Rowan in 1901. Formula of this plan is below.

Total Wage = Time taken X standard rate + ( time taken X time saved X
standard rate ) / standard time

Example
A worker takes 12 hrs to complete a job to time wage and 9 hrs on a scheme of payment
by result. The rate of payment is Rs. 5/- per hr. Calculate his earning if he is paid on the
basis of Rowan plan.

Solution :
By analysis, we get the following facts :
Standard time = 12 hrs.
Time taken = 9 hrs.
hourly rate = Rs. 5/Wage = time taken X standard rate = 9 X 5 = Rs. 45
Incentive wage or bonus = ( time taken X time saved X standard rate ) / standard time= 9
X 3 X 5 / 12 = Rs. 11.25
Total Wage = 45 + 11.25 = 56.25

3. Halsey - Weir Premium Plan

This plan was made by G.T. Weir which is improvement of Halsey plan.
It formula is given below:

Total Wage = Taken Time X Standard Rate + ( Saved Time X Standard Rate) X
30/100

Example:Calculate the wage with incentive of a worker from following information.

Standard time to produce units 250 hrs.
Time taken to produce the units 220 hrs.
Hour rate of wages Rs. 4 /Method of payment Halsey - weir premium plan

Solution :
Wage = Taken Time X Standard Rate = 220 X 4 = Rs. 880
Incentive

Wage

or

bonus

Time

= 30 X 4 X 30/100 = 36
Total wage = Rs. 880 + Rs. 36 = Rs. 916

saved

Standard

Rate

30%