What are the main Components of Labour Cost?


Remuneration or wage is paid to the labour force or workers as a reward or compensation for their labour and service. Wage is the motivating force for greater productivity. It is paid to the workers either for the time spent by them in an organisation or for the goods produced or services provided by them.

Demand for increased wages is a natural corollary on the part of labour, while the employer tends to resist this demand. However, it must be borne in mind that high wages do not necessarily result in higher cost of production and low wages low cost of productio In fact; higher wages have always resulted in greater productivity and reduced average, cost of labour.

It must be understood that there are certain basic factors which affect wages. Some of the factors are: supply and demand of labour, presence of labour unit ability to pay, productivity, cost of living, policy of Government, etc.


Components of Labour Cost

The term ‘labour cost’ comprises of wages that are paid to workers. Labour c includes expenditures incurred by the employer on employees and would covert, following:

1. Monetary or Pecuniary Benefits like:

(i) Basic wages (ii) Dearness allowance (iii) Production Bonus (iv) Pro Bonus (v) Employer’s contribution to Employees’ State Insurance (IL Scheme (vi) Employer’s contribution to Provident Fund (vii) Pension affected retirement (viii) Retirement Gratuity. Items from (v) to (viii) above JOB known as deferred monetary benefits.


2. Fringe Benefits or Non-Pecuniary Gain like:

(i) Free, or subsidised food (ii) Free or subsidised Housing (iii) Free subsidised education to workers’ children (iv) Holiday facility (v) Free medical facilities (vi) Recreational facilities.

Calculation of Labour Cost

Every organisation maintains a proper system of accounting for the purpose calculation of wages payable to workers. The processes of computation of wages involve the calculation of gross wages and net amount payable to the workers after making deductions.


The gross wages payable to the workers are calculated with the help of till records. Under the system where wages are payable on the basis of time spent a workers inside the factory (time wage system), the amount of gross wages is calculate by taking into account the total number of hours worked multiplied by the hourly rate of wage, plus overtime premium, if any.

Overtime premium is calculated by multiplying overtime hour with premium rate. In this case wages are treated as direct labour cost and overtime premium is considered as indirect labour cost or overheads.

Under the system, where wages are payable on the basis of quantity of work done (piece wage system), the amount of gross wages is calculated by taking into account the number of units produced multiplied by the wage rate per unit. Allowance for incomplete work and overtime premium is added to gross wages.

After the computation of gross wages, net amount payable to workers is found out by making different deductions. The following deductions are usually made from the gross wages:


(i) For employee’s contribution to provident fund (ii) For income tax (iii) For housing accommodation (iv) For fines and absence from duty (v) For amenities and services (vi) For recovery of advances (vii) For the dues of the co-operative society (viii) For life insurance premium (ix) For welfare fund (x) For contribution to employees’ State Insurance (xi) For damages or loss of goods or money (xii) For deduction on the basis of court order or the directive of some other authority

After the computation of net amount of wages payable, pay slips are prepared in detail showing ordinary wages, overtime premium, bonus and all deductions.

The equations of labour cost are as follows:

(a) Labour Cost = Gross wages + Employer’s Contribution to Provident


Fund and Employees’ State Insurance Scheme.

(b) Gross Wages = Ordinary Wages + Dearness Allowance + Bonus +

Overtime Premium + Leave Pay + Other Allowances

Ordinary Wages = Hours worked x Hourly Rate (under time wage system)

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