Cost Accounting - Labour Costing

 

Cost Accounting

LABOUR COSTING

 

Part A: Discussion of basic theories including various relevant formulas and tables.

Part B: Twelve Illustrations with solutions.

Part A

Introduction

Cost accounting for labour has two primary objectives:

1.         Determining labour cost component in product cost or service cost; and

2.         Reporting labour cost for management planning and control.

 

Labour cost proportion of product cost or service cost may be, sometimes, key consideration for pricing decisions and profitability analysis. Cost accounting for labour also provides management with information necessary for effective planning and control of human resources in producing goods and services.

 

Direct and indirect labour

Direct labour cost is that portion of wages or salaries which can be identified with and charged to a single cost unit. Labour cost will be classified as direct cost when:

(a)          There is a direct relationship between the labour cost and the product or process,

(b)          The labour cost may be measured in the light of this relationship, and

(c)          The labour cost is sufficiently material in amount.

 

Indirect labour costs are costs which are not identifiable with the production of specific goods or services. These labour costs are usually incurred in connection with production activities. Indirect labour costs consist of labour costs incurred in service departments such as purchasing, engineering and time-keeping. Labour costs of certain workers in the production departments will also come in the category of indirect labour costs like labour costs of foremen, material expediters and clerical assistants.

 

The auxiliary labour for store-room, factory office and maintenance department will also be categorised as indirect labour. While direct labour cost forms part of prime cost, indirect labour cost becomes part of overhead.

 

Methods of remuneration and incentives

Important methods of remuneration and incentives may be enumerated as follows:

1.               Time rate system,

2.               Straight piece rate system,

3.               Taylor’s differential piece rate system,

4.               Merrick’s differential piece rate system,

5.               Gantt task and bonus system,

6.               Emerson’s efficiency system,

7.               Halsey premium plan,

8.               Halsey-Weir premium plan,

9.               Rowan premium plan,

10.         Barth scheme,

11.         Group bonus system,

12.         Other incentive schemes.

 

    TIME RATE SYSTEM

E =	Rate per hour (day/week/month) x Hours (days/weeks/months) worked

   

Where, E =

Earnings

 

    STRAIGHT PIECE RATE SYSTEM

E =	Rate per unit x Number of units produced

 

    TAYLOR’S DIFFERENTIAL PIECE RATE SYSTEM

For below 100% efficiency level:
E =	80% of piece rate x Number of units produced
For at or above 100% efficiency level:
E =	120% of piece rate x Number of units produced

 

Important notes:

Percentage of efficiency can be calculated in following two ways:

1	Efficiency %-age =	(TA ÷ TT) x 100
2	Efficiency %-age =	(Actual output ÷ Standard output) x 100

   

Where, TA =	Time allowed
TT =	Time taken

 

MERRICK’S DIFFERENTIAL PIECE RATE SYSTEM

Efficiency	Rate of payment
Up to 83-1/3%	Normal piece rate
Above 83-1/3% but up to 100%	110% of normal piece rate
Above 100%	120% of normal piece rate

 

GANTT (HENRY LAURENCE GANTT) TASK AND BONUS SYSTEM

Output	Rate of payment
Below standard	Normal time rate (guaranteed)
At standard	120% of normal time rate
Above standard	120% of normal piece rate

 

EMERSON’S EFFICIENCY SYSTEM

Efficiency	Rate of payment
Below 662/3%	Normal time rate (guaranteed)
662/3% to 100%	Normal time rate + Increasing bonus rate in percentage as the efficiency percentage increases beyond 662/3% (Bonus rate can be increased up to 20%)
Above 100%	120% of normal time rate + 1% of Normal time rate for every 1% increase in efficiency above 100%

 

    HALSEY PREMIUM PLAN

E =	Basic wage + Bonus
E =	TT x TR + 50% (TA – TT) x TR

 

Where, TA =	Time allowed
TT =	Time taken
TR =	Time rate (normal)

 

    Important notes:

If in case of a worker TT ≥ TA, the worker will not get any bonus, he will get only the basic wage.

 

    HALSEY-WEIR PREMIUM PLAN

E =	Basic wage + Bonus
E =	TT x TR + 33-1/3% (TA – TT) x TR

 

Where, TA =	Time allowed
TT =	Time taken
TR =	Time rate (normal)

 

    Important notes:

If in case of a worker TT ≥ TA, the worker will not get any bonus, he will get only the basic wage.

 

    ROWAN PREMIUM PLAN

E =	Basic wage + Bonus
E =	TT x TR + (TT ÷ TA) x (TA – TT) x TR

 

Where, TA =	Time allowed
TT =	Time taken
TR =	Time rate (normal)

 

    Important notes:

If in case of a worker TT ≥ TA, the worker will not get any bonus, he will get only the basic wage.

    BARTH SCHEME

E =	TR × [(TA × TT)^ ½ ]

 

Where, TA =	Time allowed
TT =	Time taken
TR =	Time rate (normal)

 

Methods of measuring labour turnover

Labour turnover in an organisation is the rate of change in the composition of the labour force during a specified period measured against a suitable index. It is the rate at which employees leave employment at a factory. Labour turnover has important implications for labour cost, efficiency and productivity. The objective should be to keep labour turnover at minimal.

