Accounting For Labor

Session Objectives
Topic 6 Identify direct and indirect costs of labour

Explain the methods used to relate input labour
costs to work done
Accounting for Labour Describe different remuneration methods: time-
based systems, piecework systems and individual
and group incentive schemes
Calculate the level, and analyse the costs and
causes of labour turnover
Explain and calculate labour efficiency, capacity and
production volume ratios
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Direct Employees
Manufacturing business = production
Types of Employees workers, machine operators etc.
Building contractors business =

bricklayers, roof-builders, plasterers
Direct labour Indirect labour
employees employees
Audit business = employees doing audit
work
Direct and Indirect Labour
Indirect Employees
Cost
Support staff such as repairs and Indirect labour costs are
maintenance engineers, stores overhead costs
staff, supervisors
Some labour costs
Administrative positions associated with direct
labour may also be treated
Selling and distribution positions as indirect labour costs
Calculation of Direct Labour Guidelines for Calculating Labour

Cost Cost
Indirect Labour Cost
Direct Labour Cost
Idle time or time spent on training or hours
not engaged in direct operations
= Hours worked on direct labour Overtime premium
operations x basic rate of pay per Group bonus schemes
hour
Direct Labour Cost
Overtime for a specific reason like special
customer request
Bonus payments if they can be traced directly
to items of direct labour work
Overtime Premium Overtime Premium
Overtime is premium is time in Overtime is premium is time in

excess of the basic hours for a period excess of the basic hours for a period
for which employees are paid. for which employees are paid.
Usually overtime hours are paid at a Usually overtime hours are paid at a
higher rate than the basic hourly rate higher rate than the basic hourly rate
Idle Time Question
Some organisations record how A company pays a group of employees

employees spend their time by using £9 per hour for a 37-hour week. Time
job cards or time sheets so as to worked in excess of 37 hours is
monitor the work force overtime, which is paid in time and one
Reasons: third. During one week the work force
Idle time can be measured and works 407 hours in normal time and
monitored additional 40 hours in overtime.
Labour cost of different activities can be Calculate the labour cost
identified
Is Overtime Premium Direct or
Solution Indirect Cost?
Overtime Pay = Basic Pay + Overtime Direct: If overtime is at the specific

Premium = (447 * £9) + (40 * £3) = request of the customer
£4,143 Indirect: All other cases
OR
Overtime Pay = (407 * £9) + (40 * £12) =
£4,143
Determining Time Spent

Bonus Payments
Bonus is an additional payment in Time sheets

addition to basic salary or wage
Time cards
Paid for either achieving or
Job sheets
exceeding certain targets
Bonus schemes vary and can be
schemes for individual employees
or group schemes
Payroll Department Remuneration Methods
Preparation of payroll involves Time Related or Time-Based

calculating gross wages from time and Output Related or Piecework
activity records
Payroll department also calculates
wages after deductions from payroll
Payroll department carries out an
analysis of direct and indirect wages
Time-Based Systems
Piece Work
Employees are paid at a basic rate per Under this method more of the risks and
hour, day , week or month rewards fall on the employee rather than
Do not provide any incentive for the the employer.
employee to improve productivity Under this, employees are paid for each
Require close supervision piece they produce
Total Wages = ( Hours worked x basic Rigid inspection procedures are required
rate per hour ) + (overtime hours worked to ensure work is of an adequate
x overtime premium per hour) standard
Piece Work Differential Piece Rate
Straight piece work is almost extinct A low piece rate is paid for first units of
today due to legislation and trade unions production and high piece rate for
subsequent units
An employee might be paid on a piece-
work basis subject to receiving a
guaranteed minimum wage each week
Incentive Schemes Halsey
Halsey The employee receives 50% of the

Rowan saved time
Measured Day work
Share of Production Bonus
=[ (Time allowed – Time Taken) /2] *
Time rate
Rowan Measured Day Work
Bonus Pay a high time rate based on analysis

of past performance
= (Time taken / Time allowed ) * Time rate *
Time saved Calculate allowed time per unit
Compare this with time actually taken in the
past by the employee
If allowed time > actual time, agree on an
incentive
Share of Production Labour Turnover
The management and labour It is a measure of the proportion of

representatives agree on a constant people leaving relative to average
share in production number of people employed.
Any gains in value added are shared Labour Turnover

with employees = (No. of leavers who require
replacement) / Average number of
employees x 100
Labour Turnover and
Reasons for Leaving
Personnel Department
Main objective of the Personnel Department is Avoidable
to minimise turnover rate Poor remuneration
Each time an employee is replaced following Poor working conditions
costs are incurred: Lack of training opportunities
Advertising and selection Lack of promotion prospects
Administering departure and replacement Unavoidable
Training
Retirement
Reduced efficiency until new employee reaches the
required skill level Illness / death
Family reasons
Relocation
Labour Efficiency and Utilisation Labour Capacity Ratio
Compare actual efficiency with budgeted Labour capacity ratio measures the
efficiency using standard hours number of hours spent actively working
A standard hour is the number of as a % of total hours available for work
production units which should be
achieved by an experienced worker Labour Capacity Ratio=
within a period of one hour [Number of hours spent working (active
Efficiency Ratio production) / Total hours available
= (Actual output measured in standard (budgeted)] x 100%
hours / Actual Hours) x 100%
Labour Production Volume
Ratio Sample Exam Question
Compares the number of hours expected Overtime premium wages contained in direct
to be worked to produce actual output wages are normally classified as:
A. Prime cost
with the total hours available for work (
B. Factory overheads
full capacity or budgeted) C. Direct labour costs
D. Non-production costs
Labour Production Volume Ratio =

(Expected hours to produce actual
output / Total hours available) x 100%
Answer Sample Exam Question
B Pelican plc defines its production standards as

1 unit in 30 minutes. It has budgeted 400

production hours. John and his team produce
If overtime is at the specific request of 1800 units in 700 hours. What is his team’s
the customer it is classified as a direct efficiency ratio?
cost in all other cases it is classified as A. 96.3%
B. 112.4%
indirect cost or factory overheads.
C. 118.5%
D. 128.57%
Answer
D
1800 units should have taken 900 hours. However, the

team took only 700 hours.
Labour Efficiency Ratio
= (Expected hours to produce output / (Actual hours to
produce output) x 100
= (900/ 700) x 100 = 128.57%
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Accounting For Labor

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Session Objectives

Topic 6 Identify direct and indirect costs of labour

Building contractors business =

Calculation of Direct Labour Guidelines for Calculating Labour

Overtime is premium is time in Overtime is premium is time in

Idle Time Question

Some organisations record how A company pays a group of employees

Overtime Pay = Basic Pay + Overtime Direct: If overtime is at the specific

Determining Time Spent

Bonus is an additional payment in Time sheets

Preparation of payroll involves Time Related or Time-Based

Incentive Schemes Halsey

Halsey The employee receives 50% of the

Bonus Pay a high time rate based on analysis

Share of Production Labour Turnover

The management and labour It is a measure of the proportion of

Any gains in value added are shared Labour Turnover

Labour Efficiency and Utilisation Labour Capacity Ratio

Labour Production Volume Ratio =

Answer Sample Exam Question

B Pelican plc defines its production standards as

1800 units should have taken 900 hours. However, the

© www.accountingclassroom.com A Resource for ACCA Exam Preparation

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