Employee Cost

  • By TeamKoncept
  • 20 June, 2023
Employee Cost

Employee Cost


Table of Content


To manufacture a product or to make provision for service, the role of human exertion is inevitable. The term used for human resources may include workers, employees, labourers, staffs etc. Whatsoever nomenclature may be used to denote them; they are required to be compensated for their exertions. The compensation so paid, either in monetary terms or in kind and facility is known as wages. Cost of paying wages to workers is popularly known as labour cost as it relates to labour (exertion) they put for manufacturing of product or provision of services; hence, employee cost is also interchangeably known as labour cost. In a nutshell, employee cost is wider term which includes wages, salary, bonus, incentives etc. paid to an employee and charged to a cost object as labour cost.

Unlike other costs, employee costs are influenced by human behavior. Due to this peculiarity, divergence in employee compensation is observed across the different industries. Wages are determined on both quantitative and qualitative factors like volume of work, skills required etc. Hence, it is necessary that employees should be monitored, measured, and compensated appropriately to achieve economy in cost, efficiency in performance and effectiveness in desired output.


Employee (Labour) cost: Benefits paid or payable to the employees of an entity, whether permanent, or temporary for the services rendered by them. Employee cost includes payments made in cash or kind. Employee cost includes the following:
  1. Wages and salary;
  2. Allowances and incentives;
  3. Payment for overtimes;
  4. Employer’s contribution to Provident fund and other welfare funds;
  5. Other benefits (leave with pay, free or subsidised food, leave travel concession etc.) etc.
Classification of Employee (Labour) cost: Employee cost are broadly classified as direct and indirect employee cost.

(i) Direct Employee (Labour) Cost

Benefits paid or payable to the employees which can be attributed to a cost object in an economically feasible manner. This can be easily identified and allocated to an activity, contract, cost centre, customer, process, product etc.

(ii) Indirect Employee (Labour) Cost

Benefits paid or payable to the employees, which cannot be directly attributable to a particular cost object in an economically feasible manner.

Distinction between Direct and Indirect Employee Cost:

Direct employee cost Indirect employee cost
It is the cost incurred payment of employees who are directly engaged in the production process. Cost incurred for payment of employee who are not directly engaged in the production process.
Direct employee cost can be easily identified and allocated to cost unit. Indirect employee cost is apportioned on some appropriate basis.
Direct employee cost varies with the volume of production and has positive relationship with the volume. Indirect employee cost may not vary with the volume of production.


Employee costs are associated with human beings. To control employee costs one has to understand human behavior. Employee cost control means control over the cost incurred on employees. Control over employee costs does not imply control over the size of the wage bill; it also does not imply that wages of each employee should be kept as low as possible.

The aim should be to keep the wages per unit  of  output as  low as  possible.  This can only be achieved by giving employees appropriate compensation to encourage efficiency so that optimum output can be achieved in effective manner.

A well-motivated team of employees can bring about wonders. Each concern should, therefore, constantly strive to raise the productivity of employee. The efforts for the control of employee costs should begin from the very beginning. There has to be a concerted effort by all the concerned departments.

Department Functions
Personnel Department
  1. On receipt of employee requisition from the various departments it searches for the required skills and qualification.
  2. It ensures that the persons recruited possess the requisite qualification and skills required for the job.
  3. Arranges proper training for the newly recruited employees and workshops for existing employees.
  4. Maintain all personal and job related records of the employees.
  5. Evaluation of performance from time to time.
Engineering and work study department
  1. Prepares plans and specifications for each job.
  2. Providing training and guidance to the employees.
  3. Supervises production activities.
  4. Conducts time and motion studies.
  5. Undertakes job analysis.
  6. Conducts job evaluation.
Time-keeping Department
  1. Concerned with the maintenance of attendance records i.e. time keeping and
  2. Time spent by an employee on various jobs i.e. time booking etc.
Payroll Department
  1. The preparation of payroll of the employees.
  2. It distributes salary and wage payments.
Cost Accounting Department
  1. Accumulation and classification of employee costs.
  2. Analysis and allocation of costs to various cost centres or cost objects.

