1. Cost Accounting-I
Labor Costs

2. Labor Costs
Labor cost is a second major element of cost. The control of labor cost and its accounting is very difficult as it deals with human element.

3. Labor Costs
The efficiency of production department is based on the skill of workers. Workers convert raw materials into finished goods. Skilled worker helps in decreasing the cost of product besides increasing the quality and quantity of the production.

4. Management is interested in labor costs due to;
use direct labor cost as a basis of increasing the efficiency of workers,
identify direct labor cost with products, orders, jobs or processes in ascertaining the cost of every product, order or process,
use direct labor cost as a basis for allocation of overhead (if percentage of direct labor cost to overhead is to be used as an allocation method),
determine indirect labor cost to be treated as overhead and reduce the labor turnover.

5. Labor Costs
Labor can be;
Direct Labor or
Indirect Labor

6. Labor Costs Direct Labor
If there is any direct relationship between labor cost and the product, process or cost per unit, it is treated as direct.

7. Labor Costs Direct Labor
Direct labor cost is known as the wage of those workers who are engaged in production process whose time can be efficiently and economically traceable to units of products. Example: Wages paid to compositors in a printing press, labor of machine operators and etc.

8. Labor Costs Direct Labor
Cutting& Molding Department
Assembly Department
Polishing Department
For example in manufacturing furniture, the wood will be cut in Cutting & Molding department, assembled in Assembly department and polished in Polishing Department.

9. Labor Costs Direct Labor
Cutting& Molding Department
Assembly Department
Polishing Department
The wages paid for cutting and molding activity are direct costs. Additionally, the wages paid for assembly and polishing activities are also direct labor.

10. Labor Costs Direct Labor
Direct labor may also be defined as prime labor cost, process labor cost, operating labor cost, manufacturing wages, direct wages and productive labor cost.

11. Labor Costs Indirect Labor
Indirect labor costs are not directly related with the production. Some workers do not engage directly in conversion of output but they contribute indirectly. For example wages of store-keepers, foremen, time-keepers, supervisors, inspectors etc.

12. Labor Costs Indirect Labor
Maintenance and Repair Department
Cafeteria Department
Heating Department
For example in manufacturing furniture, support departments labor costs as Maintenance and Repair Department, Heating Department are indirect labor.

13. Labor Costs Difference Between Direct and Indirect Labor
Directly related with a particular job or work order- Direct Labor
Not- Indirect Labor
Identification
Treated as part of prime cost- Direct Labor
Treatment

14. Labor Costs Methods in Ascertaining Labor Cost
Time-Keeping
(Çalışılan Sürenin Belirlenmesi)
Time-keeping serves;
the preparation of payrolls (ücret bordroları),
ascertaining the labor cost related with cost centers,
recording of each worker’s time in and out of the factory,
true and fair cost allocation a basis of labor cost.

15. Labor Costs Wage System
There is no single method of wage system. The systems in ascertaining wages are as follows:
Time wage system (wage is paid at an hourly, daily, weekly or monthly rate)
Piece rate system (payments are made according to each unit produced, job completed or operation performed)

16. Elements of Labor Costs
Wages
Overtime Payments (Normal and Additional)
Annual Live and Vacation Pay
Gross Wages
Premium, bonus,
Allowance and other payments
Other Payments
Social Security Funds
Unemployment Insurance
Allowance for Retirement Pay
Legal Payments
Training Costs
Travel Payments
Social Benefits

17. Labor Costs Wage System
Normal wages
Idle Time Payments
Overtime Payments
Overtime Premium
Social Security Funds
Premium and Bonus etc.

18. Labor Costs Wage System- Idle Time (Boş Zaman İşçilikleri)
There may be difference in time planned to different jobs, orders or process. The difference between planned normal working hour and realized working hour is called as idle time.

19. Labor Costs Wage System- Idle Time
The idle time can be normal or abnormal. Normal idle time, is the waste of time can not be avoided. For example time taken in going from factory gate to different production departments. Abnormal idle time is the waste of time that can be avoided if proper precautions are taken. For example time wasted in because of break even of machinery.

20. Labor Costs Wage System- Idle Time.
The cost associated with idle time is treated as indirect labor cost and should, therefore, be included in manufacturing overhead cost. 

21. Labor Costs Wage System- Idle Time
For example, the normal weekly working hours of a worker are 42 (7 hour daily x 6 day in a week is normal) and he is paid 10 TL per hour. If he remains idle for 6 hours due to power failure, then the cost of 36 hours would be treated as direct labor cost and the cost of 6 hours (idle time) would be treated as indirect labor cost and included in manufacturing overhead cost.
Direct labor (36 hours × 10 TL)
360
Manufacturing overhead (6 hours × $10) 60
Idle time
Total labor cost
420

22. Labor Costs Wage System- Idle Time
Abnormal idle time is the waste of time that can be avoided if proper precautions are taken. For example time wasted in because of break even of machinery. The cost of abnormal idle time will be treated as «Idle Capacity Expenses and Loses» as a period expense in Income Statement.

