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Unit - III

Labour constitutes the second important major element of cost ,but equally
important is the cost of raw materials. As far as the material is concerned, right
policies of control can be laid down .At the same time, so much degree of
control cannot be exercised in labour , rather,it is not possible to expect it to be
controlled. Moreover materials can be easily stored to be used as and when
required but labour is a perishable commodity, which should be used .A person
may sell his labour and a buyer will purchase it. Such labour should be used
immediately and if not used, it is a waste and ultimately the cost of production
will be increased. Labour once appointed cannot easily be removed. Therefore
the right man at the job must be appointed. Labour cost may be more because of
inefficient labour , abnormal idle time, unwarranted overtime, increase of waste,
spoilage etc.

The labour cost can be divided into two types

(1) Direct Labour.

(2) Indirect Labour.

(1) Direct Labour

According to ICMA, Direct Labour cost is that cost which can be identified
with and allocated to cost centres or cost units. The labour spent in altering the
construction, composition or condition of product i.e, converting raw material
into finished product, is known as Direct Labour. The direct labour cost can
easily be identified and allocated to cost units. It varies directly with production,
thus creating a closeness to production.

(2) Indirect Labour

On the other hand, indirect labour cannot be conveniently identified with cost
unit or cost centre. ICMA defines wages as cost other than direct wages cost
.Therefore indirect labour cost is the amount of wages paid to workmen who are
not engaged in production of goods or services, but at the same time, indirectly
help the direct labour. In short wages paid to such workers cannot be identified
with any particular work. Examples of indirect labour cost are wages paid to
supervisors, inspectors, foreman, watchmen, timekeepers, repairers, cleaners
etc. If a worker is employed to perform a job a day, the remuneration is treated
as direct wages, when his job is identical to the job assigned. If not it is indirect
wages. One distinction is that direct labour cost , charged to a job, forms part of
prime cost, whereas indirect cost becomes a part of overhead.

Difference Between Direct And Indirect Labour

Direct labour is variable and effectively controlled. Indirect labour can be

controlled through labour budgets and comparing actual indirect labour cost
with budgeted indirect labour.

Objectives of Management in Relation to Labour Cost.

1. To estimate the correct labour cost of orders, jobs and processes to ascertain
the cost of each job, process or order.

2.Reduction of labour turnover.

3.Absorption of overheads by using direct labour as a basis.

4.To find out the correct amount of overheads by ascertaining the indirect
labour cost.

5.To increase the efficiency of labour by taking direct labour cost as a


General Techniques for effective control of labour cost

1.Scientific production planning

Effective production planning involves time and motion studies of various

operations. Production planning includes product engineering, process
engineering, scheduling and routing. By time and motion studies standard time
is fixed and it is to be seen that actual time conforms to the standard time.

2.Fixation of Labour Budgets

Based on production planning and schedules labour budgets have to be


3.Setting Labour standards

Based on standard time and production required standard labour cost is

determined. Actual labour costs are compared with the standard, variances are
arrived at and unfavourable variances are probed and remedial are actions are

4.Labour Reports

Frequent labour reports are obtained from various departments concerned with
labour to judge the effectiveness of incentive schemes and utilisation of labour.

5.Labour cost Accounting

Effective cost accounting system is necessary to ascertain the direct and indirect
labour cost. It helps in accurate estimation of cost of orders, jobs and processes.

Techniques of controlling labour cost can be effectively used by coordinating

the activities of various departments concerned with the labour namely

1.Personnnel Department

2.Engineering and work study Department

3.Time keeping Department.

4.Pay-roll Department.

5.Cost Accounting Department.

I- LabourTurnover

Labour turnover may be defined as change in labour force i.e., percentage

change in the labour force during a specific period. High labour turnover
indicates that labour is not stabilised and there are frequent changes by way of
workers leaving the organisation. High labour turnover is to be avoided. At the
same time very low labour turnover indicates inefficient workers are being
retained in the organisation.

Methods of Measurement of Labour Turnover

There are three methods of measuring labour turnover which are explained

1.Labour Turnover under Separation Method:

The basis of calculating labour turnover under this method is the number of
employees discharged during a period. It does not consider surplus being
discharged by the firm (retrenchment).

Number of employees left from the organisation during a period

Labour Turnover = ---------------------------------------------------------------- X 100

Average number of employees during a period

2.Labour Turnover under Replacement Method :

The number of employees recruited as Replacements during a period is taken as
basis for calculating labour turnover. This does not consider expansion

Number of employees replaced during a period

Labour Turnover = -------------------------------------------------------------X 100

Average number of employees during a period.
3.Labour Turnover under Flux Method :

This method takes into account the number of employees who left the
organisation and those recruited by the organisation during a period.

Number of employees left +Number of employees recruited during a period

Labour Turnover = --------------------------------------------------------------------X100

Average number of employees during a period

4.Additions Method:

Under this method of measurement of labour turnover, number of employees

recruited during a particular period alone is taken into consideration, including
those recruited for expansion programmes etc.

Number of additions during a period

Labour Turnover =------------------------------------------------------------ X 100

Average number of workers during the period

Causes for Labour Turnover

The causes for labour turnover can be broadly classified under three heads;

1.Personal Causes

2. Unavoidable Causes

3.Avoidable Causes

1.Personal Causes: Some of the employees may leave the organisation on

account of personal reasons as given below:

a. Circumstances of family

b. Retirement on reaching the prescribed age.

c. Change in marital status in case of women employees.

d. Dislike for the job or place

e. Death of the employee

f.Employee getting recruited in a better job.

g.Permanent disability due to accidents.

h.Involvement of employee in activities of moral turpitude.