Important Factors for the Control of Employee Cost

To exercise an effective control over the employee costs, the essential requisite is efficient utilisation of employee and allied factors. The main points which need consideration for controlling employee costs are the following:
  1. Assessment of manpower requirements.
  2. Control over time-keeping and time-booking.
  3. Time & Motion Study.
  4. Control over idle time and overtime.
  5. Control over employee turnover.
  6. Wage and Incentive systems.
  7. Job Evaluation and Merit Rating.
  8. Employee productivity.
Collection of Employee Costs

The task of collecting employee costs is performed by  the  Cost  Accounting  Department which record separately wages paid to direct and indirect employee. It is the duty of this department to ascertain the effective wages paid per hour in each department and to analyse the total payment of wages of each department into:
  1. the amount included in the direct cost of goods produced or jobs completed;
  2. the amount treated as indirect employee cost and thus included in overheads; and
  3. the amount treated as the cost of idle time and hence loss.
  4. the amount treated as abnormal loss/ gain and to be transferred to profit and loss account.
Through this process costs of various jobs are ascertained. Naturally, in this the proper recording of time spent by the employees is essential.


Attendance Procedure / Time-keeping

It refers to correct recording of the employees’ attendance time. Students may note the difference between “time keeping” and “time booking”. The latter refers to break up of time on various jobs while the former implies a record of total time spent by the employees in a factory.

Objectives of Time-keeping: Correct recording of employees’ attendance time is of utmost importance where payment is made on the basis of time worked.

Where payment is made by results viz; straight piece work, it would still be necessary to correctly record attendance for the purpose of ensuring that proper discipline and adequate rate of production are maintained. The objectives of time- keeping are as follows:
  1. For the preparation of payrolls.
  2. For calculating overtime.
  3. For ascertaining and controlling employee cost.
  4. For ascertaining idle time.
  5. For disciplinary purposes.
  6. For overhead distribution.
Methods of Time-keeping: There are various methods of time-keeping, which may be categorized into manual and mechanical methods. The choice of a particular method depends upon the requirements and policy of an entity; but whichever method is followed, it should make a correct record of the time by incurring minimum possible expenditure and it should minimise the risk of fraudulent payments of wages. The examples of time keeping methods are follows:
1. Manual Methods
  1. Attendance Register method- Under this method, an attendance register is kept to record the arrival and departure time of an employee. This method is simple and expensive and is suitable for small organisations. However, this method may lead to dishonest practice of time manipulation by way of recording wrong time and back date entry in collusion with time keeper.
  2. Metal Disc/ Token method- This method of time recording is very old and is almost obsolete in practice. Under this method, each employee is allotted a metal disc or a token with a hole bearing his identification number. The token is kept or handed to the time keeper who record the token number in his register. Like attendance register method, this method also has some disadvantages like error in recording, proxy attendance etc.
2. Mechanical/ Automated Methods
  1. Punch Card Attendance- Under this method, each employee is provided a card for marking attendance. A punch card contains data related with the employee in digital form. In punch card attendance system, an employee needs to either insert or wave his card to a card reader which then ensures whether the correct person is logging in and/or out. This system does not require to employ any time keeper and minimises the risk of recording error and time manipulation.
  2. Bio- Metric Attendance system- Under bio-metric attendance system attendance is marked by recognizing an employee on the basis of physical and behavioural traits. An employee’s unique identity like finger print, face and retina image etc. are kept in a database which is matched at the time of marking of attendance before the attendance device for this purpose. Bio-metric attendance system includes fingerprint recognition system, face recognition system, Time and attendance tracking technology etc. This system reduces the risk of time manipulation and proxy attendance. However, it may not be suitable for small organisations due to cost associated with set-up and maintenance.
Requisites of a Good Time-keeping System: A good time-keeping system should have following requisites:
  1. System of time-keeping should be such which should not allow proxy for another employee under any circumstances.
  2. There should also be a provision of recording of time of piece employees so that regular attendance and discipline may be maintained. This is necessary to maintain uniformity of flow of production.
  3. Time of arrival as well as time of departure of employees should be recorded so that total time of employees may be recorded and wages may be calculated accordingly.
  4. As far as possible, method of recording of time should be mechanical so that chances of disputes regarding time may not arise between employees and the time-keeper.
  5. Late-comers should record late arrivals. Any relaxation by the time-keeper in this regard will encourage indiscipline.
  6. The system should be simple, smooth and quick. Unnecessary queuing for marking attendance should be avoided.
  7. The system should be reviewed and maintained periodically to prevent any error.

