Cost Accounting

An Introduction
 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.
 Introduction
• 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.
 Introduction
• 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 Concepts
• Cost Unit – Is a unit of product, service or time in terms of which
costs are ascertained or expressed. It is a unit of measurement.
• Responsibility Centers – is the unit or function of an organization
under the control of a manager who has direct responsibility for its
performance. E.g. Cost Center, Revenue Center, Profit Center,
Contribution Center, Investment Center.
• Cost Center – Is a location, person or item of equipment for which
costs may be ascertained and used for the purposes of cost control.
• 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, service, process or activity for which a
separate measurement of cost is required.
 Financial & Cost Accounting
No. Basis Financial Accounting Cost Accounting
Financial performance and
1. Objective Ascertain cost and cost control
position
Shows overall costs and profit / Shows details for each product,
2. Costs and profits
loss process, job, contract, etc
Emphasis on control and
3. Control / Report Emphasis on reporting
reporting
4. Decision making Limited use Designed for decision making
5. Responsibility Does not fix responsibility Can effectively fix responsibility
6. Time frame Focus on historical data Focus on present and future
General reports like P&L
Can generate special reports
7. Type of reports Account, Balance Sheet, Cash
and analysis
Flow Statement
Voluntary, except for some
8. Legal need Statutory requirement
cases
Records internal and external
9. Transactions Records external transactions
transactions
10. Reader Everybody Internal management
11. Formats Standard, as per law Tailor made
12. Access Everybody, except for some Very limited access
13. Unit of value Monetary Monetary and physical
 Methods of Costing
No. Costing Method Meaning Application
A job, product, batch, contract,
Engineering, Construction, Ship
1. Job Costing service or any specific order is
Building, Pharmaceuticals, etc
treated as a cost unit.
For specific orders, contract or
Contract Costing Construction, Engineering, etc
service.
Garments, Pharmaceuticals,
Batch Costing Production is done in batches. Components, Toys, Tyres,
Tubes, etc
Products subject to a process;
Paper, Chemicals, Textiles,
2. Process Costing output of one process becomes
Sugar, etc
input for the next process.
Operation Type of operations performed is
Engineering, Textiles, etc
Costing monitored.
Single product, process
involved or where product is
Unit Costing Cement, Steel, etc
uniform, continuous and
identical.
Transport, Railways, Hotels,
Service Costing For service operations
Hospitals, etc.
Application of two or more
Multiple or
costing methods. Involves
Composite Vehicles, Consumer Goods, etc
manufacturing and assembly
Costing
operations.
 Costing Techniques
No. Costing Technique Description
Charging variable costs to operations, processes or products
1. Marginal Costing and writing off all fixed costs against profits in the period in
which they arise.
Charging all direct costs to operations, processes or products
2. Direct Costing and writing off all indirect costs against profits in the period in
which they arise.
Charging all variable costs and fixed production overheads to
operations, processes or products and writing off selling,
3. Absorption Costing
distribution and administration overheads against profits in the
period in which they arise.
Using the same costing principles and / or practices by a
number of firms in the same industry. Helps in inter-firm
4. Uniform Costing
comparison, price fixation, cost control / reduction and seeking
government tax relief / protection.
System which involves fixation of cost standards, ascertain
5. Standard Costing variances of actual cost with standard cost, variance analysis
and presentation for corrective action and decision making.
System which involves establishment of budgets, comparison
6. Budgetary Control
of actual with budget, variance analysis and corrective action.
7. Historical Costing Actual cost ascertained after it has been incurred.
 Cost Treatment
• Cost Ascertainment is the process of determining actual
costs after they have been incurred.
• 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.
• 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 Apportionment is the process of charging the
proportion of common items of cost to two or more cost
centers on some equitable basis.
• Cost Absorption is charging cost from cost centers to
products or services by means of a pre-determined
absorption rate.
 Cost Classification
Classification Meaning Example
By Nature or Element
Which can be directly allocated to a Basic raw material,
Direct Material Cost
product, job or process primary packing material
Which cannot be directly allocated to a Stores, consumables,
Indirect Material Cost
product, job or process some low value items
Labour directly engaged for a specific
Direct Labour Cost Shop floor labour
job, contract or work order.
Labour not directly engaged for a
Indirect Labour Cost Staff departments
specific job, contract or work order.
Processing charges,
