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Topic 2 - Labour

Topic 2 - Labour

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Published by: anafesia on Dec 27, 2009
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ACOF 014Introduction to CostingSemester 2 2008/ 2009TOPIC 2: Costing for Labour 
Topic Outline:1.Learning Objectives
Control procedures for labour 
Elements of costs (wages, salaries, bonuses)4.Calculation and accounting for the different payment schemes/remuneration methodsa.Basic pay (time-based pay)b.Overtime premiumc.Incentive schemesi)Piecework schemeii)Bonus scheme5. 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, pieceworkpay 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 paymentscheme
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 andtime 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 timebookings either to jobs or operations
Job card
relates to single jobs or batch and contain time spent on a particular job by severalemployees.
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 stretchedover several weeks
Operation card (piecework tickets)
Provided to each operation or stage of manufacture. Hence, a job to manufacture oneitem 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, materialshortages 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 paymentscheme?
correctly identify their respective payment scheme (perhaps by way of coding)
thoroughly understand the underlying concepts and applications of the various paymentschemes
2.Elements of costs
Wages -
Payment for labour or services to a worker, especially remuneration on an hourly,daily, or weekly basis or by the piece.
Salaries -
is a form of 
 periodic payment 
from an employer to an employee, which isspecified 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.
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 schemesa.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
Simple to understand and administer 
Simplifies wage negotiations – use only one rate
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 workedis over and above the normal working hours
Refer example from page 66OT scheme: time & half for weekly hours > 40 hoursEmployee A: works 50 hours; that extra 10 hours were spent on Job XHourly wage rate: RM6
A’s weekly wage:2
charge to job
carried out during OT hours… if OT due to
charge to manufacturing overheads
(i.e. overall production) through general OHaccount….… if OT because of 
 c.Incentive schemes
Relate payment to output in some way or other, either in terms of quantity or timetaken to complete production
Increase production and reduces overheads per unit
Provides competitive edge during inflation
Improve employees’ morale
Attract more efficient workers
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 mainobjective is to reduce cost per unit (i.e. increase productivity)
i)Piecework schemeWithout piecework scheme Worker BWith 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.
between actual amount he should have earned (piecework) and min wage
charged to factory OH accountii)Bonus scheme
refer Example 3.1, p.55Time allowed: 20 hoursActual time taken by Employee: 16 hoursHourly wage rate: RM8Bonus system in place: 50% of the time saved3

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