Paper F2 Management Accounting 2018/11/16

Chapter 7 Accounting for labour 2018/11/16

Labour costs Chapter Preview Measuring labour activity Recording labour costs Methods of remuneration Accounting for labour costs Labour turnover 2018/11/16 Ji Weili, JXUFE

1 Measuring labour activity Production is the quantity or volume of output produced. Productivity is a measure of the efficiency with which output has been produced. Standard hours of production Improved productivity is an important means of reducing total unit costs. 2018/11/16 Ji Weili, JXUFE

Example: Productivity and its effect on cost Clooney Co has a production department in its factory consisting of a work team of just two men, Doug and George. Doug and George each work a 40 hour week and refuse to do any overtime. They are each paid $100 per week and production overheads of $400 per week are charged to their work. (a) In week one, they produce 160 units of output between them. Productivity is measured in units of output per man hour. (b) In week two, management pressure is exerted on Doug and George to increase output and they produce 200 units in normal time. (c) In week three, Doug and George agree to work a total of 20 hours of overtime for an additional $50 wages. Output is again 200 units and overhead charges are increased by $100. 2018/11/16 Ji Weili, JXUFE

1 Measuring labour activity Automation Labour cost control is largely concerned with productivity. Rising wage rates have increased automation, which in turn has improved productivity and reduced costs. Where automation is introduced, productivity is often, but misleadingly, measured in terms of output per man-hour. 2018/11/16 Ji Weili, JXUFE

1 Measuring labour activity Other measures of labour activity include the following. • Production volume ratio, or activity ratio • Efficiency ratio (or productivity ratio) • Capacity ratio 2018/11/16 Ji Weili, JXUFE

Example Barnes Ltd budgeted to make 13,000 standard units of output during a budgeted period of 26,000 hours. During the period, the company actually made 14,000 units which took 35,000 hours. Required: what is the efficiency ratio, capacity ratio and production volume ratio? 2018/11/16 Ji Weili, JXUFE

2 Methods of remuneration Time-based systems Piecework systems Bonus/incentive schemes 2018/11/16 Ji Weili, JXUFE

Remuneration methods 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 worked × rate of pay per hour 2018/11/16 Ji Weili, JXUFE

Remuneration methods 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. 2018/11/16 Ji Weili, JXUFE

Remuneration methods Summary of day-rate systems (a) They are easy to understand. (b) They do not lead to very complex negotiations when they are being revised. (c) They are most appropriate when the quality of output is more important than the quantity,or where there is no basis for payment by performance. (d) There is no incentive for employees who are paid on a day-rate basis to improve their performance. 2018/11/16 Ji Weili, JXUFE

Remuneration methods Piecework schemes In a piecework scheme, wages are calculated by the following formula. Wages = Units produced × Rate of pay per unit 2018/11/16 Ji Weili, JXUFE

Remuneration methods It is normal for pieceworkers to be offered a guaranteed minimum wage, so that they do not suffer loss of earnings when production is low through no fault of their own. If an employee makes several different types of product, it may not be possible to add up the units for payment purposes. Instead, a standard time allowance is given for each unit to arrive at a total of piecework hours for payment. 2018/11/16 Ji Weili, JXUFE

Remuneration methods Question Penny Pincher is paid 50c for each towel she weaves, but she is guaranteed a minimum wage of $60 for a 40 hour week. In a series of four weeks, she makes 100, 120, 140 and 160 towels. Required Calculate her pay each week, and the conversion cost per towel if production overhead is added at the rate of $2.50 per direct labour hour. 2018/11/16 Ji Weili, JXUFE

Remuneration methods Example: Piecework An employee is paid $5 per piecework hour produced. In a 35 hour week he produces the following output. Piecework time allowed per unit 3 units of product A 2.5 hours 5 units of product B 8.0 hours Required:Calculate the employee's pay for the week. 2018/11/16 Ji Weili, JXUFE