All direct costs other than materials
Direct Expenses machine hire charges,
and labour costs.
excise duty, etc
Rent, repairs, telephones,
All indirect costs other than indirect
Indirect Expenses electricity, utility costs,
materials and indirect labour costs.
insurance, depreciation
Sum of indirect material, indirect labour
Factory Overheads
and indirect expenses for the factory.
Administration Sum of indirect material, indirect labour
Overheads and indirect expenses for the office.
Sum of indirect material, indirect labour
Selling Overheads
and indirect expenses for selling.
Distribution Sum of indirect material, indirect labour
Overheads and indirect expenses for distribution.
 Cost Classification
Classification Meaning Example
By Function
Sum of direct material, direct labour,
Production Cost
direct expenses and factory overheads.
Cost of the Admin Department for the
Administrative Cost
management of the organization.
Cost for seeking to create and
Selling Cost
stimulate demand and secure orders.
Costs for making the packed product
Distribution Cost ready for dispatch to recovery of
material for recycling, if any.
Costs for developing new or improved
Research Cost
product / application.
Pre-Production Cost Cost of trial run or production.
By Relation to Cost Center
Sum of direct material, direct labour
Direct Cost and direct expenses of the Cost
Center.
Sum of indirect material, indirect labour
This cost is apportioned
Indirect Cost and indirect expenses of the Cost
to the Cost Center.
Center. Also called as Overhead Cost.
 Cost Classification
Classification Meaning Example
By Variability / Behaviour
Costs that do not vary with the volume
Fixed Cost Rent, insurance, salary
of production.
Costs that vary directly with the volume All direct costs, variable
Variable Cost
of production. overheads
Costs where one part remains fixed in
Semi-Variable / Semi-
a given range and the other part varies Telephones, electricity
Fixed Cost
with volume of production.
By Controllability
Costs that can be influenced by a
Controllable Cost Direct costs
decision maker at a particular level.
Costs that cannot be influenced by a All costs can ultimately be
Uncontrollable Cost
decision maker at that particular level. controlled at the top.
By Normality
Cost that is normally incurred at a level
Normal Cost Cost as per standard
of operation.
Cost that is not normal at the level of Abnormal loss, abnormal
Abnormal Cost
operation. idle time
 Cost Classification
Classification Meaning Example
By Inventory
Product Cost Cost that is absorbed to value of stock Manufacturing costs
Period Cost Cost that are expensed out. Fixed costs
Costs incurred for generating revenue.
Expired Cost COGS, admin expenses
Expensed cost.
Unexpired cost, capitalized cost,
Fixed assets, prepaid
Deferred Cost deferred revenue expenditure – would
expenses, R&D expenses
provide benefits in future periods.
By Time
Actual cost ascertained after it has
Historical Cost
been incurred.
Future cost ascertained in advance –
Pre-determined Cost
could be standard or estimated cost
What the cost should be - based on
Standard material and
Standard Cost engineering specifications and efficient
labour costs
operating conditions
What the cost will be - estimated on the
Projection for actual
Estimated Cost basis of past experience adjusted for
material cost for next year
anticipated changes.
 Cost Classification
Classification Meaning Example
By Decision Making
Cost that is relevant for making the
Relevant Costs
underlying decision.
Cost that is not relevant for making the
Irrelevant Costs
underlying decision.
Historical or past cost already incurred
Sunk Costs
and cannot be changed.
Fixed costs to be incurred even when
Shut-Down Costs
the plant is shut down.
Out of Pocket Costs Costs that involve cash outlay.
The value of sacrifice made in
Opportunity Costs
accepting an alternate course of action.
Notional costs that do not have a cash Rent of own premises,
Imputed Costs
outlay, are similar to opportunity cost. interest on own capital
Increase or decrease in cost due to
Differential Costs change in activity level. Also called
incremental cost.
Total variable cost attributable to one
Marginal Cost unit of product. Incremental cost of
making one unit of product.
Replacement Cost Current cost of an identical asset.
Cost of converting raw material into a
Conversion Cost
finished product.
Costs that are committed and have to
Committed Costs
be incurred.
Discretionary Costs Costs that can be avoided.
 Cost Audit
• Cost Audit is the verification of cost accounts and a check on the
adherence to the Cost Accounting plan. It comprises of verification
of the cost records and ensuring that they adhere to the principles of
cost accounting.
• Purpose of Cost Audit are protective (examine undue wastage /
losses to reflect realistic cost of production) and constructive
(provide information for management decision making).
• Items excluded from Cost Accounts – items of financial nature like
Other Income, Finance Costs, Financial Accounting adjustments
and appropriations. These include profit on sale of fixed assets /
investments, interest income / expense, dividend / rent income,
preliminary expenses written off, tax, cash discount, provision for
doubtful debts, etc.
 Cost Components

