142 ACCOUNTING FOR MANAGERS
directandindirect labouris an important concept that is considered in more detail
in Chapter 11.
The cost of labour
The cost of labour can be considered either over the short term or long term. In
the short term, the cost of labour is the total expense incurred in relation to that
resource, which may, for direct labour, also be calculated as thecost per unit of
production, for either goods or services. The cost of labour is the salary or wage cost
paid through the payroll, plus the oncost. Thelabour oncostconsists of the non-
salary or wage costs that follow from the payment of salaries or wages. The most
obvious of these are National Insurance contributions and pension contributions
made by the business. These oncosts can beexpressed as a percentage of salary.
Thetotal employment costmay include other forms of remuneration such as
bonuses, profit shares and non-cash remuneration such as share options, expense
allowances, business-provided motor vehicles and so on.
A less visible but important element of the cost of labour is the period during
which employees are paid but do not work, covering public holidays, annual
leave, sick leave etc. A second element of the cost of labour is the time when
people are at work but are unproductive, such as when they are on refreshment or
toilet breaks, socializing, during equipment downtimes etc. These unproductive
times all increase the cost of labour in relation to the volume of production. The
actual at-work and productive time is an important calculation in determining the
production capacity of the business (see Chapter 9).
The following example shows how the total employment cost may be calculated
for an individual:
£
Salary 30,000
Oncosts:
National insurance 10% 3,000
Pension contribution 4% 1,200 4,20034,200
Bonus paid as share options 1,000Total salary cost 35,200
Non-salary benefits:
Cost of motor vehicle 4,000
Expense allowance 500 4,500Total employment cost 39,700Assuming a five-day week and twenty days’ annual leave, five days’ sick leave
and eight public holidays per annum, the actual days at work (the production