Types Of Labour Cost- Meaning, Methods & Examples

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Meaning

What is Labor cost?

The total of all employee wages, employee benefits, and payroll taxes paid by an employer constitutes the cost of labor.

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Types

Types Of Labor Cost

These two labor costs are the only ones.

1. Direct labour Cost
2. Indirect labour Cost

Direct cost

The amount that the factory spends on employees who are directly involved in the production process is referred to as direct labor cost. This expense can be located and attributed to a particular task, procedure, or good. It is included in the prime cost.

For Instance – The payments provided to the workers involved in the manufacture of goods are referred to as direct labour costs.

Indirect cost

The amount that the factory spends on employees who aren’t directly involved in the production process is known as indirect labor cost. This cost is the amount spent on compensating those employees who help the direct laborers finish the production procedures. It is included in the overhead expenses.

For Instance – Examples of indirect labour costs include wages paid to watchmen, cleaners, managers, and accounting staff.

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Methods

Methods to calculate labour cost

Piece Rate System

A piece-rate system is one in which wages are distributed in line with the quantity of completed work. This is separate from time spent working. Each generated unit is compensated at a set rate of price.

For example – A worker’s daily wage is equal to 10 x 1 rupee (Rs. 10) if he produces 10 pieces per day and is paid at the rate of Rs. 1 per piece.

Advantages

The workers can easily compute their wages because of the simplicity of the system’s operation.
This technique aids in identifying effective workers from ineffective ones.
In this approach, strict monitoring is not necessary.
This approach is equitable for both employers and employees.
There won’t be any wage disputes because employees would receive commensurate compensation for their efforts.

Time Rate System

The simplest and oldest way of paying wages is the time-rate system.
This approach pays employees in proportion to the amount of time spent on the job. The intervals can be hourly, daily, weekly, fortnightly, or monthly.
It is not taken into account what an employee produced or did for work.

For example – If a worker is paid Rs. 30 per hour and works 50 hours per week, the weekly pay is as follows:

Weekly wages = (Number of hours worked during the week) x (Rate per hours) = 50 x 30 = Rs.1500

Advantages

This system of paying wages is relatively straightforward. Calculating their salaries won’t be difficult for the employees.
Since this approach does not differentiate between workers based on their performance, it is acceptable to trade unions.
When workers are guaranteed timely payment of wages, the quality of the goods will improve.
This approach is beneficial for newbies because they might not be able to produce at a certain level right away.
There will be less waste because the workforce won’t be rushing to complete the output.

Combination of Time and Piece Rate System

Both time and product are taken into account in this system. Every employee has a set minimum weekly pay that must be paid regardless of the job he completes throughout the week, as long as he puts in the appropriate number of hours each week.
His overall pay gets deducted during the time he was off.

EXAMPLE : Each employee has a job card that is kept up to date and displays the number of times jobs they performed in a given week. Each job’s payment is predetermined in advance. The remaining amount is paid to the employee if their piece-rate earnings exceed their time rate earnings.
The worker will need to make up the difference by producing more pieces the next week if piece-rate pay is lower than time-rate pay.