No. Cost Component Description

Direct Material Cost + Direct Labour Cost + Direct Expenses
1. Prime Cost (Direct Material Cost = Opg. Stock of RM + Net Purchase Cost
– Clg. Stock of RM)
Works or Factory Prime Cost + Factory Overheads + Opg. Stock of WIP – Clg.
2.
Cost Stock of WIP
Cost of Production
3. or Cost of Goods Factory Cost + Admin Overheads
Produced
4. Cost of Goods Sold Cost of Production + Opg. Stock of FG – Clg. Stock of FG
5. Cost of Sales Cost of Goods Sold + Selling & Distribution Overheads
 Costing P&L Account
No. Particulars Amount Per Unit

Direct Material Cost

= Opening Stock of Materials
+ Purchases
A + Expenses on Purchases (on number of units produced)
- Purchase Returns
- Closing Stock of Materials
- Value of Normal Scrap of Direct Materials

Direct Labour Cost

= Direct Labour Cost Paid
B (on number of units produced)
+ Outstanding / Payable
- Prepaid

C Direct Expenses (on number of units produced)

D Prime Cost = (A + B + C) (on number of units produced)

Works / Factory Overheads

= Factory Overheads Paid
E - Value of Normal Scrap of Indirect Materials (on number of units produced)
+ Opening Stock of WIP
- Closing Stock of WIP

F Works or Factory Cost = (D + E) (on number of units produced)

 Costing P&L Account
No. Particulars Amount Per Unit

G Office and Admin Expenses (on number of units produced)

H Cost of Goods Produced = (F + G) (on number of units produced)

FG Stock Adjustment
I + Opening Stock of FG
- Closing Stock of FG

J Cost of Goods Sold = (H + I) (on number of units sold)

K Selling & Distribution Expenses (on number of units sold)

L Cost of Sales = (J + K) (on number of units sold)

M Profit (on number of units sold)

N Sales = (L + M) (on number of units sold)