Time keeping just records the time spent by an employee in the premises for production but it does not show how much time a person spent on a particular job. Time booking refers to a method wherein each activity of an employee is recorded. This data recorded is further used for measure the time spent on a particular job for costing, measurement of efficiency, fixation of responsibility etc.

Time booking for costing: The time spent on a particular job or activity is used to compute the cost of the job or activity.

Time booking to measure efficiency: The efficiency of the employees is measures by comparing the actual time taken by an employee with the standard time that should have been taken.

Time booking for fixation of responsibility: The time booked data is used to analyse the variance in time taken by an employee on a particular job or process with respect to standard time to see the reasons for the variance. The reasons for variance is further classified as controllable and uncontrollable. The controllable reasons are those which can be avoided by due care and efficiency. On the other hand, uncontrollable reasons cannot be avoided under the normal circumstances. Employees or any other concerned person or departments are made accountable for variance under controllable reasons.
For the collection of all such data, a separate record, generally known as Time (or Job) card, is kept.

The time (or job) card can be of two types—
  • One containing analysis of time with reference to each job:A separate job card is employed in respect of a job undertaken; where a job involves several operations, a separate entry is made in respect of each operation.

    Thus, the job card would record the total time spent on a particular job or operation. If a number of people are engaged on the same job or operation, the time of all those employees would be booked on the same card.

    One advantage of this method is that it provides complete data on the employee content of job or operation collectively so that the computation of employee cost is greatly facilitated.

    But this method has drawbacks as well. Since an employee’s job timing is scattered over a number of job cards the time spent on all these jobs and idle time must be abstracted periodically for finding each employee’s total time spent on different jobs and the time for which he remained idle during the period. The total of these two times (job and idle) must obviously equal his total attendance time, as shown by his attendance record.

  • The other with reference to each employee: In this case, it would greatly facilitate reconciliation of the employee’s job time with his attendance time recorded.

    Under this system, a separate card would be used for each employee for each day or for each week and the time which he spends on different jobs (and also any idle time) would be recorded in the same card so that the card would have a complete history on it as to how his time had been spent during the period.

    The format of job or time may vary industry to industry and according to the accounting system into used.
Payroll Procedure

Steps included in this process are as under:
  1. Attendance and Time details: A detailed sheet of number of days or hours worked by each employee (in case of time based payment) and units or percentage of work (in case of piece rate) as reflected by the time keeping methods are sent to the payroll department by the time keeping department. Further, payroll department with the help of time booking records calculate any further incentives such as overtime payment, bonus to be paid to the employees.
  2. List of employees and other details: A list of employees on roll and the rate at which they will be paid is sent by the personnel/ HR department. Payroll department should ensure that no unauthorised or bogus employee is paid.
  3. Computation of wages and other incentives: Payroll department based on the details provided by the time keeping department and personnel department calculate wages/  salary  to  be  paid  to  the  employees. Payroll department prepares pay slip for all employees authorized by the personnel department and forward the same to the cost/ accounting department for further deductions and payment.
  4. Payment to the employees:   Cost/  accounting  department  deduct  all statutory deduction such as employee’s contribution to provident fund and employee state insurance (ESI) scheme, TDS on salary etc. After all deductions wages/ salary is paid to the employees.
  5. Deposit of all statutory liabilities: All statutory deduction made from wages/ salary of the employees alongwith employer’s contributions such as provident fund and employee state insurance scheme are paid to the respective statutory bodies.
The followings are generally deducted from the payroll

Type of deductions Description
Statutory Deductions
Provident fund Employee's contribution to the Provident fund is deducted from the salary/wages of the concerned employee.
Employee State Insurance Scheme (ESI) Employee's contribution to the ESI is deducted from the salary/wages.
Tax Deduction Source (TDS) Employer is obliged to deduct tax at source if it will be paying to the employee net salary exceeding maximum exemption limit, in equal monthly installments to the income tax department.
Professional Tax Professional tax is a state level tax imposed for carrying on business, profession or service.
Other Deductions
Voluntary contribution to provident fund If an employee so desires may contribute over and above the contribution payable by the employer.
Contribution to ny benevolent fund An employee may contribute to any benevolent fund voluntarile by putting a request to the payroll department.
Loan deductions Installments of any loan taken bythe employee.
Other advances and dues Other advances like festival advance and unadjusted advances taken.


