Grade 12 Account Note

Accounting for Labour

Labour is also one of the prime inputs of production system. All manufacturing concerns require the labour for carrying out their production activities. The labour consists of workers who are essential to convert materials into finished products. The labour can be either direct or indirect. First and foremost thing is to pay the demanded amount by labours. Dissatisfaction and discontented labour always results in high labour cost and low quality outputs.



Labour is human resources and participates in the process of production. It is an essential factor of production. The amount, which is paid to the labour, is known as labour cost and it is a significant element of cost of a product. Labour cost includes monetary benefit e.g basic wages and fringe benefit such as fooding, housing, education to the children of workers, holiday pay, medical facilities etc.

In other words, labour cost is the amount of remuneration paid to a worker or an employee for his work or service in producing goods and services.


Types of labour cost

Direct cost

The cost that is easily identified and vary with level of production.Direct cost is that labours, which can be easily, identified with specified product, job or work order. It includes all labour engaged in converting raw materials into finished goods or in altering two form of labour which is incurred wholly or specifically for any particular job or work order. For example: carpenter in furniture house, tailors in garments industry,washer in dry clinic etc. Remuneration paid to direct labour is termed as direct labour cost. It is treated as part of prime cost.

Indirect cost

The cost, which is not easily identified and not vary with level of production.It is that labour which cannot be easily identified with a specific product or job. It includes all labour indirectly involved in converting raw materials into finished goods or in altering the construction, consumption or condition of the product. For example: labour employed in repair and maintenance, time keeping, cost accounting, store department etc. Remuneration paid to indirect labour is termed as indirect labour cost and it treated as part of overheads. Payments made to the sweepers, watchmen, cleaners, supervisors and accounting personnel are the examples of indirect cost.


Importance of labour cost

Labour cost is a main element of cost, which covers one of the major portions of the total cost of a product or job.
It is more difficult to control as compared to material cost due to the involvement of human element.
It is affected due to a change in government policy and requirement of trade union.
It is adversely affected due to dissatisfaction, irregularity, inefficiency, idle time, and high labour of the workers.
It is important from the fact that the direct labour cost is taken as the basis for estimating the amount of factory overheads while determining the product cost.


Labour cost control

Labour cost is an element of cost of production. It may be excessive due to the various reasons such as lack of supervision on the labours, high labour turnover, inefficiency of labour etc. Reducing the cost of production, an optimum utilization of labours is needed for each and individual firm. Therefore, labour cost control refers to the system that ensures effective employment and proper utilization of labours.

Management is concerned with controlling labour cost. Labour cost control involves such systems, procedures, techniques and tools used by the management in order to keep the labour cost of the product or job as minimum as possible.


The need of labour cost control arises to fulfil the following purposes:
To obtain better quality output with the least effort and time of the workers.
To reduce the cost of production of the products manufactures or services rendered.
To ensure the satisfaction of the workers by creating a good working environment in the factory.
To adopt a fair system of wage payment and to minimize labour turnover.
To minimize wastage of materials by workers, idle time and unusual overtime work.
To maintain safe environment.
To increase the profitability and competitiveness of the organization.


Departments involved in controlling labour cost

In a large manufacturing concern, the following department are set up for proper accounting and controlling of labour cost:

Personnel department

The personnel department concerned with the recruiting, training, placing and promoting the workers for the jobs to which they are best suited. It executes the employees policies laid down by the board of directors of the company. It keeps complete records of the employees and reports to the management regarding labourutilisation, labour efficiency, labour turnover and absenteeism.

Personnel department starts the recruitment of workers immediately after receiving the labour requisition from the concerned departments. The labour requisition is also known as employee requisition or employee placement requisition. Personnel department keeps complete records of each employees working in the organisation in a card known as employee's history card.


The main functions of personnel department are as follows:

Selection and recruitment of required labour.
Conduct the training program to employees.
Maintaining services and leave record to employees.
Preparation and submission of various reports to concerned authorities.


Engineering department

The engineering department involves in preparing plans and specifications for each job. This department is established with the view of determining the production procedure and working technique and creating sound working condition for each workers. It inspects the jobs being done at different production stages to ensure that they are being done as per plans and specification.

