Chapter 9

Costing and Control of

Labour

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 COSTING AND CONTROL OF
LABOUR

Accounting for Labour

Special Problems Relating to

Accounting for Labour

Labour Turnover

Efficiency Rating Procedures

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 Labour
Labour 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 Labour

(i) Time-keeping

(ii) Computation
of total Payroll

(iii) Allocation of
payroll costs

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 Time-keeping
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.

(ii) It determines how the labour - hours were spent

so that proper distribution can be made in
the cost records.

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 9-5
The two source-documents commonly used
in time keeping are

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

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

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 9-6
 (a) Time or Clock Card
Time Card
Employee name ………………. Department………………
Employee/clock number……............ Week……………………
Shift ……………………….

Day Regular (time) Overtime Hours

In Out In Out In Out Regular Overtime

Total

Figure 1: Time/Clock Card

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 9-7
 (b) Labour Job Ticket
Labour Job Ticket
Employee…………….. Nature of work……………..
Shift……………………. Units completed…………
Job number……………………… Department ……………….
Date …………………………
Time started Time stopped Hours worked Rate Amount

Approved by

Figure 2: Labour Job Payroll

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 Computation 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.
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.
Payroll Sheet
Week ……………..
Employee Hours worked Rate Gross pay Deduction Net pay

Figure 3: Payroll Summary

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 9-9
 Allocation of Payroll Costs
On 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 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
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To Employee Benefits
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 SPECIAL PROBLEMS RELATING TO
ACCOUNTING FOR LABOUR

The accounting for labour involves special problems

that are not encountered in the accounting for
materials. They are
Workers/employees taxes
Employer taxes and fringe benefits
Shift premiums
Overtime
Idle time
Minimum guaranteed wage and incentive plans.
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 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.

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Example 1
Journalise the following payroll cost for the week ending April 15:
Factory payroll:
Direct labour-Job 10 Rs 1,80,000
Indirect labour 1,44,000 Rs 3,24,000
Other payroll:
Salesmen’s salaries 1,45,800 ________
Administrative salaries 70,200 2,16,000
Gross payroll 5,40,000
Social security contribution payable
(employees contribution) 37,800
Social security contributions payable
(employers contribution) 37,800
Income-tax deducted at source 1,35,000
Employees pension fund (paid by
employer) 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 Inventory—Job 10Dr Rs 1,80,000
Factory Overhead Control (indirect labour) Dr 1,44,000
Selling Expenses Control 1,45,800
Dr 70,020
Administrative Expenses Control Rs 5,40,000
Dr
To Payroll Payable
(b) To record employee taxes and pay the payroll:
Payroll Payable Dr 5,40,000
To Employee Income Taxes Payable 1,35,000
To Employee Social Security Contribution
Payable 37,800
To Cash (to employees – residual balance) 3,67,200

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 14
(c) To record employer contribution and fringe benefit costs:
Factory Overhead Control (Rs 3,24,000 × 14.4 %*) Dr Rs 46,656
Selling Expenses Control (Rs 1,45,800 × 14.4%) Dr 20,995
Administrative Expenses Control
(Rs 70,200 × 14.4%) Dr 10,109
To Employer Social Security Contribution payable Rs 37,800
To Employers Pension Fund 39,960
(d) To pay on a periodic basis all taxes/contribution and fringe
benefit liabilities:
Employee Income Taxes Payable Dr. 1,35,000
Employee Social Security Contribution Payable Dr. 37,800
Employer Social Security Contribution Payable Dr. 37,800
Employer Pension Fund Contribution Payable Dr. 39,960
To Cash 2,50,560
* (Rs 37,800 + Rs 39,960)/Rs 5,40,000 = 14.4%

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 15
 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) Dr Rs 3,250

Factory Overhead Control-Shift Premium
(50 hours ×Rs 5/hour) Dr 250
To Payroll Payable (50 hours ×Rs 70/hour) 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 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.
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Loss from Overtime PremiumPublishing Company Limited, Management Accounting
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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 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 Inventory
Dr
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 Minimum Guaranteed Wage and
Incentive 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

Gantt Task and Bonus Plan
(iii)

(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 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.

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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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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 21
 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.

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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 320
B = (37 × Rs 10 × 110) ÷ 100 = Rs 407
C = (42 × Rs 10 × 120) ÷ 100 = Rs 504

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 23
 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 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.

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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.
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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
(8 × Rs 2) + 0.50 × (8 × Rs 2) + 0.333 × (2
Total wages Rs 18 Rs 17.33
(2 × Rs 2) = × Rs 2) =
Earnings
(Rs 18 ÷ 8) = 2.25 (Rs 17.33 ÷ 8) = 2.17
per hour

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 28
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.

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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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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 30
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.
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
Solution
Standard points = 8 × 60 = 480 (B)
Actual points = (120 × 480) ÷ 100 = 576 (B)
Points saved = 576 – 480 = 96 × 0.75 = 72
Bonus earned = (72 × Rs 3) ÷ 60 = Rs 3.60
Total earnings = (8 × Rs 3) + Rs 3.60 (bonus) = Rs 27.60 9-
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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 31
Labour turnover is the rate at which employees leave
Labour Turnover
employment. It has implications for labour cost.

The objective should be to keep the labour

turnover at minimal.

Labour turnover can be measured in three ways.

SEPARATION METHOD
FLUX METHOD
REPLACEMENT METHOD

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 32
 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.
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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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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 34
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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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 35
 Causes of Labour Turnover
The causes of labour turnover may be avoidable in the sense that
with suitable measures they can be eliminated or avoided.

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.

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

period ÷ Average number of workers employed] × 100.

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 36
 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.

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 37
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.
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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 38
Solution
Cost of Labour Turnover
Direct labour-hours worked 20,300
Less unproductive time of new workers (0.60 ×500) 300
Productive hours 20,000
Loss labour hours:
Replacement 600
Training 300 900
Unit sales per productive labour hour (Rs 4,00,000 ÷ 20,000) Rs 20
(i) Loss of potential sales (900 hours ×Rs 20) 18,000
Direct labour cost per hour worked (Rs 80,000 ÷ 20,300) 3.94
(ii) Increase in direct labour cost of lost hours due to ____
replacement (600* hours ×Rs 3.94) 2,364
* (300 hours already included while calculating hourly rate)
(iii) Increase in material and variable overheads due to increase
8,100
in potential sales (Rs 1,80,000 ÷ Rs 4,00,000) ×Rs 18,000 10,464
(iv) Total increase in cost [(ii) + (iii)] 7,536
Contribution foregone [(i) – (iv)]
Add separation, selection and training costs (Rs 4,000 + Rs 6,000 20,000
+ Rs 10,000) 27,536
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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 39
 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.

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 40
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.

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 41
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
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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 42
 Treatment of Labour
Turnover 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.

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 43
 Labour Turnover Report Date..............

Month Cumulative since Last year

beginning of year
Number of employees
Employees leaving
Labour turnover (%)
Reasons for leaving:
Avoidable:
..................
..................
..................
Total
Percentage
Unavoidable:
..................
..................
..................
Total
Percentage
Number of replacements
Percentages

Figure 4:  Labour Turnover Report

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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 44
 Efficiency 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 merit
of 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 Rating
As 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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© Tata McGraw-Hill Publishing Company Limited, Management Accounting 45
 Job Evaluation Methods
JOB 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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