The time during which no production is carried-out because the worker remains idle but are paid. In other words, it is the difference between the time paid and the time booked. Idle time can be normal or abnormal. The time for which employees are paid includes holidays, paid leaves, allowable rest or off time etc.

Normal idle time: It is the time which cannot be avoided or reduced in the normal course of business.

Causes Treatment
  1. The time lost between factory gate and the place of work
  2. The interval between one job and another
  3. The setting up time for the machine
  4. Normal rest time, break for lunch
It is treated as a part of cost of ptoduction. Thus, in the case of direct workers an allowance for normal idle time is considered setting of standard hours or standard rate.

In case of indirect workers, normal idle time is considered fro the computation of overhead rate.

Abnormal idle time: Apart from normal idle time, there may be factors which give rise to abnormal idle time.

Causes Treatment
  1. Idle time may also arise due to abnormal factors like lack of coordination
  2. Power failure, Breakdown od machines
  3. Non-availability of raw materials, strikes, lockouts, poor supervision, fire, flood etc.
  4. The causes for abnormal idle time should be further analysed into controllable and uncontrollable.
Controllable abnormal idle time refers to that time which could have been put to productive use had the management been more alert and efficient. All such time which could have been avoided is controllable idle time.

Uncontrollable idle time refers to time lost due toabnormal causes, over which management does not have any control e.g., breakdown of machines, flood etc. may be characterised as uncontrollable idle time.
Abnormal idle time is not included as a part of production cost and is shown as a seperate item in the costing profit and loss account.

The cost of abnormal idle time should be further categorised into controllabele and uncontrollabele. For each category, the break-up of cost due to various factors should be seperately shown. This would help the management in fixing responsibility for controlling idle time.

Management should aim at eliminating controllable idle time and on a long-term basis reducing even the normal idle time. This would require a detailed analysis of the causes leading to such idle time.


Work done beyond normal working hours is known as ‘overtime work’. Overtime payment is the amount of wages paid for working beyond normal working hours. Overtime payment consist of two elements- (i) Normal wages for overtime work and (ii) Premium payment for overtime work.

Overtime Payment = Wages paid overtime at normal rate + Premiuim (extra) payment for overtime work

Overtime premium: The rate for overtime work is higher than the normal time rate; usually it is at double the normal rates. The extra amount so paid over the normal rate is called overtime premium.

Rate and conditions for overtime premium may either be fixed by an entity itself or it may be required by any statute in force. The overtime premium should not be less than the premium calculated as per the statute.

Occasional overtime is a healthy sign as it indicates that the firm has the optimum capacity and that the capacity is being fully utilised. But persistent overtime is rather a bad sign because it may indicate either (a) that the firm needs larger capacity in men and machines, or (b) that men have got into the habit of postponing their ordinary work towards the evening so that they can earn extra money in the form of overtime wages.

Causes of Overtime and Treatment of Overtime premium in cost accounting

Causes Treatment
The customer may agree to bears the entire charge of overtime because urgency of work. If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.
Overtime may be called for to make up any shortfall in production due to some unexpected development. If overtime is required to cope with general production programmes or for meeeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost centre which works overtime.
Overtime work may be necessary to make up for a shortfall in production due to soem fault of management. If overtime is worked in a department due to the fault of another department, the overtime premium should be charged to the latter dpartment.
Overtime work may be resorted to, to secure an out-turn in excess of the normal output to take advantage of an expanding market or of rising demand Overtime worked on accountof abnormal conditions sucha s flodd, earthquake etc., should not be charged to cost, but to Costing Profit and Loss Account.


For identifying utilisation of labour a statement is prepared (generally weekly) for each department / cost centre. This statement should show the actual time paid for, the standard time (including normal idle time) allowed for production and the abnormal idle time analysed for causes thereof.

Identification of Utilisation of labours with Cost Centres:

For the identification of utilisation of labour with the cost centre, a wage analysis sheet is prepared. Wage analysis sheet is a statement in which total wages paid are analysed according to cost centre, jobs, work orders etc. The data for analysis is provided by wage sheet, time card, piece work cards and job cards.