 

The standard or usual labour turnover in the industry or the labour turnover rate of a past period may be taken as the index or norm against which actual labour turnover rate is compared.

 

There are four methods of calculating labour turnover rate (LTR) as given below:

1.         Separation method

2.         Replacement method

3.         Flux method (when there are no new appointments on account of expansion)

4.         Flux method (when there are new appointments on account of expansion)

 

Labour Turnover Formulas:

1	LTR (Separation method)      =	(S ÷ A) × 100
2	LTR (Replacement method) =	(R ÷ A) × 100
3	LTR (Flux method – when new appointments on account of expansion are not included) =	[(S + R) ÷ A] × 100
4	LTR (Flux method – when new appointments on account of expansion are included) =	[(S + R + N) ÷ A] × 100

 

    Where,

S =	Number of workers separated (i.e. left and discharged) during the period
R =	Number of workers replaced (i.e. recruited in the vacancies) during the period
A =	Average number of workers during the period
A =	½ (Number of workers at the beginning of the period + Number of workers at the end of the period)
N =	Number of new workers appointed on account of expansion during the period

 

    Important notes:

New workers appointed on account of expansion are not to be included in the number of replacements.

 

Treatment of idle time cost in cost accounts

	Causes of idle time	Treatment
1	(a) Time lost between the factory gate and the department	Not recorded separately
	(b) Personal needs, tea breaks
	(c) Machine set-up time, time break between two jobs
2	(a) Waiting for job, materials, tools, power, instruction, etc.	Debited to factory overhead control account
	(b) Short machine breakdown, short load shedding
3	(a) Prolonged machine breakdown, prolonged load shedding	Charged to costing profit and loss account
	(b) Strike, lock-out, natural calamity, etc.

 

Treatment of overtime wages in cost accounts

	Causes of overtime	Overtime Normal Wages Debited to	Overtime Premium Debited to
1	General pressure of work	Wages control a/c	Factory OH control a/c
2	Customers’ specific request to expedite delivery	Wages control a/c	Wages control a/c
3	Seasonal work pressure in a seasonal industry	Wages control a/c	Factory OH control a/c
4	To avail of a special opportunity of the market	Wages control a/c	Wages control a/c
5	Abnormal conditions like major breakdown, prolonged power-cut, natural calamity, etc.	Costing P/L a/c	Costing P/L a/c
6	To utilise the surplus perishable materials from one job in another job	Wages control a/c	Factory OH control a/c

 

Part B

Illustration: 1

Calculate the total earnings and effective rate of earnings per hour of three operators under Rowan System and Halsey System from the following particulars.

The standard time fixed for producing 1 dozen articles is 50 hours. The rate of wages is Rs 1/- per hour. The actual times taken by the three operators are as follows:-

        A – 45 hours

        B – 40 hours

        C – 30 hours.

Solution: 1

Illustration: 2

In a factory guaranteed wages at the rate of Rs 1.80 per hour are paid in a 48 hour week. By time and motion study it is estimated that to manufacture one unit of a particular product standard time is 20 minutes. The time allowed (i.e. standard time per unit) is increased by 25% for the purpose of computing wages cost under different methods of remuneration and incentives. During the week A produced 180 units of the product. Calculate his wages cost under the following methods:

(a)          Time Rate

(b)          Piece Rate with a guaranteed weekly wage

(c)          Halsey premium Bonus

(d)          Rowan Premium Bonus

 

Solution: 2

Illustration: 3

Calculate the earnings of workers A and B in a day of 8 hours under Straight Piece Rate system and Taylor’s Differential Piece Rate system from the following particulars:-

(a)          Normal rate per hour – Rs 1.80

(b)          Standard time per unit – 20 seconds

(c)          Differentials to be applied are:

1.   80% of the piece rate below the standard;

2.   120% of the piece rate at or above standard.

A produced 1,300 units and B produced 1,500 units in the day of 8 hours.

Solution: 3

Illustration: 4

The following particulars apply to a particular job:

1.         Standard production per hour – 6 units

2.         Normal rate per hour – Rs 1.20

3.         In a day of 8 working hours -

(a)                Mohan produced 32 units,

(b)                Ram produces 42 units, and

(c)                Prasad produces 50 units.

Calculate the wages of these workers for the day under Merrick Differential Piece Rate System.

 

Solution: 4

Illustration: 5

The following particulars for the first week of September, 2015 relate to two workers X and Y employed in a factory:

	Particulars	Worker: X	Worker: Y
(a)	Units completed	3,600	4,200
(b)	Out of above units rejected and unsalable	540	420
(c)	Time allowed	12 Mts./dozen	3 Hrs./200 units
(d)	Basic wage rate per hour	Rs 5	Rs 6
(e)	Hours worked	45	50

 

The normal working hours per week are fixed at 42 hours. Bonus is paid @ 2/3 of the basic wage rate for gross time saved in producing gross output without deduction for rejected output. The overtime for the first 4 hours is paid at the rate of time plus 1/3 and for the next 4 hours at the rate of time plus 1/2.

