An Important HR Function.

Presented by:-

Rini Prasad (26)

Ashwani Ajwani (07)

MPM(2008-10)

COST BENEFIT ANALYSIS

What is Cost-Benefit Analysis? DefinitionCost-benefit analysis (CBA) is the weighing-scale approach for decision-making. All the positive elements (cash-flows and other intangible benefits) are put on one side of the balance and all the negative elements (the costs and disadvantages) are put on the other.  Whichever weighs the heavier wins.

Example of a Cost-Benefit Analysis:-

A company that would like to buy “Business Intelligence” software to improve its business might use a CBA to make up its mind.  On the minus (cost) side would be:- the price of the software,- the cost of consultants to install and implement the software, and- the cost of training for the users of the software. However on the plus (benefits) side would be:- improved business processes (leading to an annual cost decrease),- due to better available information, the company will be able to take better decisions (leading to additional cash-flows), and- increased staff moral, due to using these modern tools to support the business.

CBA for Labours (HR function) :

It includes:-

• The amount of productivity is produced by the workers.

• Evaluation & All the remuneration, compensation, benefits (monetary & non-monetary) provided to workers.

• Comparison.

• To count profit & Loss.

Specific Items included in CBA for Labours:-

(1) CBA of Overtime work:-

When work can’t be completed during routine or normal working hours, workers are asked to work for additional hours. Wages paid during additional hours is known as overtime wages.

Overtime working is required in following circumstances :

• Seasonal rush of work,

• Making up time lost due to unavoidable reasons,

• General pressure of work,

• Shortage of labour or some workers are on leave,

• Workers are working inefficiently during normal hours with an intention to get sanction for overtime working. Etc…..

Control of Overtime:-

• It should be permitted in emergencies only,

• It should be sanctioned by the competent authority,

• Job may be subcontracted (Outsourcing),

• Effective supervision may be exercised,

• Their must be a proper flow of work during normal working hours.

Accounting of Overtime:-

• If overtime is worked at the request of the customer or to complete an order before time, it is charged to the job or order.

• If it is due to general pressure of work (time lost because of normal causes), it may be considered as overhead.

• IF it is due to departmental delay, it may be charged to the concerning department.

• If it is due to unavoidable causes (machine breakdown, non-availability of materials, power failure etc. ), it may be charged to costing profit and loss account.

• If it is due to seasonal rush, it may be charged to the job directly.

(2) Cost analysis of losses due to IDLE TIME:-

Idle time signifies the time for which employee attends the work place but does not actually work, yet wages is paid for the time spent in premises. It represents wages paid for the time lost.

Related to production

Admn. Causes Eco. Causes Others

Causes of Idle Time

Lack of Matrl

Lack of Mach

Lack of Powr

Lack of Instrn

Mis-Mangt.

Tran-sfer

Labor

CnflctInternal Causes

External Causes

Causes of IDLE TIME:-

(A) Causes related to Production

Unavoidable causes

1. Time lost

2. Workers Movement

3. Instruction time

4. Setting of machines

5. Fatigue

6. Personal needs

Avoidable Causes1. Lack of material

2. Lack of machines

3. Lack of power

4. Lack of instructions

(B) Administrative Causes:-

• Mismanagement,

• Transfer of workers,

• Employer-Employee Conflicts

(C) Economic Causes :-

• Seasonal Industry,

• Lack of Demand ,

• Change in export policy ,

• Strikes or lockouts.

(D) Other Causes.

Control of IDLE TIME:-

• Production should be properly planned.• Repairs & Maintenance of plant &

machinery should be regularly undertaken.

• Raw Materials, Tools & Instructions should reach to the workers well in time.

Accounting of Idle Time:-

Normal Idle Time

• Moving from one job to another,• Waiting for materials,• Waiting for instructions,• Movements of workers,• Temporary absences (minor

accidents, personal needs, tea breaks etc.)

The above factors can’t be avoided and therefore they are charged to factory overheads

Abnormal Idle Time

• Power failure,• Lack of material,• Machine breakdown,• Strike, Lockout, fire etc.

The lose incurred and caused by abnormal conditions can’t be regarded as part of the cost of the product & should be transferred to P/L account.

(3) CBA of Leave with pay :-

According to the Factories Act 1948, Workers are entitled to annual leave with full pay for specified number of days in a year. This may include casual leave, medical leave, special leave, etc. The cost of paid leave can’t be charged to any work order or cost unit since no work is done during this period. It is, therefore, treated as indirect labour cost charged overhead.

(4) CBA of extra-shift & night-shift working:-

• Shift premium is needed to meet the requirements of a particular order or job, the additional cost of which should be charge to the job concerned.

• When shift premium is incurred in order to increase the output a whole the premium element should be treated as a production overhead.

(5) CBA of losses of Strike:-

• Sometimes it is not possible to agree on the demands of the trade union and strike takes place. All monetary losses during strike are treated as abnormal loss but it is difficult to estimate non-monetary losses such as loss of reputation and goodwill.

(6) CBA of Training & Development Costs:-

Training is provided to workers to increase their efficiency and to reduce loss of material. It is easy to compute cost of training which is treated as overheads but it is difficult to estimate benefits of training as it is received over a time.

(7) CBA of Fringe Benefits:-

Fringe benefits are the benefits over and above salary such as vacations and holiday pay, medical & educational benefits etc. These indirect benefits tend to improve employee morale, loyalty & stability. The cost of these benefits are treated as a direct charge to production. Alternatively they are treated as Factory overheads.

(8)CBA of Holiday & Vacation Pay:-

Employees are entitled to statutory holidays such as independence day, republic day etc. Payments which are made to an employee while he is absent on vacation and holidays, are accumulated monthly and spread out over the years production. The total amount is charged to the full year’s overhead expense.

(9) CBA of Attendance Bonuses:-

Workers who performed full number of shifts in a working week, or who lose no time over a stated period are entitled to an attendance bonus. Such bonuses are part of wages and sometimes are treated as direct wages. Alternatively they may be treated as production overhead.

(10) CBA of Learner’s or Apprentices Wages:-

In many plants new workers receive some preliminary training before they can become economically productive. They generally take more time than skilled workers to perform a given task. They are paid lower rate per hour. The wages of workers under training should be treated as production overhead.