Accounting for Labour

Introduction

After material, the wages paid to workers are usually the next largest element of cost, and how a firm pays and controls its labour affects both the cost of the product and the morale of the workforce. This chapter studies what labour cost is, why it must be controlled, the documents used to record a worker's time and output, and the two basic systems of paying wages together with the incentive schemes built on them.

Meaning and importance of labour cost

Labour cost is the total payment made to the workers who convert raw material into finished goods, including basic wages, allowances, bonus and the employer's contribution to welfare funds. Labour cost is important because it is a large part of total cost, because unlike a machine a worker's efficiency varies, and because the way workers are paid strongly influences how hard and how carefully they work. Controlling labour cost means getting the most output for each rupee of wages without cutting quality.

Direct and indirect labour

Labour cost is split into two kinds. Direct labour is the wages of workers who work directly on the product and whose time can be traced to it, such as a machine operator; this is part of prime cost. Indirect labour is the wages of workers who assist production generally but do not work on any one product, such as supervisors, cleaners and storekeepers; this is treated as overhead.