Labour Costs

Methods of remuneration

• Time-based systems
  
• Piecework systems
  
• Bonus System
  
• Bonus/incentive schemes

Methods of Calculating payments for Labour

There are four main methods of calculating pay:

• Time rate – payment based on time worked, also known as basic rate
  
• Overtime – a form of time rate – payment for extra time worked
  
• Payment of a Bonus added onto the normal time rate and overtime
  
• Piecework – payment based on the amount of work carried out

Time Rate

Time rate is based on payment for the amount of time spent working

• Common method of calculating labour payment
  
• The unit of time used could be an hour, a week or a month ( i.e. A trainee accountant paid 1,200 per month, working hours 38 per week)
  
• Pay based on a time rate means that both employee and employer know in advance how much will be paid
  
• It gives the employees the security of knowing that they will be paid the same for each period at work
  
• Efficient and inefficient employees are paid the same – no financial reward for hard working ones
  
• Basic Rate is the amount paid per time period for normal working hours – normal hourly rate

Overtime Rate

An overtime rate is a time rate that is paid for time Worked in excess of the normal contracted time

Bonus Payments

A bonus payments is an extra payment paid to employees as a reward for productivity

• Are usually offered to reward employees when the organisation performs well( items produced or products sold)
  
• Bonus payments are based on a variety of calculations depending on the organisation

Piecework

Piecework is payment based on the number of items produced by the employee

• Labour payment based on output or production
  
• Do not take account the time that the employees spends working
  
• Makes payment per unit produced

Classifying and Coding labour Costs

• Labour is one of the elements of costs (material, labour and expenses)
• The nature of labour costs may be :
  - Direct (part of prime cost) – are the costs of
  employing those who work directly engaged in
  production (production operatives)
  - Indirect (part of production overheads or
  non-production overheads) are the costs of
  employing those in the production area who
  are not directly involved in production
  (administration, selling, distribution etc.)

Behaviour of Labour Costs

Three basic ways in which costs can behave:

• Fixed Costs – costs that do not change when the output changes
  
• Variable Costs – those costs which change as the level of output (or activity level) changes
  
• Semi-variable costs – those costs that contain both a fixed element and a variable element