Labour Cost – Free Cost Accounting Articles

Labour Cost


Labour cost is the second important element of the cost of production. Wages, salaries and other forms of remunerations represent a major portion of the total cost of a product or service. The growth and profitability of the concern depend upon proper utilization of human resources or labour force which in turn needs proper accounting and control of cost. Thus, control of labour costs is a very significant issue from the viewpoint of management.

If you want to learn more about this topic you can watch the below lecture.


The labour cost can be classified into two types:
(1) Direct Labour Cost,
(2) Indirect Labour Cost.

(1) Direct Labour Cost

Any labour cost that is specially incurred for or can be readily charged to or identified with a specific job, contract, work order or any other unit of cost is termed as direct labour cost. Wages for supervision, wages for foremen, and wages for labours who are actually engaged in operation or process are examples of direct
labour cost.

(2) Indirect Labour Cost

Indirect labour is for work in general. The importance of the distinction lies in the fact that whereas direct labour can be identified with and charged to the job, indirect labour cannot be so charged and has, therefore to be treated as part of the factory overheads to be included in the cost of production. For example, salaries and wages of supervisors, storekeepers, maintenance labour, etc

Merrick’s differential piece rate system:

This method is also known as the ‘Multiple piece rate system’. Under this method, three grade piece rates are used instead of two as in the case of Taylor’s. The features are as follows:
(i) There is no guaranteed wages.
(ii) Standard time is fixed for each work.
(iii) Slabs are:
Upto 83.33% of the standard output-100% of ordinary piece rate.
Above 83.33% and upto 100% of the standard output -110% of ordinary piece rate.
Above 100% of the standard output- 120% of ordinary piece rate.

Stock Level Labour Cost
OverheadsMaterial Cost 
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