Costing for Labour: Introduction

Cambrige AS and A Level Accounting Notes (9706): Costing for labour

In most entities the two largest expenses are usually material/purchases and labour
We have already looked at costing for materials (inventory) here
We will now examine the costing for labour
First we will look at the basic terms involved and different labour setups and scenarios of typical real businesses to put all the concepts in context
Labour- refers to the aggregate of all human physical and mental effort used in creation of goods and services
The reward for labour is wages/salaries
These salaries constitute a cost to business
Costing for labour therefore involves analysing labour costs and looking at how the final wages/salaries amount is arrived at
Because businesses/entities are different there are many ways of compensating workers that involve different remuneration methods
When costing for labour it is often important to distinguish between direct and indirect costs
Direct labour costs make up part of the prime cost of a product and include the basic pay of direct workers
Direct workers are those employees who are directly involved in the producing whatever it is that the entity in question produces
Examples of direct workers include shop floor workers, the baker who bakes bread in a bakery, accountants in an accounting firm, car assembling workers at Toyota etc
Indirect labour costs make up part of the overheads i.e. indirect costs
Indirect workers are those employees who are not directly involved in producing whatever it is that the business in question produces
This includes for example the janitor, maintenance staff who repair the machinery when it breaks down, IT staff etc
In addition to additional basic pay for indirect workers Indirect labour costs also include the following:
Bonus payments
Benefit contributions
Idle time i.e. when workers are paid but are not making any products, for example when a machine breaks down
Sick pay
Time spent by direct workers doing ‘indirect jobs’ for example,cleaning or repairing machines
All these forms of compensation for labour are known as remuneration
Remuneration- refers to the reward for employment in the form of pay, salary, or wage, including allowances, benefits for example a company car or medical aid etc, bonuses, cash incentives, and monetary value of the noncash incentives such as company housing
Costing for labour involves looking at various remuneration methods and using them to calculate the total labour cost as well as ascertaining the labour costs attributable to each unit of production
You can learn more about remuneration methods here