© costing and control of labour

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Costing and Control of Costing and Control of LabourLabour


LabourLabourLabour is the physical/mental effort expended in the production of a product.

Labour costs can be broken down into direct and indirect, based on the employees’ relationship with the finished product.

Total labour costs are based on elements other than just wages paid. The additional costs include bonus payments, vacation pay, pension costs and other fringe benefits including employees contribution to health, life and other insurance.


Accounting for LabourAccounting for Labour

(i) Time-keeping

(ii) Computation of total Payroll

(iii) Allocation of payroll costs


Time-keeping

(ii) It determines how the labour - hours were spent so that proper distribution can be made in the cost records.

The timekeeping function involves two major activities in labour costing and control.

(i) It accumulates the total number of hours worked by each worker so as to calculate his earnings.


The two source-documents commonly used in time keeping are

(b) Labour Job Ticket (b) Labour Job Ticket

(a) Time or Clock Card(a) Time or Clock Card


(a) Time or Clock Card(a) Time or Clock Card

Time Card

Employee name ……………….

Employee/clock number……............

Shift ……………………….

Department………………

Week……………………

Day Regular (time) Overtime Hours

In Out In Out In Out Regular Overtime

Total

Figure 1: Time/Clock Card


(b) Labour Job Ticket(b) Labour Job TicketLabour Job Ticket

Employee……………..

Shift…………………….

Job number………………………

Nature of work……………..

Units completed…………

Department ……………….

Date …………………………

Time started Time stopped Hours worked Rate Amount

Approved by

Figure 2: Labour Job Payroll


Computation of Total PayrollComputation of Total Payroll

The payroll department computes the total payroll including the gross amount earned and the net amount payable to employees

after deduction of taxes and so on.

Payroll Sheet

Week ……………..

Employee Hours worked Rate Gross pay Deduction Net pay

Figure 3: Payroll Summary

It distributes the payroll and maintains records of employees’ earnings, wage rate and job classification. The procedure is that the time

cards are entered on the payroll sheet/summary.


Allocation of Payroll CostsAllocation of Payroll CostsOn the basis of the time cards and job tickets, the cost accounting

departments allocate the total payroll costs to individual jobs/departments/products.

Journal Entries to Record Labour Costs

(A) To record the payroll:

Work-in-process Inventory (direct labour) Dr

Factory Overhead Control (indirect labour) Dr

To Payroll Payable

(B) To record deductions and payment of payroll (wages):

Payroll PayableDr

To Employee Deductions Payable

To Cash (to employees)

(C) To record fringe benefits costs (pension, insurance, and so on):

Factory Overhead ControlDr

To Employee Benefits Payable


SPECIAL PROBLEMS RELATING TO SPECIAL PROBLEMS RELATING TO ACCOUNTING FOR LABOURACCOUNTING FOR LABOUR

The accounting for labour involves special problems that are not encountered in the accounting for

materials. They are

Workers/employees taxes

Shift premiums

Overtime

Idle time

Minimum guaranteed wage and incentive plans.

Employer taxes and fringe benefits


Workers Taxes

Employers are required to deduct income taxes as well as social security payments, such as provident fund/pension

contributions, which are remitted to government/social security organisations on a

monthly/quarterly basis.

Fringe Benefit Costs

Employers are required to pay a matching contribution towards provident/pension funds of workers. They also bear the cost

of workman’s compensation and insurance to provide funds to employees who are injured on the job.


Example 1

Journalise the following payroll cost for the week ending April 15:

Factory payroll:Direct labour-Job 10Indirect labourOther payroll:Salesmen’s salariesAdministrative salariesGross payrollSocial security contribution payable (employees contribution)Social security contributions payable (employers contribution)Income-tax deducted at sourceEmployees pension fund (paid by employer)

Rs 1,80,0001,44,000

1,45,80070,200

Rs 3,24,000

________2,16,0005,40,000

37,800

37,8001,35,000

39,960


Solution

Assuming all employers contribution and fringe benefits are recorded on a weekly basis, the following journal entries would be made on April 15:

(a) To record the payroll:

