Competitive Exams: Cost Accounting (Part 2 of 2)

Definition of Labour Cost and main reasons of increasing labour cost

Labour is very important part of production. Its cost is very important in total cost of production. So we should know what is meaning of labour cost.


Labour cost means all amount which direct or indirect is given to labourer or employee for his work for production.

In labour cost we include two type cost relating to labour

Ist type-Monetary cost of labour

In monetary cost of labour includes

  1. basic wages/salary of employee

  2. dearness allowance

  3. provident fund

  4. Employee state Insurance (ESI)

  5. Employee's share in profit of business

  6. pension of employee

  7. Gratuity and other monetary benefits

2nd Type-Non monetary labour cost

  1. Free food facility to labourers

  2. Subsidised housing facility

  3. free educational facility to employee's children

Main Reasons of Increasing labour cost

It is the duty of cost accountant to reduce the cost of labour so that cost of production will reduce and businessmen can sell their products at lower price. So he must know what exact reasons beyond increasing labour cost.

Ist Reason

  • Increasing labour turnover

  • Increasing idle time

  • forgery names in wage sheet

Affect of Business Activities on Stock Calculation

There are many business activities and events which affect the quantity and value of stock.

  • 1st Affect: When company buys the material, it increase the quantity and value of stock.
  • 2nd Affect: When company returns the goods to supplier, it reduces quantity and value of stock.
  • 3rd Affect: When company sells the goods to buyers then it reduces quantities and value of stock.
  • 4th Affect: When our customers returns us the goods at this time our quantity and value of stock will increase.
  • 5th Affect: Today is most important effect is the effect of of inflation and deflation. It affect only on the value of stock. But there is no change the value of stock.
  • 6th Affect: There are different method of calculating of stock can affect the value of stock. Calculating the value of stock with FIFO will differ the calculated stock with LIFO method.