2.Unavoidable Causes:In certain instances the organisation may discharge the

employees due to unavoidable reasons as mentioned below:

a.Termination of workers on account of insubordination or inefficiency

b.Discharge of workers on account of irregularity or long absence.

c.Retrenchment of workers by the company on account of shortage of work.

3.Avoidable Causes: Some of the employees may leave the organisation on

account of the following reasons:

a.Non availability of promotion opportunities.

b.Dissatisfaction with incentive schemes.

c.Unhappy with remuneration.

d. Unsuitable to job due to wrong placement.

e. unhappy with working conditions.

f.Non availability of accommodation, health and recreational facilities.

h.Lack of stability of Tenure.

Effects of Labour Turnover

The labour turnover ranges between 10% to 80% depending on nature of trade.
Being too low is also desirable as it offers few opportunities for youngsters for
promotion and they may look elsewhere for suitable positions. High labour
turnover results in high cost of production on account of the following reasons:

1.Reduction in output due to changes in labour force.

2.Increase in cost of production due to newly recruited employees who may

lack expertise and skill of carrying out the jobs.
3.Newly recruited employees may be unfamiliar with the work and may cause
increased loss of raw materials. Defectives, scrap and spoilage ultimately
increase the cost of production.

4.Inexprienced workers may cause more damage to tools and machinery which
results in frequent break down of machinery, hampering production.

5.Non availability of suitable employees may disrupt flow of production.

Cost of Labour Turnover :As explained above the effect of labour turnover is
to push up the cost. The expression of : loss of output, damage to materials,
spares, depreciation of machinery and replacement cost of labour in terms of
money is called cost of labour turnover. The cost of labour turnover is broadly
classified under two main heads:

1.Preventive costs

2.Replacement costs.

1. Preventive costs: These costs are incurred to prevent labour turnover. They
are incurred to avoid the causes of labour turnover. They include the following.

a. Administration costs incurred to provide better working conditions.

b. Cost of health care facilities provided for workers.

c. Cost of welfare facilities like recreation, sports and games , subsidised food
and drinks, crches for workers children etc.

d. Cost of old age facilities: This includes pension, gratuity, leave encashment.

2.Replacement Costs:These costs include the following:

a.Recruitment cost

b.Training cost

c.Losses arising due to inefficiency of newly recruited employees.

d.Loss of output

e.Cost of machine breakdown

6.Cost of spares, tools etc

7.Cost of compensation for employees involved in accidents etc.

Treatment of costs of Labour Turnover- Preventive costs are to be
apportioned to different departments on the basis of number of employees in
each department.

The replacement costs are allocated to the department which is the cause for
labour turnover. If the labour turnover is a result of short sighted policies of
management, the replacement cost is treated as overhead and apportioned
between different departments on the basis of number of employees in each

Reduction of Labour Turnover-Normal labour turnover is desirable to recruit

young employees into the firm. Labour turnover is inherent in every
organisation. However high labour turnover leads to increased cost of
production. Therefore high labour turnover is to be controlled by removing
avoidable causes. The following control measures will be helpful in reducing
high labour turnover.

1.Recruitment and placement An efficient system of labour policy will

avoid inefficient workers being employed and helps in placement of right
person for the right job.

2.Good working conditions - Efficient supervision, quality tools, good safety

measures and sufficient health care facilities will reduce labour turnover to a
great extent.

3.Goood wage payment scheme- Fair remuneration and suitable incentives

scheme attract skilled employees and retains them in the firm.

4.Promotion opportunities Fair remuneration and suitable incentive scheme

attract skilled employees and retains them in the firm.

5.Opportunities for creativity- Employees creativity and innovation are to be

encouraged through suitable rewards.

6.Labour participation- Labour participation in management will improve the

labour relations and comprehension of workers about the organisation will lead
to reduction in labour turnover.

Thus, labour turnover can be kept at reasonable levels only by creating suitable
environment for employees. Personnel department plays a vital role in this
Labour Turnover

Problem No.1

From the following data given by the Personnel Department,calculate the labour
turnover rate by applying:

(a) Seperation Method.

(b) Replacement Method.

(c) Flux Method.

No. Of Workers on the payroll:

At the beginning of the month 900

At the end of the month 1,100

During the month 10 workers left, 40 workers were discharged and 150 workers
were recruited. Of these, 25 workers are recruited in the vacancies of those
leaving while the rest were engaged for an expansion scheme.

Problem No.2

From the following information calculate the labour turnover rate:

Number of workers at the beginning of the period : 3800

Number of workers at the end of the period :4200

During the year,40 workers left while 160 workers are discharged 600 workers
are recruited during the year, of these 150 workers are recruited to fill up
vacancies and rest are engaged on account of an expansion of an expansion

Problem No.3

Calculate the number of Separations during the year from the following

Labour Turnover (based on Separations) 10%

Labour Turnover (based on Replacements) 8%

Number of Replacements during the year 24

II- Computation And Treatment of Labour Cost

(A) Allocation of Wages

Problem No.1
Rajan, a worker in a manufacturing unit is paid at the rate of Rs.10 per hour.His
working hours constitute 42 hours over a 5 days week. Time allowed per day as
approved absence for personal needs etc is 24 minutes.

