# 8.2 Labour costs

Labour costs have to be collected and charged to the appropriate goods or services. It is beyond the scope of this course to consider a detailed remuneration accounting system. You just need to be aware of the basic cost implications and how cost is charged to each unit of output.

In general, remuneration can be paid by two methods or combinations of them:

- time-related
- performance-related.

In a time-related system, an effective means of recording the time spent on a job is needed, which involves using time records. The remuneration is calculated by multiplying the time incurred on particular work by the appropriate rate per hour, minute and so on.

In the case of performance-related pay (PRP), where the amount of pay depends on the efficiency and effectiveness of staff, systems have to be devised that record the level of relevant activity (e.g. the number of units produced). This is then used to pay employees at the appropriate rate. It is unusual for employees to be paid purely on a performance basis. Generally, they receive a minimum basic wage or salary and then their PRP is added to it.

The wages costs have to be allocated to products (cost units) or relevant cost centres. How this is done depends on the nature of the activities. For example, for individual discrete jobs (e.g. shipbuilding), it is based on the time spent on the job. In continuous processing or production (e.g. jam making), the labour costs incurred at each stage of the process are added together to arrive at the total labour cost, which is then divided by the number of units of output produced to obtain the labour cost per unit. In an accounting services firm, the cost allocation of wages for their services can be based on the time spent on each client engagement.

It is important to recognise that when charging labour to production, the associated labour costs, such as employer’s pension contributions and other directly related costs, should also be charged to production.

Labour costs can be categorised as direct (relating to a specific item, e.g. table leg cutter wages) or indirect (relating to activities in general, e.g. factory supervisor salaries, rather than to specific individual items). Alternatively, they can be classified in terms of whether they are variable costs or fixed costs.

These classifications are not always straightforward. For example, when premium time, such as overtime, is involved, this is generally treated as an overhead cost. However, where a customer demands a job urgently, the cost of the overtime premium may well be charged directly to the specific, unplanned job (as a direct cost). Similarly, the use of PRP has potential implications for the classification of costs between fixed costs and variable costs. One way of avoiding these difficulties is to employ labour on a sub-contract basis.

OpenLearn - Fundamentals of cost accounting and environmental management accounting
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