Material Cost

Fundamentals
 Material Cost
• Material Cost can be Direct and Indirect
• Direct Materials are those which can be
identified with and directly allocated to the
product, job or process.
• Includes basic material and primary packing
material
• Indirect Materials are those which cannot be
easily identified with and directly allocated to the
product, job or process.
• Includes stores, consumables, small value
materials
 Direct Material Cost
• The total direct material cost includes:
– Purchase price
– Customs Duty, Excise Duty, VAT, CST, Octroi
– Inward freight
– Insurance
– Directly attributable expenses like packing expenses,
inspection, storage, delivery, etc
– (Less) Volume or Trade Discounts
– Rebates, Duty Drawback, MODVAT, Subsidies, etc
– (Less) Cost of containers recovered on return
 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, including ordering
and carrying costs
• Avoid wastages and losses in storage and use
• Maintain proper inventory records
• Provide information for decision making
 Requirements for Material Control
• Proper co-ordination
• Proper purchase system
• Proper storage system
• Proper issue system
• Perpetual inventory system
• Continuous stock taking system
• Budgetary control system
• Proper documentation
• Proper accounting system
• Proper reporting system
 Documents for Materials
• Purchase of Materials
– Bill of Materials (BoM)
– Purchase Requisition
– Supplier Selection
– Purchase Order
– Goods Received Note
– Inspection Note
– Return of Rejected Material
– Bill Passing
– Making Payment to Supplier
• Issue of Materials
– Bin Card
– Stores Ledger
– Material Requisition
– Material Return Note
– Material Transfer Note
 Material Losses
• Waste – portion of raw material lost during processing or storage, having no
recovery value
• Arises due to shrinkage, evaporation, chemical reaction, etc
• Scrap – incidental residue manufacturing operations usually of small
amount and low value recoverable without further processing
• Arises due to processing of material, defective or broken parts and
obsolescence / abortion of development projects
• Defective Work – work that has some imperfections which can be rectified
by additional material or processing
• Arises due to improper product design, bad raw material, poor
workmanship, inadequate supervision, improper material handling, defective
machinery or improper training
• Spoiled Work – work that cannot be reconditioned or brought to standard
and must be sold as scrap or “seconds”
• Arises due to improper product design, improper machinery or process
used, 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 & Loss Account
 Controlling Material Loss
• 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)
– LIFO (Last In First Out)
– HIFO (Highest In First Out)
– Base Stock Price
• Average Price Methods
– Simple Average
– Weighted Average
– Periodic Simple / Weighted Average
– Moving Simple / Weighted Average
• Notional 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, stores & spares, work-in-process and
finished goods
• Inventory control includes planning, organizing and controlling purchase and
storage to ensure availability in terms of quantity, quality, 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
 Techniques of Inventory Control
• ABC Analysis
• Economic Order Quantity (EOQ)
• Stock Levels – minimum, maximum, reorder level,
reorder quantity
• Inventory Turnover Ratio
• Slow and Non-Moving Items
• Purchase, Storage and Issue Procedure
• Two Bin System
• Perpetual Inventory Records and Continuous Stock
Verification
• Budgetary System
 ABC Analysis
• A: 70% value, 10% items
• B: 20% value, 20% items
• C: 10% value, 70% items
• Ensures control on high value items
• Saves time and cost of monitoring
• Reduces total investment in inventory
• Facilitates faster decision making
• Better utilization of resources
• Better physical control of stock
 Economic Order Quantity (EOQ)
• Level at which the ordering and carrying costs are
minimum. At EOQ, the ordering and carrying costs are
equal.
• Ordering Cost includes costs for placing an order,
transportation, receiving goods and inspecting goods
• Ordering Cost reduces with order size
• Carrying Cost includes costs for storage space, handling
materials, insurance, obsolescence and personnel.
• Carrying Cost increases with order size
• Dependent on periodicity and annual material
consumption
• EOQ determines quantity to be ordered at a given time
