Labour Costs

Labour costs refers to all the costs incurred in compensating the human resources employed to provide a useful service in the production process. This compensation usually comes in the form of:

  • Basic salary
  • Wages
  • Overtime pay
  • Bonus
  • Allowances


   It can be classified into

  1. Direct or indirect cost
  2. Fixed or variable cost
  3. Controllable and non controllable cost

Direct labour cost may be defined as the cost of remuneration for employees efforts and skills applied directly to a product or saleable service and which can be identified separately in product costs.

Indirect labour cost may be defined as labour costs, which are not charged directly to a product.

The analysis of labour costs into direct or indirect cost depends upon the circumstances under review

Examples include-

The wage paid to a worker who assembles components for a product is a direct cost while that paid to a worker who is moving components for a range of products from one part of the factory to another is an indirect cost.

  • Fixed cost in relation to labour is where by an employee is paid a fixed weekly wage irrespective of the output produced cost varies directly with level of activity, for example where wages are paid at a rater per unit.
  • Variable Labour Costvaries directly with level of activity, for example where wages are paid per unit.
  • Controllable labour cost is a cost, which can be influenced by the actions of a person in whom authority for such control is vested. The control of labour costs will be influenced by the method of remuneration and the degree of management control, which is exercised.

Uncontrollable labour costs cannot be influenced by an officer in the organization, for example, wage rise agitated by the trade union is an uncontrollable labour cost.

Time Keeping

A labour cost control routine should ensure that payments are paid only to employees who have spent time at the work place and that payments are at agreed rates of pay including overtime premium and shift premium payments where relevant.

Where an employee is paid a fixed sum for an agreed length of working week, it may be decided by a check by the supervisor that the employee is at work is all that is necessary.

Where the employee is being paid at the rate per hour for the time spent at work together with premium rates for overtime work, it is likely that a detailed record of time spent on the premises is required. This is done by having the employee to register his arrival and departure times.

 Time analysis

This is usually achieved by having the employee complete a daily or weekly timesheet or by having job cards or piecework tickets. Where time sheets are issued, the employee records the time analysis stating how much time was spent on each job and recording idle time. This sheet will then be authorized by the supervisor. Job cards move with a job as it passes from one employee to another. There may be time clocks at each work center where the time spent on the job is recorded. Where this routine is used, employees may also be required to clock idle time on an idle time card, which will be analyzed to determine the cause of idle time. Where payments are made in return for out put units, piecework tickets may be completed which are signed by the supervisor certifying the number of units claimed. The analysis of employee time will facilitate:

  1. Correct charge of direct labour cost to each job
  2. Correct charge of indirect labour cost to cost centers
  3. Control of labour costs by job and cost center
  4. Calculation of employee bonus
  5. Measurement of efficiency