Labor costing

Habari Student! Welcome to the World of Labor Costing!

Ever wondered how a company like Naivas or a local *mjengo* (construction site) figures out how much to pay its workers? Or how the salary of a *fundi* (artisan) who made your school desk affects its final price? It's not magic, it's Cost Accounting! Today, we're diving deep into one of the most important parts: Labor Costing. Think of it as the art and science of understanding the money we spend on people's hard work. Let's get started!

What Exactly is Labor Cost?

Simply put, labor cost is the total amount of money a business pays to its employees for the work they do. But it's not just about the basic salary! It includes wages, bonuses, allowances (like house or transport allowance), and even the company's contribution to things like NSSF and NHIF.

In cost accounting, we are super interested in how to track, control, and assign these costs to the products or services being sold. We split them into two main categories.

Direct vs. Indirect Labor: The Fundi and the Askari

Imagine a workshop in Gikomba that makes wooden chairs. You have different people working there. Understanding their roles helps us classify their cost.

• Direct Labor: These are the wages paid to workers who are directly involved in making the product. You can literally "trace" their time to a specific chair. The carpenter shaping the wood is a perfect example. Their salary is a direct labor cost.
• Indirect Labor: These are wages for employees who are essential for the workshop to run, but they don't physically make the chairs. Think of the supervisor who manages the carpenters, the cleaner who sweeps the sawdust, or the *askari* (security guard) at the gate. Their salaries are important but are considered indirect labor costs.

    +--------------------------------+
    |      FURNITURE WORKSHOP        |
    +--------------------------------+
               |
    +---------------------------+------------------------+
    |                           |                        |
    v                           v                        v
+------------+          +----------------+        +---------------+
| Carpenter  |          |   Supervisor   |        |   Cleaner     |
| (Shapes Wood)|          |   (Manages)    |        | (Maintains)   |
+------------+          +----------------+        +---------------+
      |                           |                        |
      |                           +------------------------+
      v                                       |
  [ DIRECT LABOR ]----------------------> [ INDIRECT LABOR ]
(Cost directly tied to one chair)  (Cost spread across all operations)

Image Suggestion: A vibrant, realistic digital painting of a Kenyan workshop. In the foreground, a focused carpenter (fundi) is carving a wooden chair (Direct Labor). In the background, a supervisor with a clipboard is overseeing the work, and a security guard (askari) is visible at the entrance (Indirect Labor). The style should be warm and industrious.

How We Pay Our People: Methods of Remuneration

A business needs a fair and motivating way to pay its employees. The method chosen affects both the employee's morale and the company's costs. Here are the most common systems:

1. Time Rate System

This is the most straightforward method. You are paid based on the amount of time you spend at work, whether it's by the hour, day, week, or month. It's common in jobs where quality is more important than quantity, like in office administration or for a cashier at a supermarket.

Formula:
Total Wages = Hours Worked × Rate per Hour

Scenario: Mary works as a data entry clerk in Westlands, Nairobi. Her contract says she is paid KES 300 per hour. Last week, she worked for 40 hours.

Calculation:

Total Wages = 40 hours × KES 300/hour
Total Wages = KES 12,000

2. Piece Rate System

Here, you get paid for what you produce! Your wage is based on the number of units ('pieces') you complete, not the hours you work. This method is common in agriculture (like tea picking in Kericho) or in manufacturing (like an Export Processing Zone factory where workers are paid per garment sewn).

Formula:
Total Wages = Number of Units Produced × Rate per Unit

Scenario: Kamau works at a factory that assembles mobile phones. He is paid KES 50 for each phone he assembles correctly. In one day, he assembles 60 phones.

Calculation:

Total Wages = 60 units × KES 50/unit
Total Wages = KES 3,000 for the day

Boosting Performance: Bonus & Incentive Schemes

Smart companies know that a motivated worker is a productive worker! Bonus schemes are used to reward employees for being efficient and saving time. Let's look at two popular ones.

A. Halsey Premium Plan (50/50 Sharing)

The idea is simple: A 'standard time' is set for a job. If you finish the job faster, you get paid for the time you actually worked, PLUS a bonus for 50% of the time you saved. It's a win-win!