Work-in-process Inventory—Job 10Dr

Factory Overhead Control (indirect labour) Dr

Selling Expenses ControlDr

Administrative Expenses ControlDr

To Payroll Payable

Rs 1,80,000

1,44,000

1,45,800

70,020

Rs 5,40,000

(b) To record employee taxes and pay the payroll:

Payroll Payable Dr

To Employee Income Taxes Payable

To Employee Social Security Contribution Payable

To Cash (to employees – residual balance)

5,40,000

1,35,000

37,800

3,67,200


(c) To record employer contribution and fringe benefit costs:

Factory Overhead Control (Rs 3,24,000 × 14.4 %*) Dr

Selling Expenses Control (Rs 1,45,800 × 14.4%) Dr

Administrative Expenses Control

(Rs 70,200 × 14.4%) Dr

To Employer Social Security Contribution payable

To Employers Pension Fund

Rs 46,656

20,995

10,109

Rs 37,800

39,960

(d) To pay on a periodic basis all taxes/contribution and fringe benefit liabilities:

Employee Income Taxes Payable Dr.

Employee Social Security Contribution Payable Dr.

Employer Social Security Contribution Payable Dr.

Employer Pension Fund Contribution Payable Dr.

To Cash

1,35,000

37,800

37,800

39,960

2,50,560

* (Rs 37,800 + Rs 39,960)/Rs 5,40,000 = 14.4%


Shift Premium

The shift premium/differential refers to the payment of higher hourly rates for working in less desirable evening/night shift(s). It is charged to factory overhead control rather than work-in-process, and spread over all units produced because they are not caused by specific units. If day shift rate is Rs 65 per hour and the night shift rate for the same job is Rs 70, for a worker working 50-hours week in the night shift, the entry would be:

Work-in-process Inventory (50 hours ×Rs 65) DrFactory Overhead Control-Shift Premium (50 hours ×Rs 5/hour) Dr

To Payroll Payable (50 hours ×Rs 70/hour)

Rs 3,250

250Rs 3,500


Overtime PremiumRegular earnings represent the total hours worked, including overtime

hours multiplied by the regular pay rate. But a higher rate may be paid for overtime work. This is called overtime premium.

Accounting Treatment Random Scheduling of Jobs

Work-in-process Inventory—Job No. (Total hours worked × Normal hourly rate)

Dr

Factory Overhead Control-Overtime Premium (Overtime hours × Overtime premium rate)

Dr

To Payroll Payable

Requirements of a Specific Job

Work-in-process—Job No.Dr

To Payroll Payable

Negligence/Poor Workmanship

Work-in-process Inventory—Job No.Dr

Loss from Overtime PremiumDr

To Payroll Payable


Idle Time

Idle time results from payment when workers have no work.

If idle time is normal for the production process and is unavoidable, the cost of idle time is charged to factory overhead control and the entry is:

Work-in-process Inventory—Job No.

(Hours worked × Rate per hour)Dr

Factory Overhead Control-Idle Time (Hours × Hourly rate)Dr

To Payroll Payable

If idle time is caused by negligence/inefficiency, it is charged to a loss account and the entry would be:

Work-in-process InventoryDr

Loss from Idle TimeDr

To Payroll Payable


Minimum Guaranteed Wage and Minimum Guaranteed Wage and Incentive PlansIncentive Plans

The incentive/bonus plans vary in format and applications. They fall into two categories.

(1) Differential price rate schemes

(i) Taylor Differential Piece Rate

(ii) Merrick Differential Piece Rate

(iii) Gantt Task and Bonus Plan

(2) Premium bonus plans


Taylor Differential Piece Rate System

Under the Taylor Differential Piece Rate System, there are two piece wage rates: a low rate for output below standard performance and a higher rate applicable to workers where production is above standard. The efficiency of a worker may be determined as a percentage of (i) time allowed for a job to the actual time taken or (ii) actual output to standard output within a specified time.


Example 2

Assuming the following facts, calculate the earnings of workers under Taylor Differential Piece Rate System:

Standard time per piece; 20 minutes Normal rate per hour, Rs 9 In a 9-hour day, A produces 25 units and B produces 30 units. Differential to be applied: 80 per cent of piece rate below standard and

120 per cent above standard.

