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53937231 Cost Accounting 1

53937231 Cost Accounting 1

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Published by: Abrar Rasheed on Apr 30, 2011
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  • Cost Accounting
  • Advantages of Cost Accounting
  • Essentials of a Good System
  • Cost Concepts
  • Financial & Cost Accounting
  • Methods of Costing
  • Costing Techniques
  • Cost Treatment
  • Cost Audit
  • Cost Components
  • Material Cost
  • Direct Material Cost
  • Objectives of Material Control
  • Requirements for Material Control
  • Documents for Materials
  • Material osses
  • Controlling Material oss
  • Materials Issue Pricing
  • Inventory Control
  • Techniques of Inventory Control
  • AC Analysis
  • Economic Order Quantity (EOQ)
  • EOQ Technique
  • Inventory Turnover Ratio
  • Other Techniques
  • Labour Cost
  • Meaning
  • Labour Cost Control
  • Time Keeping
  • Time ooking
  • Labour Turnover
  • Labour Turnover Measurement
  • Incentive Wage Plans
  • Premium onus Plans
  • Differential Piece Rate System
  • Incentives for Indirect Workers
  • Profit Sharing
  • Direct Expenses
  • Examples

Cost Accounting

An Introduction

‡ Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. ‡ Cost is the amount of actual or notional expenditure relating to a product, job, service, process or activity. ‡ Cost is often used as a generic term to describe various types of costs. ‡ Costing is the technique and process of ascertaining costs.

‡ Cost Accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. It includes:
± Collecting, classifying, recording, allocating and analyzing costs ± Preparation of periodical statements and reports for ascertaining and controlling costs ± Application of cost control methods ± Ascertainment of profitability of activities carried out or planned.

‡ Cost Accounting is the processing and evaluation of monetary and non-monetary data to provide information for internal planning, control of business operations, managerial decisions and special analysis.

‡ Cost Accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making. ‡ Objectives of Cost Accounting
± ± ± ± ± To ascertain cost To control cost To provide information for decision making To determine selling price To ascertain costing profit

Advantages of Cost Accounting
‡ Helps in ascertainment of cost ‡ Helps in control of cost ‡ Helps in decision making (make or buy, retain or replace, continue or shut down, accept or reject orders, etc) ‡ Helps in fixing selling prices ‡ Helps in inventory control ‡ Helps in cost reduction ‡ Helps in measurement of efficiency ‡ Helps in preparation of budgets ‡ Helps in identifying unprofitable activities ‡ Helps in identifying material losses ‡ Helps in identifying idle time, idle capacity ‡ Helps in improving productivity ‡ Helps in cost comparison

Essentials of a Good System ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Suitability ± to the nature of business Tailor made system ± to meet requirements of the business Simplicity ± easy to understand and simple to operate Economical ± to install and operate Flexibility ± to adapt to the changing business needs Accuracy ± must provide accurate information Promptness ± of information Support of staff ± must have staff co-operation and participation Cost control ± must ensure cost control in various fields Clearly defined Cost Centers ± least ambiguity Detail ± give relevant details but avoid unnecessary detail .

‡ Cost Center ± Is a location. process or activity for which a separate measurement of cost is required. It is a unit of measurement. person or item of equipment for which costs may be ascertained and used for the purposes of cost control. Contribution Center. Investment Center. ‡ Types of Cost Centers: ± ± ± ± Personal Cost Center ± person or group of persons Impersonal Cost Center ± location or equipment Production Cost Center ± where actual production takes place Service Cost Center ± departments which render service to other cost centers ‡ Cost Object ± any product.g. E. Profit Center. .Cost Concepts ‡ Cost Unit ± Is a unit of product. Cost Center. service. service or time in terms of which costs are ascertained or expressed. Revenue Center. ‡ Responsibility Centers ± is the unit or function of an organization under the control of a manager who has direct responsibility for its performance.

