Payroll is a major element of cost in organizations especially the manufacturing one. So, it is not an easy task to reduce this cost. Payroll in cost & management accounting refers to the office staff and labor wages. In manufacturing concerns, labor wages account for most of the payroll expense and that is why, it is the major area where controls are implemented to control or reduce the cost.
Managing the labors and put controls to reduce the labor cost is not an easy task as this may invoke the feeling of injustice among the labors. The labor may decide to the leave the organization which may create issues for the management to find new suitable candidates to fill the vacancy. This will disturb the production process and ultimately cause losses to the organization.
In Payroll accounting, labor costs are divided into two main headings as follows:
Monetary benefits – this involves all the expenditure incurred by the employer for the workers such as basic wages, pension scheme, contribution to provident fund etc.
Fringe benefits – these are the secondary benefits incurred for the betterment of the employees such as subsidized housing, subsidized foods, festival pay etc.
If management tries to reduce the labor cost by doing any sort of reduction in above monetary and fringe benefits, then the will to work for the benefit of the organization among labors start to diminish.