Accounting for labour cost
Labour is a essential factor used in the process of production arise from human resources. It can be classified in two parts
Direct and indirect
Tailor, carpenter etc it is a part of prime cost
Indirect labour
Such cost can not be identified with per units of production
Time keeping department , pay role, security department etc, it is part of overheads.
Time study and motion study
It is a measure at which reasonable skill and ability will be studied
It involves observation of movement of body which is not necessary
Time study is useful fair day rate for work
Motion study eliminates wasteful movement.
Time study is possible with stop watch while motion study is possible through movie camera.
Job evaluation and merit rating
Job evaluation – Assessment of worth of job in job hierarchy
Gives ranking for job
Used for rational wages
Merit rating – Assessment of worth of job holder
Gives ranking to job holder
Used for scientific base for fair wages
Idle time :
Time for which payment made but no direct production or benefit is obtained
Treatment of idle time in cost account
Normal and controllable
As a part of cost through production overheads
Normal and uncontrollable
Part of cost through inflated wages
Abnormal idle time charged to profit and loss account.
Q 1 hours
Hours as per time card 48
Less daily allowances (4)
Normal 40*6/60 effective 44
Less : actual work 36
Abnormal loss 8
Accounting treatment
Given wage rate 20
Charged to
Job – 36*20=720 Production overhead
Assume normal and controllable 4*20=80
Abnormal hours profit & loss 8*20 =160
Holiday pay to employees charged as below
Production department – production overheads
Administration department – admin overheads
S & D department – S & D overheads
Overtime
Workers work extra time beyond normal working hours is treated as a O.T.
Generally O.T. is paid at twice of normal rate
Overtime wages
Normal wages = O. T. hours * normal rate
- T. premium = O.T. hours *excess of
normal rate
accounting treatment of overtime premium
at the desire of customer- charged directly to job
due to abnormal reasons – charged to costing p & l.
due to seasonal demand or due to general production programme- charged to production overheads
if O.T. due to regular labour shortage higher wage rate will be considered.
Q.2 Calculation of normal rate and overtime wages
| Day | Hrs worked | Normal rate | Overtime rate |
| Monday | 8 | 8 | 0 |
| Tuesday | 9 | 9 | 0 |
| Wednesday | 10 | 9 | 1 |
| Thursday | 11 | 9 | 2 |
| Friday | 10 | 9 | 1 |
| Saturday | 8 | 8 | 0 |
| Total | 56 | 52 | 4 |
Option 1
Normal rate 52*.5 = 26
Double 4*1= 4
30
Option 2
48*.5 = 24
8*1 = 8
32
Option 2 is better for employee
Q.3
A due to regular labour shortage – at inflated rate
Total hours
Normal 1,00,000
Before and after working hours 20,000
Sunday 5,000
1,25,000
Total labour cost
Normal 1,00,000*10 = 10,00,000
Before and after (20,000*17.5)= 3,50,000
Sunday (5,000*22.5) = 1,12,500
14,62,500
Wage rate = 14,62,500/1,25,000
= 11.7
Cost of Z = 1125*11.7
= 13,162.5
Irregular requirement of production
Cost of job =
Labour cost
Normal wages 1125*10 11,250
Production overheads
100*(17.5-10) 750
25*(22.5-10) 312.5
12,312.5
C at the desire of customer
Labour cost
Normal 1125*10 11,250
Overtime premium
100*(17.5-10) 750
(25*(22.5-10) 312.5
Total cost 12,312.5
Labour turnover:
It is a change in composition of labour force of an organization for calculating such change following methods are used for labour turnover
1 seperation rate method –
Labour turnover = no of separation*100
Average no of workers
In the period
No of separation = no of workers left
Average no of workers = beginning + end
2
2 replacement rate method
Labour turnover = no of replacement*100
Average no of workers
In the period
No of replacement = no of workers recruited in the vacancy due to leaving not for expansion
3 Flux rate method
Labour turnover=separation+ replacement
Average no of workers
In the period
No of replacement = no of workers recruited in the vacancy due to leaving not for expansion
No of separation = no of workers left
OR
Labour turnover=separation+ Accession
Average no of workers
In the period
No of separation = no of workers left
No of accession =no of workers recruited either vacancy due to leaving or due to expansion
Equivalent annual labour turnover =
Turnover rate for the period * 365
No of days in a period
Methods of wage payment
1 Time rate wage system
2 Piece rate wage system
Difference :
| Time rate | Piece rate | |
| Base | Per hour, per day, per month | Per unit produced
Or job completed |
| Perfor
mance- reward |
No, efficient & ineffcicient same | Highperformance more units, motivation. |
| Quality | High | Law |
| Wastage | Less | More |
| Supervision | Required | Not required |
| Useful | Dissimilar & creative | Repetitive nature task |
| Assurance | Minimum pay | No |
| Trade union | preference | oppose |
Incentive system :
Due to increase in efficiency of every worker or group of workers, various methods of incentive will be used.
