UNIT 4

Labour Costs
 Learning Outcomes
2

At the end of this unit, you should be able to:

Distinguish between time-based, piecework and bonus
systems as ways of remuneration
 Discuss the source documents applicable to:
 time recording systems such as the clock card and time
ticket
 activity recording systems such as piecework/ bonus
ticket
Compute the remuneration of employees under:
 time-based system
 piecework system
 bonus system
 Learning Outcomes
3

Compute an hourly recovering rate to

provide for holiday pay
Define idle-time
Compute gross wages, deductions and net
wages and indicate them on a payroll
Analyse the labour cost into direct and
indirect labour cost
Show the accounting entries in the general
ledger regarding labour costs
 Introduction
4

Labour costs consists of direct and indirect labour

Direct labour – directly traceable to a specific
product or service
Indirect labour – not directly traceable to a specific
product or service  part of manufacturing
overheads
Direct labour is the second element of
manufacturing costs
 Payroll Accounting
5

 Information required:
 Employees’ attendance times
 Absences from work
 Hourly wage rates
 Deductions
 Tax
 Pension or provident fund
 Medical aid
 Social security (SSC)
 Source Documents
6

Clock cards(electronic)

Timesheet records with starting and finishing

times(manual)
Job cards for calculation of actual time spent and

indicating the tasks time was spent on.

Output sheet records indicating the number of

units produced.
 Types of Remuneration
7

Fixed salary
Fixed amount irrespective of quality of work,
time used, or output
Professional, administrative and supervisory
staff receives a fixed salary.
Hourly wages (Time-based system)
Employee is paid at a specific rate for the hours
worked. Output is not taken into consideration.
Gross remuneration
 = Hours worked x Rate per hour + bonus
 Types of Remuneration
8

Overtime
 Amount paid to employees for extra hours
worked over and above normal working
hours (e.g 8 hours a day).
 Normal time must be completed before
any overtime is paid.
 Overtime is usually paid at time and a half,
except for Sundays and public holidays,
which is paid at double time.
 Employees at certain levels (management)
are not paid for overtime worked.
 Remuneration Systems
9

Three main methods

 Time-based systems
 Piecework systems
 Bonus schemes
 Time-Based Systems
10

Employees are paid for the hours of work

attendance
Paid extra if more hours than the normal working
week are worked (overtime)
Overtime is paid at a premium
Overtime premium is manufacturing overhead
BECAUSE it is not directly traceable to a specific
product or service
Overtime premiums are treated as direct labour
costs, if at the specific request of a customer because
they want a job to be finished as soon as possible.
 Example
11

Normal week is 40 hours. Work 45 hours. Tariff

per hour is N$20. Time-and-a-half paid for
overtime.
Feedback
Basic remuneration: 40 hours x N$20 = N$800
Overtime paid: 5 hours x N$20 x 1.5 =N$150
=N$950
What is the overtime premium?
5 hours x N$20 x 1 = N$100  Basic
5 hours x N$20 x 0.5 =N$50Overtime
premium (Overhead)
 Exercise 1
12

Fred is paid N$8 per hour and overtime is paid at

time and a half, when Fred works overtime, he will
receive N$12 per hour (N$8 + N$4 (50% x N$8).
Analyse his pay into direct and indirect labour costs.
 Exercise 2
13

Vienna is a direct labour employee who works a

standard 35 hours per week and is paid a basic rate
of N$12 per hour. Overtime is paid at time and a
third. In week 8 she worked 42 hours and received a
N$50 bonus. Complete the following table.
 Feedback
14

$420 = 35 x 12
$84 = (42-35) x 12
$28 = 7 x (12 x 1/3)
 Feedback
15

Basic pay for standard hours ($420) is a direct labour

cost because the work involved is directly attributable
to production.
Basic pay for overtime hours ($84) is also a direct
labour cost because the basic rate for overtime is part
of the direct labour cost.
Overtime premium ($28) is usually part of the indirect
labour cost
Unless overtime is worked at the specific request of a
customer, overtime premium is part of the indirect
labour costs of an organisation.
 Piecework Systems
16

Employees are paid for units of output

produced
Variation – daily goals are set and an
employee is paid more for every unit
completed over the goal
Most piece system have a guaranteed pay
known as differential piece work systems.
Employees are paid the higher of
guaranteed pay or the pay calculated on
output achieved
 Example
17

A company operates a piecework system of

remuneration, but also guarantees its
employees 75% of a time-based rate of pay
which is based on N$19 per hour for an eight
hour working day.
Three minutes is the standard time allowed
per unit of output.
Piecework is paid at the rate of N$18 per
standard hour.
 Example
18

If an employee produces 200 units in eight

hours on a particular day.
What is the employee gross pay for that
day?
A N$114
B N$152
C N$180
D N$190
 Feedback
19

A $114
B $152
C $180
D $190
200 units x standard time of 3 minutes per unit =
600 minutes (10 hours).
Employee gross pay = 10 hours x N$18 = N$180
Guaranteed (N$19 x 8 hrs) x 75% = N$152 x 75% =
N$114
As gross pay exceeds the guaranteed amount, the
answer is N$180.
 Feedback
20

Alternatively calculate the rate per standard hour


 = $0.90 per unit
Total wage = $0.90 x 200 = $180
 Normal, Gross and Net Remuneration
21

 Normal Remuneration: Basic salary or wage.