Its main functions are as follows:

Making job analysis.
Setting piece rate.
Preparing the performance evaluation.
Creation of safe environment to minimize the risk of accident.
Preparing of plans.


Time and motion study department

 This department works properly coordinating with personnel, engineering and cost department. This department performs the following functions of making of time and motion studies of labour.

Motion study

A worker or a machine makes various moments of the part of his body while performing a job or a work. It is a study of moments of workers in performing a job or work for the propose of eliminating useless, ill directed and inefficient motions to improve the productivity. It is conducted while the worker in the job. Motion study is also known as methods study because its main objectives are to find out the best method of completing the job.


Time study

It is conducted after the motion study. The main objectives of the time study is to determine the required time for performing the job or work. Various methods are used for the determination of basic time. Standard or basic time is fixed for a job or operation providing allowances to worker for drinking water, smoking and other so on selecting an average workers as model rather than exceptionally fast or slow workers.


Main functions of time and motion study department are ;

To divide a given job into detailed elements or parts.
To make a study of the movements of a worker while performing each element of job.
To determine and eliminate unnecessary or wasteful motions or movements.
To observe and record the time required for each necessary movement and to fix standard time required to complete a given job.
To set reasonable piece rate for different job.


Time-keeping department

This department is related with the recording of time of each worker engaged in the factory to know the attendance and ascertainment of wages. The main objective of this department is to prepare pay roll, meeting the statutory requirements, maintaining discipline in attendance, recording of each worker's time 'in' and 'out' of the factory making distinction between normal time. Over time, late attendance and early leaving and to provide basis for the distribution of overheads when overheads are absorbed on the basis of labour hours.

To record the time of each worker properly, either an attendance register or time card can be used.


Time booking

It is concerned with recording the time spent by each worker in the factory on different jobs is work orders. It determines the exact time spent by the worker in different departments or processes or products or jobs for the purpose of calculating the correct amount of labour cost. When the workers spends his time on several  jobs or work orders then the need of time booking arises for the purpose of cost analysis and apportionment.


The following forms are used for time booking:

Daily time sheet: it is given for each worker to record the details of time spent daily on different jobs.

Weekly time sheet: It is similar to the daily time sheet which records the details of time sent by a worker in a week on different jobs or work orders. It is an improvement over the daily time sheet because each worker is given a single sheet for a week to record his time.

Job card: It is used to keep the correct record of the time spent by each worker on each job. It helps to calculate the labour cost of a job accurately ad conveniently. The card can be used for each worker or for each job as per the need of the factory.

Piece work card: It is used to record the quantity of output produced by a worker along with the time spent by him. It is issued to each worker when the wages is payable on piece rate basis.

Idle time card: It records the time wasted by each worker. It is the difference between the time booked to different jobs and the gate time. It shows the reasons of not doing a work while the workers remains present in the factory.


The main functions of time keeping department are:

To keep attendance record of each worker showing arrival time, departure time and overtime.
To keep an accurate record of time spent by each worker  in the factory for calculating wages.
To maintain discipline to ensure a regular attendance of the workers.
To record and determine the exact time spent by the workers on different jobs or work orders for calculating the correct amount of labour cost,
To ascertain the unproductive or idle time of each worker and to minimise it.


Pay-roll department

The pay-roll department involves in verifying the time of the workers, calculating wages due to each worker and preparing the pay roll or wage sheet. It prepares the pay roll or wage sheet for each department separately and distributed wages and salaries to the workers.


Pay slip

It is prepared for each worker showing the net payable amount of wages. Pay roll is prepared for each department but pay slip is prepared for each worker. Pay slips of a worker, in fact, is the copy of the pay roll.


The main functions of the pay-roll department are as follows:

To keep the records of the workers, departments, jobs and wages rate of each worker.
To verify and summarise the time of each worker as shown on the Time Card.
It should provide more wages to efficient and skilled workers.
It should follow the government policy and trade unions' norms.
It should be simple and understandable to all the workers.
It should help in improving performance and productivity of the workers.
It should be flexible enough to suit the needs of an organization.


Cost accounting department

The cost accounting department involves in determining the labour cost of each product, process and job. It collects, records, classifies and analyses the labor cost.


The functions of a accounting department are;

To collect, record and classify the labour cost.
To analyse, allocate and apportion the labour costs of different products or jobs.
To determine the correct amount of labour cost, process, job.
To supply information regarding labour cost through cost reports to the management when required.