Financial & Cost Accounting No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Fo i o L gal n ansactions a ats alu Acc ss nit o E E Basis j cti Costs an Cont ol / cision a o ts o its ot a ing Financial Accounting Financial osition o so loss E Li it o anc an o it / E Cost Accounting Asc tain cost an cost cont ol o s tails o ac o uct oc ss jo cont act tc asis o ting sign s onsi ilit li &L t Cas Can Focus on o cti l on cont ol cision i s nt an s c t an all costs an o ting asis on us a ing utu o ts so t nal s onsi ilit o s not i s onsi ilit Focus on isto ical ata n al o ts Account Balanc Flo tat nt tatuto co s o as c la t o so o ui Can g n at an anal sis Volunta cas s cial o nt t nal t ansactions co s int nal an t ansactions nt nal ailo V Mon ta a li it acc ss an sical anag nt tan a Mon ta .

o t t of one o ess e o es in t fo the ne t o ess e of o e tions e fo onito ed ed is e tiles e tiles et ingle od t o ess he e od t is in ol ed o nifo ontin o s nd identi l o se i e o e tions li tion of t o o oe osting ethods n ol es nuf turing nd sse l o erations Ce ent teel et il s otels e i e Costing Multi le Co osite Costing o ns o t os it ls et Vehi les Consumer oods et . 1 Costing Method Jo Costing Cont t Costing Meaning jo od t t h ont t se i e o n s e ifi o de is t e ted s ost nit o s e ifi o de s se i e od tion is done in ont t o Application Enginee ing Const tion hi B ilding h e ti ls et Const tion Enginee ing et h o s ls e ti ls es B t h Costing t hes ents Co onents es et e Che i g et Enginee ing 2 o ess Costing e tion Costing nit Costing od ts s je t to o ess.Methods of Costing No.

variance analysis and corrective action. Charging all irect costs to o erations. processes or products and riting off selling. niform Costing 5. 6. Absorption Costing 4. variance analysis and presentation for corrective action and decision making. 2. elps in inter-firm comparison. cost control reduction and seeking government tax relief protection. System hich involves fixation of cost standards. ascertain variances of actual cost ith standard cost. Charging all variable costs an fixe pro uction overheads to operations.Costing Techniques No Cost ng Techn que Descr pt on 1. System hich involves establishment of budgets. price fixation. sing the same costing principles and or practices by a number of firms in the same industry. 7. irect Costing 3. distribution and administration overheads against profits in the period in hich they arise. rocesses or ro ucts riting off all fixe costs against rofits in the erio in an hich they arise. comparison of actual ith budget. Actual cost ascertained after it has been incurred. Marginal Costing Charging variable costs to o erations. rocesses or ro ucts riting off all in irect costs against rofits in the erio in an hich they arise. Standard Costing udgetary Control istorical Costing .

‡ Cost Apportionment is the process of charging the proportion of common items of cost to two or more cost centers on some equitable basis.Cost Treatment ‡ Cost Ascertainment is the process of determining actual costs after they have been incurred. ‡ Cost Allocation is the process of charging the full amount of an individual item or cost directly to the cost center for which the item of cost was incurred. ‡ Cost Absorption is charging cost from cost centers to products or services by means of a pre-determined absorption rate. . ‡ Cost Estimation is the process of determining future costs in advance before production starts. on the basis of actual past cost adjusted for anticipated future changes.

depreciation Meaning Example Indirect Expenses Factor O erheads Administration O erheads Selling O erheads Distribution O erheads . contract or wor order. indirect labour and indirect expenses for the factor . All indirect costs other than indirect materials and indirect labour costs. insurance. primar pac ing material Stores. indirect labour and indirect expenses for selling. machine hire charges. indirect labour and indirect expenses for the office. etc Rent. telephones. electricit . repairs. Sum of indirect material. Sum of indirect material. indirect labour and indirect expenses for distribution. consumables. All direct costs other than materials and labour costs. excise dut . utilit costs. contract or wor order. abour not directl engaged for a specific job. asic raw material. job or process Which cannot be directl allocated to a product.Cost Classification Classification By Nature or Element Direct Material Cost Indirect Material Cost Direct abour Cost Indirect abour Cost Direct Expenses Which can be directl allocated to a product. Sum of indirect material. job or process abour directl engaged for a specific job. some low alue items Shop floor labour Staff departments Processing charges. Sum of indirect material.