Rajans job cards for the week ended 30 th Sep 2010 show that his during the
week is chargeable as under:

Job No. A- 42= 15 hours

Job No. K- 12= 20 hours

Job No.R-3 = 2 hours

The time unaccounted for is due to a power failure.

You are required to show Rajans wages for their week and how they would be
dealt with in cost accounts.

(B) Normal and Overtime Wages

Problem No.2

Calculate the normal and overtime wages payable to a workman from the
following data:

Calculate the normal and overtime wages payable to a workman from the
following data:

Days Hours worked

Monday 8

Tuesday 12

Wednesday 10

Thursday 10

Friday 9
Saturday 4




Normal working hours 8 hours per day, on Saturday 4 hours.

Normal rate Rs.2 per hour.

Overtime rate Upto 9 hours in a day at single rate and over 9 hours in a day at
double rate. Or upto 48 hours in a week at single rate and over 48 hours at
double rate, whichever is more beneficial to the workers

(C) Cash required for wage payment

Problem No.3

From the following particulars find the amount required for cash payment of
wages in a factory for a particular month:

Wages for normal hours worked 2,00,000

Wages for overtime worked 5,000

Leave Wages 4,000

Deduction for employees state insurance scheme 3,000

Employees contribution to provident fund 2,000

House rent to be recovered from 20 employees at Rs.50 per month. Employer

also contributes an equal amount towards ESI and PF.

(D)Labour cost to the Employer

Problem No.4(Cost per day)

From the following data,prepare a statement showing the cost per day of 8 hours
of engaging a particular type of labour:

1.Monthly salary (Basic plus dearness allowance) Rs.400

2.Leave salary payable to workman 15% of basic and dearness allowance.

3.Employees contribution to provident fund 8% of salary (items 1 and 2)

4.Employers contribution to E.S.I 5% of salary (items 1 and 2)

5.Pro rata expenditure on amenities to labour Rs.25 per head per month.

6.No. of working hours in a month 200

Types of Idle Time

Based on causes or reasons for its occurrence, idle time can be divided into two
categories i.e

(a)Normal Idle Time

(b)Abnormal Idle Time

(a) Normal Idle Time- This is inherent in all kinds of employment and cannot
be avoided. The cost of this time is borne by the respective jobs or products or
departments. Examples of normal idle time are given below:

1.Time consumed by the workers to walk from gate to department.

2.Time taken to pick up tools, change of dress and picking up instructions for

3. Time consumed for changing from one job to another.

4.Time taken for personal needs and tea break.

5.Waiting time when the machine is made ready for production work, called
Setting up Time.

Treatment of Normal Idle Time: Normal idle time is unavoidable and its cost
is charged to production. There are two ways of charging normal idle time to

(1)Normal idle time cost is taken as factory expensed and recovered as indirect

(2) The normal idle time cost is directly charged to production as direct wages.

(b)Abnormal Idle Time: The abnormal idle time is avoidable idle time which
occurs due to conditions which can be prevented. The reasons for abnormal idle
time are as follows:

1.Time lost due to machine break down

2.Time lost due to power failure

3.Time lost on account of shortage of materials

4.Time wasted due to lack of instructions

5.Time lost on account of strikes and lock outs

Treatment of Abnormal Idle Time

A basic principle of cost accounting is to eliminate the effect of all abnormal

losses and gains on jobs or processes or operations by transferring all abnormal
costs and gains to profit and loss account. They should not form part of the cost
of production. Wages paid for abnormal idle time is charged to costing Profit
and loss Account.

Control of Idle Time

The abnormal idle time can be controlled by effective planning. The reasons for
idle time are to be analysed and steps are to be taken to provide for all
contingencies like preventive maintenance of machinery, proper arrangement
for providing sufficient materials, preparation of job instructions in advance,
avoidance of strikes etc. Even normal idle time can be controlled by efficient
administrative planning and supervision.


Employees are expected to work during a fixed schedule of hours of a day of a

week. If they work beyond these hours the excess hours are called overtime
hours. In other words the work performed beyond the normal hours is called
overtime work.

The Indian Factories Act provides for payment of wages at double the normal
rates for overtime. If a worker works for more than 9 hours in a day or for more
than 48 hours in a week, he is treated to have worked overtime and is given
wages at double the normal rate for such time. The wages are calculated at
normal rate upto 9 hours and at double the normal rate for hours beyond 9 hrs
in a day or calculated at single rate upto 48 hours and a double the normal rate
beyond 48 hours.

The additional amount paid to workers on account of overtime is called

overtime premium. Overtime is not to be encouraged as it increases cost of
production because of the under mentioned reasons:

1.Overtime is paid at double the normal time rates.

2.Overtime is done after normal hours which are late hours, when fatigue sets in
and the efficiency of workers may not be at the required level.
3.In order to have sufficient work for overtime, the workers may not work to
their potential during normal time.

4.Expenditure incidental to overtime like electricity, maintenance of plant, wear

and tear and supervision etc have to be additionally incurred.

Each of the above will push up the cost and therefore overtime is not preferable
unless the demand for output is such that revenues justify the additional cost.