The preparation of such sheet serves the following purposes:
  1. It analyse the labour time into direct and indirect labour by cost centres, jobs, work orders.
  2. It provides details of direct labour cost comprises of wages, overtime to be charged as production cost of cost centre, jobs or work orders.
  3. It provides information for treatment of indirect labour cost as overhead expenses.
Identification of labour hours with work order or batches or capital job:

For identification of labour hours with work order or batches or capital jobs or overhead work orders the following points are to be noted:
  1. The direct labour hours can be identified with the particular work order or batches or capital job or overhead work orders on the basis of details recorded on source document such as time sheet or job cards.
  2. The indirect labour hours cannot be directly identified with the particular work order or batches or capital jobs or overhead work orders. Therefore, they are traced to cost centre and then assigned to work order or batches or capital jobs or overhead work orders by using overhead absorption rate.


There exist several systems of employee wage payment and incentives, which can be classified under the following heads:
Time based (Time Rate System)

Straight Time Rate System: Under this system, the workers are paid on time basis
i.e. hour, day, week, or month. The amount of wages due to a worker are arrived at by multiplying the time worked (including normal idle period) by rate for the time.

Time based wages payment is suitable for the employees (i) whose services cannot be directly or tangibly measured, e.g., general helpers, supervisory and clerical staff etc. (ii) engaged in highly skilled jobs, (iii) where the pace of output is independent of the operator, e.g., automatic chemical plants.

Wages under time rate system is calculated as under:

Wages = Time Worked (Hours/Days/Months) x Rate for the time 

Output Based (Piece Rate System)

Straight Piece Rate System: Under this system, each operation, job or unit of production is termed a piece. A rate of payment, known as the piece rate or piece work rate is fixed for each piece. The wages of the worker depend upon his output and rate of each unit of output; it is in fact independent of the time taken by him. The wages paid to a worker are calculated as:

Wages = Number of units produced x Rate per unit

Premium Bonus Method

Under these methods, standard time is established for performing a job. The worker is guaranteed his daily wages (except in Barth System), if his output is below and upto standard. In case the task is completed in less than the standard time, the saved time is shared between the employee and the employer.

(i) Halsey Premium Plan: Under Halsey premium plan a standard time is fixed for each job or process. If there is no saving on this standard time allowance, the worker is paid only his day rate. He gets his time rate even if he exceeds the standard time limit, since his day rate is guaranteed.

If, however, he does the job in less than the standard time, he gets a bonus equal to 50 percent of the wages of time saved; the employer benefits by the other 50 percent. The scheme also is sometimes referred to as the Halsey fifty percent plan. Earnings under Halsey Premium plan is calculated as under:

Wages = Time taken x Time rate + 50% of time saved x Time rate

Advantages and Disadvantages of Halsey Premium Plan

Advantages Disadvantages
  1. Time rate is guranteed while there is opportunity for increasing earnings by increasing production.
  2. The system id equitable in as much as the employer gets a direct return for his efforts in improving production methods and providing better equipment.
  1. Incentive is not so strong as with piece rate system. In fact the harder the worker works, the lesser he gets per piece.
  2. The sharing principle may not be liked by employees.

(ii) Rowan Premium Plan: According to this system a standard time allowance is fixed for the performance of a job and bonus is paid if time is saved.
Under Rowan System the bonus is that proportion of the time wages as time saved bears to the standard time.

{\rm{Time taken*Rate per hour  +  }}\frac{{{\rm{Time Saved}}}}{{{\rm{Time Allowed}}}}*{\rm{Time taken*Rate per hour}} 

Advantages and Disadvantages of Rowan Premium Plan

Advantages Disadvanatages
  1. It is claimed to be a fool-proof system in as much as a worker can never double his earnings even if there is bad rate setting.
  2. It is admirably suitable for encouraging moderately efficient workers aas it provides a better return for moderate efficiency than under the Halsey Plan.
  3. The sharing principle appeals to the employer as being equitable.
  1. The system is a bit complicated.
  2. The incentive is weak at a high level where the time saved is more than 50% of the time allowed.
  3. The sharing principke is not generally welcomed by employees.


Elements of wages

In common parlance, the term ‘wages’ represents monetary payment which an employee receives at regular intervals for the services rendered. Strictly speaking, however, from the point of view of the employer and the cost to the industry, wages should be taken to include also non-monetary benefits which an employee receives by virtue of employment. Such non-monetary benefits may include:
  1. Medical facilities;
  2. Educational and training facilities;
  3. Recreational and sports facilities;
  4. Housing and social welfare; and
  5. Cost of subsidised canteen and co-operative societies.
Such benefits are generally given in an industrial establishment. In some cases, the provision of benefits is compulsory. Therefore, while computing the wage cost per worker, the monetary value of such non-monetary benefits should also be taken into account.