Solution

Efficiency of A = 92.6 per cent = (25/27) × 100

B = 111 per cent = (30/27) × 100

Piece rate of A = 0.80 × Rs 3 = Rs 2.4

B = 1.2 × Rs 3 = Rs 3.6

Earnings of A = 25 × Rs 2.40 = Rs 60

B = 30 × Rs 3.60 = Rs 108


Merrick Differential Piece Rate System

Merrick Differential Piece Rate System is a modification of/improvement over the Taylor Differential Piece Rate System. It uses three piece rates. Normal piece rates are paid when output is upto 83 per cent of the standard output; 110 per cent of normal piece rates are paid for output between 83–100 per cent; 120 per cent is paid if the output exceeds 100 per cent.


Example 3

From the under-mentioned facts, calculate the earnings of A, B and C under the Merrick Differential Piece Rate System:

Normal piece rate (upto 83 per cent of high task output), Rs 10 per unit;High task, 40 units per weekOutput for the week: A, 32 units; B, 37 units; C, 42 units.

Solution

Efficiency of A = (32 × 100) ÷ 40 = 80 per cent

B = (37 × 100) ÷ 40 = 92.5 per cent

C = (42 × 100) ÷ 40 = 105 per cent

Wages of A = 32 × Rs 10 = Rs 320

B = (37 × Rs 10 × 110) ÷ 100 = Rs 407

C = (42 × Rs 10 × 120) ÷ 100 = Rs 504


Gantt Task and Bonus Plan

Gantt Task and Bonus Plan is a mixture of a guaranteed time rate with a bonus and piece rate plan using the differential plan when output is below standard (efficiency below 100 per cent), time rate is guaranteed. In case of output at standard level (100 per cent efficiency) bonus at the rate of 20 per cent on time rate is payable while a higher piece rate on the whole output is paid if output exceeds standard.


Example 4

Calculate the wages of A, B and C under the Gantt Task and Bonus Plan from the facts given below:

Time rate, Rs 10 per hour for 40-hours week Standard production, 40 units per week Piece rate above standard output, Rs 12 Weekly output: A, 32 units; B, 37 units; C, 42 units

Solution

Wages:

A = Rs 400 (40 × Rs 10): output below standard (32 units)

B = Rs 400 (40 × Rs 10): output below standard (37 units)

C = Rs 504 (42 × Rs 12): output above standard (42 units)


Premium Bonus PlansPremium Bonus Plans

Under the time rate basis of wage payment, additional production beyond normal level benefits the

employer(s); with piece rate system, the benefit goes to the employee(s).

Bonus plans are a mid-way in the sense that the savings are shared between them. These plans include (i)

Halsey/Halsey-Weir Plan and (ii) Rowan Plan.


Halsey Premium Plan

Under the Halsey Premium Plan the earnings and

bonus of a worker is computed as below.

Earnings = (Time taken × rate) + [0.50 × (Standard time

– Time taken) × Rate]

Bonus = [0.50 × (Standard time – Time taken) × Rate].

Halsey-Weir Premium Plan

Halsey-Weir Premium Plan is similar to Halsey Plan

with the difference that the bonus/premium is usually

applied on 33.33 : 66.67 basis.


Example 5

The standard time for Job Exe is 6 hours while the time given to complete the work is 10 hours. The wage rate is Rs 4 per hour. If the job is completed in 8 hours, compute the earnings per hour using Halsey Premium and Halsey-Weir Premium plans.

Solution

Computation of Wages and Earnings per Hour

Halsey premium Halsey-Weir plan

Total wages(8 × Rs 2) + 0.50 ×

(2 × Rs 2) =Rs 18

(8 × Rs 2) + 0.333 × (2 × Rs 2) =

Rs 17.33

Earnings per hour

(Rs 18 ÷ 8) = 2.25 (Rs 17.33 ÷ 8) = 2.17


Rowan Plan

According to the Rowan Plan earnings and bonus are

computed as below:

Workers earnings = (Time taken × Rate per hour) + [(Standard

time – Time taken) ÷ Standard time] × Time taken × Rate Per

hour.

Bonus = (Time taken ÷ Time allowed) × Time saved × Time

rate.


