Labour Turnover in Cost Accounting [Meaning, Methods, Effects and Cost]

Labour Turnover in Cost Accounting

Meaning, Methods, Effects and Cost


In the post, I have explained about labour turnover meaning, methods measuring labour turnover, reasons of labour turnover and effects of labour turnover.

In this post, you will also get short notes on cost of labour turnover and measures to control labour turnover.

Labour Turnover Meaning and Definition

Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period of time. Change in labour force may be cause due to addition, separation and replacement of workers. High labour turnover indicates that labour is not stabilized and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.

Measuring Labour turnover

It is essential for any organisation to measure the labor turnover. This is necessary for having an idea about the turnover in the organisation and also to compare the labor turnover of the previous period with the current one. The following methods are available for measurement of the labor turnover.

a) Additions Method

Under this method, number of employees added during a particular period is taken into consideration for computing the labor turnover. The method of computing is as follows:

Labour Turnover ratio = (Number of additions/Average number of workers during the period) X 100

b) Separations Method

In this method, instead of taking the number of employees added, number of employees left during the period is taken into consideration. The method of computation is as follows:

Labour Turnover ratio = (Number of separations/Average number of workers during the period) X 100

c) Replacement Method

In this method neither the additions nor the separations are taken into consideration. The number of employees replaced is taken into consideration for computing the labour turnover.

Labour Turnover ratio = (Number of replacements/Average number of workers during the period) X 100

d) Flux Method

Under this method labor turnover is computed by taking into consideration the additions as well as separations. The turnover can also be computed by taking replacements and separations also. Computation is done as per the following methods:

Labour Turnover ratio = ½ [Number of additions + Number of separations] /Average number of workers during the period X 100

Example of labour turnover

The above methods of labour turnover can be understood with the help of following example:

Number of workers on the payroll at the beginning of the month: 1000

Number of workers on the payroll at the end of the month: 1200

During the month, 10 workers left the organisation, 40 persons were discharged due to inefficiency and 150 new workers were appointed. Out of the new workers appointed, 20 workers were recruited to fill the vacancies caused due to leaving of the workers while the rest were engaged under an expansion scheme.


In the above example,

Number of workers replaced during the month = 20

Number of workers separated from the organisations = 10 + 40 = 50

Number of workers added during the month = 150

Average number of workers during the month = (Opening number of workers + Closing number of organisation)/2

= (1000+1200)/2 = 1100

Now, considering the above formula of labour turnover,

a) Labour turnover ratio under addition method = (150/1100)*100 = 13.64%

b) Labour turnover ratio under separation method = (50/1100)*100 = 4.54%

c) Labour turnover ratio under replacement method = (20/1100)*100 = 1.81%

d) Labour turnover ratio under flux method = [(150+10+40)/1100]*100 = 18.18%

Reasons for labour turnover

The reasons for labour turnover can be broadly classified under three heads:

1) Personal Causes

2) Unavoidable Causes

3) Avoidable Causes

1) Personal Causes: 

Some of the employees may leave the organization on account of personal reasons as given below:

a) Circumstances of family.

b) Retirement on reaching the prescribed age.

c) Change in material status in case of women employees.

d) Dislike for the job or place;

e) Death of the employee.

f) Employee getting recruited in a better job.

g) Permanent disability due to accidents.

h) Involvement of employee in activities of moral turpitude.

2) Unavoidable Causes: 

In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:

a) Termination of workers on account of insubordination or inefficiency

b) Discharge of workers on account of irregularity or long absence.

c) Retrenchment of workers by the company on account of shortage of work.

d) Unhealthy atmosphere of the locality

e) Change of place due to political reasons or on the ground of health etc.

3) Avoidable Causes: 

Some of the employees may leave the organization account of the following reasons:

a) Non availability of promotion opportunities

b) Dissatisfaction with incentive schemes

c) Unhappy with remuneration

d) Unsuitable to job due to wrong placement

e) Unhappy with working conditions

f) Non availability of accommodation, health and recreational facilities

g) Lack of stability of Tenure

h) Unfair method of promotion

i) Lack of proper training facilities

Effects of labour turnover

The impact of labour turnover on a manufacturing organization’s working is many folds. In fact the labour turnover increases the cost of production in the following ways:

a) Frequent changes in the labour force gives rise to interruption in continuous flow of production.

b) Cost of recruitment and training of new employees increases due to frequent change in labour force.

c) Breakage of tools, wastage of materials increases due to new and unskilled worker.

d) Overall production decreases due to the time lost between the leaving and recruitment of new workers.

e) New workers being inexperienced workers are more prone to accidents. So there are chances of increase in all cost associated with accidents of workers such as compensation to workers, loss of output, damage of material etc.

Cost of labour turnover

The cost of labour turnover may be classified into two categories:

a) Preventive costs

Preventive costs are incurred to keep the labour turnover rate at a low level. This includes:

a) Costs of providing better medical facilities, better accommodation, better education facilities, transport facilities etc.

b) Cost of providing welfare schemes, pension schemes, accident compensation etc.

c) Cost of providing better working conditions such as environment improvement, lighting, heating, air-conditioning etc.

d) Cost of maintaining better industrial relations and peace.

e) Cost of providing for promotion, training etc.

The rate of labour turnover is usually low, if a company incurs higher preventive costs.

b) Replacement costs

Replacement costs arise due to high labour turnover. Examples of replacement costs are:

a) Cost of advertising, recruitment, selection, training & induction.

b) Abnormal breakage and scrap, extra wages & overheads etc., caused as a result of in efficient and inexperienced newly recruited workers.

c) Cost of repairs of machinery in course of training.

d) Loss of working hours and materials in course of training.

e) Compensation payable to workers on accident during training period.

Measures to control labour turnover

The following steps are useful for reducing labour turnover:

a) An Exit interview is arranged with each outgoing employee to ascertain the reasons of his leaving the organization.

b) Job analysis and evaluation must be done to ascertain the requirement of each job.

c) Organization should make use of a scientific system of recruitment, placement and promotion for employees.

d) Organization should create healthy atmosphere, providing education, medical and housing facilities for workers.

e) Committees comprising of members from management and workers for settling workers grievances.

f) A suitable personnel policy should be framed for employing the right man for the right job.

g) Encouraging labour participation in management.

h) Maximisation of non-monetary benefits.


Hope, after going through this article you has clear idea about labour turnover. Thanks for visiting our blog regularly.

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