The monetary part of a worker’s remuneration includes the basic wages, dearness allowance, overtime wages, other special allowance, if any, production bonus, employer’s contribution to the provident fund, Employees State Insurance scheme premium, contribution to pension fund, leave pay, etc.
The basic wage is the payment for work done, measured in terms of hours attended or the units produced, as the case may be. The basic wage rate is not normally altered unless there is a fundamental change in the working conditions or methods of manufacture.

Dearness allowance is an allowance provided to cover the increase in cost of living from one period to another. This allowance is calculated either as percentage of the basic wage or as a fixed amount for the days worked. In either case, the percentage or the fixed amount is subject to revision whenever the cost of living index or consumer price Index rises or falls by a certain figure as agreed to by the employer with the Employee union. When permanent rise in the cost of living index occurs, a part of the dearness allowance is often absorbed in the basic wage.

Overtime allowance is an allowance paid for the extra hours worked at the rates laid down in the Factories Act. In certain industries, where special allowance for the working conditions, tool maintenance, etc., are paid they are also considered as part of wages.

Production Bonus is an incentive payment made to workers for efficiency that results in production above the standard. There are different methods of computing incentives. Under the Payment of Bonus Act, a worker is entitled to compulsory bonus of 8.33% wages earned in the relevant year or `100 (whichever is greater). The bonus may be upto 20% of wages depending upon the quantum of profits calculated as per the Act.

Component of wages cost or wages for costing purposes

In addition to wages (including allowances, such as D.A.) that are paid to workers, a firm may have to spend on many other items (such as premium to the ESI or provident fund or bonus).

Further, the worker does not spend all the time for which he is paid on productive work.
This is because he is entitled to weekly holiday and various type of leave. There is also a certain amount of unavoidable idle time. The question is to what extent such additional payment or cost in respect of Employee can be charged directly to unit of cost as part of direct Employee cost? Of course, in the case of indirect Employee, all such payments as also the wages paid to them, must be treated as part of overheads.

But in the case of direct workers, two alternatives are possible. The additional charges may be treated as overheads. Alternatively, the wage rates being charged to job may be computed by including such payments; automatically then, such payments will be charged to the work done along with wages of the worker. (It should be remembered that such wage rate will be only for costing purposes and not for payment to workers). The total of wages and additional payment should be divided by effective hours of work to get such wage rates for costing purposes.

Holiday and leave wages

One alternative to account for wages paid on account of paid holiday and leave can be to include them as departmental overheads. In such a case, it is necessary to record such wages separately from “worked for wages”. Such a segregation can be made possible by providing a separate column in the payroll for holiday and leave wages in the same way as there are columns for dearness allowance, provident fund deductions, etc. If, however, a separate or additional column cannot be provided for this purpose it would be necessary to analyse the payroll periodically to ascertain how much of the total payment pertains to “worked for wages” and how much is attributed to leave and holiday wages.

Another way could be to inflate the wage rate for costing purposes to include holiday and leave wages. This can be done only in the case of direct workers.

Night shift allowance

In some cases, workers get extra payment if they work at night. Since the extra payment is not for any particular job, therefore such a payment should be treated as part of overheads.

Absorption rates of Employee cost:

Employee cost as stated above include monetary compensation and non-monetary benefits to workers.
Monetary benefits include, basic wages, D.A., overtime pay, incentive or production bonus contribution to employee provident fund, House Rent Allowance, Holiday and vacation pay etc.

The non-monetary benefits include medical facilities, subsidized canteen services, subsidized housing, education and training facilities.

Accounting of monetary and non-monetary benefits to indirect workers does not pose any problems because the total of monetary and non-monetary benefits are treated as overhead and absorbed on the basis of rate per direct employee hour, if overheads are predominantly employee oriented.

For direct workers, the ideal method is to charge jobs or units produced by supplying per hour rate calculated as below:

{\rm{Rate per hour  = }}\frac{{{\rm{Total estimated monetary benefits and cost of monetary benefits}}}}{{{\rm{Budgeted direct employee hour Normal idle time}}}}

Another alternative method is to treat the monetary benefits other than basic wages and dearness allowance as well as cost of non-monetary benefits as overheads.


