Labor cost covers one of the major portion of the total cost of a product or job. It may increase unnecessarily due to inefficiency of workers, wastage of materials by workers, idle time, unusual overtime work and high labor turnover. Hence, the management should devise effective techniques for controlling labor cost to ensure maximum outputs of better quality at low cost through proper utilization of the labor force.
Basically, management is concerned with controlling labor cost. Labor cost control involves such systems, procedures, techniques and tools used by the management in order to keep the labor cost of the product or job as minimum as possible. Labor cost control consists of a number of such regular activities which are carried on by various departments of the organization in a coordinated manner to ensure the availability of the best employees and their optimum utilization. It is the system followed by the management to maximize quality output at a minimum cost. Labor cost control includes the process of developing various forms, studying and recording the activities and performance of workers, calculating the correct amount of wages and making payment in time. It also include the process of analyzing and reporting labor cost to the management for planning and decision making.
Importance of labour cost/ importance of accounting for labour
Accumulation, analysis and proper control over labour cost are most importance to every manufacturing organization for the fulfillment of following purposes:
- To use direct labour cost as a basis for increasing the efficiency of workers.
- To identify direct lobour cost with product, job or process for ascertaining cost of production as accurately as possible.
- To use direct labour cost as a basis for absorption of overhead, if desired.
- To use direct labour as a basis for comparison with past labour cost and for substitution proposes.
- To determine the amount of indirect labour cost to be treated as overhead.
- To reduce the labour turnover.