Important Techniques of Labour Costing

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 6, 2021

In this article, we are trying to explain some important techniques and formulas to calculate labour cost, payroll and incentive wages.

1. Measurement of Labour Turnover

(a). Separation Method

Labour Turnover = (No. of separations in a period / Average No. of Workers) x 100
LT = (NS / ANW) x 100

(b). Replacement Method

Labour Turnover = (No. of replacements in a period / Average No. of Workers) x 100
LT = (NR / ANW) x 100

(c). Flux Method

Labour Turnovber = (No. of separations + No. of replacements / Average No. of Workers) x 100
LT = (NS + NR / ANW) x 100

2. Labour Productivity

Labour Productivity  = Output / Actual Hours Worked

3. Labour Cost per Unit

Labour cost per unit = Direct Wages / No. of units

4. Time Allowed

Standard Time + Incentive Allowance

5. Labour Efficiency

Labour Efficiency = (Actual output / Standard output) x 100

6. Time Rate Method

Earnings = Hours worked x Rate per hour

7. Straight Rate Method

Earnings = No. of units x Rate per unit

Differential Piece Rate System

8. F.W. Taylor’s System

Earnings = 80% of price rate when below standard
Earnings = 120% of price rate when at or above standard

9. Merrick Differential Price Rate System

Output % Standard Payment
Up to 83% Ordinary piece rate
83% to 100% 110% of ordinary piece rate
Above 100% 120% of Ordinary Piece Rate

10. Gantt Task Bonus Plan

Output % Standard Payment
Output below standard Guaranteed time rate
Output at standard 120% of time rate
Output above standard 120% of ordinary piece rate

11. Halsey Premium Plan

Earnings = Hours Worked x rate per hour + (500/100 x time saved x rate per hour)
E = HW x RH + (50 / 100 x TS x RH)

12. Halsey Weir Plan

Earnings = Hours Worked x rate per hour + (33 1/3% + time saved x rate per hour)
E = HW x RH + (33 1/3 / 100 x TS x RH)

13. Rowan System

Earnings = Hours worked x rate per hour + (Time saved / Time Allowed x hours worked x per hour rate)
E = HW x RH + (TS / TA x HW x RH)

14. Barth Variable Sharing Plan

Earnings = Rate per hour x √Standard hours x hours worked
E = RH x √SH x HW

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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