Efficiency is usually related with performance and may be computed by comparing the time taken with the standard time allotted to perform the given job/task.

If the time taken by a worker on a job equals or less than the standard time, then he is rated efficient.

In case he takes more time than the standard time he is rated as inefficient.

{\rm{Efficiency in \%   =  }}\frac{{{\rm{Time allowed as per standard}}}}{{{\rm{Time Taken}}}}*100 

For efficiency rating of employees the following procedures may be followed:
  1. Determining standard time/performance standards: The first step is to determine the standard time taken by a worker for performing a particular job/task. The standard time can be determined by using Time & Motion study or Work study techniques. While determining the standard time for a job/task a heterogeneous group of workers is taken and contingency allowances are added for determining standard time.
  2. Measuring Actual Performance of workers:For computing efficiency rating it is necessary to develop a procedure for recording the actual performance of workers. The system developed should record the output of each worker along with the time taken by him.
  3. Computation of efficiency rating: The efficiency rating of each worker can be computed by using the above mentioned Formula.
Need for efficiency rating

As discussed earlier when a firm follows a system of payment by results, the payment has a direct relationship with the output given by a worker. The firm for making payment to worker is required to ascertain his efficiency level. For instance, under Taylor's differential piece work system the lower rate i.e. 83%
of piece rate is given to a worker when his efficiency rating is less than 100% and higher rate viz., 125% of piece rate is offered at efficiency level of either 100% or more. Similarly, under Emersion efficiency plans bonus is paid at rising scale at various level of efficiency, ranging from 66.67% to 150%.

The efficiency rating also helps the management in preparing employee requirement budget or for preparing manpower requirements.

Example - 1: P Ltd. manufactures two products by using one grade of employees. The following estimates are available:

  Product A Product B
Budgetes production (Units) 3,480 4,000
Standard hours allowed per product 5 4

It is further worked out that the efficiency rating (efficiency ratio) for productive hours worked by direct workers in actually manufacturing the production is 80% then the exact standard employee-hours requirement can be worked out as follows:

  Product A Product B Total
Budgeted production (Units) 3,480 4,000  
Standard hours allowed for budgeted production 17,400
(1,480 units x 5 hours)
(4,000 units x 4 hours)
Since efficiency ratio is given as 80% therefore standard employee hours
required for 100% efficiency level is  33,400hours*\frac{{100}}{{80}} = 41,750hours 

Employee Productivity: Productivity is generally determined by the input/output ratio. In case of employees, it is calculated as below:

\frac{{{\rm{Standard time for doing actual work}}}}{{{\rm{Actual time taken}}}} 

Employee productivity is used for measuring the efficiency of individual workers. It is an index of efficiency in the utilisation of human resources, materials, capital, power and all kinds of services and facilities.

It is measured by the output in relation to input. Productivity can be improved by reducing the input for a certain quantity or value of output or by increasing the output from the same given quantity or value of input.

Factors for increasing Employee productivity: The important factors which must be taken into consideration for increasing employee productivity are as follows:
  1. Employing only those workers who possess the right type of skill.
  2. Placing a right type of person to a right job.
  3. Training young and old workers by providing them the right types of opportunities.
  4. Taking appropriate measures to avoid the situation of excess or shortage of employees.
  5. Carrying out work study for fixation of wages and for the simplification and standardisation of work.


Employee (Labour) Turnover

Employee turnover or labour turnover in an organisation is the rate of change in the composition of employee force during a specified period measured against a suitable index.

The standard of usual employee turnover in the industry or locality or the employee turnover rate for a past period may be taken as the index or norm against which actual turnover rate is compared.
There are three methods of calculating Employee turnover which are given below:

(i) Replacement Method: This method takes into consideration actual replacement of employees irrespective of number of persons leaving the organisation. Employee Turnover under this method is calculated as under:

\frac{{{\rm{Number of employees Replaced during the period}}}}{{{\rm{Average number of employees during the period on roll}}}}*100 

New employees appointed on account of expansion plan of the organisation are not included in number of replacements.

