Power Point Slides to Chapter 09

8/8/2019 Power Point Slides to Chapter 09

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Tata McGraw Tata McGraw--Hill Publishing Company Limited, Management AccountingHill Publishing Company Limited, Management Accounting 99--11

Chapter 9Chapter 9Costing and Control ofCosting and Control of

LabourLabour


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COSTING AND CONTROL OFLABOUR

Accounting for Labour

Labour Turnover

Special Problems Relating to

Accounting for Labour

Efficiency Rating Procedures


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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.


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Accounting for LabourAccounting for Labour

(i) Time-keeping

(ii) Computation

of total Payroll

(iii) Allocation of

payroll costs


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Time-keeping

(ii) It determines how the labour - hours were spentso that proper distribution can be made inthe 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.


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The two source-documents commonly usedin time keeping are

(b) Labour Job Ticket

(b) Labour Job Ticket

(a) Time or Clock Card

(a) Time or Clock Card


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

Labour 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


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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.


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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 individualjobs/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 Payable Dr

To Employee Deductions Payable

To Cash (to employees)

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

Factory Overhead Control Dr

To Employee Benefits Payable


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SPECIAL PROBLEMS RELATING TOSPECIAL 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


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Workers Taxes

Employers are required to deduct income taxes as well as socialsecurity 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 workmans compensation and insurance to provide

funds to employees who are injured on the job.


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Example 1

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

Factory payroll:Direct labour-Job 10

Indirect labour

Other payroll:

Salesmens salaries

Administrative salariesGross payroll

Social security contribution payable

(employees contribution)

Social security contributions payable

(employers contribution)Income-tax deducted at source

Employees pension fund (paid by

employer)

Rs 1,80,000

1,44,000

1,45,800

70,200

Rs 3,24,000

________

2,16,0005,40,000

37,800

37,8001,35,000

39,960


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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 InventoryJob 10Dr

Factory Overhead Control (indirect labour) Dr

Selling Expenses Control Dr

Administrative Expenses Control Dr

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


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(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%


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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 factoryoverhead 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) Dr

Factory Overhead Control-Shift Premium

(50 hours Rs 5/hour) Dr

To Payroll Payable (50 hours Rs 70/hour)

Rs 3,250

250

Rs 3,500


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Overtime Premium

Regular 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 TreatmentRandom Scheduling of Jobs

Work-in-process InventoryJob 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-processJob No. Dr

To Payroll Payable

Negligence/Poor Workmanship

Work-in-process InventoryJob No. Dr

Loss from Overtime Premium Dr

To Payroll Payable


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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 InventoryJob 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 Inventory Dr

Loss from Idle Time Dr

To Payroll Payable


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Minimum Guaranteed Wage andMinimum 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


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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 toworkers 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.


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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


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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 83100 per cent; 120 per cent is

paid if the output exceeds 100 per cent.


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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 week

Output 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 320B = (37 Rs 10 110) 100 = Rs 407

C = (42 Rs 10 120) 100 = Rs 504


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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.


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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)


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Premium Bonus PlansPremium Bonus Plans

Under the time rate basis of wage payment, additional

production beyond normal level benefits theemployer(s); with piece rate system, the

benefit goes to the employee(s).

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

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


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Halsey Premium Plan

Under the Halsey Premium Plan the earnings andbonus 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.


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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

Earningsper hour

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


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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 Perhour.

Bonus = (Time taken Time allowed) Time saved Time

rate.


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Example 6

From the under mentioned facts, calculate bonus, total earnings, and rate of

earnings per hour under the Rowan plan:

Time allowed, 6 hours

Time taken, 4 hours

Hourly 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


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Solution

Standard pointsActual 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.


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Labour TurnoverLabour TurnoverLabour turnover is the rate at which employees leaveemployment. 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.


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According to the Separation Method

Labour turnover = [Employees leaving (number of

separations) in a period Average number of workersemployed] 100.

According to Flux/Separation-cum-Replacement Method

Labour turnover = [(Number of employees leaving) + Numberof 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.


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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.


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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


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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.


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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 andother 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.


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Example 9

From the information given below, calculate the cost of labour turnover, usingseparation and replacement method:

Income Statement for the Year Ended March 31, Current YearSales Rs 4,00,000

Variable costs:

Materials Rs 1,00,000

Direct labour 80,000

Variable overheads 80,000 2,60,000Contribution 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 traineestime was productive. As replacement of workers left was delayed for sometime, 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.


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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 turnoverequal profit foregone.


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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 costdue 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 profitforegone in the previous year on account of labour turnover.


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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) 15,000Actual 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


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Treatment of LabourTreatment of Labour

Turnover CostTurnover CostLabour turnover costs are usually treated as factory

overhead costs. While the preventive costs are

distributed among different departments, thereplacements 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.


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

Month Cumulative sincebeginning of year

Last year

Number of employees

Employees leavingLabour turnover (%)

Reasons for leaving:

Avoidable:

..................

..................

..................

Total

Percentage

Unavoidable:

..................

..................

..................

TotalPercentage

Number of replacements

Percentages

Figure 4: Labour Turnover Report


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Efficiency Rating ProceduresEfficiency Rating Procedures

Job Evaluation

Job 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.


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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/hypotheticalscale/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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