LABOUR COSTS:

Contents
• Learning Objectives
• Introduction
• Direct and indirect labour
• Payroll Accounting
• Calculation of net wages
• Wage incentive schemes
• Learning curve
Learning objectives
▪ Define direct labour and indirect labour costs
▪ Distinguish between time base remuneration
methods and piecework remuneration methods
▪ Use labour remuneration principles to calculate the
net salary/wages of an employee
▪ Explain the role of the different premium bonus
systems and the calculation of the main incentive
schemes used by the majority of business entities
▪ Record the basic accounting labour transactions in
the relevant ledger accounts
▪ Use learning-curve technique to estimate labour
hours
Introduction
• Remuneration is compensation paid by employers to their
employees in exchange for the services they provide to
the employer.
• Services may include physical labour, application or
parting of knowledge, managing a process where a
product is manufactured or a service is rendered
• The remuneration system allows an employer to
determine the salaries and wages payable to employees.
• Information from this system is also used to calculate
labour cost assigned to specific products and/or services
• In order to do this, the costs have to be included in the
accounting or cost records
Direct and Indirect labour
Payroll accounting
• When salaries or wages are earned, an expense
account – “salaries and wages” is debited with the
total labour costs incurred for the period and the
credit entries go to all the funds to which
contributions are owed as well as an account
“creditors for salaries and wages”
• As soon as the payment is made, the bank is
credited and the various funds (pension, medical
aid, etc.) are debited.
Payroll accounting

• Recording wages as a cost element

• The gross wages account does not distinguish between
direct and indirect labour.
• Direct labour is an element of production cost whereas
indirect labour is regarded as part of manufacturing
overheads and contributes to production cost as a
manufacturing overhead cost
Payroll accounting

• The accounting entries regarding labour costs will

appear in three transactions namely the:
• Labour costs incurred on the payroll
• Payroll analysis into direct and indirect labour, and
• Payment of labourers and contributions
• Idle time is the time labourers are unoccupied due to
disruptions in the production process and is
normally treated as an overhead cost.
Payroll accounting
• There are other costs associated with employees
directly involved in producing a product (e.g
workers on an assembly line) but are considered as
indirect labour and made part of manufacturing
overheads and these are
i. Idle time
ii. Fringe benefits
iii. Overtime premium
Payroll accounting (Example)
• ABC Ltd provides you the following on the time
tickets of workers for the week ended 15 March:
Hours Worked

Name Job Basic Normal Overtime

Hourly
Rate
P. Smith Panel beater R20 32 (1 day 5
leave)
J. Turner Spray painter R30 40 3

S. Williams Supervisor R35 40 2

Payroll accounting (Example)
• Notes:
• Overtime is paid at time and a half of the normal time.
• Supervisors only receive a basic rate for overtime and no
overtime premium.
• The following are deducted from gross wages:
• Income tax (10%) PAYE
• Pension 6%
• Medical aid R30 per person

Pension is exempted from income tax and the employer

contributes a further 6% to the pension fund and R50 for
medical aid.
Wage sheet – cost incurred
Wage sheet – direct and indirect cost
Accounting entries

