Labour Costing Formula | How to Calculate Labour Cost In India

Labour Turnover: It denotes the percentage change in the labour force of an organisation. High percentage of labour turnover denotes that labour is not stable and there are frequent changes in the labour force. It is always expressed in the terms of percentage. It can be measured with the help of the following formula:

1) Separation rate method = Separation during the period / Average No. of worker’s during the period

Note: This method is not suitable when surplus labour is discharged.

2) Net labour Turnover rate (or) Replacement method = Number of replacements / Average No. of worker’s during the period

Note: This method takes into surplus labour.

3) Labour flux rate = No. of separation + No. of replacement / Average No. of worker’s during the period

Note: this method is not applicable when the organisation is expanding.

4) Labour turnover = (No. of Additions + No. of Separations)/2 / Average no. of employees during a period

Note: This method will misguide when an organisation has reached its optimum size and does not require expansion at all.


Average number of employees = (No. of workers in the beginning + No. of workers at the end)/2

No. of additions = Total of new workers appointed and workers replaced during the year.

No. of Separations = Total of workers discharged, leaved and retrenched during the year.

No. of Replacement = Workers appointed on behalf of those workers who are separated from the organisation.


Labour Productivity: It is simply relationship between output and input.

It is calculated as:

Output per man hour = Total output/Man hour used

Output per rupee of wages paid = Total output/Total wages

Output per worker = Total output/Total No. of workers

Sale value per worker = Sales value/Total No. of workers

Wages per unit of Product = Direct wages/No. of Units

Added Value per rupee of wages = Added Value of Product/Total wages

Labour Performance Ratios:

Absenteeism Rate = (No. of Absentees during a period/Avg. no. of workers employed during a period)x100

Accident Frequency Rate = (No. of accidents to date/Number of days to date)

Labour Illness Rate =(Lost hours due to illness/Total man hours during a period)x100

Labour Efficiency Rate = (Hours Allowed for Actual Production/Actual hours taken)x100

Labour Utilization Rate = (Actual hours utilized/Available hours)x100

Ratio of Overtime Premium cost to Total labour cost = (Overtime premium cost/Total labour cost)x100


Method of Remuneration:

1) Time Rate system

  1. Flat time Rate
  2. High wage system
  3. Graduated time rate

2) Payment by Results

a) Piece rate system

  • Straight piece rate
  • Differential piece rate
  • Taylor system
  • Merrick system

b) Group Bonus System

  • Budgeted Expenses
  • Towne gain sharing scheme
  • Cost efficiency bonus
  • Priest man system

c) Combination of Time and Piece rate

  • Gantt task and Bonus scheme
  • Emerson Efficiency system
  • Point scheme
  • Bedaux system
  • Haynes manit system

d) Premium bonus plans

  • Halsey premium plan
  • Halsey weir premium plan
  • Rowan scheme
  • Barth scheme
  • Accelerating premium bonus scheme

e) Other incentive schemes

  • Indirect monetary incentive
  1. Profit sharing
  2. Co-partnership
  • Non-Monetary Incentive

1) Time rate system = Hours worked * Rate per hour (Basic wages)

2) Piece rate system:

i) Straight piece rate earnings = Number of units produced * Rate per Piece

If Units are not given, then straight piece rate earnings are calculated on the basis of Standard time basis.

ii) Differential Piece rate = Number of units produced * Differential Rate per Piece

F.W.Taylor’s differential rate system

» 80% of piece rate when below standard

» 120% of piece rate when above or at standard

Merrick differential or multiple piece rate system

» Efficiency Level up to 83% = Normal piece rate is applicable

» 83% to 100% = 110% of Normal piece rate is applicable

» Above 100% = 120% of Normal piece rate is applicable

iii) Gantt Task and Bonus system

» Output Below standard = Time rate (Guaranteed Payment)

» standard output = 20% Bonus of Time rate

» Above standard = 120% of ordinary piece rate

iv) Emerson’s Efficiency system

» Efficiency Level Below 66.7% = Hourly Rate of payment

» Efficiency Level from 66.7% to 100% = Hourly rate of payment (+) increasing bonus according to degree of efficiency on the basis of step bonus rates

» Efficiency Level Above 100% = Hourly rate of payment (+) 20% Bonus (+) additional bonus of 1% of hourly rate for every 1% increase in efficiency

v) Halsey Premium Plan = (Time Taken * Hourly Rate) + 50% (time saved * Hourly Rate)

vi) Halsey Weir Premium Plan = (Time Taken * Hourly Rate) + 30% (time saved * Hourly rate)

vii) Rowan Plan = (Time Taken * Hourly Rate) + (Time saved/Time Allowed) *(Time Taken * Hourly Rate)

viii) Bedaus Point system = (Time Taken * Hourly Rate) + 75% * Bedaus point/60 * Rate per hour

ix) Barth’s System = Hourly rate * √Std time *Time taken

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