# Labour Cost
## Definition
Labour Cost is the total cost incurred by the company on its workforce — i.e., everything the company pays out (whether to the worker directly or to authorities on the worker's behalf).
## Build-up of Labour Cost
| Component |
|---|
| Basic Pay |
| (+) Dearness Allowance |
| Basic + D.A. |
| (+) Other Allowances |
| (+) Bonus / Commission |
| (+) Other cash payments (Overtime) |
| (+) Perquisites |
| (+) Employer's Contribution to PF |
| (+) Employer's Contribution to ESI |
| = Total Labour Cost |
## Labour Cost per Hour
$$\text{Labour Cost per Hour} = \frac{\text{Total Labour Cost}}{\text{Effective Working Hours}}$$
where Effective Working Hours = Normal Hours − Holidays − Idle Time.
## Critical PF / ESI Adjustments
ICAI frequently tests students on confusion between Employee's and Employer's contributions.
### Rule 1 — Question gives only "Employee's contribution"
If only the employee's contribution is mentioned (and the employer's contribution is silent), assume Employer's contribution = Employee's contribution and add both while computing Labour Cost.
### Rule 2 — Question gives both separately
If both employer's and employee's contributions are given separately, use them as given — don't equate them.
### Rule 3 — Mechanics of PF deposit
The employer deducts the employee's share from the employee's salary and pays the combined amount (employee's + employer's) to the PF authority.
- Employee's share → use only the employee's contribution figure.
- Employer's share → use only the employer's contribution figure.
- Total PF deposited by employer with the authority = Employee's share + Employer's share.
## Three Concepts at a Glance
| Gross / Net Pay | Labour Cost | Earnings |
|---|---|---|
| What company actually paid to the worker | Total cost company incurred on the worker | Net amount received / accrued to the worker |