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What is Cost of Labour Turnover | Causes, Effects Classification

Cost of Labour Turnover
Cost of Labour Turnover

1. What is Preventive costs

These costs are incurred to prevent the labour turnover. They are incurred to avoid the causes of labour turnover. For example cost of health care facilities, cost of welfare facilities, cost of old age facilities etc.

2. What is Replacement Costs

These costs include requirement cost. training cost, loss of output. cost of machine bread down etc.

Treatment or Control of Cost of Labour Turnover

Preventer cost are to be apportioned to different departments on the basis of number of workers in each department.

Calculation of Labour Turnover

To facilitate the comparisons between different undertaking. labor turnover may be expressed in rate.

There are three alternative methods by which this rate is computed Once a particular methods is used, it should be consistently followed for comparative analysis These methods are:

Also Read – What is technique of Costing | Various techniques of Costing

(i) Meaning of Separation Method

It is a most popular method. Under this method. only those workers, are taken in account who have left during a particular period. This ratio is established relation between no. of workers left and average no. of workers during the period which is expressed in percentage. In the form of formula.

Labour Turnover Rate = No. of workers left during the period Average/no. of workers during the period * 100

It should be remembered that those workers who were discharged or the workers who left voluntarily both are included in number of workers left.

Also Read – What is Installation of a Costing System | Conditions and Factors

(2) Meaning of Replacement method

It is also known as net labour turnover method This method takes into account only those new workers who have joined in plac of those who have left, these are known as replaced workers.

Thus, this ratio is established relation between no. of workers replaced (new recruitment) and average number of workers during partic percentage. Its formula is:

period which is expressed in Labour Turnover Rate = No. of workers left during the period / Average no. of workers during the period×100

It should be noted that if new workers are engaged for expansion programmer or any other such purpose they are not considered for this computation. In other words, they will not be included in replaced workers.

Meaning of Labour

Labour is perhaps the most important factor in any institution, specially in an industrial concern, it is only labour or human beings who convert raw materials into finished goods or services.

A harmonious and congenial atmosphere are the basis requirements for a healthy relationship between an industry and labour force.

An industry cannot succeed without having a healthy approach regarding labour relation.

The success of an industry is not doubtful if it had adopted the proper accounting for labour rational wage payment system, good working condition, efficient and rational solution of labour problems, etc.

Also Read –  What is meaning of Classification of Cost & elements of Cost | rules of Cost Accounting Standard

Meaning of Labour Cost

Labour can be direct as well as indirect. The sum of direct and indirect wages paid to workers as known as labour cost. Basic wages, dearness allowances, bonus bonus and other monetary benefits paid to workers are included in labour cost.

Labour Cost or Employee Cost

The aggregate of all kinds of consideration paid, payable and provision made for future payments for the services rendered by employees of an enterprise (including temporary, part time and contract employees).

Consideration includes wages, salary contractual payments and  benefits, as applicable or my payment on behalf of employee. This as also known as labour cost.


Labour cost is divided into direct and indirect.

(1) Meaning of Direct Labour Cost

Labour which takes on active and direct part in the production of a particular commodity are called direct labour.

Direct labour costs are, therefore, specifically and conveniently traceable to specific products.

In other words, it refers to the cost of wages paid to operations who help in altering the construction, composition. contarmation on condition of the product manufactured by a concern.

Also Read – Meaning of Methods of Cost | Basic Methods of Costing

For example, carpenter, tailor, any machine operator etc. would be direct to job since the jobs for which the payment is being made can be easily identified.

The wages paid to such workers are known as direct wages or manufacturing wages or direct labour cost.

(2) Meaning of Indirect Cost Labour

Labour employed for the purpose of carrying out tasks incidental to production of goods or those engaged for office work and selling and distribution activities are known as indirect labour.

Such labour does not alter the construction, composition or condition of the product. In short, labour which cannot be directly intensified with a particular product or job process are generally treated as indirect wages.

Supervisions, inspectors, work checker, instructors, peons, watchman are example of indirect labour. The wages paid to such workers are indirect labour cost. Direct lab our cost is a part of prime cost but indirect labour cost includes in overhead.

Thus, under this chapter direct labour cost has been studied and indirect labour has been studied under subsequent chapter overhead.

Meaning of Lobour Turnover

In all-business organization, it is a common feature that some workers leaves the employment and new workers join in place of those leaving.

This change in work force is known as labour turnover. The labour turnover is thus defined as the influx and exist of individuals into and out of the working force of an organization over a specified period of time.

It can also be referred to as quantitative measurement of instability of working force of the organization.

Causes of Labour Turnover

The causes of labour turnover may be classified into three broad categories

(A) Personal Causes –  Workers may become employment purely on personal grounds. eg..

(I) Personal betterment

(II) Retirement due to old age and illness

(III) Domestic troubles and family responsibilities.

(IV) Dislike the job. locality or environments

(v) Marriage of girls

(B) Unavoidable Causes – There are such reasons under which it is compulsory for management to discharge some workers.

(I) Redundancy due to seasonal fluctuations.

(II) Shortage of raw material and power.

(III) Change in factory site.

(IV) tenability due to worker is not able to work

(v) Discharge on disciplinary grounds

(vi) Marriage particular in case of women workers.

(C) Avoidable Causes – There are such reasons if management take proper interest in such a case the labour turnover may be recurred. These includes:

(I) Low wages and allowances

(II) Lack of medical facilities, etc.

(III) Misbehavior of management

(iv) Lack of promotion chances

(v) Unsatisfactory recruitment system.

Also Read – What is concept of Cost Audit | Objective and Scope of Cost Audit

Effects of Labour Turnover

A certain of labour turnover will always take place. To a limited extend this may be welcome particular at the lower management level in that it creates vacancies for internal promotions and maintains the morals high for the young and the ambitions.

Moreover new workers being new ideas and methods of doing work from other concerns Labour turnover is expensive and generally it should be minimized because it results in increased cost of production for reasons stated below-

(i) Decrease in overall production due to lack of desired efficiency of new workers.

(ii) Increased cost of selection, training of new workers.

(iii) Efficiency of new workers becomes very low here productivity will also below.

(iv) Cost connected with new entrants such as accidents, breakage tools, spoilage of finished products.

(v) Delay in productid.

(vi) Increase in cost of scrap, defective work and additional supervision.

Labour turnover due to unavoidable causes is not only a loss to the individual but also a loss to the organization industry and the nations as a whole.

Also Read – Difference between Cost Accounting and Management Accounting

In the senior grades of factory, employment may not be a good thing because there will be few possibilities of promotion for the young workers who will be forced to leave the organization for future advancement.

This also results in increased labour cost per unit of production because of high wages of existing senior workman.

Remedial Steps to Minimize Labour Turnover

The following steps be taken in this regard:

(i) Providing a suitable and satisfactory wage policy.

(ii) Providing working condition conductible to health and efficiency.

(iii) Impartial and sympathetic attitude of personal management.

(iv) Introducing financial and non-financial plans.

(v) Providing promotional opportunities.

(vi) Encouraging labour participation in management.

(vii) Introducing an effective grievance procedure.

(viii) Strengthening the welfare measures.

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