Replacement Costs These costs arise on account of labour turnover and consequent replace- ment of employees. They include costs which are incurred for recruitment/training of new workers as well as those which result from wastages, losses, lower production due to less competent and inexperienced new employees: Personnel Department Expenses This is for recruitment training new employees and loss of production time during training period. Inefficiency of New Workers. This has an adverse effect on production. Delay in Recruitment of New Workers Recruitment of new workers is time-consuming, neces- sitating overtime payment to existing employees and the consequent burden on the organisation. Cost of Abnormal Breakages This pertains to tools, equipments by new/inexperienced workers as well as machine break-down and the consequent interruption of production. Cost of Spoilage and Defectives More spoilage/defectives are likely to occur due to mishandling carelessness of new workers. The greater the spoilage defectives, the larger is the production costs. The replacement cost of labour turnover can be computed in two ways: (1) By separation and replacement method and (ii) By profit forgone method. Separation and Replacement Method Under this method, the specific costs associated with sepa- ration (turnover) and replacements (recruitment/training) are accumulated. The separation costs include terminal pay, gratuity and other benefits. The replacement costs include costs associated with selection/training of new employees. Another relevant cost is the lost contribution in terms of sales less additional variable cost due to labour cost of lost hours due to replacement, and increase in material and variable overhead due to increase in potential sales. EXAMPLE 9.10 y36 From the information given below, calculate the cost of labour turnover, using separation and replacement method: Income Statement for the Year Ended March 31, Current Year Sales 340,00,000 Variable costs: Materials $10,00,000 Direct labour 8,00,000 Variable overheads 8,00,000 26,00,000 Contribution 14,00,000 Less fixed overheads 9,00,000 Profit before tax 5,00,000 The direct labour-hours worked during the period were 20,300 of which 500 hours pertained to new workers on training. Only 40 per cent of trainee's time was productive. As replacement of workers left was delayed for some time, 600 productive hours were lost. The company incurred direct costs as a consequence of separation replacements detailed below: Separation, 240,000; Selection, 260,000, and Training, 1,00,000