Cost Classification Classification nction o ction Cost inist ati llin Cost ist i tion Cost Cost of i ct i ct at ial i ct la o ns s an facto o a s Meaning Example Cost of t in a t nt fo t ana nt of t o ani ation Cost fo sti lat s in to c at an an s c o o an s ct of Costs fo a in t ac a fo is atc to co at ial fo c clin if an Costs fo o ct a Cost of t ial lo in n lication no o o i ction s a c Cost o ction Cost o By Relation to Cost Center i ct Cost an C nt of i ct i ct at ial i ct la o ns s of t Cost n i ct Cost of in i ct at ial in i ct la o is cost is a o tion an in i ct ns s of t Cost to t Cost C nt lso call as a Cost C nt .

Cost Classification Classification Meaning Example a ia ilit i Cost a io Costs t at o not a of o ction Costs t at a of o ction i i ctl it t it t ol ol nt ins anc sala ll i ct costs o as l a ia l a ia l Cost i a ia l Cost i Costs on a t ains fi in at ai s a i n an an t ot it ol of o ction Costs t at can infl nc cision a at a a tic la l Costs t at cannot infl nc cision a at t at a tic la l Cost t at is no all inc of o ation Cost t at is not no al at t o ation at a l l a l a l l l of on s l ct icit By Controllability Cont olla l Cost ncont olla l Cost By Normality i ct costs ll costs can lti at l cont oll at t to No al Cost no al Cost Cost as stan a no al loss a no al i l ti .

Cost Classification Classification n nto o ct Cost io Cost i f By Time isto ical Cost t in Cost ct al cost asc tain n inc t co l aft it as Cost Cost Cost t at is a so Cost t at a Costs inc fo ns cost n i f oi ns to al o t n atin n of stoc an fact in costs i C i costs a in ns s ai ns s Meaning Example cost ca itali cost n n it o l n fits in f t io s ass ts ns s cost asc tain in a anc stan a o sti at cost tan a Cost at t cost s o l as on tan a at ial an n in in s cifications an ffici nt la o costs o atin con itions at t cost ill sti at on t asis of ast i nc a st fo antici at c an s o ction fo act al at ial cost fo n t a sti at Cost .

ncrease or ecrease in cost e to c an e in activit level. lso calle incre ental cost. C rrent cost of an i entical asset. a in t e Meaning Example ant Costs rrelevant Costs n Costs t-Do n Costs t of oc et Costs ort nit Costs te Costs Differential Costs a in t e inc rre en i e costs to e inc rre even t e lant is s t o n. otal varia le cost attri ta le to one nit of ro ct.Cost Classification Classification cision l a in Cost t at is relevant for n erl in ecision Cost t at is not relevant for n erl in ecision istorical or ast cost alrea an cannot e c an e . e val e of sacrifice a e in acce tin an alternate co rse of action. otional costs t at o not ave a cas o tla are si ilar to o ort nit cost. ncre ental cost of a ing one nit of ro ct. aterial into a ave to ent of o n re ises interest on o n ca ital arginal Cost e lace ent Cost Conversion Cost Co itte Costs itte an Discretionary Costs Costs t at can e avoi e . . Costs t at are co e inc rre . Costs t at involve cas o tla . Cost of converting ra finis e ro ct.

‡ Purpose of Cost Audit are protective (examine undue wastage losses to reflect realistic cost of production) and constructive (provide information for management decision making).Cost Audit ‡ Cost Audit is the verification of cost accounts and a check on the adherence to the Cost Accounting plan. These include profit on sale of fixed assets investments. Financial Accounting adjustments and appropriations. cash discount. preliminary expenses written off. It comprises of verification of the cost records and ensuring that they adhere to the principles of cost accounting. . Finance Costs. tax. etc. dividend rent income. provision for doubtful debts. ‡ Items excluded from Cost Accounts ± items of financial nature like Other Income. interest income expense.

3. tock of Cl . 2. rime Cost orks Cost or actor Dire t Material Cost + Dire t Labour Cost + Dire t Expenses Dire t Material Cost = p .Cost Components No ost omponent Description 1. Cost of roduction oods or Cost of roduced Cost of oods old Cost of ales erheads p . to of M + et urchase Cost Cl . tock of erheads oods old + ellin Distribution . 5. 4. tock of I Cl . tock of M rime Cost + actor tock of I actor Cost + dmin Cost of roduction + Cost of erheads + p .