Treatment of Overtime-The normal wages form part of direct labour cost

whereas there is controversy regarding treatment of overtime premiums. The
work done during normal time has to bear single rate and work done during
over time to cost double which creates inequity. To do away with this the
normal wages are to be increased to include overtime premiums so that the jobs
either during normal time or during overtime will bear the same cost. But if
overtime is done an account of pressure from a specific customer, the overtime
premium is charged to that customer. If the overtime is due to abnormal reasons
like machine break down, power failure, the overtime premium is charged to
costing profit and loss account directly, as an abnormal cost.

Control of Overtime

Since the overtime has many disadvantages it is to be avoided and controlled to

the fullest extent. The following measures are suggested.

1.All usual work has to be completed in normal time to leave little scope for
overtime work.

2.The justification for overtime should be backed up by substantial benefits and

over time should be sanctioned by a competent authority.

3.The maximum limit of over time should be fixed for each worker.

4.Frequent and periodical reports are to be prepared and forwarded to the

management relating to hours of overtime and its cost. This will enable the
management to take corrective action.

III- Methods of Remuneration and Incentives
Introduction to Wages

Total wages earned by the employees is termed as remuneration. Time wages or

piece wages earned plus other financial incentives constitute the earnings of
employees. Productivity depends mainly on labour and other things like better
equipment, production planning are contributory factors to higher productivity.
Good wage system along with effective incentive system will encourage the
labour force to give their best to the employer. More over attractive pay package
will reduce labour turnover. In addition to monetary incentives non monetary
incentives also encourage employees to improve their productivity. Non
monetary incentives include, promotional opportunities, training schemes etc.
The remuneration system should serve the twin objectives of reducing the
labour cost and at the same time the workers are to be compensated adequately
for their work.

Essentials of a Good Wage System /Principles of Labour Remuneration

The features of a good wage system are listed below:

1.The wage system has to be fair to employees and the employer.

2.The workers are to be assured of minimum guaranteed wages irrespective of

work done.

3.Workers are to be compensated on the basis of their relative efficiency.

4.The wage system should be flexible to incorporate future changes.

5.The wage system should encourage higher productivity and reduce labour

6.The wage system should be as per the labour policy of the government and
follow the legislation applicable.

7.The wage system should equate with industry wage levels.

8.The method of computation of wages, wages rates and incentive system

should be simple and easy for workers to understand.
Methods of Remuneration

The remuneration paid to employees should reduce labour turnover, increase

productivity of employees and improve the quality of output. There are two
basic methods of wage payment:

1.Payment made on the basis of time spent by the workers in the factory
irrespective of output produced.

2.Payment of wages on the basis of production or work done irrespective of

time taken by the worker.

The methods of wage payment are respectively called

1. Time Rate System

a.At ordinary levels

b.At high wage levels

c.Guaranteed time rates.

2. Piece Rate System

a.Straight piece rate

b.Piece rate with guaranteed time rate

c.Differential piece rates

(i)Taylor Differential Piece rate system

(ii)Merrick Differential Piece Rate System

(iii)Gantt Task Bonus System

3.Bonus System

(a)Individual Bonus Systems:

(b)Group Bonus

1.Budgeted Expenses Bonus

2.Cost Efficiency Bonus

3.Priest Man System

4.Townes Gain Sharing system

5.Waste Reduction scheme

4.Indirect Monetary Incentives

1.Profit Sharing


1.Time Rate at Ordinary Levels

Under this system the worker is paid on hourly daily, weekly or monthly basis.
The payment is made according to the time worked irrespective of the quantity
of the work done.

Time wages = Hours worked X Rate per Hour

This method is suitable in the following cases:

1.Where quality of work is more important than the quantity of work.

2.Where the work requires high degree of skill.

3.Where the output of indirect workers cannot be measured e.g.Watchman,

supervisor, drivers, cleaners, etc.

4.Where production involves delay and interruption due to unavoidable factors.


It is simple to understand and easy to operate.

2.Each workers is assured of minimum wages.

3.Standard of the quality is maintained.

4.It is preferred by trade unions.

5.There is no discrimination among workers.

6.Average and below average workers are benefited.


1.Efficient and inefficient workers get the same wages.

2.Equality in wages to all will depress superior workers.

3.Labour cost cannot be estimated in advance. So it is difficult to submit


4.Slow workers go further slow, leading to overtime.

5.Effective supervision is necessary in order to reduce idle time. This increases

cost of production.

Time Rates at High Wage Levels

This system is similar to the previous one ,except that the time is high, higher
than the time rate at ordinary level, in order in order to have a higher standard of
performance. The high rate is equally effective as that of other incentive plans.
High wages increase labour cost rate is equally effective as that of other
incentive plans, High wages increase labour cost rate is equally effective as that
of other incentive plans. High wages increase labour cost unless it is
compensated by an increase in production. Overtime is not permitted.


1.Like the flat time rate, it is simple and easy for calculation.

2.Workers are satisfied.

3.It attracts highly efficient workers.

4.It will increase productivity thus reducing labour cost.

5.It reduces fixed overheads per job.

6.Employees get more returns.


1.It affects the less efficient workers.

2.The system fails where the output cannot be measured.

Guaranteed Time Rates

Under this system the payment is at the time rates, but adjusted to the cost of
living. Merit awards for personal qualities, skill , ability, punctuality etc are also
considered. The employer is not losing, but compensates it by increasing the
price of the products. In any case it is difficult to determine the wage index,
though the scheme is acceptable to all.

