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

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