Closing Stock of WIP Works or Factory Cost (D E) (on number of units produced) F (on number of units produced) .Costing P& Account No.Purchase Returns .Prepaid C Direct Expenses Amount Per Unit A (on number of units produced) (on number of units produced) (on number of units produced) D Prime Cost (A C) (on number of units produced) E Works Factory Overheads Factory Overheads Paid .alue of ormal Scrap of Direct Materials Direct abour Cost Direct abour Cost Paid Outstanding Payable .alue of ormal Scrap of Indirect Materials Opening Stock of WIP .Closing Stock of Materials . Particulars Direct Material Cost Opening Stock of Materials Purchases Expenses on Purchases .

Particulars Amount Per Unit G Office and Admin Expenses (on number of units produced) H Cost of Goods Produced FG Stock Adjustment Opening Stock of FG .Costing P& Account No.Closing Stock of FG Cost of Goods Sold (H (F G) (on number of units produced) I I) (on number of units sold) K Selling & Distribution Expenses (on number of units sold) Cost of Sales ( K) (on number of units sold) M Profit (on number of units sold) Sales ( M) (on number of units sold) .

Material Cost Fundamentals .

job or process.Material Cost ‡ Material Cost can be Direct and Indirect ‡ Direct Materials are those which can be identified with and directly allocated to the product. ‡ Includes basic material and primary packing material ‡ Indirect Materials are those which cannot be easily identified with and directly allocated to the product. consumables. ‡ Includes stores. job or process. small value materials .

storage.Direct Material Cost ‡ The total direct material cost includes: ± Purchase price ± Customs Duty. Subsidies. etc ± ( ess) Cost of containers recovered on return . Excise Duty. etc ± ( ess) olume or Trade Discounts ± Rebates. MOD AT. Duty Drawback. delivery. inspection. AT. Octroi ± Inward freight ± Insurance ± Directly attributable expenses like packing expenses. CST.

Objectives of Material Control ‡ Avoid under stocking or shortages ‡ Avoid over stocking and obsolescence ‡ Ensure proper quality from reliable sources ‡ Explore alternate sources and reduce cost ‡ Reduce total cost of materials. ordering and carrying costs ‡ Maintain proper inventory records ‡ Provide information for decision making including ‡ Avoid wastages and losses in storage and use .

Requirements for Material Control ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Proper co-ordination Proper purchase system Proper storage system Proper issue system Perpetual inventory system Continuous stock taking system udgetary control system Proper documentation Proper accounting system Proper reporting system .

Documents for Materials ‡ Purchase of Materials ± ± ± ± ± ± ± ± ± ± ± ± ± ± ill of Materials ( oM) Purchase Requisition Supplier Selection Purchase Order Goods Received ote Inspection ote Return of Rejected Material ill Passing Making Payment to Supplier in Card Stores edger Material Requisition Material Return ote Material Transfer ote ‡ Issue of Materials .

evaporation. having no recovery value Arises due to shrinkage. poor workmanship. improper machinery or process used. inadequate supervision.Material osses ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Waste ± portion of raw material lost during processing or storage. bad raw material. improper material handling. chemical reaction. defective or broken parts and obsolescence abortion of development projects efective Work ± work that has some imperfections which can be rectified by additional material or processing Arises due to improper product design. defective machinery or improper training Spoiled Work ± work that cannot be reconditioned or brought to standard and must be sold as scrap or ³seconds´ Arises due to improper product design. improper material quality or untrained operators Normal Loss is charged to the particular job or as production overheads Abnormal Loss is charged to Costing Profit & oss Account . etc Scrap ± incidental residue manufacturing operations usually of small amount and low value recoverable without further processing Arises due to processing of material.

Controlling Material oss ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Proper product design Proper selection of manufacturing process Proper selection of machinery & equipment Proper process control Proper storage and material handling Trained manpower Proper record keeping Proper control system having scientific standards Proper reporting system Defined accountability Corrective action .

Materials Issue Pricing ‡ Cost Price Methods ± FIFO (First In First Out) ± IFO ( ast In First Out) ± HIFO (Highest In First Out) ± ase Stock Price ‡ Average Price Methods ± ± ± ± Simple Average Weighted Average Periodic Simple Weighted Average Moving Simple Weighted Average ‡ otional Price Methods ± Standard Price ± Inflated Price ± Replacement or Market Price ‡ Weighted Average and FIFO Methods are used in Accounting .