2.Piece Rate System(Payment of Result)

This is also called Payment by results. The workers are paid in the basis of
output produced by them. The earnings of the workers depend on the number of
units of output produced and the wage rate per unit received by the worker. The
payment by results system is successful only if the work is of repetitive nature.

The effect of piece rate is that the remuneration is at constant rate and labour
cost per unit remains stable throughout the range of output.

This method is suitable in the following cases

1.Quantity of work can be measured.

2.Work is of repetitive nature.

3.Quality of work is not important.

4.Where it is not possible to control effectively the wasting of time by workers.


1.This system is simple to understand and easy to operate.

2.No payment is made for idle time.

3.It requires less supervision.

4.It encourages for higher production by rewarding efficient workers.

5.Increased volume of production reduces cost per unit.

6.Breakage of machinery will reduce output and wages. Hence, machines will
be handled with care.


1.Fixation of satisfactory piece rate is a difficult task.

2.It does not assure minimum wages.

3.Inefficient workers are penalised.

4.Increase in production is likely to affect the quality of work.

5.High speed of work is injurious to the health of the workers.

6.In order to maximise production it is possible that machines are used

recklessly. This leads to heavy wear and tear of machinery.

7.It cannot be adopted in cases where work is not measurable.

Difference between Time and Piece Rate system

Time Rate System Piece Rate System

1.Minimum wages are guaranteed 1.Minimum wages are not guaranteed.

2.It is suitable to learners and beginners. 2.It is not suitable to learners and beginners

3.This pertains to hours of work 3.This pertains to output

4.Cost reduction is not possible 4.Cost reduction is possible

5.Individual efficiency is not accounted for 5.Individual efficiency is measured and

accounted for

6.Idle time is paid 6.Idle time is not paid

7.Quality of work is more important than the 7. Quantity of work is more important than the
quantity of work quality of work.

Variations of Piece Wages

There are variations of piece wages. They are as under

(I) Straight piece rate

(II)Differential piece rate:

a)Taylors Differential Piece Rate System

b)Merricks multiple piece rate system

c)Gantts task and Bonus plan

(I)Straight Piece Rate System

Under straight piece rate system workers are paid according to the number of
units produced at a fixed rate per unit

(ii)Differential Piece Rates

This is an improvement over straight piece rate to increases the performance of

both efficient and inefficient workers. Two or more rates are offered to workers.
Higher performance is paid at a higher rate and lower performance is paid at
lower piece rate. In other words the increase in wages is in proportion to
increase in production.

There are three types of differential piece rates

1.Taylors Differential Piece Rate

2.Merricks Differential piece rate system (Multiple piece rate system)

3.Gantt Task and Bonus plan

1.Taylors Differential piece rate system

The Father of Scientific Management F.W.Taylor has introduced this method.

Main features of the method are as under.

a.Time wages or minimum wages are not guaranteed

b.Standard output is determined and standard time is fixed for the output based
on time and motion studies.

c.Actual performance of workers is compared with the standard and the

efficiency level of the performance is computed as percentage of the standard.

d.Two piece rates are to be applied for computation of earnings of each worker

Low piece rate is applicable for below standard output

High piece rate is applicable for output at or above standard

For example if standard output per hour is 10 units and high piece rate is
Re.1.20 per unit and low piece rate Re.0.80 per unit workers producing 10 units
or more per hour are paid at Rs.1.20 per unit and those produce less than 10
units per hour are paid at Re.0.80 per unit.
Though no rates are specified high piece rate of 120 % of the straight piece rate
and low piece rate of 80 % of the straight rate are usually employed.

This method is intended to reward efficient workers and penalise substandard

workers. The assumption is that slow workers also will try to improve and attain
the standard to earn more.

This method was not popular due to its harsh treatment of average workers and
trade unions were against it because it does not guarantee time wages.

2.Merricks Multiple or Differential piece rate system

This method is an improvement over Taylors method. This method has three
rates for different level of performance. Wages are paid at ordinary piece rate to
those workers whose performance is less than 83% of standard output,110% of
the ordinary piece rate is given to workers whose level of performance is
between 83% and 100% of the standard and 120% of the ordinary piece rate is
given to workers who produce more than 100% of the standard output.

3.Gantts Task and Bonus Plan

Under this method a standard time is fixed for a task to be performed by

workers. Actual time taken is compared with the standard time and efficiency is
ascertained(1) Time wages are paid to the workers whose performance is below
100% i.e., those who take more than the standard time(2) Time wages and 20%
of time wages as bonus are paid to those workers who take standard time to
complete the job(whose performance is at 100%) (3)Wages at high piece rate on
the whole output are paid to the workers who take less than standard time
(whose efficiency is above 100%).

Some authors have provided for 20% bonus over and above high piece rate for
above standard workers. But an overwhelming majority of authorities concur
with the rates given above and are used here.

3. Premium and Bonus System

Premium plans are introduced to enhance the individual performance of

workers. The workers are induced to show efficiency by performance of job in
less than the standard time.

Under the premium plans a standard time is fixed for a specific job or operation
and the worker is paid for the actual time taken by him at hourly rate plus wages
for a proportion of the time saved as bonus. A premium and bonus plan is called
Incentive plan because the worker is provided incentive to earn more wages by
completing the work in less time.

Factors to be taken into accounts in designing a premium plan (or) Factors

Governing Incentive Schemes

1.The plan should be simple and easy for workers to understand.

2.The plan should offer sufficient incentive to the workers

3.The standard time should be set on the basis of time and motion study and
should be realistic.

