ACCOUNTING

FOR LABOUR
Introduction
Direct and indirect labour
costs
• All costs of indirect workers (i.e. those not
directly involved in making products, such as
maintenance staff and supervisors) are indirect
costs.
• For workers directly involved in making
products:
– Direct costs are their basic pay, and any overtime
premium paid for a specific job at the customer’s
request.
– Indirect costs are general overtime premiums,
bonus payments, idle time, and sick pay
Remuneration methods
• There are three basic remuneration
methods;
– time work,
– piecework, and
– bonus schemes
i. Time work
• Wages are paid on the basis of hours
worked.
• For example, if an employee is paid at the
rate of $5 per hour and works for 8 hours a
day,
• Total pay = 5*8 = $ 40
• For example, an employee is paid a normal
rate of $5 per hour and works 4 hours
overtime for which he is paid at time-and-a
half.
• The amount paid for the overtime will be 4
x 1.5 x $5 = $30.
ii. Piecework
• Wages are paid on the basis of units
produced
• For example an employee is paid $0.20 for
every unit produced, with a guaranteed
minimum wage of $750 per week.
• In week 1, they produce 5,000 units and so
the;
• Pay will be = 5,000 x $0.20 = $1,000
• In week 2, they only produce 3,000 units;
the pay will be?
• Pay = 3,000 x $0.20 = $600.
• However, since this is below the
guaranteed minimum the employee will
receive $750 for the week.
iii. Bonus (or incentive)
schemes
• There are many different ways in which a
bonus scheme can operate, but essentially
in all cases the employee is paid a standard
wage but in addition receives a bonus if
certain targets are achieved,
 Example: overtime and idle time

• Given below are the labour costs incurred by a

manufacturing business for the week commencing 23
July 20X5.
– Direct production workers 120 hours at $6.40 per hour
– Direct production workers overtime hours 20 at $9.40 per
hour
– Indirect workers 40 hours at $5.20 per hour
– Indirect workers overtime hours 5 at $8.00 per hour
– Of the hours paid to the direct production workers 4 of these
were idle time hours.
• What is the total for direct labour and indirect labour for
the week?
Changes effect on remuneration methods
and productivity on unit labour costs

• To increase competitiveness, employers

will try to reduce unit costs and will often
attempt to do this by offering employees
productivity payments.
• Employers need to look at the-before and
after costs.
Illustration
• Current scheme:
– $7/hour, 40 hour week.
– Overtime premium = time and a half.
– Usually 400 units are produced in 50 hours
• Proposed scheme:
– rates as above, but in addition;
– the overtime premium is paid on any hours saved.
– Assume that 500 units are now made in 44 hours
• Evaluate the proposal
Gross and net earnings
• Gross pay: the total amount earned by the
employee
• Net pay: the amount paid to the employee
after the employer makes deduction for
income tax and certain statutory amounts.
• Total labour cost to employer:
employees’ gross pay plus any additional
payroll taxes (and perhaps pension costs)
that the employer has to bear.
Example: gross pay to net pay
• An employee is paid at;
– an hourly rate of $7.00 for a 35 hour week
– with any overtime hours paid at time and a half.
– During week 22 the employee worked for 41 hours.
• The income tax to be deducted was $55, the
Employee's benefit contributions for the week
were $28, and the Employer's benefit contributions
were $29.
• What is the employee's net pay?
• What is the labour cost to the employer for this
employee for the week?
Ledger accounting for
labour costs
• The gross pay is debited to the wages
control account and the;
• Direct cost element is then transferred to
the work in progress account whilst the ;
• Indirect cost element is transferred to the
production overhead control account.
 In double entry, the system
is as follows
• Dr. Work-in-progress with the gross wages, direct cost
• Cr. Wages control account with the gross wages

• Dr. Work-in progress with the employer’s payroll tax

• Cr. Wages control account with the employer’s contributions
to payroll tax

• Dr. Wages control account

• CR. Cash as employee paid the net amount
• CR. Cash as the revenue authorities are paid employee
deductions and employer contributions.