Inventory Control ‡ Inventory is tangible property or assets held ± for sale in the ordinary course of business or ± in the process of production for sale or ± for consumption in the production of goods or services for sale including maintenance supplies and consumables other than machinery spares ‡ ‡ ‡ ‡ ‡ ‡ ‡ Inventory comprises of raw materials. organizing and controlling purchase and storage to ensure availability in terms of quantity. timeliness at least cost Monitoring level of inventory with respect to production and sales Releasing material in a systematic manner to ensure quality at least cost and reduce wastage obsolescence Analyze inventory levels and suggest optimal and alternate uses of material including value engineering Ensure physical stock taking to avoid pilferage Provide information for inventory valuation . quality. work-in-process and finished goods Inventory control includes planning. stores & spares.

Techniques of Inventory Control ‡ A C Analysis ‡ Economic Order Quantity (EOQ) ‡ Stock evels ± minimum. reorder quantity ‡ Inventory Turnover Ratio ‡ Slow and on-Moving Items ‡ Purchase. maximum. Storage and Issue Procedure ‡ Two in System ‡ Perpetual Inventory Records and Continuous Stock erification ‡ udgetary System . reorder level.

% items : % value. % items Ensures control on high value items Saves time and cost of monitoring Reduces total investment in inventory Facilitates faster decision making etter utilization of resources etter physical control of stock .A C Analysis ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ A: % value. % items C: % value.

obsolescence and personnel. At EOQ. Carrying Cost increases with order size Dependent on periodicity and annual material consumption EOQ determines quantity to be ordered at a given time . Ordering Cost includes costs for placing an order. insurance. transportation. receiving goods and inspecting goods Ordering Cost reduces with order size Carrying Cost includes costs for storage space.Economic Order Quantity (EOQ) ‡ ‡ ‡ ‡ ‡ ‡ ‡ evel at which the ordering and carrying costs are minimum. handling materials. the ordering and carrying costs are equal.

tabular or formula method ‡ Find the level at which total of ordering and carrying cost is least or ordering cost equals carrying cost ‡ EOQ ¥( AO C) where A Annual Consumption. constant usage rate.EOQ Technique ‡ Assumes prior knowledge of annual usage. constant carrying cost and zero lead delivery time ‡ EOQ can be determined by graphical. constant ordering cost. O Ordering Cost per order and C Carrying Cost per order ‡ EOQ ¥( AO IP) where I Inventory or Stock Holding Cost (as % of average stock value) and P Price per unit ( umber of orders per ‡ Economic Order Frequency (in days) year) ‡ Total annual ordering and carrying cost at EOQ ¥( AOC) .

‡ It avoids cost of over-stocking such as costs for storage. obsolescence. cost of storage. availability of funds and storage space. price fluctuation. etc ‡ Formula: Maximum evel Reorder evel Reorder Quantity ± (Minimum Consumption x Minimum Reorder Period) . insurance. reorder quantity. rate of consumption. investment. reorder period.Stock evels ‡ Maximum Stock evel is the maximum stock level that can be held in store. insurance and risk of obsolescence ‡ Dependent on reorder level.

Stock evels ‡ Minimum Stock evel is the level below which the stock should not be allowed to fall ‡ Dependent on reorder level. reorder period and minimum level ‡ Formula: Reorder evel Maximum Consumption x Maximum Reorder Period OR Minimum evel ( ormal Consumption x Reorder Period) . rate of consumption and reorder period ‡ Formula: Minimum evel Reorder evel ± ( ormal Consumption x Reorder Period) ‡ Reorder evel is the level of stock at which fresh replenishment order should be placed ‡ Dependent on consumption rate.

