Cost Accounting: Labor Costs

• Cost accounting captures a company's production costs by assessing input costs at each production step and fixed costs like equipment depreciation.
• Cost accounting individually measures and records costs, comparing input results to actual outcomes.
• Managers use cost accounting to inform decisions and is not usually reported externally.
• The objectives of cost accounting include determining the cost of each product, operation, or process to support decision-making and cost control.
• Cost accounting can prepare reports for internal stakeholders, focusing on cost reduction.
• Cost accounting data is often used in:
  • Budgeting
  • Standard costing
  • Variance analysis
  • Marginal costing
  • Cost-volume-profit analysis

Labour cost

• Labour cost includes the wages, salaries, and benefits paid to employees.
• Labour costs include gross wages, payroll taxes, and fringe benefits.
• Labour costs are direct or indirect:
  • Direct labour costs are for workers directly involved in producing goods or services.
  • Indirect labour costs are for workers supporting the production process but aren't directly involved.
• Labour costs are a significant expense for most businesses and require effective management.

Classification of labour cost

• Direct labour costs:
  • Salaries or hourly wages of production workers form the main part of direct labour costs.
  • Piece-rate wages are compensation based on the number of units produced, directly tied to output.
  • Production bonuses are incentives for exceeding production targets, directly linked to output.
  • Employer payroll taxes and contributions for production workers cover taxes and benefits for production employees (e.g., social security, Medicare, unemployment insurance, health insurance).
• Indirect labour costs:
  • Salaries or hourly wages of factory supervisors oversee production.
  • Salaries or hourly wages of factory maintenance staff maintain equipment and facilities.
  • Salaries or hourly wages of factory security personnel provide security for the production facility.
  • Employer payroll taxes and contributions include the employer's share of taxes and benefits for indirect labor employees.
  • Wages for material handlers who move materials within the factory but don't directly work on the product.
  • Wages for quality control inspectors ensure product quality.

Accounting for labour cost

• Labour costs can be accounted for through:
  • Timekeeping: This provides accurate records of employee work hours to calculate labour costs.
  • Job costing: Labour costs are tracked by job, batch, or product.
  • Standard costing: Labour costs are compared to standard costs to identify variances.
  • Variance analysis: Differences between actual and standard labor costs can be investigated and analyzed.
• Accurate accounting for labour costs is essential for cost control, pricing, and profitability analysis.

Control of Labour Cost

• The main areas for labour cost control are:
  • Labour cost planning
  • Labour cost standards
  • Labour cost monitoring
  • Labour cost analysis

Methods of wage Payments

• Time Rate System:
  • Wages are based on the amount of time spent by a worker.
  • This is suitable when quality is paramount, output is hard to measure, or close supervision is possible.
  • It's easy to understand and calculate, offering income stability for workers.
  • It might lower productivity if not monitored.
• Piece Rate System:
  • Wages are based on the quantity of output produced.
  • This motivates workers to increase output and rewards efficiency.
  • Quality may suffer as workers focus on quantity.
  • Income may fluctuate, especially during periods of low production.
• Combination of Time and Piece Rate:
  • This combines both time and piece rate systems.
  • It provides a minimum wage and incentives for increased output.
  • Aims to balance productivity and quality.
  • Careful design is needed to ensure effectiveness.
• Incentive Plans / Bonus systems:
  • These motivate workers to improve performance.
  • Incentives may be individual, group, or plant-wide.
  • They can be based on productivity, quality, or other performance metrics.
  • Clear goals, fair standards, and communication are needed.
• Group bonus scheme:
  • A bonus paid to a group of workers.
  • This encourages team work.

Other methods of remuneration

• Profit Sharing:
  • Employees receive a share of the company's profits in addition to their regular wages.
  • This aligns employee interests with company performance.
  • It can boost morale and foster a sense of ownership.
  • Profit distribution criteria must be defined and communicated.
• Co-Partnership:
  • Employees can become shareholders in the company.
  • This encourages a long-term commitment to the company's success.
  • It enhances employee engagement and loyalty.
  • A well-structured plan for employee stock ownership is needed.
• Fringe Benefits:
  • These are non-wage benefits like health insurance, retirement plans, and paid time off.
  • They attract and retain employees.
  • They improve employee satisfaction and well-being.
  • They can be a significant portion of total labour costs.