Formula:
Total Earnings = (Hours Worked × Rate per Hour) + (50% × Time Saved × Rate per Hour)

Where:
Time Saved = Standard Time - Time Taken

Scenario: A mechanic at a *jua kali* garage in Industrial Area is given a job that has a standard time of 10 hours to complete. The hourly rate is KES 400. He's very skilled and finishes the job in just 8 hours!

Calculation:

Step 1: Find the Time Saved
Time Saved = 10 hours (Standard) - 8 hours (Taken) = 2 hours

Step 2: Calculate the Basic Pay
Basic Pay = 8 hours × KES 400/hour = KES 3,200

Step 3: Calculate the Bonus
Bonus = 50% × 2 hours (Time Saved) × KES 400/hour
Bonus = 0.50 × 2 × 400 = KES 400

Step 4: Calculate Total Earnings
Total Earnings = KES 3,200 (Basic Pay) + KES 400 (Bonus) = KES 3,600

B. Rowan Premium Plan (Proportional Bonus)

The Rowan plan is a bit more complex but is often seen as fairer. The bonus is a proportion of the worker's time-based wage, calculated based on the ratio of time saved to the standard time.

Formula:
Bonus = (Time Saved / Standard Time) × Time Taken × Rate per Hour

Total Earnings = (Time Taken × Rate per Hour) + Bonus

Scenario: Let's use the same *jua kali* mechanic. Standard Time = 10 hours, Time Taken = 8 hours, Rate = KES 400/hour.

Calculation:

Step 1: Find Time Saved and Basic Pay (same as before)
Time Saved = 2 hours
Basic Pay = 8 hours × KES 400/hour = KES 3,200

Step 2: Calculate the Rowan Bonus
Bonus = (2 hours / 10 hours) × 8 hours × KES 400/hour
Bonus = 0.2 × 8 × 400
Bonus = KES 640

Step 3: Calculate Total Earnings
Total Earnings = KES 3,200 (Basic Pay) + KES 640 (Bonus) = KES 3,840

As you can see, the Rowan plan gave our mechanic a bigger bonus! This is often the case when the time saved is a small fraction of the standard time.

The Challenge of Labor Turnover

Labor Turnover is the rate at which employees leave a company and are replaced. If a company has high labor turnover, it's like trying to fill a bucket with a hole in it! It's very costly.

Why is it a problem?

• Recruitment Costs: Advertising for the job, interviewing... it all costs money.
• Training Costs: New employees need to be trained, and during that time, they are less productive.
• Loss of Productivity: It takes time for a new person to reach the efficiency of an experienced one.
• Low Morale: When colleagues are always leaving, it can make the remaining staff feel insecure.

Formula for Labor Turnover Rate (Separation Method):

(Number of employees who left during a period / Average number of employees during the period) × 100

Wasted Time and Extra Hours: Idle Time & Overtime

Idle Time

This is time for which a worker is paid, but they are not being productive. Unfortunately, it happens!

• Normal Idle Time: This is expected and unavoidable. Examples: Time for tea breaks, moving from one job to another, or small machine setup times. This cost is usually treated as an indirect factory overhead.
• Abnormal Idle Time: This is unexpected and should be avoided. Examples: A sudden KPLC power outage, machine breakdown due to poor maintenance, or running out of raw materials. This cost is not included in the production cost but is charged to the Profit & Loss account.

Overtime

This is the time worked over and above the normal working hours. To compensate employees for this, they are paid an overtime premium, which is a higher rate than their normal pay (e.g., "time-and-a-half" means 1.5 times the normal rate).

Example: If Wanjiku's normal rate is KES 200/hour and she works 4 hours of overtime at time-and-a-half, her overtime pay would be:

Overtime Pay = 4 hours × (KES 200 × 1.5)
Overtime Pay = 4 hours × KES 300/hour
Overtime Pay = KES 1,200

The extra amount (the premium) is the key part. The extra KES 100 per hour (300-200) is the overtime premium. How this premium is treated depends on why the overtime was needed.

You've Made It!

Congratulations! You've just covered the core concepts of Labor Costing. From telling the difference between a direct and indirect worker to calculating complex bonuses, you now have the foundational knowledge to understand how businesses manage one of their biggest and most important costs: their people.

Keep practicing the calculations, and always try to link these concepts to the businesses you see around you every day in Kenya. It will make learning much more fun and memorable. Keep up the great work!