N$3 755
Accounting entries
Accounting entries
Accounting entries
Accounting entries
Accounting entries
Accounting entries
Notes on Calculation of net wages
• Requires information about:
• Employee’s attendance times
• Absences from work
• Hourly wage rates
• Various deductions – PAYE, pension (or provident fund),
medical aid, Social security (unemployment insurance
fund – UIF), loans, etc.
• Leave can be given to the employee by means of
paid leave or the value of leave can be paid out to
him.
• Become very complex as a result of Union and
legislation – AA, Labour Act, Soc Sec Act, Income Tax
Act, etc
Types of remuneration
• Labour remuneration systems
• Fixed salary – remains fixed irrespective the quantity of
work. Get paid even if employee is on leave
• Hourly wages – directly linked to hours work – calculated
hrs x rate per hour = Gross Remunumeration
• Piece work – paid for work actually done – calculated
units completed x rate per unit = G R
• Several methods that combine piecework, hourly wages
and fixed salaries have been developed
• Benefit from advantages and avoid short comings
Normal, gross and net remuneration
Normal deductions
• Pension fund/provident fund contribution
• Must be deducted from the gross remuneration before
any other deductions are made
• The employer also contributes for the employee a
certain amount to the pension/provident fund
• PAYE (Pay As You Earn)
• This deduction should be made after the pension fund
contribution has been deducted
• PAYE is deducted from the gross remuneration
• Min of Finance provides tax tables for the calculation of
the PAYE purposes
Normal deductions
o Social Security Fund Contribution
 Statutory requirements to contribute
 Mandatory limits of 0.90% of basic salary with a minimum of
N$2.70 and a maximum of N$ 81
 Are deducted from gross remuneration of the employee
 The employer also pays the same amount in favour of the
employee to the same fund
o Other deductions
 Medical aid contributions – certain amount is deducted from
the gross remuneration of the employee towards the medical
aid fund
 The employer also contributes to the same fund
 VET Levy – 1% of total salaries and wages payable to NTA by
employers. Cannot be deducted from employees.
 Trade union membership fees
Format: computation of net pay
Normal pay (Normal time x Normal rate) X
Overtime (over time x overtime rate) X
Any other form of remuneration X
Allowances X
Gross earnings X
Pension contribution (x)
Taxable income X
Deductions
PAYE X
Social security X
Medical aid X
Total deductions (x)
Net earnings x
Example on Calculation of wages
Mrs. Hill owns a coffee shop. She employs a supervisor, who earns a
monthly salary of N$6 795. The baker gets N$ 1 700 per month and
the two waiters are paid N$ 490 per week.
Pension fund contributions equal 7.50% per salary earner. Pension
Fund contributions by the employer are 10%. The supervisor
contributes N$ 230 per month to a retirement annuity fund.

a) Calculate the taxable income of each employee at the end of the

month.
a) Calculate the employer’s contribution.
Solution A
Solution B
 Wage incentive schemes
Major aim of bonus schemes is to provide an incentive to
employees to save time in the production process.
Premium bonus schemes
• Halsey method (50/100) – reward the employee with a
payment based on half the time saved:
Time allowed – Time taken = Time saved
Time saved x 50% x Basic rate per hour)
• Halsey-Weir premium bonus system – reward
employees 33.33% of the time saved multiplied by the
wage rate per hour
Time saved x 33.33% x basic rate per hour
Wage incentive schemes
• Rowan premium bonus system – percentage is calculated
of the time worked (or taken) (TW), in relation to the time
allocated (TA) multiplied by the time saved (TS)
multiplied by the wage rate per hour (WRH):
(Time worked/taken x Time saved x wage rate per hour)
divide by time allowed

• Taylor’s differential piecework system – based on

performance of the employee
Units produced x rate per unit x standard percentage
given
Wage incentive schemes
 Emerson efficiency scheme – guaranteed minimum wage
and standard are determined for each job. Actual time is
expressed as a percentage of standard time.
If the percentage is lower than 67% only the minimum
wage is paid;
Between 67% and 100% a small bonus is paid;
and over 100% an additional bonus equivalent to the
percentage over 100% is added to the normal hourly rate
and employee is paid at the higher rate
 Bonus points – standard points are allocated on
completion of each task or product, according to a
predetermined standard. Allied to differential piecework
 Profit-sharing schemes
EXAMPLE – INCENTIVE SCHEMES
During March 2014, Jakes, whose basic rate of pay is N$15.00 per
hour worked, was assigned the following jobs which he completed:

Job no. Time allowed in hours Time taken in hours

1 28 22
2 20 15
Required:
Calculate Jakes basic wages and his bonus based on:
1.1 Rowan premium bonus system
1.2 Halsey-Weir premium bonus system
1.3 Halsey premium bonus system
SUGGESTED SOLUTION
1.1 Rowan Premium bonus system
Time worked x Time saved x Wage rate per hour
Formula Time allowed

Basic
Job 1 22 x 6 x 15 Bonus wage Total
28 70.71 330 400.71

Job 2 15 x 5 x 15
20 56.25 225 281.25
Gross remuneration 681.96
SUGGESTED SOLUTION
1.2 Halsey-Weir premium bonus system
Formula (33.33% of time saved x wage rate)

Basic
Bonus wage Total
Job 1 33.33%x6x15 30.00 330.00 360.00

Job 2 33.33%x5x15 25.00 225.00 250.00

Gross Remuneration 610.00
SUGGESTED SOLUTION
1.3 Halsey premium bonus system
Formula (50% of time saved x wage rate)

Basic
Bonus wage Total
Job 1 50%x6x15 45.00 330.00 375.00

Job 2 50%x5x15 37.50 225.00 262.50

Gross remuneration 637.50
Example Taylor’s differential piecework
system
Standard time allowed: 65 units per hour
Normal hours per day: 8 hours
Wage rate per hour: N$ 20

If the employee’s work is below standard the employer has set a bonus
percentage at 45%. If the employee’s work is standard/above standard the
employer has set a bonus percentage at 95%.

Mark manufactured 520 units and John 600 units on a given day.

Required:
Calculate the employee’s gross remuneration using Taylor’s differential
piecework systems.
SUGGESTED SOLUTION
Standard production 65 x 8 520 units
Hours worked x wage rate
Standard time rate standard units

8 x 20 0.31 per unit

520

Mark John

Basic wage (520/65 x 20) 160.00

(600/65 x 20) 184.62

Bonus (520 x 0.31 x 95%) 153.14

(600 x 0.31 x 95%) 176.70
313.14 361.32
Learning curve
CIMA OFFICIAL TERMINOLOGY:
The mathematical expression of the phenomenon that, when complex and
labour-intensive procedures are repeated, unit labour times tend to decrease
at a constant rate.

According to the learning curve model, as the amount of experience in

performing a task increase, the average time to complete the task declines.

This relation can be approximated as a constant percentage reduction in the

average direct labour input time required per unit as the cumulative output
doubles.

Used to estimate the number of labour hours that a company will need
to complete a production process or an order.
Example of a learning rate of 90%
Example of a learning rate of 80%
Learning curve formula
Learning curve example
Example extended
• Same information as per the previous slide using a
90% learning rate
• Let us assume that the manufacturer above has the
opportunity to bid for a contract to produce ten
batches of his product and wishes to estimate the
time it will take to complete the contract, in order
to help set the tender price. How much time should
be provided for?
Solution
Calculate the learning rate
Assume that the following set of information about
Outdoors CCs umbrellas is available:
It takes 10 hours to produce the first unit and 6,4
hours to produce the fourth unit. A learning model is
applicable.
Required:
Calculate the learning rate for the scenario above.
Suggested approach
First of all, we need to determine how many times
the number of units produced doubles. Here it
doubles twice, and the following formula is therefore
applicable:
Question 1
PT has discovered that when it employs a new test
engineer, there is a learning curve with a 75%
learning rate that exists for the first 12 customer
assignment. A new test engineer completed her first
customer assignment in 6 hours.

How long should she take for her seventh

assignment, to the nearest 0,01 hours?

Note: The index for a 75% learning curve is -0,415.

Question 2
FH is an electronics company that has developed a
new product for the video conferencing market. The
product has successfully completed its testing phase
and FH has now produced the first four production
units. The first unit took 3 hours of labour time and
the total time for the first four units was 8,3667
hours.

What is the learning curve improvement rate

(learning rate), to the nearest 0,1%?
These slides are only a
guideline.
Please read further!!!