Employee cost should reflect the total cost to the company for compensating employees for their services and also for retaining them. Therefore, employee cost includes both monetary and non-monetary benefits. Employee cost does not include the cost of recruiting and training employees.
Examples of monetary benefits are basic salary and dearness pay/allowance; overtime pay; productivity, and profit sharing bonus; house rent allowance; fair value of employee stock options; special allowances such as night shift allowance and attendance allowance; contribution to post-retirement benefits like pension, provident fund; and contribution to staff welfare expenses.
Examples of non-monetary benefits are free accommodation, medical facilities, subsidized canteen services, subsidized transport, and recreational and sports facilities.
Accounting for Employee Cost:
Cost of indirect employees is included in overheads. E.g., cost of indirect employees engaged in manufacturing activities is included in manufacturing overhead.
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A rate is established for the cost of direct employees. The rate is inflated to include normal idle time. E.g., if the employee cost for 100 hours is CU 90,000 and normal idle time is 10%, the rate is (CU 90,000)/(0.90 X 100) or CU 10, although employees are paid at the rate of CU 9 per hour. Separate rate should be established for different classes of employees.
Overtime Premium and Night Shift Allowance:
Usually, the rate at which an employee is paid for working extra hours is higher than the normal rate. The difference between the overtime rate and the normal rate is called overtime premium. Similarly, in addition to normal compensation an employee is paid an allowance for the night shift working.
Accounting for the overtime premium and night shift allowance depends on the cause that lead to overtime/night shift working. If, overtime/night shift working is attributable to a particular job/batch, the overtime premium/ night shift allowance is directly booked to that job. If, overtime/night shift working is attributable to increased workload, the overtime premium/ night shift allowance is included in the manufacturing overhead.
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If, overtime/night shift working is resorted to cover up loss of production due to the fault of another workstation, the overtime premium/ night shift allowance is included in the manufacturing overhead of that workstation. If, overtime/night shift working is resorted to cover up loss of production due to abnormal conditions, the overtime premium/ night shift allowance is charged to the Costing Profit and Loss Account.
Usually, holiday and vacation pay is included in the manufacturing overheads. Alternatively, direct labour hour rate is inflated to cover holiday pay and vacation pay. If special vacation is allowed to a special category of employees because of the very nature of the job, holiday pay and vacation pay of such category of the employees should be charged to the special job.