Types Of Labour Cost- Meaning, Methods & Examples

TYPES OF LABOUR COST CONTENT

1. Labor Cost
2. Types with example
3. Methods to calculate labor turnover
4. Download PPT (AVAILABLE IN END OF THIS TOPIC)

What is Labor cost?

The cost of labour is the sum of all wages paid to employees and the cost of employee benefits and payroll taxes paid by an employer.

2. Types of labour cost

These are only two types of labour cost
1. Direct labour Cost
2. Indirect labour Cost

 1. Direct cost
Direct labour cost is the amount spent by the factory for those workers involved directly in the manufacturing process. This cost can be identified and allocated to the specific job or process or product. It forms a part of the prime cost.

Examples- Direct labour costs are the payments made to the workers engaged in the production of goods.

2. Indirect costs
Indirect labour cost is the amount spent by the factory for those workers who are not directly engaged in the production process. This cost refers to the expenses incurred in remunerating such workers who assist the direct labour to complete the manufacturing processes. It forms a part of the overhead costs.

Example- Payment made to the sweepers, watchmen, cleaners, supervisors, and accounting personnel are examples of indirect labour costs.

Read More: Causes of Labour Turnover

3. Methods to calculate labour cost | Various method of wage payment

1. Time rate system
2. Piece-rate system
3. Combination of time and piece rate system

1) Time Rate System With Example

The time rate system is the simplest and oldest method of wage payment.
According to this system, the workers are paid in accordance with the time spent on the job. The time may be on an hourly, daily, weekly, fortnightly, or monthly basis.
The work or production done by an employee is not taken into consideration.

Advantages of time rate system

1. This method of wage payment is very simple. The workers will not find any difficulty in calculating the wages.
2. This method is acceptable to trade unions because it does not distinguish between workers on the basis of their performance.
3. The quality of goods will be better as workers are assured of wages on a timely basis.
4. This system is good for beginners because they may not be able to reach a particular level of production in the beginning.
5. There will be less wastage, as workers will not be in a hurry to push through production.

2. Piece Rate System With Example

A piece-rate system is a system in which wages are paid in accordance with the number of units of work produced. This is independent of time spent on the job. A fixed rate of wage is paid for each piece of unit produced.
For example– If a worker produces 50 pieces per day and he is paid at the rate of Rs.1.2 per piece, the daily wage is 50 x 1.2 = Rs.60.

Advantages of piece rate system

1. This system is simple in working and the workers can easily calculate their wages.
2. This system helps in distinguishing between efficient and inefficient workers.
3. Strict supervision is not required in this system.
4. This system is fair to employee and employer both.
5. There will be no dispute over wages, as workers will be rewarded satisfactorily for their work.

3. Combination of Time and Piece Rate System With Example

In this system, both time and product are taken into consideration. The minimum weekly wages are fixed for every worker, which is to be paid irrespective of his output during the week, provided he has worked for full working hours required in a week.
The wages for the period of his absence are deducted from the total amount of his wages.

EXAMPLE:- A job card of each worker is maintained which clearly shows the number of jobs completed by the worker during a week. Payment for each job is fixed in advance. If the piece-rate wages earned by the worker are more than time rate wages, the balance is paid to the worker.
On the other hand, if piece-rate wages are less than time rate wages, then the worker will have to compensate the same by making more pieces during the next week.

Advantages of combination of Time and Piece Rate System

1. This system provides incentives to workers to produce more.
2. It is simple in its working and the workers can easily calculate their wages.

4. Download PPT Of Labour Cost

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