Example A company pays its employees using a piecework scheme. The rate are as following: 0—100 units per work $4 per unit 101—150 units per work $4.50 per unit 151—200 units per work $5 per unit 201+ units per work $5.50 per unit Required: If an employee produces 163 units in week 8, what would their pay be for at the week? 2018/11/16 Ji Weili, JXUFE

Remuneration methods Summary of piecework schemes They enjoy fluctuating popularity. They are occasionally used by employers as a means of increasing pay levels. • They are often seen to drive employees to work too hard to earn a satisfactory wage. 2018/11/16 Ji Weili, JXUFE

Remuneration methods Bonus/incentive schemes A bonus scheme must satisfy certain conditions to operate successfully. objectives ( clearly stated and attainable ) rules and conditions ( easy to understand) win ( acceptance) Fair( to employees and employers) paid soon( after the extra effort has been made) Allowances Only (who make the extra effort should be rewarded). properly communicated 2018/11/16 Ji Weili, JXUFE

Individual bonus schemes Profit-sharing schemes Remuneration methods High day-rate system Individual bonus schemes Group bonus schemes Profit-sharing schemes 2018/11/16 Ji Weili, JXUFE

Remuneration methods Question The following data relate to work at a certain factory. Normal working day 8 hours Basic rate of pay per hour $6 Standard time allowed to produce 1 unit 2 minutes Premium bonus 75% of time saved at basic rate What will be the labour cost in a day when 340 units are made? A $48 B $51 C $63 D $68 2018/11/16 Ji Weili, JXUFE

Recording labour costs Organisation for controlling and measuring labour costs Several departments and management groups are involved in the collection, recording and costing of labour. These include the following: • Personnel • Production planning • Timekeeping • Wages • Cost accounting 2018/11/16 Ji Weili, JXUFE

3 Recording labour costs Attendance time--These may be recorded as follows. • In a signing-in book • By using a time recording clock which stamps the time on a clock card • By using swipe cards (which make a computer record) Job time Continuous production --Where routine ,repetitive work is carried out might not be practical to record the precise details . Job costing --When the work is not of a repetitive nature the record required might be one or several of the following. Daily time sheets . Weekly time sheets. Job cards . 2018/11/16 Ji Weili, JXUFE

3 Recording labour costs Salaried labour Even though salaried staff are paid a flat rate monthly ,they may be required to prepare timesheets. The reasons : Timesheets provide management with information . Timesheet information may provide a basis for billing for services provided . Timesheets are used to record hours spent and so support claims for overtime payments by salaried staff. 2018/11/16 Ji Weili, JXUFE

3 Recording labour costs 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 occurs when employees cannot get on with their work, through no fault of their own. Examples are as follows. • Machine breakdowns • Shortage of work 2018/11/16 Ji Weili, JXUFE

3 Recording labour costs In order to establish the labour cost involved in products, operations, jobs and cost centres, the following documents are used. • Clock cards • Job cards • Idle time cards • Payroll 2018/11/16 Ji Weili, JXUFE

3 Recording labour costs Idle time ratio 2018/11/16 Ji Weili, JXUFE

4 Labour turnover The rate at which employees leave the company Reasons may be controllable or uncontrollable by the company Costs associated with labour turnover can be split into two categories: Replacement costs Preventative costs 2018/11/16 Ji Weili, JXUFE

4 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. 2018/11/16 Ji Weili, JXUFE

5 Accounting for labour costs Example: The wages control account 2018/11/16 Ji Weili, JXUFE

Direct VS indirect costs 5 Accounting for labour costs Direct VS indirect costs Direct workers Indirect workers Normal Basic Pay Direct cost Indirect cost General Overtime Basic pay premium Specific 2018/11/16 Ji Weili, JXUFE

5 Accounting for labour costs Ledger accounting Dr Wages account Gross wages Cr Bank / PAYE / NIC accounts Dr WIP account Direct wages Cr Wages account Direct wages Dr Production o/h Indirect wages Cr Wages account Indirect wages 2018/11/16 Ji Weili, JXUFE

End of Chapter 7 2018/11/16