Chapter 4 Accounting For Labour

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.
• Advantages
• It is simple to calculate and easy to understand
• It guarantees the employee a consistently high

wage.
• 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).
• 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.
• 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.
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.
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
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Chapter 4

Accounting For Labour

• Production & Productivity

• Production is the quantity or volume of output

• Productivity is a measure of the efficiency with

• Standard hour of production is a concept used in

• There are three basic groups of remuneration

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

Wages = Hours of worked x Rate of pay per hour

• If an employee works for more hours than the

• If employee work unsocial hours, for instance

• In a piecework scheme, wages are calculated by

Wages = Unit produced x Rate of pay per unit

• Piecework offer guaranteed minimum wage,

• It also offer standard time allowance where the

• Differential piecework schemes offer an incentive

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

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

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

• Bonus schemes were introduced to compensate

• Various types of incentives and bonus schemes

• A high day rate system is a system where

• It is simple to calculate and easy to understand

• It guarantees the employee a consistently high

• Employees cannot earn more than the fixed hourly

• There is no guarantee that the scheme will work

• Employees may prefer to work at a normal rate of

• An individual bonus scheme is a remuneration

• To be successful following factors need to take into

• Work should be fairly routine, so that standard

• Each individual should be rewarded for the work

• A group bonus scheme is an incentive plan which

• They are easier to administer because they

• They increase cooperation between follow

• They have been found to reduce accidents,

• The employee groups demand low efficiency

• Individual employees are browbeaten by their

• A profit sharing scheme is a scheme in which

• This schemes is that they company will only pay

• Employees must wait until the year end for a

• Factors affecting profit may be outside the

• Value added is an alternative to profit as a

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

• Labour attendance time is recorded on, for

• Job time may be recorded on daily time sheets,

• The manual recording of times on time sheets or

• The labour cost of pieceworkers is recorded on a

• Idle time has a cost because employees will still be

• Idle time occur due to machine breakdown,

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

• The idle time ratio is useful because it shows the

• Idle time may arise for many reasons. Sometimes

• Labour turnover is the rate at which employees

• The cost of labour turnover can be divided into

• Labour turnover is a measure of the number of

• Labour turnover rate = (replacements / average

• Here are some of the examples of cost of labour

• The cost of recruiting new employees to replace

• The cost of increased wastage due to lack of