Cost and Management Accounting · Employee Cost and Direct Expenses

Labour Turnover: Methods, Cost and Control (CA Intermediate Cost and Management Accounting)

Updated 4 October 2026 · Fact-checked

Labour turnover is the rate at which employees leave an organisation and are replaced during a period. You measure it as a percentage of average workers using the separation, replacement or flux method. Find the number of separations, replacements and average workers, apply the right formula, then cost the turnover if asked.

Understand Labour Turnover

Labour turnover means the change in the workforce of a concern during a period. People leave and new people join. It is usually shown as a rate: the number of workers changing, as a percentage of the average number of workers.

Some turnover is normal. Retirement, death, and genuine transfers will always happen. A very high rate is a warning sign. It means the firm keeps losing trained people and keeps paying to find and train new ones.

Causes fall into groups. Avoidable causes are within management's control: low wages, poor working conditions, bad supervision, no promotion path, poor job security, and weak recruitment that places people in the wrong jobs. Unavoidable causes are outside management's control: retirement, death, illness, marriage, relocation and similar personal reasons.

Discharge for indiscipline or redundancy is different. Management starts it, so it is not a genuine unavoidable cause. It still counts as a separation when you measure the turnover rate.

The cost of labour turnover has two components: preventive costs and replacement costs. Cost of labour turnover = preventive costs + replacement costs.

Replacement costs are what the firm spends because people left. They include recruitment and selection, induction and training, lower output from new workers, more scrap and spoilage, tool and machine breakage, and lost production while a post is vacant.

Preventive costs are what the firm spends to keep people, such as personnel administration, medical services, welfare, and better facilities. They form part of the cost of labour turnover. Show them as a separate component from replacement costs, then add the two.

A cost accountant measures the rate, studies the reasons, and tells management where the money is leaking. Reduction measures include fair pay and incentives, sound selection, training, career planning, good supervision, grievance handling, and exit interviews to find the real reasons.

Key rules to remember

Separation method: Labour turnover rate = Number of separations during the period ÷ Average number of workers during the period × 100; Counts only workers who left. In the standard separation method, separations include all workers who leave, whether by resignation, discharge, retirement or death.
Replacement method: Labour turnover rate = Number of replacements during the period ÷ Average number of workers during the period × 100; Counts only workers who joined in place of those who left. New posts created by expansion are not replacements.
Flux method: Labour turnover rate = (Number of separations + Number of accessions) ÷ Average number of workers during the period × 100; Accessions are all new joiners, replacements and additions. This is the fullest measure; it takes both exits and entries.
Average number of workers: Average workers = (Opening number + Closing number) ÷ 2; Use this when the question gives opening and closing strength, unless a better average is given.
Flux rate in terms of separation and accession rates: Flux rate = Separation rate + Accession rate (separation rate = separations ÷ average workers × 100; accession rate = accessions ÷ average workers × 100); Accessions include both replacements and additions. If accessions equal separations, flux rate = 2 × separation rate.
Cost of labour turnover: Cost of labour turnover = Preventive costs + Replacement costs; Preventive costs include personnel administration, medical services and welfare. Replacement costs include recruitment, training, lower output, extra scrap and breakage, and lost production. Show the two components separately, then add them.

How to solve Labour Turnover questions

Use this order for any labour turnover question. It works for rate calculations and for cost questions.

1Read the data and list opening workers, closing workers, joiners, leavers and any new posts created for expansion.
2Compute the average number of workers as (opening + closing) ÷ 2, unless the question gives it directly.
3Separate leavers into separations, and joiners into replacements (filling vacancies) and additions (new posts).
4Identify which method the question asks for. If it asks for all three, calculate each one separately.
5Apply the formula, multiply by 100, and show the workings clearly.
6If cost is asked, list the preventive cost items and the replacement cost items separately, total each, and add the two totals to get the cost of labour turnover.
7State the result in one line and add a short comment, such as which cause is avoidable or what management should do.

Quickest way: Fast method for MCQs and written answers

When to use it: Use this when you have little time. Labour turnover is a short topic, so the full answer should take only a few minutes.

Write the three formulas side by side with the same denominator: average workers.
Circle the numerator for each: separations, replacements, or separations plus accessions.
In MCQs, remember that flux rate = separation rate + accession rate. So it is greater than the separation rate or the replacement rate whenever there are any separations or accessions.
If separations equal replacements and there are no additions, then separation rate equals replacement rate, and flux is double it.
In written answers, show the average workers line first, then each method on its own line, so you earn step marks even if one figure is off.
For theory, answer in two lists: causes (avoidable and unavoidable) and costs (preventive costs and replacement costs, which together make the cost of labour turnover).

