Labour Ratios

Labour Ratios

Labor efficiency

Labour efficiency ratio tell us about how efficiently labour are working  the efficiency ratio is calculated on the concept what is expected from labour and how is actual performance. If the result are below the 100% then we say that labour are under performing when the result are above 100% we say that labour performance is beyong the expectation and if the result is 100% the labour performance is upto expectation.

Labour efficiency is important because labour involve a high production cos therefore the labour should be working efficiently and efficiency ration provide effective information for controlling the labour performance.

Labour efficiency ratio is an important factor while calculating the bouns for the employees. The bonus is also an important tool to improve the efficiency of the worker.

Efficiency is very important because low efficiency mean that you are paying for wasted time. The some worker have tendency to waste time and efficiency ratio can be used to identify those worker or group of worker. The low efficiency is effectively mean that you are paying more and getting less.

 formula for efficiency

E efficiency Ratio =expected time/Actual time *100

Capacity utilization = (total hour spend / Total hour available) X 100

Production Volume = (Expected Time/total time available) X100

Example

There are 30 days in a month and 10 hour and number of employee are 10 there is idle time of 300 hours and standard time per unit 1 hour. Unit produced 6000 and expected time per unit produced was 20 minute.

Solution

Total hour available ( 30 days @ 10 * employee) =3000 hour

Total Productive hour ( 3000 hour – 300 idle ) = 2700 hour

Expected hour = 6000 X 20/60 = 2000 standard hour

Efficiency ratio =  2000/2700 X100 = 74%

Capacity utilization =  (Total hour spend / Total hour available) X 100

                                 =( 2700/3000)* 100 = 90 %

Labour capacity ratio

The purpose of calculating to identify that at what level the entity operating and how much of the capacity is being utilized. Capacity utilization is important factor because under utilization of capacity is a loss for the entity and specially in case of labour under utilization of capacity means that there are some over employment.

If there is over employment and the money is being paid it technically shows a poor management and the management should review the number of labour required and make appropriate decision in this regard.

The under utilization may also be due to the shortage of demand especially in case of season based industries. Some industries are not willing to reduce the staff due to shortage of demand because losing the employee and hiring again also involve cost moreover it requires training and experience is not an visible option.

Under utilization is possible but over utilization of capacity is not possible unlike efficiency ratio where the over efficiency is possible. Technically saying the answer of capacity ratio would be always equal or less than 100%.

Production volume

Production volume =( Expected Time/ Time Available ) X 100

This ration is basically an further interpenetration of efficiency and capacity ratio and explain what would be the production volume in case of efficient and non efficiency environment. If the capacity is being utilized and it is being utilized effectively then this production volume will show a positive sign if the capacity is being under utilized and efficiently then this production volume will improve.

Simple word it can be said if people are working and working with focus and integrity then you will have good production but if the people are wasting time and not working properly then this will be reflected in production volume ratio.

Difference between product hour and Normal Hour

Difference between product hour and Normal Hour

Difference between productive hour and normal hour is idle time. The normal hour is very much the time spent by labour including the idle time while the productive hour is the only working hours. The productive hours are hours where labour is involved in producing Good.

Example of Product Hour

There are 10 employee and working hour per week are 30 . Due to strike the the labour could not work for one day what would be normal hour and productive hour. There are five working days in a week.


Normal Hours 10 employees X hour per day X  5 days = 300 Hours

Product Hours 10 X 6 hour per day X 4 days = 240 Hours

Different Types of Labour hour

Different Types of Labour hour

There are four types of labour hour term used in production process. These all types are different from each other and a deep understanding is required of these hour. These hour are usually confused with each other.

Basic Labour hour

Basic Labour hour is the number of minimum hour required from a labour to work. This is more like an office timing concept when a employee is required to attend the office.

Productive Labour Hour

Productive hours are the actual number of hour worked by the employee or worker. it is to be noted that productive hour may exceed the basic hour.

Paid Labour Hour

Paid hour is clearly from the terminology that worker paid for hour , sometime paid hour are more than productive hour because of idle time. simply you can say these are hour for which employee was available for work and therefore paid.

Standard Labour Hour

Standard hour is basically used to measure the efficiency of worker, The standard hour are calculated with reference to the unit produced by the employee. The efficiency is calculated for the purpose of bonus payment etc.

Direct and Indirect Labour

Direct and Indirect Labour

Direct labour is a labour which is directly connected with the production process whereas the indirect labour is not directly connected with production process. The direct labour is the person who are producing the product and any other labour would be treated as indirect labour and would be treated as production overhead.

Example of Direct Labour

The basic rate of direct labour is the only direct labour cost and any other cost will be treated as indirect cost. There is once exception to the rule when there customer is ready to pay for overtime premium then overtime premium may be charged as direct labour.

Example of Indirect Labour

There are number of indirect labour involve in the production process like supervisor and managerial involvement in production. There are also some payment made to the direct labor but actually those payment would be treated as indirect labor cost. These include the overtime premium payment, bonus payment etc.

Types of Labour payment Systems

Types of Labour Systems

There are basically three type of labour payment system which includes Hourly Rate System, Piece work and bonus system.

Hourly Rate

The management identify a per hour work rate for the employee and also an overtime hour rate . The overtime rate is slightly above the normal hour rate. it is important to note that overtime is paid in addition to normal rate and therefore if it is stated that 50% overtime rate it mean that rate would be 150% of normal rate.

Piecework Rate

This rate is based on output. This is sometime is supported with guaranteed minimum payment. 

Bonus system

This system is based on the efficiency of the employee.The management described the standard hour of work and actual working hour. The standard hour is the expected hour of unit produced and the actual hour off course the actually hour spent on producing unit.