 

From the above data calculate for each employee –

a)       Number of bonus hours and amount of bonus earned;

b)       Total wages earned including basic wages, overtime premium and bonus;

c)       Direct wages cost per 100 saleable units.

 

Solution: 5

Illustration: 6

From the following particulars work out the earnings for the week of a worker under

(a)          Straight Piece Rate

(b)          Differential Piece Rate

(c)          Halsey Premium System

(d)          Rowan System

1	Number of working hours per week	48
2	Wages per hour	Rs 3.75
3	Normal time per piece	24 minutes
4	Normal output per week	120 pieces
5	Actual output for the week	150 pieces
6	Differential piece rate (% of piece rate):
	When output is below standard	80%
	When output is above standard	120%

 

Solution: 6

Illustration: 7

Ten men work as a group. When the weekly production of the group exceeds standard (200 pieces per hour) each man in the group is paid a bonus for the excess production in addition to his wages at hourly rates. The bonus is computed thus:

The percentage of production in excess of the standard amount is found and one-half of this percentage is considered as the men’s share. Each man in the group is paid as bonus this percentage of a wage rate of Rs 3.20 per hour. There is no relationship between the individual workman’s hourly rate and the bonus rate. The following is the week’s records.

	Hours Worked	Production (units)
Monday	90	22,100
Tuesday	88	22,600
Wednesday	90	24,200
Thursday	84	20,100
Friday	88	20,400
Saturday	40	10,200
	480	1,19,600

 

(a) Compute the rate and amount of bonus for the week;

(b) Compute the total pay of Jones who worked 41 ½ hours and was paid Rs 2 per hour basic and of Smith who worked 44 ½ hours and was paid Rs 2.50 per hour basic.

Solution: 7

Illustration: 8

A manufacturer introduces new machinery into his factory with the result that production per worker is increased. The workers are paid by results and it is agreed that for every 2% increase in average individual output, an increase of 1% on the rate of wages will be paid as bonus.

 

At the time the machinery is installed the selling price of the products falls by 8-1/3%. Show the net saving in production costs which would be required to offset the losses expected from the turnover and bonus paid to workers taking into consideration the following further information provided by the manufacturer:

	1st Period	2nd Period
Number of workers	175	125
Number of articles produced	16,800	14,000
Wages paid	33,600
Total sales	75,600

 

Solution: 8

Illustration: 9

The extracts from the payroll of M/s. Maheswari Bros. is as follows:-

Number of employees at the beginning of 2015	150
Number of employees at the end of 2015	200
Number of employees resigned in 2015	20
Number of employees discharged in 2015	5
Number of employees replaced due to resignations and discharges	20

 

Calculate the Labour Turnover Rate for the factory by different methods.

 

Solution: 9

Illustration: 10

The management of XYZ Ltd. is worried about the increasing Labour Turnover in the factory and before analyzing the causes and taking remedial steps they want to have an idea of the profit foregone as a result of Labour Turnover during the last year. Last year’s sales amounted to Rs 83, 03,300 and the profit / volume ratio was 20%. The total number of actual hours worked by the direct Labour force was 4.45 lakhs. As a result of the delays by the Personnel department in filling vacancies due to Labour Turnover, 1, 00,000 potentially productive hours were lost. The Actual Direct Labour hours included 30, 000 hours attributable to training new recruits, out of which, half of the hours were unproductive. The cost incurred consequent on Labour turnover revealed on analysis the following:

Settlement cost due to leaving	Rs 43, 820
Recruitment costs	Rs 26,740
Selection costs	Rs 12,750
Training costs	Rs 30,490

 

Assuming that the potential production lost as a consequence of Labour Turnover could have been sold at prevailing prices, find the profit foregone last year on account of Labour Turnover.

 

Solution: 10

Illustration: 11

In a factory bonus to workman is paid according to Rowan Plan. Time allotted for a job is 40 hours and the normal rate of wages is Rs 1.25 per hour. The factory overhead charges are 50 paise per hour for the hours taken.

 

The factory cost of a work order executed by a worker is Rs 161.875. The cost of material in each case is Rs 100.

 

Calculate the hours of time taken by the worker to complete the work order.

 

Solution: 11

Illustration: 12

Two workmen, Vishnu and Shiva, produce the same product using the same material. Their normal wage rate is also the same. Vishnu is paid bonus according to the Rowan System, while Shiva is paid bonus according to Halsey System. The time allowed to make the product is 100 hours. Vishnu takes 60 hours while Shiva takes 80 hours to complete the product. The factory overhead rate is Rs 10 per man-hour actually worked. The factory cost for the product for Vishnu is Rs 7,280 and for Shiva it is Rs 7,600.

 

You are required:-

(a)          To find the normal rate of wages;

(b)          To find the cost of materials;

(c)          To prepare a statement comparing the factory cost of the products as made by the two workmen.

Solution: 12