ACOF 014

Introduction to Costing
Semester 2 2008/ 2009

TOPIC 2: Costing for Labour

Topic Outline:
1. Learning Objectives
2. Control procedures for labour
3. Elements of costs (wages, salaries, bonuses)
4. Calculation and accounting for the different payment schemes/remuneration methods
a. Basic pay (time-based pay)
b. Overtime premium
c. Incentive schemes
i) Piecework scheme
ii) Bonus scheme
5. Labour turnover

1. Learning Objectives
After studying this topic, students should be able to:
 identify the basic procedures to control labour cost
 differentiate between labour cost accounting and payroll accounting
 calculate and account for selected payment schemes - basic pay, overtime premium, piecework
pay and bonuses
 understand the issues concerning labour turnover

2. Control Procedures for Labour Cost

Labour cost is one major cost in an organisation, thus vital for it to be kept under control.

 How can we control labour cost? Various methods but the basic procedures include:
 ensure labour times are recorded accordingly and accurately
 determine the correct time spent by employees on production
 accurately calculate wages paid to employees in accordance to their payment
scheme

 How can we ensure labour times are recorded accordingly & accurately?
° with the help of various record-keeping documents:
 Attendance record
- a clock card given to each employee, a time recording clock will record time entering and
time leaving the premises

 Time sheet
- daily or weekly records filled in by the employee and countersigned
- shows how the employee spent his/her time during the day or week
- objective is to reconcile all the time in attendance (recorded on clock card) with time
bookings either to jobs or operations

 Job card
- relates to single jobs or batch and contain time spent on a particular job by several
employees.
- completed job cards will have a full record of times and quantities involved in the job or
batch
- difficult to reconcile work time and attendance time especially for jobs which stretched
over several weeks

 Operation card (piecework tickets)

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 - Provided to each operation or stage of manufacture. Hence, a job to manufacture one
item may have several operation cards
- Contains data such as Batch quantity, Quantity produced, Number of rejected units etc

 Idle time card

- simply record the amount of time a particular employee is left idle, or unoccupied
- also records the reason for idle time, for example machine breakdowns, material
shortages or bottlenecks

 Employee record card

- records the personal details of an employee, for example, address, employee number,
payment scheme, pay rate, contact numbers, skills etc.

 How do we determine the correct time spent by employees on production?

° carefully analyse all the relevant records (time sheets, attendance records, job cards,
piecework tickets etc)
° identify occurrence of idle time (idle time? ~ the amount of time an employee is unoccupied)

 How do we accurately calculate wages paid to employees in accordance to their payment

scheme?
° correctly identify their respective payment scheme (perhaps by way of coding)
° thoroughly understand the underlying concepts and applications of the various payment
schemes

2. Elements of costs
i. Wages - Payment for labour or services to a worker, especially remuneration on an hourly,
daily, or weekly basis or by the piece.
ii. Salaries - is a form of periodic payment from an employer to an employee, which is
specified in an employment contract. It is contrasted with piece wages, where each job, hour
or other unit is paid separately, rather than on a periodic basis.
iii. Bonus - Compensation paid to an employee or employees for achieving a particular target or
organisational objective. This is above and beyond a salary or wage.

3. Calculation and accounting for the different payment schemes

a. Basic pay (time-based pay)
- employee is paid for the number of hours worked at a basic rate per hour
- Basic pay = hours worked * hourly rate

- Advantages:
°Simple to understand and administer
°Simplifies wage negotiations – use only one rate

- Disadvantages:
°No incentive to increase output
°Employees in the same grade are paid the same rate regardless performance
°Constant supervision is necessary

b. Overtime premium
- A variation of the basic pay system, however the rate is higher because the time worked
is over and above the normal working hours
- Refer example from page 66
OT scheme: time & half for weekly hours > 40 hours
Employee A: works 50 hours; that extra 10 hours were spent on Job X
Hourly wage rate: RM6

∴ A’s weekly wage:

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→ → charge to job carried out during OT hours
… if OT due to RUSH ORDER (URGENT REQUEST)

→ → charge to manufacturing overheads (i.e. overall production) through general OH

account….
… if OT because of GENERAL FACTORY PRODUCTION PRESSURE

c. Incentive schemes
−Relate payment to output in some way or other, either in terms of quantity or time
taken to complete production
−Advantages:
° Increase production and reduces overheads per unit
° Provides competitive edge during inflation
° Improve employees’ morale
° Attract more efficient workers