23. Labor Costs Wage System- Overtime (Fazla Çalışma).
Overtime occurs from the work done beyond the normal working period. For overtime working workers will be paid on overtime premium.

24. Labor Costs Wage System- Idle Time.
Overtime premium is the amount that is paid, for the overtime worked, in excess of the normal wage rate. Like idle time, overtime premium is also treated as indirect labor cost and included in manufacturing overhead cost.

25. Labor Costs Wage System- Overtime (Fazla Çalışma)
For example, the normal weekly working hours of a worker are 42 (7 hour daily x 6 day in a week is normal) and he is paid 10 TL per hour. In a particular week, if he works for 46 hours and company pays him 12 TL for every hour worked in excess of 42 hours, the allocation of the labor cost of the worker would be made as follows:
Direct labor
(42 hours × 10 TL) + (4 hours x 10 TL)
460
Manufacturing overhead (4 hours × 2 TL) 8
Overtime premium
Total labor cost
468

26. Direct Labor Indirect Labor
Labor Costs Production Department Labor Costs
Direct Labor
Wages
Overtime Payments (Normal)
Indirect Labor
Overtime Payments (Overtime Premium)
Idle Time Payments
Premium, bonus, Allowance and other payments
Legal Payments (Social Security Funds, Unemployment Insurance, Allowance for Retirement Pay)
Training, Social Benefits and Other Payments

27. Labor Costs Production Department Labor Costs

28. Labor Costs Recording System
Labor Costs (Nature)
Wages
Idle Time Payments
Overtime Payments (Normal and Additional)
Annual Live and Vacation Pay
Premium, bonus,
Allowance and other payments
Legal Payments
720. Direct Labor
Wages and Payments Related with Production
730. Manufacturing Overhead
Indirect Labor

29. Material Costs-Labor Costs
Raw materials and the items directly related with production
Materials
Manufacturing Costs
Beginning Material +
Direct Material
Net Purchases
Direct Labor
Purchases
Manufacturing Overhead
Acquisition Costs
Discounts -
Returns
Purchases Available to Use
Total Product Cost
Ending Material
Material Issued xx
Conversion costs are costs incurred to convert raw material to finished goods
Indirect Materials +
Indirect Labor

30. Labor Costs Example
The labor costs ABC Furniture Manufacturing Company’s has been occurred in May are as follows:
Department
Normal Working Hour
Idle Time
Overtime Working
Cutting& Molding Department
160 6 10
Polishing Department 3 15
Maintenance and Repair Department -
Regular rate is 10 TL per hour and overtime rate is 14 TL per hour.
Requirement: Determine the direct and indirect labor cost for ABC Co.

31. Labor Costs Example Department Direct Labor Cost Indirect Labor Costs
Cutting& Molding Department
- Normal Working Hour
160 hrs. * 10 TL =
1.600
- Overtime Working
10 hrs. *10 TL =
100
- Overtime Premium
10 hrs. * (14 TL-10 TL) = 40
- Idle Time
6 hrs. * 10 TL = 60
Polishing Department
160 hrs. * 10 TL =
15 hrs. *10 TL =
150
15 hrs. * (14 TL-10 TL) =
3 hrs. * 10 TL = 30
Maintenance and Repair Department
TOTAL LABOR COST
3.450
1.790

32. Labor Costs Recognition
DIRECT LABOR COST
Labor Cost (Nature)
Cutting& Molding Department (Cost Center)
Polishing Department (Cost Center)
3.450
FACTORY OVERHEADS
Labor Costs (Nature)
- Polishing Department (Cost Center)
- Maintenance and Repair Department (Cost Center)
1.790
EXPENSE ACCURALS
(PAYABLES TO EMPLOYEES)
5.240

33. Labor Costs Example
ABC Co.'s Manufacturing Department working hours are as follows.
DAYS
HOURS WORKED
Monday
8 hrs.
Tuesday
10 hrs.
Wednesday
9 hrs.
Thursday
11 hrs.
Friday
Saturday
4 hrs.
ABC Co.’s normal working hours is 8. Normal rate is 10 TL. Overtime rate is up to 9 hours normal rate, over 9 hours in a day is 12 TL.
Requirement: Determine the direct and indirect labor cost for ABC Co.

34. Labor Costs Example Direct Labor Cost Indirect Labor Costs Monday
8 hrs.
8 hrs. * 10 TL 80 -
Tuesday
10 hrs.
(9 hrs. *10 TL) + (1 hrs. *10 TL)
100
1 hrs. * 2 TL 2
Wednesday
9 hrs.
9 hrs. * 10 TL 90
Thursday
11 hrs.
9 hrs. * 10 TL (2 hrs. *10 TL)
110
2 hrs. * 2 TL 4
Friday
Saturday
4 hrs.
4 hrs. * 10 TL 40
TOTAL
510 6