System of wage payment

System of wages payment is the method adopted by manufacturing concerns to remunerate workers. It is the way of giving financial compensation to the workers for the time and efforts invested by them in converting materials into finished product.

It is important because of following reasons;

It facilitates the preparation of a wage plan for future.
It helps to determine the cost of production and the profitability of the organisations.
It determines the amount of earning of the workers and their living standards.
It affects the interest and attitude of the workers.


Essential criteria of a good wage system

It should be fair and justifiable to the workers and organisation.
It should help in maximising workers satisfaction and minimising labour turnover.
It should assure minimum guaranteed wages to all workers.
It should assure equal pay for equal work.



Piece rate system of wage payment


The piece is that system of wages payment in which the workers are paid on the basis of the units of output produced. It does not consider the time spent by the workers. It is a method of remunerating the workers according to the number of units produced or job completed. It is also known as payment by result or output. It pays wages at a fixed piece rate for each unit of output produced.

It is calculated by,

Total wages earned = output * Piece rate


It pays wages according to the output produced by the workers.
It helps to reduce idle time.
It gives incentive to the workers to adopt a better method of production for increasing their production and earning.
It helps the management to determine the exact labour cost per unit for submitting quotation.
It reduces per unit cost of production due to increased volume if production.
It requires less supervision cost.


It does not help in producing quality output as the workers are concentrates more on quantity instead of quality.
It does not help for a uniform flow of production and makes difficult to regulate the production schedule.
It is very difficult to fix an acceptable and reasonable piece rate for each item of output or job.
It creates greater chances of ineffective use of materials, tools and equipment due to more concentration on increasing output.
It may adversely affect the workers health as well.
It requires extra supervision cost for quality output and effective use of materials, tools and equipment.




The time rate is that system of wages payment in which the workers are paid on the basis of time spent by them in the factory. Under this system, the workers and employees are paid wages on the basis of the time they have worked rather than the volume of output they have produced. Hence, according to this system, wages are paid on hourly, weekly or monthly basis. Under it, the wages earned by a worker is determined by using the following formula;

Wages earned = hours spent * wages rate per hour


It is simple to understand and easy to calculate.
It is quite useful for organisations that use costly inputs for quality outputs.
It is beneficial for average and below average workers.
It assures regular income and creates the feeling of economic security among the workers.
It does not discriminate the workers and is preferred by trade unions.


It does not help in increasing output and improving as there is no correlation between effort and reward.
It is not justifiable to differentiate between efficient and inefficient workers and skilled and unskilled workers.
It pays for idle time, which increase the cost of production.
It encourages a go-slow tendency among workers during working hours and encourages them to work for overtime.
It is difficult to estimate exact labour cost in advance.


Differences between piece rate and time rate system

Piece rate system

Time rate system

Piece rate system is a method of wage payment to workers based in the quantity of output they have produced

Time rate system is a method of wage payment to workers based on time spent by them for the production of output.

It pays the workers according to the units of output produced.

It pays the work according to the time spent in the factory.

It does not pay for idle time.

It pays for idle time.

It requires strict supervision to get the required quality output.

It requires strict supervision to get the required quantity of output.

It helps to fix per unit labour cost in advance.

It does not fix labour cost per unit in advance.

It does not bring uniformity in the flow of production and causes an excessive wastage of inputs.

It helps maintain a uniform flow of production and ensures an efficient use of materials, tools and equipment.



Wages are one of the major portions in the total cost of production. There is always a chance of fraud in wage payment. Therefore, an effective administrative and accounting control system must be implemented by the management to minimise fraud and to keep the labour cost minim in. The management should evaluate and revise its controlling system to find out leakage and to stop leakages in time.

The following are the steps to minimise fraud in wage payment:

The time of job card and idle card should be compared with the time shown by the time card.
The wages sheet should be prepared by involving two or more than two responsible employees.
The organisation should issue identify cards to all the workers for their identification.
The pay roll or wage sheet should be prepared for each department separately and wages should be distributed in the presence of the concerned authority of the department.
The cashier should not be allowed to involve in the preparation of wage sheet.
The cashier should be allowed to draw only the net amount of wages as per wage sheet from the bank in required denominations of notes.

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