4.Standard time once fixed should remain for a long duration unless there are
changes in the method of work.

5.The system should increase production and lower the cost of production.

6.The workers should have scope for higher earnings with each improvements
in performance level.

7.The quality of output is also to be maintained.

8.The system should also benefit indirect workers.

9.It should reduce labour turnover.

10.The cost of operating the schemes should be minimum.

Premium Bonus System

The following are some of the popular premium bonus systems

1. Halsey premium plan

2. Rowan system

3.Halsey- Weir premium plan

4.Barth variable sharing plan

5.Emersion Efficiency Bonus

6.Bedaux point premium system

7.Acclerating premium plan

1. The Halsey premium plan- This system is known as fifty fifty plan. It was
introduced by F.A.Halsey an American Engineer. Under this method a standard
time is fixed for the performance of each job, worker is paid for actual time
taken at an hourly rate plus 50% of time saved as bonus:
Total Earnings =Hours worked X Rate per hour + 50/100 (Time saved x Rate per hour)

=T X R + 50% (S T)R

2.Halsey Weir Scheme - Under this method the worker gets a bonus at 30%
of time saved unlike 50% under Halsey plan. Except for this change, Halsey and
Halsey weir plans are similar.

3.Rowan system or Rowan Plan This scheme was introduced in 1901 by

David Rowan of Glasgow England. The wages are calculated on the basis of
hours worked where as the bonus is that proportion of the wages of time taken
which the time saved bears to the standard time allowed.

Total Earnings under Rowan plan=

Hours worked xRate per hour + Time saved x Hours worked xRate per hour


S-T Standard time

= TxR+------------xTxR

4.Barths variable Sharing Plan- Under this scheme wages are not
guaranteed.The earnings is calculated by multiplying the rate per hour by the
geometric mean of standard hour and actual hours worked. Thus
Earnings= Rate per hour standard time x Actual time

5.Emersion Efficiency Plan

Under this plan a standard time is fixed for every job or work. Workers output
is measured as a percentage of the standard fixed. When a workers efficiency
reaches 66 2/3 % of the standard, he becomes eligible to get bonus at given
rate.The rate of bonus increases gradually when efficiency percentage goes up
from 67% to 100% of the basic time rate. For every additional 1% efficiency
beyond 100% additional bonus is 1% of the time rate.
6.Bedeauxs point premium system-It is a combination of time and bonus
schemes. Standards time for a job is determined by time study. Standard
production per hour is fixed and the unit measurement is minute. An hour is
taken as sixty minutes. Each minute at standard time is called a point-Bedaux
point or B. The number of points has to be determined in respect of each job. If
actual time is more than the standard time, the worker is paid on hourly basis.
Excess production is counted in points, for which a bonus of 75% is allowed to
the worker and remaining 25% goes to the foreman which itself is a novel

Earnings= Hours worked x Rate per hour =75/100xBSxRH/60

Where B.S.= Number of points saved i.e number of points actually earned less
the standard number of points for the job.

R.H= Basic Rate per hour.

7.Accelerating Premium plan- Under this premium plan bonus increases at a

faster rate as output increases. The plan offers higher incentive to the workers.
The efficiency is determined on the basis of time saved or increased output. The
plan is a complex one .It goals and forces the workers to increase production.|
Beyond a limit workers may find the strain is intolerable.


(A)Time and Piece Wages

Problem No.1

Mr.A a worker in a factory is paid on time basis. During the month of October
2010 he has worked for 200 hours. His hourly wage rate is Rs.10 per hour.

Mr.B another employee of the company is paid in the basis of piece wages.
During the month of October 2010 his output was 1,000 units. Rate of wages
per piece is Rs.3.
Problem No.2

In a factory workers are paid at Rs.50 per hour. During the month of April
2010,there were 25 working days of 8 hours each.

There is also a piece work plan where in Rs.10 is to be per piece produced.

During the month worker X produced on average 48 pieces per working day.

Ascertain the wages of worker X under

(a) Time Wages

(b)Piece Wages

(B)Taylors Differential piece Rate System

Problem No.3

With the help of the following information, ascertain the wages paid to workers
Ram and Shyam under Taylors differential piece rate system.

Standard time allowed 40 units per hour

Normal time rate Rs.4 per hour

Differential to be applied:

75% of piece rate when below standard

125% of piece rate when at or above standard

In a day of 8 hours,the workers have produced as follows:

Ram 280 units, Shyam 400 units.

Problem No.4

Calculate the earnings of workers A and B under Taylors differential piece rate
system and straight piece rate system from the following particulars:

Normal rate per hour Rs.18

Standard time per unit 20 seconds

Differential to be applied:

80% of piece rate below standard

120% of piece rate at or above standard

Worker A produces 1,400 units per day and worker B produces,1500 units 0per
day of 8 Hours.

(C)Merricks Multiple Piece Rate System

Under this method wages are computed as follows:

Efficiency - Piece rate Applicable

Upto 83% - Ordinary piece rate

83% to 100% - 110% of ordinary piece rate

Above 100 % - 120% of ordinary piece rate

Problem No.5

The following particulars apply to a particular job:

Standard production per hour Rs.1.20

In an 8 hour day

X produces 32 units , Y produces 42 units , Z produces 50 units

Calculate the wages of these workers under Merricks Multiple Piece rate

Problem No .6 (Gantts Task Bonus Plan)

The following are the particulars applicable to a work process:

Time rate Rs. 5 per hour

High task 40 units per week

Piece rate above the high task Rs.6.5 per unit

In a 40 hour week, the production of the workers was as follows:

A 35 units B 40 units
C 41 units D 52 units

Calculate the wages of the workers under Gnatts task bonus plan.