Types of incentive system
Halsey premium plan
It provides 50% of time saved as a bonus
Total earning = time rate wages + bonus
Time rate wages = actual time taken*time rate
Bonus = 50% (time saved*time rate)
This methods easy to understand and simple to operate.
Halsey weir system :
Under this system instead of 50%, 30% of time saved will be paid as a bonus other things as like halsey plan
Rowan plan
Total earning = time rate wages + bonus
Bonus =(time saved/Time allowed) * (actual time*time rate)
Example
Standard time 10, actual time 8,
rate per hour 5
Find halsey and rowan wages
Halsey
Wages = (8*5)+50% of (10-8)*5 = 45
Rowan :
(8*5)+(10-8)/10*(8*5) = 48
Example
Standard time 10, actual time 5,
rate per hour 5
Find halsey and rowan wages
Halsey
Wages = (5*5)+50% of (10-5)*5 = 37.5
Rowan :
(5*5)+(10-5)/10*(5*5) =37.5
Example:
Standard time 10, actual time 4,
rate per hour 5
Find halsey and rowan wages
Halsey
Wages = (4*5)+50% of (10-4)*5 = 35
Rowan :
(4*5)+(10-4)/10*(4*5) =32
Barth system :
Hourly rate*under root standard hours*actual hours
Taylor’s differential piece rate :
Less than standard output =
actual output * (normal rate * 80%)
standard or more than standard = actual output*(normal rate *120%)
merrick’s differential piece rate :
| Efficiency | Rate |
| Upto 83.33 % | 100% |
| Above 83.33% upto 100% | 110% of ordinary piece rate |
| Above 100% | 120% of ordinary piece rate |
Total wages = actual output*above rate
Emorson’s efficiency system
| Level of efficiency | Time rate |
| Upto 66.67% | Guaranteed time rate |
| Above 66.67% upto 100% | Wages= actual hours*time rate) + bonus
Bonus = % given in question Maximum 20% of basic |
| Above 100% | (actual hours*time rate) + bonus,
Bonus= 20% of basic + 1% additional wages for 1% increase in efficiency |
Gantt task
| Efficiency | Rate | |
| Less than standard | Guaranteed time rate | |
| At standard | 120% of time rate | |
| Above standard | 120% of piece rate | |
Bedaux system or point scheme :
Wages = time rate wages + bonus
Bonus = 75% of point saved (given in question)
Group bonus system :
When there is a group task bonus will be calculated on the basis of collective efforts & then it will be distributed to individual at agreed ratio.
