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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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%

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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%

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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%

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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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