Chapter 4

Accounting For Labour Ibrahim Sameer (MBA - Specialized in Finance,

B.Com – Specialized in Accounting & Marketing)

Measuring Labour Activity

• Production & Productivity

• Production is the quantity or volume of output

produced.

• Productivity is a measure of the efficiency with

which output has been produced. An increase in

production without an increase in productivity will

not reduce unit cost.

Standard Hour of Production

• Standard hour of production is a concept used in

standard costing, and means the number of units

that can be produced by one worker working in the

standard way at the standard rate for one hour.

Efficiency, Capacity &

Production Volume Ratios

Remuneration Methods

• There are three basic groups of remuneration

method: time work, piecework schemes and

bonus / incentive scheme.

Time Work

• The most common form of time work is a day rate

system in which wages are calculated by the

following formula.

Wages = Hours of worked x Rate of pay per hour

Overtime premiums

• If an employee works for more hours than the

basic daily requirement he may be entitled to an

overtime payment. Hours of overtime are usually

paid at a premium rate.

• If employee work unsocial hours, for instance

overnight, they may be entitled to a shift

premium.

Piecework Schemes

• In a piecework scheme, wages are calculated by

the following formula.

Wages = Unit produced x Rate of pay per unit

Piecework Schemes

• Piecework offer guaranteed minimum wage,

where the employee get guarantee minimum

wage, when the production is low through no fault

of their own.

• It also offer standard time allowance where the

employee should produced the require amount of

unit in the given time period.

Differential Piecework Schemes

• Differential piecework schemes offer an incentive

to employees to increase their output by paying

higher rates for increased level of production. For

example:

Differential Piecework Schemes

• Up to 80 units per week, rate of pay per unit =

$1.00

• 81 to 90 units per week, rate of pay per unit =

$1.20

• Above 91 units per week, rate of pay per unit =

$1.30

Bonus / Incentive Schemes

• Bonus schemes were introduced to compensate

workers paid under a time based system for their

inability to increase earning by working more

efficiently.

• Various types of incentives and bonus schemes

have been devised to encourage greater

productivity.

High Day – Rate System

• A high day rate system is a system where

employees are paid a high hourly wage rate in

the expectation that they will work more efficiently

than similar employees on a lower hourly rates in a

different company.

High Day – Rate System

• Advantages

• It is simple to calculate and easy to understand

• It guarantees the employee a consistently high

wage.

High Day – Rate System

• Disadvantages

• Employees cannot earn more than the fixed hourly

rate for their extra effort.

• There is no guarantee that the scheme will work

consistently.

• Employees may prefer to work at a normal rate of

output.

Individual Bonus Schemes

• An individual bonus scheme is a remuneration

scheme whereby individual employees quality for a

bonus on top of their basic wage, with each

person’s bonus being calculated separately.

Individual Bonus Schemes

• To be successful following factors need to take into

account:

• Work should be fairly routine, so that standard

times can be set for jobs.

• Each individual should be rewarded for the work

done by that individual.

Group Bonus Schemes

• A group bonus scheme is an incentive plan which

is related to the output performance of an entire

group of workers, a department, or even the whole

factory.

Group Bonus Schemes

• Advantages

• They are easier to administer because they

reduce the clerical effort required to measure

output and calculate individual bonus.

• They increase cooperation between follow

workers.

• They have been found to reduce accidents,

spoilage, waste and absenteeism.

Group Bonus Schemes

• Disadvantages

• The employee groups demand low efficiency

standard as a condition of accepting the scheme.

• Individual employees are browbeaten by their

follow workers for working too slowly.

Profit – Sharing Schemes

• A profit sharing scheme is a scheme in which

employees receive a certain proportion of their

company’s year end profits (the size of their bonus

being related to their position in the company and

they length of their employment to date).

Profit – Sharing Schemes

• Advantages

• This schemes is that they company will only pay

what it can afford out of actual profits and the

bonus can also be paid to non production

personnel.

Profit – Sharing Schemes

• Disadvantages

• Employees must wait until the year end for a

bonus.

• Factors affecting profit may be outside the

control of employees, in spite of their greater

effort.

Incentive Schemes Involving

Shares

• It is becoming increasingly common for companies

to use their shares, or the right to acquire them, as

a form of incentives.

Incentive Schemes Involving

Shares

• A share option scheme is a scheme which gives

its members the right to buy shares in the

company for which they work at a set date in the

future and at a price usually determined when the

scheme is set up.

Incentive Schemes Involving

Shares

• An employee share ownership plan is a scheme

which acquires shares on behalf of a number of

employees, and it must distribute these shares

within a certain number of years of acquisition.

Value Added Incentive Schemes

• Value added is an alternative to profit as a

business performance measure and it can be used

as the basis of an incentive scheme. It is

calculated as follows:

Value added = Sales – Cost of bought-in materials &

Services

Recording Labour Cost

• Labour attendance time is recorded on, for

example, an attendance record or clock card.

• Job time may be recorded on daily time sheets,

weekly time sheets or job card depending on the

circumstances.

Recording Labour Cost

• The manual recording of times on time sheets or

job cards is, however, liable to error or even

deliberate deception and may be unreliable.

• The labour cost of pieceworkers is recorded on a

piecework ticket/ operation card.

Idle Time

• Idle time has a cost because employees will still be

paid their basic wage or salary for these

unproductive hours and so there should be a

record of idle time.

• Idle time occur due to machine breakdown,

shortages of work.

Idle Time

• Idle time ratio = (Idle hours/Total hour) x 100%

• The idle time ratio is useful because it shows the

proportion of available hours which were lost as a

result of idle time.

Idle Time

• Idle time may arise for many reasons. Sometimes

it may be due to uncontrollable external factors,

such as a world shortage of material supply.

However, idle time can also arise due to

controllable internal factors such as inefficient

production scheduling or inadequate machine

maintenance leading to machine breakdowns.

Labour Turnover

• Labour turnover is the rate at which employees

leave a company and this rate should be kept as

low as possible.

• The cost of labour turnover can be divided into

preventive and replacement costs.

Labour Turnover

• Labour turnover is a measure of the number of

employees leaving/being recruited in a period of

time expressed as a percentage of the total labour

force.

• Labour turnover rate = (replacements / average

number of employees in period) x 100%

Labour Turnover

• Here are some of the examples of cost of labour

turnover:

• The cost of recruiting new employees to replace

those leaving.

• The cost of increased wastage due to lack of

expertise among new staff.

• The contribution forgone on the output lost due to

slower working.

Accounting for Labour Cost

• Direct labour costs are the costs of the hours

worked by the production workers at the normal

hourly rate.

• Indirect labour costs normally include the

overtime premium for direct workers and any idle

time hours for direct workers as well as the

indirect workers employment costs.

Accounting for Labour Cost

• The gross pay is debited to the wages control

account and the direct cost element is then

transferred to the work in progress account whilst

the indirect cost element is transferred to the

production overheads.

Remember

• Production Overhead Example:

• Cost centre supervisors’ wages.

• Overtime cost of indirect operatives.

• Training of direct operatives.

• Normal idle time in the factory.

Remember

• With regards to Labour costing the following are

some examples of direct cost:

• Overtime hours of direct operatives at basic rate.

• Productive time of direct operatives.

• Wages of distribution staff.

• Sales personal salaries.

Questions & Answers

Thank You

Ibrahim Sameer Seek knowledge from cradle to grave