Example 6

From the under mentioned facts, calculate bonus, total earnings, and rate of earnings per hour under the Rowan plan:

Time allowed, 6 hoursTime taken, 4 hoursHourly rate, Rs 3

Solution

Bonus = [(4/6) × 2 × Rs 3 = Rs 4*

Earnings = (4 × Rs 3) + Rs 4* or 4* [(6 – 4) ÷ 6] × 4 × Rs 3

Earnings per hour = Rs 16 ÷ 4 = Rs 4


Solution

Standard points

Actual points

Points saved

Bonus earned

Total earnings

= 8 × 60 = 480 (B)

= (120 × 480) ÷ 100 = 576 (B)

= 576 – 480 = 96 × 0.75 = 72

= (72 × Rs 3) ÷ 60 = Rs 3.60

= (8 × Rs 3) + Rs 3.60 (bonus) = Rs 27.60

Example 7

From the information given below, compute bonus and total earnings according to Bedaux Point Plan:

Standard production for 8 hours daily = 100 (number)

Actual production for hours daily = 120 (number)

Hourly wage rate = Rs 3

Bedaux Point Plan

Under this plan, a guaranteed hourly rate is paid until standard production is achieved, and a premium or additional wage is paid for units in excess of standard.


Labour TurnoverLabour TurnoverLabour turnover is the rate at which employees leave employment. It has implications for labour cost.

SEPARATION METHOD

FLUX METHOD

REPLACEMENT METHOD

The objective should be to keep the labour turnover at minimal.

Labour turnover can be measured in three ways.


According to the Separation Method

Labour turnover = [Employees leaving (number of separations) in a period ÷ Average number of workers employed] × 100.

According to Flux/Separation-cum-Replacement Method

Labour turnover = [(Number of employees leaving) + Number of employees joining/replacements against vacancies of those leaving (new employees) ÷ Average number employed)] × 100.

According to Replacement/Net labour Turnover Method

Labour turnover = (Number of workers replaced in a period ÷ Average number employed) × 100.


Example 8: The information relating to the workforce of Premier Industries Ltd during the latest month is listed below:

Number of workers in the beginning and end of the month 19,000 and 21,000 respectively;

During the month workers discharged, 600 and left on their own, 200;

During the month workers engaged, 2,000 out of which workers appointed against vacancies caused by separation, 400 and on account of expansion, the remaining 1,600.

Compute the monthly labour turnover rate and the equivalent annual rates under the three methods of labour turnover measurement.


1.Separation Method:

Labour turnover rate = (800 ×100) ÷ 20,000* = 4 per cent *(19,000 + 21,000) ÷ 2

Equivalent annual turnover = (4 ×365 days) ÷ 30 days = 48.67 per cent

2. Flux Method:

Labour turnover rate = (800 + 400) ÷ 20,000* = 6 per cent

Equivalent annual rate = (6 ×365) ÷ 30 = 73 per cent

3. Replacement Method:

Labour turnover rate = (400 ×100) ÷ 20,000* = 2 per cent

Equivalent annual rate = (2 ×365) ÷ 30 = 24.33 per cent


Causes of Labour TurnoverCauses of Labour Turnover

The causes of labour turnover may be avoidable in the sense that

with suitable measures they can be eliminated or avoided.

Labour turnover = [Employees leaving (number of separations) in a

period ÷ Average number of workers employed] ×

100.

The labour turnover cost consists of two elements, that is, preventive cost and replacement.

The replacement can be computed in either of two ways: (i) Separation and replacement method and (ii) Profit forgone method.


Separation and Replacement Method

Under separation and replacement method, the specific costs associated with separation (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 costs due to increase in potential sale.


Example 9

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 Rs 4,00,000

Variable costs:

Materials Rs 1,00,000

Direct labour 80,000

Variable overheads 80,000 2,60,000

Contribution 1,40,000

Less fixed overheads 90,000

Profit before tax 50,000

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, Rs 4,000; Selection, Rs 6,000, and Training, Rs 10,000.