q.11
group incentive = (11000-8000)*10
=30,000
Distribution of group incentives
| Particulars | Direct labour | Inspection | Maintenance | Super
vision |
total |
| 70:10:12:8 | 21000 | 3000 | 3600 | 2400 | 30000 |
| Less:penalty | |||||
| Inspection
(200-(11000*1%)*20 |
1800 | 1800 | |||
| Maintenance | 800
(40*20) |
800 | |||
| Net incentives | 21000 | 1200 | 2800 | 2400 | 27400 |
Accounting treatment of labour cost :
Statutory bonus to labour cost:
1 Statutory bonus to direct workers charged by inflating wage rate
2 statutory bonus to indirect workers charged as a overhead
3 extra bonus should be excluded from cost account
Format of statement for the calculation of gross wage & net wages:
Gross wages and net wages for employees point of view
| Particulars | RS. |
| Normal wages | |
| Overtime allowance | |
| Dearness allowance | |
| Bonus | |
| Any other allowances payable in cash | |
| Gross wages | |
| Less : contribution of employees to P.F. | |
| contribution of employees to ESI | |
| Net wages payable to a worker |
Format of calculation of labour cost per hour & per output.
Employer’s point of view
| particulars | Rs. |
| Normal wages | |
| Dearness Allowances | |
| Bonus | |
| Other allowances in cash | |
| Employer’s contribution to PF | |
| Employer’s contribution to ESI | |
| Leave salary | |
| Expenditure on amenities | |
| Total labour cost |
Labour cost per hour = labour cost
Working hours
Labour cost per units = Labour cost
Output
Q.12 Format of calculation of labour cost per man day of 8 hours
Employer’s point of view
| Particulars | Per month | Per day |
| Basic salary | 500(20*25) | 20 |
| DA 2.5*(700-100) | 1,500 | 60 |
| Leave salary(10% of 2000) | 200 | 8 |
| Employer’s 8% 2200 contribution in PF | 176 | 7.04 |
| Employer’s
contribution in ESI 2.5% of 2200 |
55 | 2.2 |
| Expenditure on amenities | 200 | 8 |
| LABOUR COST | 2631 | 105.2 |
Q.13 Calculation of normal rate and overtime wages
| Day | Hrs work | normal rate | Overtime double rate |
| Monday | 8 | 8 | 0 |
| Tuesday | 9 | 9 | 0 |
| Wednesday | 10 | 9 | 1 |
| Thursday | 11 | 9 | 2 |
| Friday | 10 | 9 | 1 |
| Saturday | 8 | 8 | 0 |
| Total | 56 | 52 | 4 |
Option 1
Normal rate 52*.5 = 26
Double 4*1= 4
30
Option 2
Normal 48*.5 = 24
Over time 8*1 = 8
32
Option 2 is better for employee
Format of statement for the calculation of gross wage & net wages:
Gross wages and net wages for employees point of view
| Particulars | RS. |
| Normal wages | 24 |
| Overtime allowance | 8 |
| Dearness allowance (150% of 24) | 36 |
| Bonus | 6 |
| Gross wages | 74 |
| Less : contribution of employees to P.F
(13% of 24+36) |
7.8 |
| contribution of employees to ESI
(3% of 24+36) |
1.8 |
| Net wages payable to a worker | 64.4 |
Format of calculation of labour cost per hour & per output.
Employer’s point of view
| particulars | Rs. |
| Normal wages | 24 |
| Dearness Allowances | 36 |
| Bonus | 6 |
| Employer’s contribution to PF | 7.8 |
| Employer’s contribution to ESI | 1.8 |
| Leave salary (24+36)*2/52 | 2.31 |
| Expenditure on amenities | 18.09 |
| Total labour cost | 96.00 |
Labour cost per hour = labour cost
Working hours
=96/48=2
Labour cost per units = Labour cost
Output
= 96/32 =3
From the above two statement we may conclude that overtime premium will income of employee but for employer it will be overheads.
For leave salary calculation, basic plus DA is considered.
Leave salary and expenditure of amenities will be recorded in employer’s cost only.
Employee records only cash salary
Contribution of PF and ESI :
Employer’s contribution is cost for employer hence add in labour cost
Employee’s contribution is paid out of his cash salary hence deduct for calculation of net wages