Chapter 4 Accounting For Labour Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

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1 Chapter 4 Accounting For Labour Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

2 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.

3 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.

4 Efficiency, Capacity & Production Volume Ratios

5 Remuneration Methods There are three basic groups of remuneration method: time work, piecework schemes and bonus / incentive scheme.

6 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

7 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.

8 Piecework Schemes In a piecework scheme, wages are calculated by the following formula. Wages = Unit produced x Rate of pay per unit

9 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.

10 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:

11 Differential Piecework Schemes Up to 80 units per week, rate of pay per unit = $ to 90 units per week, rate of pay per unit = $1.20 Above 91 units per week, rate of pay per unit = $1.30

12 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.

13 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.

14 High Day Rate System Advantages It is simple to calculate and easy to understand It guarantees the employee a consistently high wage.

15 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.

16 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.

17 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.

18 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.

19 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.

20 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.

21 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).

22 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.

23 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.

24 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.

25 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.

26 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.

27 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

28 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.

29 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.

30 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.

31 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.

32 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.

33 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.

34 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%

35 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.

36 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.

37 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.

38 Remember Production Overhead Example: Cost centre supervisors wages. Overtime cost of indirect operatives. Training of direct operatives. Normal idle time in the factory.

39 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.

40 Questions & Answers

41 Thank You Ibrahim Sameer Seek knowledge from cradle to grave

Classifying and accounting for Labour costs

Intro to Labour Costs Remuneration methods Incentive schemes and productivity Labour turnover Classifying and accounting for Labour costs 1 Critical cost in all organisations Need to make employee investments