(ii) Separation Method: In this method employee turnover is measured by dividing the total number of employees separated during the period by the average total number of employees on payroll during the same period. Employee Turnover under this method is calculated as under:

\frac{{{\rm{Number of employees Seperated during the period}}}}{{{\rm{Average number of employees during the period on roll}}}}*100 

(iii) Flux Method: This method takes both the number of replacements as well as the number of separations during the period into account for calculation of employee turnover. Employee Turnover under this method is calculated as under:

{\rm{Number of employees Sepertaed  +  }}\frac{{{\rm{Number of employees Replaced during the period}}}}{{{\rm{Average number of employees during the period on roll}}}}*100 
Employee turnover due to new recruitment: Generally, employees recruited on account of expansion of an organisation, are not considered for calculation of employee turnover. But it is considered that the newly recruited employees are also responsible for changes in the composition or work force. Due to this feature, some management accountants feel to take new recruitment for calculating employee turnover. The total number of workers joining, including replacements, is called accessions.

When number of accessions are considered for measuring employee turnover, the employee turnover rate by Flux method may be computed by using any one of the following expressions:
\frac{{{\rm{No}}{\rm{. of Seperation  +  No}}{\rm{. of Accessions}}}}{{{\rm{Average number of employees during the period on roll}}}}*100 
Average number of employees during the period is calculated as follows:

 = \frac{{{\rm{No}}{\rm{. of employees at the beginning  +  No}}{\rm{. of employee at the end of the period}}}}{2} 

Equivalent Employee (Labour) Turnover rate:

If in the above computations, the data given is for a period other than a year, the employee turnover rate so computed may be converted into equivalent annual employee turnover rate by using the following formula:

\frac{{{\rm{Employee Turnover rate for the period}}}}{{{\rm{Number of days in the period}}}}*365 

Causes of Employee (Labour) Turnover:

The reasons for employee turnover in an organisation can be classified under the following three heads:
(a) Personal causes: All the personal reasons which induce or compel an employee to leave his job; such causes include the following:
  1. Change of jobs for betterment.
  2. Premature retirement due to ill health or old age.
  3. Domestic problems and family responsibilities.
  4. Discontent over the jobs and working environment.
In all the above cases the employee leaves the organisation at his will and, therefore, it is difficult to suggest any possible remedy in the first three cases.

But the last one can be overcome by creating conditions leading to a healthy working environment. For this, officers should play a positive role and make sure that their subordinates work under healthy working conditions.

(b) Unavoidable Causes: Unavoidable causes are those under which it becomes obligatory on the part of management to ask one or more of their employees to leave the organisation; such causes are summed up as listed below:
  1. Seasonal nature of the business;
  2. Shortage of raw material, power, slack market for the product etc.;
  3. Change in the plant location;
  4. Disability, making a worker unfit for work;
  5. Disciplinary measures;
(c) Avoidable Causes: Avoidable causes are those which require the attention of management on a continuous basis so as to keep employee turnover ratio as low as possible. The main causes under this case are indicated below:
  1. Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,
  2. Strained relationship with management, supervisors or fellow workers;
  3. Lack of training facilities and promotional avenues;
  4. Lack of recreational and medical facilities;
  5. Low wages and allowances.
Proper and timely management action can reduce the employee turnover appreciably so far as avoidable causes are concerned.
Effects of Employee (Labour) Turnover:

High employee turnover increases the cost of production in the following ways:
  1. Even flow of production is disturbed;
  2. Efficiency of new workers is low; productivity of new but experienced workers is low in the beginning;
  3. There is increased cost of training and induction;
  4. New workers cause increased breakage of tools, wastage of materials, etc.
  5. Cost of recruitment and training increases.
Cost of Employees (Labour) Turnover: Two types of costs which are associated with employee turnover are:

(a) Preventive Costs: The cost incurred to prevent employee turnover or keep it as lowest as possible. Cost incurred for prevention of employee turnover includes the following:
  1. Cost of medical benefit provided to the employees;
  2. Cost incurred on employees’ welfare like pension etc.
  3. Cost on other benefits with an objective to retain employees.
(b) Replacement Costs: These are the costs which arise due to employee turnover. If employees leave soon after they acquire the necessary training and experience of good work, additional costs will have to be incurred on new workers, i.e., cost of recruitment, training and induction, abnormal breakage and scrap and extra wages and overheads due to the inefficiency of new workers.

It is obvious that a company will incur very high replacement costs if the rate of employee turnover is high. Similarly, only adequate preventive costs can keep Employee turnover at a low level. Each company must, therefore, work out the optimum level of Employee turnover keeping in view its personnel policies and the behaviour of replacement cost and preventive costs at various levels of Employee turnover rates.
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