1. © www.paperhint.com Costing and Control of Labour

2. © www.paperhint.com 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.

3. © www.paperhint.com Accounting for Labour (i) Time-keeping (ii) Computation of total Payroll (iii) Allocation of payroll costs

4. © www.paperhint.com Time-keeping (ii) It determines how the labour - hours were spent so that proper distribution can be made in the 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.

5. © www.paperhint.com The two source-documents commonly used in time keeping are (b) Labour Job Ticket (a) Time or Clock Card

6. © www.paperhint.com (a) Time or Clock Card Time Card Employee name ………………. Employee/clock number……............ Shift ………………………. Department……………… Week…………………… DayRegular (time)OvertimeHours InOutInOutInOutRegularOvertime Total Figure 1: Time/Clock Card

7. © www.paperhint.com (b) Labour Job Ticket Labour Job Ticket Employee…………….. Shift……………………. Job number……………………… Nature of work…………….. Units completed………… Department ………………. Date ………………………… Time startedTime stoppedHours workedRateAmount Approved by Figure 2: Labour Job Payroll

8. © www.paperhint.com 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. Payroll Sheet Week …………….. EmployeeHours workedRateGross payDeductionNet 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.

9. © www.paperhint.com 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 PayableDr To Employee Deductions Payable To Cash (to employees) (C)To record fringe benefits costs (pension, insurance, and so on): Factory Overhead ControlDr To Employee Benefits Payable

10. © www.paperhint.com 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 Shift premiums Overtime Idle time Minimum guaranteed wage and incentive plans. Employer taxes and fringe benefits

11. © www.paperhint.com 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.

12. © www.paperhint.com Example 1 Journalise the following payroll cost for the week ending April 15: Factory payroll: Direct labour-Job 10 Indirect labour Other payroll: Salesmen’s salaries Administrative salaries Gross 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 ________ 2,16,000 5,40,000 37,800 1,35,000 39,960

13. © www.paperhint.com 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 Factory Overhead Control (indirect labour) Dr Selling Expenses ControlDr Administrative Expenses ControlDr 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

14. © www.paperhint.com (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 PayableDr. Employee Social Security Contribution PayableDr. Employer Social Security Contribution PayableDr. Employer Pension Fund Contribution PayableDr. To Cash 1,35,000 37,800 39,960 2,50,560 * (Rs 37,800 + Rs 39,960)/Rs 5,40,000 = 14.4%

15. © www.paperhint.com 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 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

16. © www.paperhint.com 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.Dr Loss from Overtime PremiumDr To Payroll Payable

17. © www.paperhint.com 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 InventoryDr Loss from Idle TimeDr To Payroll Payable

18. © www.paperhint.com 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 (iii) Gantt Task and Bonus Plan (2) Premium bonus plans

19. © www.paperhint.com 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.

20. © www.paperhint.com 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 ofA= 92.6 per cent = (25/27) × 100 B= 111 per cent = (30/27) × 100 Piece rate ofA= 0.80 × Rs 3 = Rs 2.4 B= 1.2 × Rs 3 = Rs 3.6 Earnings ofA= 25 × Rs 2.40 = Rs 60 B= 30 × Rs 3.60 = Rs 108

21. © www.paperhint.com 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.

22. © www.paperhint.com 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 ofA= (32 × 100) ÷ 40 = 80 per cent B= (37 × 100) ÷ 40 = 92.5 per cent C= (42 × 100) ÷ 40 = 105 per cent Wages ofA= 32 × Rs 10 = Rs 320 B= (37 × Rs 10 × 110) ÷ 100 = Rs 407 C= (42 × Rs 10 × 120) ÷ 100 = Rs 504

23. © www.paperhint.com 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.

24. © www.paperhint.com 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)

25. © www.paperhint.com 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.

26. © www.paperhint.com 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.

27. © www.paperhint.com 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 premiumHalsey-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 Earnings per hour (Rs 18 ÷ 8) = 2.25(Rs 17.33 ÷ 8) =2.17

28. © www.paperhint.com 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.

29. © www.paperhint.com 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

30. © www.paperhint.com Solution Standard points Actual 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.

31. © www.paperhint.com Labour Turnover Labour turnover is the rate at which employees leave employment. 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.

32. © www.paperhint.com 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.

33. © www.paperhint.com 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.

34. © www.paperhint.com 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

35. © www.paperhint.com 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. 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.

36. © www.paperhint.com 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.

37. © www.paperhint.com 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 SalesRs 4,00,000 Variable costs: MaterialsRs 1,00,000 Direct labour80,000 Variable overheads80,0002,60,000 Contribution1,40,000 Less fixed overheads90,000 Profit before tax50,000 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.

38. © www.paperhint.com Solution Cost of Labour Turnover Direct labour-hours worked Less unproductive time of new workers (0.60 ×500) Productive hours Loss labour hours: Replacement600 Training300 Unit sales per productive labour hour (Rs 4,00,000 ÷ 20,000) (i) Loss of potential sales (900 hours ×Rs 20) Direct labour cost per hour worked (Rs 80,000 ÷ 20,300) (ii) Increase in direct labour cost of lost hours due to replacement (600* hours ×Rs 3.94) * (300 hours already included while calculating hourly rate) (iii) Increase in material and variable overheads due to increase in potential sales (Rs 1,80,000 ÷ Rs 4,00,000) ×Rs 18,000 (iv) Total increase in cost [(ii) + (iii)] Contribution foregone [(i) – (iv)] Add separation, selection and training costs (Rs 4,000 + Rs 6,000 + Rs 10,000) Cost of labour turnover 20,300 300 20,000 900 Rs 20 18,000 3.94 ____ 2,364 8,100 10,464 7,536 20,000 27,536

39. © www.paperhint.com 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.

40. © www.paperhint.com 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.

41. © www.paperhint.com Solution Determination of Profit Foregone Contribution foregone (working note)Rs 7,72,400 Settlement cost87,640 Recruitment cost53,480 Selection cost25,500 Training cost 60,980 Total10,00,000 Working Note Determination of contribution foregone: Actual hours worked4,45,000 Less unproductive hours (0.50 × 30,000) 15,000 Actual productive hours4,30,000 Sales lost (Rs 1,66,06,600 ÷ 4,30,000 hours) × 1,00,000 hoursRs 38,62,000 Contribution lost (Rs 38,62,000 × 0.20, P/V ratio)7,72,400

42. © www.paperhint.com 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.

43. © www.paperhint.com Labour Turnover ReportDate.............. MonthCumulative since beginning of year Last 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

44. © www.paperhint.com 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.

45. © www.paperhint.com 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.