Premium Bonus System

Problem No.7 ( Halsey Premium Plan)

A worker is paid at 25 paise per hour for completing a work within 8 hour. If he
complete the work within 6 hours. Calculate his wages under Halsey plan when
the rate of premium is 50%.Also ascertain the effective hourly rate of earning
by the worker.

Problem No.8(Halsey Weir Premium Plan)

Calculate the total earnings from the following data under Halsey plan and
Halsey weir plan.

Standard Time 10 Hrs

Time taken 8 Hrs

Time Rate Rs. 2.50 per hour

Problem No.9(Rowan Plan)

Standard time 10 hours. Number of units to be completed 5.Hourly rate is

Re.0.25.Time taken 8 hours. Calculate a workers total earnings under Rowan
plan. Also determine the effective rate of earnings per hour.

Problem No.10 ( Halsey and Rowan Plans)

Calculate the earnings of a worker (A)Halsey premium plan and (B) Rowan

Time allowed 48 hours

Time taken 40 hours

|Rate per hour Re.1


Definition of Overhead

Overhead is defined as ,the aggregate of indirect material cost ,indirect wages

and indirect expenses. The term indirect means that which cannot be allocated,
but which can be apportioned to or absorbed by cost units or cost centres.
Therefore overhead refers to those expenses which cannot be identified with
particular products, process or jobs.

Classification of overheads

Classification is the process of grouping of costs according to their common

characteristics. Classification of overhead is important in order to identify costs
with cost units or cost centres. There are various methods for the classification
of overhead. The method to be rendered and policy of management. Overheads
may be classified in the following ways.

1.Classification according to Nature:

Indirect Materials: Indirect materials are those materials which do not form a
part of the finished product. Cost of indirect materials cannot be identified with
and allocated but can be apportioned to a particular product, process or jobs.
E.g. Cotton waste, Lubricant , Grease, Small tools etc.

Indirect Labour: Indirect labour is that labour which is not directly engaged in
production of goods or services. It indirectly helps the direct labour engaged in
production. The wages paid for indirect labour is known as indirect wages.
Indirect wages are those which cannot be identified with and allocated but can
be apportioned to a particular product, process or job. E.g. Wages of mechanics,
supervisors, watchman, sweepers, time keeper etc.

Indirect Expenses : Expenses (other than indirect material and indirect labour)
that are not directly charged to production are indirect expenses. E.g. Office
expenses ,selling and distribution expenses.

2.Classification according to Function:

Factory overheads: These are also called manufacturing overheads, works

overheads or factory on cost. Factory overheads cover all expenses incurred
from the stage of raw materials to finished foods. It includes indirect material,
indirect labour and indirect expenses in producing an article .E.g. Factory rent,
supervisors salary ,power and fuel, heating and lighting, depreciation of factory
building, consumable stores etc.

Administration overheads: These are expenses incurred for running the

administrative office. E.g. Office rent and salaries, printing and stationery,
telephone expenses, depreciation of office building etc.

Selling overheads : These are expenses incurred for actual sales and
promotion of sales. E.g. Salaries of sales manager, commission , travelling
expenses of salesman and promotion expenses like advertisement and publicity,
after sales service etc.

Distribution overheads : These are expenses concerned with packing and

delivery of goods to the customer. E.g. Packing charges, warehouse expenses,
delivery van depreciation , loading charges etc.

3.Classification according to Variability:

Fixed overheads: Expenses that do not vary with volume of production are
known as fixed overheads. E.g Salary, rent , insurance etc.

Variable overheads: Expenses that vary with the volume of production are
known an variable overheads. These are direct costs. E.g. material , wages ,
selling commission, electricity charges etc.

Semi- variable overheads : Expenses that are partly fixed and partly variable
are called semi- variable overheads. These expenses do not vary in the same
ratio in which the output changes.

4. Classification according to Normality

Normal overheads: Normal overheads refer to such overheads which are

expected to be incurred in attaining a given output. These overheads are
unavoidable. They are therefore included in production costs.

Abnormal overheads : Abnormal overheads refer to such overheads which are

not expected to be incurred in attaining a given output. such overhead costs are
charged to costing profit loss account . E.g.Cost of abnormal idle time
,abnormal wastage.
5.Classification according to controllability

Controllable overheads : Controllable costs are variable costs which can be

controlled. E.g. Cost of power used in a particular department is controllable by
the departmental manager.

Uncontrollable overheads : Uncontrollable costs are fixed costs which cannot

be controlled. E.g. Rent, salaries etc. These expenses are incurred on time basis.

Cost Classification

Cost classification is the process of grouping of costs according to their

common characteristics. Classification of overhead is important in order to
identify costs with cost units or cost centres. There are various methods of
classification of overheads. The method to be adopted depends upon the type
and size of business, nature of product or service and policy of management.
Costs may be classified according to their function ,variability, normality and

Cost Allocation

Cost allocation is defines as the allotment of whole amount of cost to cost

centres or cost units. In other words it is the process of charging the full amount
of overhead without division, to a particular department or cost centre. E.g.
Salary of sales manager is allocated to sales department. Similarly, overtime
premium of a particular department can be allocated to that department.

