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The second important element of cost is labour cost or wages. Labour represents human contribution to production. The role of labour in the process of production can not be underestimated in spite of increasing use of machines. There is no denying the fact that a contented labour force is one of the most valuable assets of an undertaking. Labour can be classified as:
1. Direct Labour
2. Indirect Labour

(1) Direct Labour: Direct labour is that labour which can be conveniently identified or attributed wholly to a particular job, product or process. It is the labour directly employed on production work. Thus, direct labour includes all labour expended in converting raw materials into finished goods or in altering the construction, composition and condition of the product. It varies directly in relation to the volume of output, e.g., labour of a carpenter or a machine man is direct labour.

(2) Indirect Labour: Indirect labour is the remuneration of employees who are not directly connected with manufacturing operation. In other words, it cannot be conveniently identified with a particular job, product or process. It represents ancillary work done in connection with the product manufactured. It aids and facilitates production work indirectly. According to CIMA, London, “Indirect labour cost means labour cost which cannot be allocated but which can be apportioned to or absorbed by cost centres or cost units.” Examples of indirect labour cost are: wages paid to supervisory staff, inspectors, watchmen, cleaners, storekeepers, time keepers etc. Such labour may also be called as unproductive labour.

Methods of Wage Payment
Any amount given to a person as consideration for his work is called Remuneration. The work-efficiency of workers in any industry depends upon the amount paid as remuneration. Proper pay package can attract the workers in a particular industry and also control the labour turnover from that industry. Payments of proper remuneration the workers satisfied, do very few strikes, work attentively, presents them to go far, make proper utilization of material and machines and enhance productivity.

Time Wage System
It is the oldest system of wage payment. In this system, a worker is paid on the basis of attendance for the day or on the basis of the working hours of the day, irrespective of the output. The wage rate of the workers may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed in the company. Under this system the wages are calculated by multiplying the wage rate with the hours worked according to worker’s card or attendance register. Apart from that, overtime wage, overtime premium and dearness allowances are also paid to the worker.

Piece Wage System
Under this system of wage payment the workers are paid the wages on the basis of quantity and quality of work performed by them, no regard being given to time taken in performing the work. Under this system, the rates of wages are fixed per unit of output. The amount of wages to be paid to a worker under this system is calculated as under:
Basic Wages = Output x Piece Rate
Where Piece Rate is computed as follows:
Standard Time per piece x Wage rate on time basis

(i) Straight piece rate:
(ii) Piece Rate with guaranteed day rate
(iii) Differential piece rates

Bonus System or Incentive Plans
Specific Incentive Plans: The various individual bonus schemes are as follows:
(A) Bonus Plan for Payment on Time Basis
(1) Halsey Premium Plan
The formulae for calculation of bonus and total earnings are as follows:
Bonus = Time Saved (TS) x Time Rate (TR) x Given % of Bonus (Normally 50%)

Where Time saved (TS)= Standard time (ST) – Actual time (AT)
Total Earnings = Time Wages + Bonus

(2) Rowan Premium Plan
Bonus = Time Saved (TS) x Time Rate (TR) x Actual time (AT) /Standard time (ST)

(3) Emerson’s Efficiency Bonus Plan
(4) Gantt Bonus Plan
(5) Bedeaux Plan
(6) Hayne’s Plan
(7) Barth Plan

(B) Bonus Plan for Payment on Piece Rate Basis
(1) Taylor Differential Piece Rate System
(2) Merrick Multiple Piece Rate Plan

(C) Others Bonus Plans
(1) Group Bonus Plan
(2) Remuneration Related to Price of Product
(3) Highest Remuneration Method
(4) Minimum Remuneration Method
(5) Special Production Bonus
(6) Participative System

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