Common mistakes in Labour Turnover

Dividing by opening workers instead of average workers.
Students rush and take the first number in the data.
Fix: Always compute (opening + closing) ÷ 2 first, unless the question gives another average.
Counting new posts as replacements.
Students treat every joiner as a replacement.
Fix: Only workers who fill vacancies caused by separations are replacements. Extra posts from expansion are additions, which count only in the flux method.
Using only separations in the flux method.
Students mix up flux with the separation method.
Fix: Flux = separations + accessions. Both exits and entries must be added.
Leaving preventive costs out of the cost of labour turnover.
Students think only costs caused by people leaving count, so they stop at replacement costs.
Fix: Cost of labour turnover = preventive costs + replacement costs. Show each component separately, then add them.
Listing causes without grouping them as avoidable or unavoidable.
Students write a long, loose list.
Fix: Group the causes. Avoidable ones are management's responsibility, and the remedies attach to them.
Forgetting that the rate is a percentage.
Students stop after the division.
Fix: Multiply by 100 and show the % sign in the answer.

Worked examples

Example 1

A factory had 380 workers at the start of the year and 420 at the end. During the year 40 workers left, and these 40 include 10 who were discharged. All 40 leavers are to be counted as separations. 80 workers joined, of whom 40 were for a new section opened during the year and the rest filled vacancies. Calculate the labour turnover rate by the separation, replacement and flux methods.

Show the solution

Check the data: 380 + 80 joiners − 40 leavers = 420, which matches the closing strength.
Average workers = (380 + 420) ÷ 2 = 400.
Separations = 40 (the 40 leavers already include the 10 discharged, and all 40 are counted as separations).
Accessions = 80. Additions for the new section = 40. Replacements = 80 − 40 = 40.
Separation method = 40 ÷ 400 × 100 = 10%.
Replacement method = 40 ÷ 400 × 100 = 10%.
Flux method = (40 + 80) ÷ 400 × 100 = 120 ÷ 400 × 100 = 30%.

Answer: Separation method 10%, replacement method 10%, flux method 30%.

Example 2

In a company the average number of workers was 500. During the quarter, 20 workers left and 30 were recruited, of whom 20 replaced those who left and 10 were additions for expansion. The recruitment and training cost of each replacement was ₹6,000. Extra scrap and breakage due to the 20 replacement workers was ₹40,000, and loss of output due to their lower efficiency was ₹50,000. The 10 expansion additions are ignored for these two costs. Welfare spending to retain workers was ₹30,000. Compute the turnover rate by the flux method and the cost of labour turnover. Show the preventive and replacement costs separately.

Show the solution

Separations = 20. Accessions = 30.
Flux rate = (20 + 30) ÷ 500 × 100 = 10%.
Recruitment and training = 20 replacements × ₹6,000 = ₹1,20,000.
Replacement costs = ₹1,20,000 + ₹40,000 + ₹50,000 = ₹2,10,000.
Preventive costs = welfare spending = ₹30,000.
Cost of labour turnover = preventive costs + replacement costs = ₹30,000 + ₹2,10,000 = ₹2,40,000.

Answer: Flux rate is 10%. Cost of labour turnover is ₹2,40,000, made up of preventive costs of ₹30,000 and replacement costs of ₹2,10,000.

Exam tips

In numericals, write the average workers line first. Examiners give a separate mark for it.
If the question says some joiners are for expansion, split them out. This is the usual trap that separates replacement from flux.
For theory, give causes as avoidable and unavoidable, then give remedies matched to the avoidable causes.
For cost questions, present preventive costs and replacement costs as two separate lists, each with a subtotal, then add them to get the cost of turnover. Add one line of comment.
In MCQs, remember that flux rate = separation rate + accession rate. So it is greater than the separation or replacement rate whenever there are any separations or accessions. It equals twice the separation rate when accessions equal separations.

Practice questions from Employee Cost and Direct Expenses

Labour Turnover in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Labour Turnover: frequently asked questions

What are the three methods of measuring labour turnover?

They are the separation method, the replacement method and the flux method. Each divides a count by the average number of workers and multiplies by 100. The counts are separations, replacements, and separations plus accessions respectively.

What is the difference between replacement and flux method?

The replacement method counts only workers who joined to fill vacancies. The flux method counts all separations and all accessions, including new posts. Flux therefore shows the full movement in the workforce.

What are preventive costs and replacement costs of labour turnover?

Preventive costs are incurred to keep workers, such as personnel administration, medical aid, welfare and better working conditions. Replacement costs arise when workers leave. They include recruitment, selection, training, lower output, extra scrap and breakage. The cost of labour turnover is the sum of the two.

How can labour turnover be reduced?

Improve selection, pay fair wages and incentives, give training and promotion paths, and keep good working conditions. Handle grievances quickly and use exit interviews to find real reasons for leaving. These steps address the avoidable causes.