Employee cost is the second major cost element for manufacturers and the largest for most service businesses. CAS-7 defines what it includes and how it is assigned.
What employee cost includes
- Salaries, wages, allowances and bonus.
- Employer contributions to provident fund, ESI and other statutory funds.
- Gratuity and leave encashment, measured on an accrual basis.
- Perquisites and welfare costs that are part of the employment benefit.
- Costs of contract labour engaged for production work.
- Separation costs that are part of normal operations, spread over the relevant period.
What it excludes
- Recruitment and training costs (overheads).
- Abnormal payments, such as compensation for retrenchment beyond normal schemes, penalties and damages.
Assigning employee cost
| Category | Treatment |
|---|---|
| Direct employee cost | Traced to the product or job using time records or a reasonable basis |
| Indirect employee cost | Included in the relevant overhead pool (production, administration, selling) |
Idle time and overtime
- Normal idle time (setup, waiting within norms) is included in the cost of production.
- Abnormal idle time (strikes, breakdowns beyond norms, lack of orders) is excluded and charged to the costing profit and loss account.
- Overtime premium is charged to the job that required it if worked at a customer’s request; otherwise it is treated as production overhead. Overtime arising from abnormal conditions is excluded.
Practical points
- Match labour records with payroll monthly; unreconciled labour cost is a common cost audit observation.
- Under the labour codes, revisit the components counted as “wages” for statutory contributions; this affects measured employee cost.
- For service businesses, record time by engagement or service line to enable cost per service unit.
Official sources
Disclaimer. This article explains the law as understood on the review date shown above. It is general information, not advice on any particular case. Provisions may have changed since; refer to the official sources and obtain professional advice before acting. Full disclaimer.