ASSIGNMENT

LABOUR COSTING AND COMPENSATION

Cost COST represents a sacrifice of values, a foregoing or a release of something of value. It is the price of economic resources used as a result of producing or doing the thing costed. It is the amount of expenditure incurred on a given thing. Cost has been defined as the amount measured in money or cash expended or other property transferred, capital stock issued, services performed or a liability incurred in consideration of goods or services received or to be received Direct Cost Direct cost is the cost incurred by the firm which can be ascertained and measured for the product. It is a cost that can be easily and conveniently traced to the particular cost object under consideration. A cost object is anything for which cost data is required including products, customers jobs and organizational subunits. Direct labor and overhead are often called conversion cost, while direct material and direct labor are often referred to as prime cost. The three element in direct cost are direct material, direct labour, direct expenses. Indirect Cost: An indirect cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration. This cost is incurred by a firm can be ascertained but cannot be measured, especially for a product and cannot be easily identified for any cost centre or cost unit. It has to be allocated, apportioned and absorbed over the units manufactured on a suitable basis. The three elements in Indirect cost are Indirect material. Indirect labour, Factory overheads, Office and administration overheads, Sales and Distribution overheads. Variable cost Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost.. Variable costs are sometimes called unit-level costs as they vary with the number of units produced. If the output is

decreased, variable cost also will decrease. It is concerned with output or product. Therefore, it is called as a product cost. If the output is doubled, variable cost will also be doubled. For example, direct material; direct labour, direct expenses and variable overheads.

Fixed Cost A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. It is a cost which does not vary irrespective level of an activity or production. It is that portion of the total cost, which remains constant irrespective of output up to the capacity limit. It is called as a period cost as it is concerned with period. It depends upon the passage of time. It is also referred to as non-variable cost or stand by cost or capacity cost or period cost. It tends to be unaffected by variations in output. These costs provide conditions for production rather than costs of production. They are created by contractual obligations and managerial decisions. Rent of premises, taxes and insurance, staff salaries constitute fixed cost.

Britannia Breads The Britannia Brand is all about eating healthy for leading a better life. It is the largest company in the food processing industry whose product range also includes breads and cakes. Britannia has a basketful of goodies with biscuits like Nice Time, Tiger, Marie Gold, 50 50 Maska Chaska, Milk Bikis, Pure Magic, Time Pass Nimkee, Treat, Good Day, Little Hearts, Nutri Choice, Nutrichoice Digestive, Daily Fresh Bread and Britannia Cakes.

Britannia Daily Fresh Bread, which finds its way to over 6 lakh households daily, is the mainstay of the companys non-biscuit business at present. Britannia hopes to drive this emerging business through the exploding modern trade and has already gained access to Reliance Retail, Trinethra and Fabmall for its breads. Britannia is widely recognized as an innovative marketer.

Direct cost and Indirect cost of Britannia Breads

Sr. no. 1.

Direct Cost Direct Material y y y y Flour Wheat Yeast Salt

Indirect Cost Factory Overheads y y y y Indirect labour Power Cost and maintenance Depreciation on machinery

Direct Wages

Office and Administrative Overheads y y y y y Salary to staff Office and general expenses Printing and stationery Telephone expenses Electricity and lightings

Direct expenses y y y Carriage inward Loading and unloading material Petty expenses

Sales and Distribution Overheads y y y y y Sales commission Discount allowed Salary of salesman Carriage outward Sales expenses

Analysis of Direct and Indirect cost of Britannia Company: Product - Bread

Britannia is a manufacturing company its product Bread is sold all over. Here the Bread is the finished product and it is associated to direct and indirect cost. Direct cost of producing bread consists of

Direct Cost 1. Cost of direct materials Wheat, Flour , Wheat, Yeast , Salt, all these are direct cost as it is directly associated by production of bread and quantity produced. 2. Direct Wages is the wages given to workers producing the bread. 3. Direct expenses consist of expenses directly related to production of bread. The raw material transportation from one place to another, loading and unloading the raw material also carries cost to the organization.

Indirect Cost

Indirect cost is not directly associated or be recognized as cost. It consists of following 1. Factory overheads: It includes cost other than direct cost. The Factory Overheads includes the indirect labor, Depreciation on Machinery, Works Overheads, Cost of Maintenance, Other Factory Expenses, supervisors Salary and Power & Fuel. 2. Office and Administrative expenses: Office and administration overheads include Depreciation on office furniture, office rent, salary to staff, office and general expenses, Postage and Telegrams, telephone expenses, electricity and lightings. These expenses are indirect. 3. Sales and Distribution: Selling and distribution cost includes Sales Commission, Discount allowed, Salary of salesmen, Carriage outward and Sales expenses. The sales and distribution expenses are related to how many products sold therefore it is an indirect expense for the company.

Fixed Cost

Fixed cost is one which remains unchanged for a long period. For Britannia the fixed cost can be as follows 1. Rent for the land 2. Salary of staff 3. Machinery All these are fixed cost these do not change as per the quantity produced in the factory.

Variable Cost Variable cost is that which changes frequently. It is associated to the quantity and quality of production. it can be direct as well as indirect. 1. Raw materials used for production of breads 2. Wages given to workers for the hours they have worked 3. Power, fuel, electricity, and lightings required while production 4. Office and Administration expenses 5. Sales expenses and sales commission also depends on quantity of products sold

Reducing the labour cost per unit

Workers are asset of company and to run a factory workers has to feel contended. To reduce the labour cost per unit it is necessary to increase productivity. The effect of other methods to reduction of labour cost are as follows a) Low wage rates Low wage rates is not a good option. Cutting down the wage rates can hamper the performance of laborer. Workers may not have the enthusiasm to work. It will also lead to high attrition rate in the factory b) Higher input output ratio Higher input and output ratio is the productivity of company. Labour productivity is the "average product of labor" (average output per worker or per worker-hour, an output
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which could be measured in physical terms or in price terms). Therefore in the same wage rate employees work more efficiently and the output is more than usual. This reflects to the quality of work performed by the worker. The qualitative aspects of labor productivity such as creativity, innovation, teamwork, improved quality of work can be measured in terms of the output produced by the workers. c) Strict control and supervision Strict control and supervision can lead to more expense to the company of hiring someone to supervise. This will increase the direct cost of production. In strict control and supervision person cannot work comfortably and even a small mistake can result in negative impact on the worker. This can be another reason for high attrition rate. d) Longer hours of work Long hours of work will increase the work time and hence wages for extra hours has to be given to workers. This will increase the wage rate and reduction in labour cost per unit is not possible.

Analyzing the above points we can see that increase in Productivity reduces the labour cost per unit. Productivity gives output to the firm and also optimally uses the companies resources. Therefore higher input and output ratio benefits workers to get better wages and conditions, the firm benefits through increase profits and dividends to shareholders, firms customer would get products for lower prices etc. Therefore productivity is the most important factor in reducing labour cost per unit