Stock evels ‡ Average Stock evel Minimum evel ½ Reorder Quantity OR (Minimum evel Maximum evel) ‡ Danger evel is the level at which only emergency material issue is done (normal material issue is stopped) ‡ It is a level at which urgent ordering action is required ‡ If Danger evel is below Minimum evel. urgent corrective action is required ‡ If Danger evel is above Minimum evel. it calls for preventive action ‡ Dependent on rate of consumption and reorder period ‡ Formula: ormal Consumption Rate x Maximum Reorder Period for emergency purchases .

dormant or obsolete stock ‡ Ideal level is determined with reference to level of other firms or the industry average . slow moving.Inventory Turnover Ratio ‡ Indicates the speed with which inventory is consumed ‡ A high ratio indicates fast moving stock. low ratio indicates slow moving stock ‡ Inventory Turnover Ratio Materials Consumed Average Stock Held expressed in ³times´ ‡ Materials Consumed Opening Stock Purchases ± Closing Stock ‡ Average Stock ½ (Opening Stock Closing Stock) Inventory Turnover Ratio ‡ Days of Inventory ‡ Can be computed for stock categories to determine fast moving.

requiring shut down ‡ Records then physically reconciled ‡ Perpetual Inventory System ± Records updated at every receipt and issue ‡ Done using bin cards and stores ledger ‡ Continuous stock taking done by random checks of the bin cards and stores ledger .Other Techniques ‡ Two in System ± in has two parts. material used from smaller bin till replacement received and filled ‡ Periodic Inventory System ± Physical stock taking done periodically. the smaller one for reorder stock level and the other for the remaining material ‡ Issues are made from the larger bin. fresh order placed when it become empty.

Labour Cost Fundamentals .

Meaning ‡ Essential factor of production ‡ A human resource that participates in the process of production ‡ Two Categories ± Direct & Indirect Labour ‡ Labour Cost controlled by: ± ± ± ± ± Personnel Department Engineering Work Study Department Time Keeping Department Payroll Department Cost Accounting Department .

Labour Cost Control ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Manpower requirement assessment Time and Motion Study ob Evaluation and Merit Rating Labour Productivity Wage Systems Incentive Systems Time Keeping and Time ooking Labour Turnover Casual and contract workers .

Token Disc Method and Time Clocks Clock Card .Time Keeping ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Statutory attendance record Maintain discipline and punctuality Payroll preparation Ascertain Overtime Ascertain Idle Time Ascertain Labour Cost Provide basis for apportionment Control Labour Cost Maintained using Attendance Register Muster.

Time ooking ‡ Records time spent by each worker on various jobs orders processes ‡ Methods: ‡ Daily Time Sheet ‡ Weekly Time Sheet ‡ ob Card or ob Ticket ‡ Time and ob Card ‡ Labour Cost Card Circulating ob Card ‡ Piece Work Card .

initial inefficiency. wage & retirement benefits ‡ Replacement Cost ± personnel department expenses. time lag in recruitment. initial breakages and defectives. medical & health care.Labour Turnover ‡ Rate of change in the composition of labour force due to retirement. avoidable and unavoidable causes ‡ Cost of Labour Turnover consists of Preventive Cost and Replacement Cost ‡ Preventive Cost ± personnel administration. training of new workers. resignation or retrenchment ‡ Defined as the number of workers left or replaced or both in relation to the average number of workers ‡ Turnover due to personal. welfare measures. .

Labour Turnover Measurement ‡ Measurement by Separation Rate Method. all ( umber of Separations Recruitments) Average umber of Workers x . Flux Method ‡ Separation Rate Method: umber of Separations Average umber of Workers x ‡ Replacement Rate Method: umber of Replacements (not normal additions) Average umber of Workers x ‡ Flux Method: ( umber of Separations Replacements) Average umber of Workers x OR Accessions i. Replacement Rate Method.e.

charged to Costing P&L Account ‡ Idle Time: ± ormal Idle Time. charged to total production ± Abnormal overtime. charged to Costing P&L Account ‡ Casual Workers. charged to specific job ± For increased production.Types of Labour Cost ‡ Overtime Cost: ± Customer requested. charged to specific job or as production overhead based on work done ‡ Out-Workers (who do the work in their premises) normally supply based on piece rate ‡ Outside Workers (outdoor duty) should be monitored to ensure adequate time booking . charged to the product ± Abnormal Idle Time.

charged same as Overtime Cost ‡ Fringe enefits are part of wages and treated accordingly ‡ Apprentice Wages. charged as production overhead . charged as production overhead ‡ Holiday acation Pay.Types of Labour Cost ‡ Attendance onus are part of wages and treated accordingly ‡ Shift Premium. charged as overhead or accounted in an inflated rate ‡ Leave with pay. accounted in an inflated rate ‡ Employer¶s contribution to employee insurance.