Solution

Cost of Labour Turnover

Direct labour-hours workedLess unproductive time of new workers (0.60 ×500)Productive hoursLoss labour hours: Replacement 600 Training 300Unit sales per productive labour hour (Rs 4,00,000 ÷ 20,000) (i) Loss of potential sales (900 hours ×Rs 20) Direct labour cost per hour worked (Rs 80,000 ÷ 20,300) (ii) Increase in direct labour cost of lost hours due to replacement (600* hours ×Rs 3.94)* (300 hours already included while calculating hourly rate) (iii) Increase in material and variable overheads due to increase in potential sales (Rs 1,80,000 ÷ Rs 4,00,000) ×Rs 18,000 (iv) Total increase in cost [(ii) + (iii)]Contribution foregone [(i) – (iv)]Add separation, selection and training costs (Rs 4,000 + Rs 6,000 + Rs 10,000)Cost of labour turnover

20,300 30020,000

900Rs 20

18,0003.94____

2,364

8,10010,464

7,536

20,00027,536


Profit Foregone Method

According to profit foregone method, the cost of labour turnover

equals the profit foregone in terms of the difference between

the actual profit for the period and the estimated profit

that would have been earned had no labour

turnover occurred.

Alternatively, contribution lost due to labour turnover and costs

incurred consequent on labour turnover

equal profit foregone.


Example 10

The sales of Premier Industries Ltd in the previous year aggregated Rs 1,66,06,600 and the P/V (profit - volume) ratio was 20 per cent. The actual hours worked was 4.45 lakh. The actual direct hours included 30,000 hours attributable to training of new recruits of which 50 per cent represented unproductive hours. As a result of delays in filling vacancies caused by labour turnover, 1,00,000 potentially productive hours were lost.

The cost associated with labour turnover were: (i) Settlement cost due to leaving, Rs 87,640; (ii) Recruitments cost, Rs 53,480; (iii) Selection costs, Rs 25,500, and (iv) Training costs, Rs 60,980.

Assuming the potential production loss consequent upon labour turnover could have been sold at the prevailing price, find the profit foregone in the previous year on account of labour turnover.


Solution

Determination of Profit Foregone

Contribution foregone (working note) Rs 7,72,400

Settlement cost 87,640

Recruitment cost 53,480

Selection cost 25,500

Training cost 60,980

Total 10,00,000

Working Note

Determination of contribution foregone:

Actual hours worked 4,45,000

Less unproductive hours (0.50 × 30,000) 15,000

Actual productive hours 4,30,000

Sales lost (Rs 1,66,06,600 ÷ 4,30,000 hours) × 1,00,000 hours Rs 38,62,000

Contribution lost (Rs 38,62,000 × 0.20, P/V ratio) 7,72,400


Treatment of Labour Treatment of Labour Turnover CostTurnover Cost

Labour turnover costs are usually treated as factory overhead costs. While the preventive costs are distributed among different departments, the replacements costs are shared by the department(s) affected by the labour turnover.

The personnel department prepares a labour turnover report periodically to minimise turnover by taking appropriate measures.


Labour Turnover Report Date..............

Month Cumulative since beginning of year

Last year

Number of employeesEmployees leavingLabour turnover (%)

Reasons for leaving:Avoidable:......................................................

Total Percentage

Unavoidable:......................................................

TotalPercentage

Number of replacementsPercentages

Figure 4: Labour Turnover Report


Efficiency Rating ProceduresEfficiency Rating Procedures

Job EvaluationJob evaluation is the systematic technique of analysis and assessment of jobs to ascertain their comparative labour/job worth. It grades all jobs with reference to their main characteristics so that the relative meritof each job in terms of work value may be ascertained. Its focus is on jobs and it has nothing to do with the rating of the employees.

Merit RatingAs a systematic method of determining the relative worth of employees, merit rating is the comparative appraisal of the individual merits of an employee. It rates an employees’ performance through some norms/standards.


Job Evaluation MethodsJob Evaluation MethodsJOB RANKING METHOD

According to the job ranking method, different jobs are evaluated and ranked on the basis of relative difficulty in performance and responsibilities.

JOB GRADING METHOD

Under the job grading method, a predetermined/hypothetical scale/standard of job value is determined on the basis of education, experience, skill, responsibilities and so on and each job is placed in suitable grade(s)/class(es).

POINT/FACTOR RANKING METHOD

According to the point/factor ranking method, each job is analysed in terms of job factors consisting of elements like basic skills and knowledge, mental and physical efforts, responsibilities, working conditions and so on. Each job is assigned points/weightage.

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