 EOQ Technique
• Assumes prior knowledge of annual usage, constant usage rate,
constant ordering cost, constant carrying cost and zero lead /
delivery time
• EOQ can be determined by graphical, tabular or formula method
• Find the level at which total of ordering and carrying cost is least or
ordering cost equals carrying cost
• EOQ = √(2AO / C) where A = Annual Consumption, O = Ordering
Cost per order and C = Carrying Cost per order
• EOQ = √(2AO/IP) where I = Inventory or Stock Holding Cost (as %
of average stock value) and P = Price per unit
• Economic Order Frequency (in days) = 365 / (Number of orders per
year)
• Total annual ordering and carrying cost at EOQ = √(2AOC)
 Stock Levels
• Maximum Stock Level is the maximum stock
level that can be held in store.
• It avoids cost of over-stocking such as costs for
storage, investment, insurance and risk of
obsolescence
• Dependent on reorder level, reorder quantity,
rate of consumption, reorder period, availability
of funds and storage space, cost of storage,
insurance, obsolescence, price fluctuation, etc
• Formula: Maximum Level = Reorder Level +
Reorder Quantity – (Minimum Consumption x
Minimum Reorder Period)
 Stock Levels
• Minimum Stock Level is the level below which the stock
should not be allowed to fall
• Dependent on reorder level, rate of consumption and
reorder period
• Formula: Minimum Level = Reorder Level – (Normal
Consumption x Reorder Period)
• Reorder Level is the level of stock at which fresh
replenishment order should be placed
• Dependent on consumption rate, reorder period and
minimum level
• Formula: Reorder Level = Maximum Consumption x
Maximum Reorder Period OR Minimum Level + (Normal
Consumption x Reorder Period)
 Stock Levels
• Average Stock Level = Minimum Level + ½ Reorder
Quantity OR (Minimum Level + Maximum Level) / 2
• Danger Level 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 Level is below Minimum Level, urgent
corrective action is required
• If Danger Level is above Minimum Level, it calls for
preventive action
• Dependent on rate of consumption and reorder period
• Formula: Normal Consumption Rate x Maximum
Reorder Period for emergency purchases
 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 “times”
• Materials Consumed = Opening Stock + Purchases –
Closing Stock
• Average Stock = ½ (Opening Stock + Closing Stock)
• Days of Inventory = 365 / Inventory Turnover Ratio
• Can be computed for stock categories to determine fast
moving, slow moving, dormant or obsolete stock
• Ideal level is determined with reference to level of other
firms or the industry average
 Other Techniques
• Two Bin System – Bin has two parts, 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, material used from smaller bin till
replacement received and filled
• Periodic Inventory System – Physical stock taking done
periodically, 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
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
• Job Evaluation and Merit Rating
• Labour Productivity
• Wage Systems
• Incentive Systems
• Time Keeping and Time Booking
• Labour Turnover
• Casual and contract workers
 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,
Token / Disc Method and Time Clocks / Clock
Card
 Time Booking
• Records time spent by each worker on various
jobs / orders / processes
• Methods:
• Daily Time Sheet
• Weekly Time Sheet
• Job Card or Job Ticket
• Time and Job Card
• Labour Cost Card / Circulating Job Card
• Piece Work Card
 Labour Turnover
• Rate of change in the composition of labour force due to
retirement, 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, avoidable and unavoidable
causes
• Cost of Labour Turnover consists of Preventive Cost and
Replacement Cost
• Preventive Cost – personnel administration, medical &
health care, welfare measures, wage & retirement
benefits
• Replacement Cost – personnel department expenses,
training of new workers, initial inefficiency, initial
breakages and defectives, time lag in recruitment,
 Labour Turnover Measurement
• Measurement by Separation Rate Method, Replacement
Rate Method, Flux Method
• Separation Rate Method: Number of Separations /
Average Number of Workers x 100
• Replacement Rate Method: Number of Replacements
(not normal additions) / Average Number of Workers x
100
• Flux Method: (Number of Separations +
Replacements) / Average Number of Workers x 100
OR
(Number of Separations + Accessions i.e. all
Recruitments) / Average Number of Workers x 100