Cost Apportionment

Cost apportionment is defined as the allotment of proportion of cost to cost

centres or cost units. In other words it is the process of distribution of overheads
to various departments or cost centres on some equitable basis.

E.g. Factory rent is an expense which cannot be allocated to any one department
but is to be shared by all production departments on the basis of floor area.

Cost Absorption

Cost absorption means allotment of overheads to jobs. In other words,

distribution of the overhead expenses of a particular department, over the units
produced in that department is called cost absorption.
Difference between Allocation and Apportionment.

1.Allocation means the allotment of whole amount of cost to cost centres or

cost units. Apportionment means the allotment of proportions of cost to cost
centres or cost units.

2.Expenses which can be directly identified with a particular department or cost

centre is called Allocation. On the other hand ,expenses which cannot be
directly identified with a particular department or cost centre is called

3.Allocation is much wider term than Apportionment.

Distribution of Overhead

Distribution of overhead consists of apportioning and allocation of overhead to

the different departments. The distribution is followed by redistribution of the
costs assigned to certain departments. The distribution is of two types:

1.Primary Distribution and

2.Secondary Distribution

1.Primary Distribution of Overheads

Primary distribution of overheads is the process of allocating and apportioning

the costs on suitable basis to all the departments or cost centres. Primary
distribution is done without distinction between production and service de-

Bases of Apportionment

In order to ascertain the correct cost of cost centre and cost units, suitable bases
have to be adopted for allocation and apportionment of manufacturing

2.Secondary Distribution of overheads

Secondary distribution is the process of redistribution of service department

costs to production departments.

This is done as output or jobs pass through one or more production cost centres
only. This kind of distribution is called secondary apportionment. Suitable bases
have to be adopted for redistribution of service department cost to production

I. Bases of Apportionment

Problem No.1

Indicate the basis you would adopt for apportionment of the following items of
overhead expenses to different departments.

1.Factory rent 2.Factory lighting 3.Power 4.Depreciation of plant and

machinery 5. Insurance of plant and machinery and fire insurance of stock
6.Welfare expenses 7. Material handling charges 8. Indirect material 9.Indirect
wages 10. Supervision 11.Repairs to plant expenses 12.Employers contribution
to E.S.I 13.Employers contribution to P.F 14. Stores expenses 15.Sundry

II. Primary Apportionment of Overhead Expenses

Problem No.2

Jai Ltd has three production departments A, B and C and two service
departments D and E. The following figures are extracted from the records of
the company:

Rent and rates 5,000

Indirect Wages 1,500

Depreciation of Machinery 10,000

General lighting 600

Power 1,500

Sundries 10,000

Following further details are available:

Total A B C D E

Floor space in square feet 10,000 2,000 2,500 3,000 2,000 500

Light Points 60 10 15 20 10 5

Direct Wages (Rs.) 10,000 3,000 2,000 3,000 1,500 500

H.P of Machines 150 60 30 50 10 -

Value of Machinery 2,50,000 60,000 80,000 1,00,000 5,000 5,000

Apportion the cost to various departments on the most equitable basis by

preparing a primary departmental distribution summary.

Problem No. 3

Krishna producing concern is divided into four departments. A,B,C are

production departments and D is a service department. The actual expenses for
a period are as follows:

Rent 10,000

Repairs to plant 6,000

Depreciation of plant 4,500

Lighting Expenses 1,000

Supervisory Expenses 15,000

Fire insurance (on stock) 5,000

Power 9,000

Employers liability for insurance 1,500

The following information is available in respect of the four departments



Area (Sq.feet) 1,500 1,100 900 500

Number of lights 75 11 9 5

Number of employees 200 150 100 50

Total wages (Rs.) 60,000 40,000 30,000 20,000

Value of plant (Rs.) 2,40,000 1,80,000 1,20,000 60,000

Value of stock (Rs.) 1,50,000 90,000 60,000 -

Apportion the cost to the various departments on the most equipment method.

III- Secondary Apportionment or Secondary Distribution Of Overhead


Problem No.4

Calculate the overhead allocable to production departments A and B from the


There are two service departments X and Y, X renders service to A and B in

the ratio of 3:2 and Y renders service to A and B in the ration of 9:1.
Overheads as per primary overhead distribution is :

A- Rs. 49,800 , B Rs.29,600, X Rs. 15,600, Y- Rs.10,800.

Problem No.5 (Primary and Secondary Apportionments)

Strongman Ltd has three production departments A,B and C and two service
departments X and Y.

The following particulars are available for the month of March 2010,concerning
the organisation.
Rent 15,000

Municipal taxes 5,000

Electricity 2,400

Indirect wages 6,000

Power 6,000

Depreciation on Machinery 40,000

Canteen Expenses 30,000

Other labour related costs 10,000




The following further details are also available:

Total A B C X Y

Floor space (sq.mts) 5,000 1,000 1,250 1,500 1,000 250

Light points 240 40 60 80 40 20

Direct Wages (Rs.) 40,000 12,000 8,000 12,000 6,000 2,000

Horse power of 150 60 30 50 10 -

2,00,000 48,000 64,000 80,000 4,000 4,000
Cost of Machines (Rs.)

The expenses of service departments are to be allocated in the following manner


X 20% 30% 40% _ 10%

Y 40% 20% 30% 10% -

You are requested to calculate the total overhead of the three production