−Disadvantages:
° Difficult to establish performance levels and rates
° Complex incentives are difficult to administer
° Unskilled group of workers may also earn higher wages – may affect morale of
skilled workers

− Piecework and Bonus Schemes are examples of an incentive scheme, whose main
objective is to reduce cost per unit (i.e. increase productivity)

i) Piecework scheme

Without piecework scheme – Worker B With piecework scheme – Worker B

 Hourly rate: RM6  Piecework rate: 50 sen per unit
 Produces 10 units in 1 hour  Produces 14 units in 1 hour
∴ Average labour cost per unit: 60sen ∴ Hourly rate increases to RM7 (i.e. 14 x 50sen)

∴ Overall effect of piecework scheme  increase in hourly rate;

 reduction in labour cost per unit

…Wage = Higher of
[piecework rate at RM _____ x _____< # of units completed>]
OR
[guaranteed min wage at RM_______ per hour.]

…When production is low, employee gets min wage.

 Difference between actual amount he should have earned (piecework) and min wage
→ → charged to factory OH account

ii) Bonus scheme

 refer Example 3.1, p.55

Time allowed: 20 hours

Actual time taken by Employee: 16 hours
Hourly wage rate: RM8
Bonus system in place: 50% of the time saved

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 ∴ Total wage received by Employee:
Normal time rate wage: 16hrs x RM8 = RM128
+ Bonus premium: 50% x 4hrs saved x RM8 = RM 16
Total wage: RM144

 Bonus scheme.. (e.g. if time achieved < standard set.) bonus based on time savings
 Total amount due = basic pay + bonus (based on time saved)

4. Labour turnover

Expressed as a ratio:
Number of employees replaced per period

Average total number of employees in the period

Reasons for turnover:

 Redundancy
 Dissatisfied employee
 Lack of career structure
 Lack of training or day release
 Personal advancement
 Retirement
 Marriage, pregnancy
 Discharge

Costs of turnover:

 Leaving costs e.g. disruption of production

 Replacement costs e.g. advertising, personnel selection, interviews
 Training costs e.g. costs of internal and external courses
 Learning costs e.g. slower initial production, increased scrap, accident rate

Lecture Illustration: Q3.29b (p. 83)

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EXTRA TUTORIALQUESTION
1. The following information is available:
Normal working day: 8 hours
Guaranteed rate of pay (on time basis) RM5.50 per hour
Standard time allowed to produce 1 unit: 3 minutes
Piecework price: RM0.10 per standard minute
Premium bonus: 75% of time saved, in addition to hourly pay

Required:
For the following levels of output produced in one day:
80 units
120 units
210 units

Calculate earnings based on:

i. piecework, where earnings are guaranteed at 80% of time-based pay;
ii. premium bonus system.

2. A firm’s basic rate is RM8 per hour and overtime rates are time and a half for evenings and
double time for weekends. The following details have been recorded on three jobs:

Job X321 Job X786 Job X114

Clock hours Clock hours Clock hours
Normal time 480 220 150
Evening time 102 60 80
Weekend 10 30 16

You are required to calculate the labour cost chargeable to each of the jobs in the following
circumstances:
i. Where overtime is worked occasionally to meet production requirements
ii. Where the overtime is worked at the customer’s request to bring forward the delivery time.

3. Manyou Sdn Bhd is considering implementing a new incentive scheme. The following are some
data that that have been collected for evaluation purposes. You are provided with the following
data for 2 employees of Manyou Sdn Bhd:
Rooney Giggs
Actual hours worked 30 33
Hourly rate of pay RM6.50 RM7.50
Total output (units):
Product SPF 140 130
Spoilt units SPF 16 10

Piecework scheme:
Under the proposed piecework scheme, wages are to be paid on the basis of good units only. There
are various rates that have been determined in accordance to the number of units produced as well
as the spoilage rate. The following rates will apply in the corresponding situations:

Spoilage <10% Spoilage >10%

0-100 good units RM2.00 per unit RM1.50 per unit
The next 80 good units RM2.50 per unit RM2.00 per unit

Bonus scheme:

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The standard time allowed per unit for Product SPF is 15 minutes. Under the bonus scheme, the
employees will receive a bonus on the time saved on the production of good units. The bonus will
be 50% of the time saved.

Required:
i. Show your full computation for calculating the total earnings of Rooney and Giggs under both
schemes:
a. piecework earnings, with guaranteed earnings at 75% of the basic pay
b. bonus scheme

ii. Identify which of the schemes will be preferred by each of the employee.