 Types of Labour Cost
• Overtime Cost:
– Customer requested, charged to specific job
– For increased production, charged to total production
– Abnormal overtime, charged to Costing P&L Account
• Idle Time:
– Normal Idle Time, charged to the product
– Abnormal Idle Time, charged to Costing P&L Account
• Casual Workers, 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
 Types of Labour Cost
• Attendance Bonus are part of wages and treated
accordingly
• Shift Premium, charged same as Overtime Cost
• Fringe Benefits are part of wages and treated
accordingly
• Apprentice Wages, charged as production overhead
• Holiday / Vacation Pay, charged as overhead or
accounted in an inflated rate
• Leave with pay, accounted in an inflated rate
• Employer’s contribution to employee insurance, charged
as production overhead
 Incentive Wage Plans
• Premium Bonus Plan - Halsey Plan, Halsey Weir Plan,
Rowan Plan, Barth Plan
• Differential Piece Work - Taylor System, Merrick System
• Combination of Time and Piece Work - Emerson’s
Efficiency Plan, Gantt Task and Bonus Plan, Points
Scheme (Bedeaux Plan, Haynes Plan), Accelerated
Premium Plan
• Group Incentive Plans – Priestman’s Production Bonus,
Rucker Plan, Scalon Plan, Towne Gain Sharing Plan,
Budgeted Expenses Bonus
• Incentives for Indirect Workers
• Profit Sharing
• Co-Partnership
 Premium Bonus Plans
• Halsey Plan: standard time fixed for each work,
guarantees hourly wages for actual time taken, bonus of
50% paid if time saved
Earnings = Time Rate Wages + Bonus
= Actual Time Taken x Time Rate + 50% (Time Saved x
Time Rate)
• Halsey – Weir Plan: same as Halsey Plan except bonus
is 33⅓% compared to 50% 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
• Barth Plan: Designed for trainees, beginners and slow
workers. Earnings = Time Rate x √(Standard Hours x
Time Taken)
 Differential Piece Rate System
• Lower and higher production rates are defined
• Taylor’s System:
– Production < standard output: Earnings are 80% of
normal
– Production = or > standard output: Earnings are
120% of normal
• Merrick’s System:
– Production < 83% of standard output: Earnings are
100% of normal rate
– Production > 83% and < 100% of standard output:
Earnings are 110% of normal rate
– Production > 100% of standard output: Earnings are
120% of normal rate
 Combination Plans
• Emerson’s Efficiency System:
– Up to 66⅔% efficiency, nil bonus
– More than 66⅔% and < 100% efficiency, bonus on
step basis (32 bonus steps defined)
– More than 100% efficiency, bonus @ 20% of basic
wages + additional bonus @ 1% for each 1%
increase in efficiency
Gantt Task and Bonus System:
– Less than standard output, no bonus
– At standard output, 120% of time rate
– More than standard output, 120% of piece rate
 Combination Plans
• Bedeaux System or Points Scheme:
– Points awarded for each unit of production
– Up to standard time, no bonus
– If time saved, bonus of time saved is given 75% to worker and
25% to foreman
• Haynes System
– Job expressed in standard man-minutes
– For repetitive work, time saved is shared between worker and
foreman in 5:1 ratio
– For non-repetitive work, time saved is shared between worker,
employer and foreman in 5:4:1 ratio
• Accelerated Premium System
– Bonus rate increases with output
 Group Incentive Plans
• Priestman’s Production Bonus:
– Bonus paid in proportion to production in excess of
standard output per week
• Rucker Plan
– Also known as Cost Saving Sharing Plan
– Bonus = fixed proportion of value added (sales –
purchased materials & services)
– ⅔ of the monthly bonus is paid out, 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

• Towne Gain Sharing Plan

– Bonus calculated as 50% of direct labour
hours saved
• Budgeted Expenses Bonus
– Bonus 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, fosters teamwork and
increases efficiency
• Measuring or relating indirect work to production
is difficult
• Establish standards for measurable and
repetitive activities
• Generally clubbed under group incentive plans
• Two Types: Monetary & Non-Monetary
 Profit Sharing
• Based on overall business prosperity and
is over and above other benefits
• Types: Cash Plan, Deferred Credit Plan,
Combined Plan
• Minimum bonus for eligible workers
determined under Payment of Bonus Act
• Discretionary bonus for all determined by
the management
• Paid on a flat percentage or on slab rates
Direct Expenses

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