Halsey Weir Plan. Gantt Task and onus Plan. Accelerated Premium Plan ‡ Group Incentive Plans ± Priestman¶s Production onus.Emerson¶s Efficiency Plan. Rowan Plan.Taylor System. Merrick System ‡ Combination of Time and Piece Work . Points Scheme ( edeaux Plan.Halsey Plan. Rucker Plan.Incentive Wage Plans ‡ Premium onus Plan . Scalon Plan. arth Plan ‡ Differential Piece Work . Haynes Plan). udgeted Expenses onus ‡ Incentives for Indirect Workers ‡ Profit Sharing ‡ Co-Partnership . Towne Gain Sharing Plan.

beginners and slow workers. Earnings Time Rate x ¥(Standard Hours x Time Taken) . guarantees hourly wages for actual time taken.Premium onus Plans ‡ Halsey Plan: standard time fixed for each work. bonus of % paid if time saved onus Earnings Time Rate Wages Actual Time Taken x Time Rate % (Time Saved x Time Rate) ‡ Halsey ± Weir Plan: same as Halsey Plan except bonus is % compared to % in Halsey Plan ‡ Rowan Plan: same as Halsey Plan except bonus is a proportion ± (Time Saved Time Allowed) x Actual Time Taken x Time Rate ‡ arth Plan: Designed for trainees.

Differential Piece Rate System ‡ Lower and higher production rates are defined ‡ Taylor¶s System: ± Production < standard output: Earnings are % of normal ± Production or > standard output: Earnings are % of normal ‡ Merrick¶s System: % of standard output: Earnings are ± Production < % of normal rate ± Production > % and < % of standard output: Earnings are % of normal rate % of standard output: Earnings are ± Production > % of normal rate .

% of piece rate . bonus on step basis ( bonus steps defined) % efficiency. % of time rate ± More than standard output. nil bonus ± Up to ± More than % and < % efficiency. no bonus ± At standard output. bonus @ % of basic ± More than wages additional bonus @ % for each % increase in efficiency Gantt Task and onus System: ± Less than standard output.Combination Plans ‡ Emerson¶s Efficiency System: % efficiency.

bonus of time saved is given % to foreman % to worker and ‡ Haynes System ± ob expressed in standard man-minutes ± For repetitive work.Combination Plans ‡ edeaux System or Points Scheme: ± Points awarded for each unit of production ± Up to standard time. no bonus ± If time saved. time saved is shared between worker. time saved is shared between worker and foreman in : ratio ± For non-repetitive work. employer and foreman in : : ratio ‡ Accelerated Premium System ± onus rate increases with output .

balance transferred to reserve fund ‡ Scalon Plan ± Similar to Rucker Plan except that bonus is linked to ratio of direct labour cost to sales value .Group Incentive Plans ‡ Priestman¶s Production onus: ± onus paid in proportion to production in excess of standard output per week ‡ Rucker Plan ± Also known as Cost Saving Sharing Plan ± onus fixed proportion of value added (sales ± purchased materials & services) ± of the monthly bonus is paid out.

Group Incentive Plans ‡ Towne Gain Sharing Plan ± onus calculated as hours saved % of direct labour ‡ udgeted Expenses onus ± onus determined as a fixed percentage of savings in actual expenses over the budgeted expenses .

Incentives for Indirect Workers ‡ For expense and service cost centers ‡ Creates goodwill. increases efficiency fosters teamwork and ‡ Measuring or relating indirect work to production is difficult ‡ Establish standards repetitive activities for measurable and ‡ Generally clubbed under group incentive plans ‡ Two Types: Monetary & on-Monetary .

Profit Sharing ‡ ‡ ‡ ‡ ‡ ased on overall business prosperity and is over and above other benefits Types: Cash Plan. Combined Plan Minimum bonus for eligible workers determined under Payment of onus Act Discretionary bonus for all determined by the management Paid on a flat percentage or on slab rates . Deferred Credit Plan.

Direct Expenses asics .

consultant. testing related to the job ‡ Fees paid to architect. sub-contracting charges ‡ Generally considered as direct overhead and then allocated to the job or product . tools.Examples ‡ Cost of designs. freight. surveyor. drawings. insurance. technology. fixtures for the job ‡ Special services for layout. jigs. machining. royalty. patent fees. hire charges for special tools or equipment related to the job.

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