 Gross Remuneration: Normal salary or wage

plus any overtime or allowances.
 Net Remuneration: The amount paid out to
the employee after deductions are made.
 Allowances: Several available, including

 travel allowances
 housing allowances/subsidies.
 Example
22

James is a qualified fitter and turner. His normal

working hours are Monday to Friday (8 hours a
day) and 6 hours on Saturdays. His clock card and
personal record show the following information in
respect of the week 21 to 27 April
 Example
23

 James receives a housing allowance of N$500 per week.

His normal hourly rate is N$50 per hour. Overtime is paid
at 1.5 times the normal rate, except for Sundays and public
holidays, when it is paid at twice the normal rate
 His pension fund contributions are: employer 7.5%,
employee 7.5% of the basic wage.
 His medical aid contributions are: employer N$230,
employee N$230
 PAYE is 23% of taxable income
 Unemployment Insurance Fund (UIF): employer 1% of
basic wage, employee 1% of basic wage
 Calculate James net earnings for the week
Feedback
24
 Bonus Schemes
25

Workers are compensated for more efficient work

Set goal and compare actual performance with goal
Saving as a result of increase in efficiency shared
between employer and employee
Total remuneration = Day rate wage plus
bonus based on time saved
Most bonus schemes pay a basic time rate, plus a
portion of the time saved as compared to some agreed
allowed time.
These bonus schemes are known premium bonus plans.
Examples of such schemes are Halsey and Rowan.
 Bonus Schemes
26

The objective is to reduce the production cost by

giving an incentive for increased output.
Rowan Premium Bonus System
Bonus amount
=Time worked x Time saved x Wage rate per hour
Time Allowed
Halsey and Halsey-Weir Premium Bonus
System
 Employees receive incentives for time saved
according to different percentages.
 Bonus Schemes
27

Halsey Premium Bonus System

 Bonus = Time saved x 50% x wage rate per hour

Halsey-Weir Premium Bonus System:

 Bonus = Time saved x 33.33% x Wage rate per
hour

 Time saved = Time allowed – Time taken

 Example
28

Calculate the employee’s basic wage and bonus

based on the following information
During July 2017, Mr James with a basic rate pay
of N$15 per hour worked, was assigned the
following jobs which he completed:
 Feedback
29

Basic wage = Hours worked x Wage rate per hour

Job 1 = (22 x N$15) = N$330.00
Job 2 = (15 x N$15) = N$225.00
 Rowan Premium Bonus System
30

= Time worked x Time saved x Wage rate per hr

Time Allowed
Bonus job 1 = 22 x 6 x N$15 = 1 980 = N$70.71
28 28
Bonus job 2 = 15 x 5 x N$15 = 1 125 = N$56.25
20 20
 Halsey Premium Bonus System
31

= 50% of time saved x Wage rate per hour

Bonus Job 1 = 50% x 6 x N$15 = N$45.00
Bonus Job 2 = 50% x 5 x N$15 = N$37.50
 Halsey-Weir Premium Bonus System
32

= 33.33% of time saved x Wage rate per hour

Bonus Job 1 = 33.33% x 6 x N$15 = N$30.00
Bonus Job 2 = 33.33% x 5 x N$15 = N$25.00
 Exercise
33

Calculate the bonus of the following data that

relate to Job A under Rowan and Hesley Premium
schemes
Feedback
34
 Idle Time
35

Time lost in the manufacturing process

Unintentional, e.g internal - machine break down,
or external employee strike
Even if it is direct labour time, allocate to
manufacturing overhead
Spread cost over the total production for the
period
 Labour Recovery Rate (LRR)
36

Calculated to determine how much the business is

spending on each employee per hour

LRR = Total gross amount paid

Total productive hours worked
 Holiday Pay
37

Holiday pay received by direct labourers is charged to jobs

by means of a higher hourly tariff
Example
 Employees are paid N$20 per hour for 40 hours per
week and they have two weeks leave per year.
 Other benefits like employer contribution to medical aid
and pension fund are N$24 200 per year for 10
employees.
 Public holidays for the year are 10 and a normal idle time
of 10% of available working hours is allowed. A holiday
bonus of N$35 000 will be paid for the 10 employees.
 Calculate the hourly tariff for 10 employees
Feedback
38
Feedback
39
Treatment of Labour Costs
40
 Wage Sheet
41

Calculation of gross wages

Calculation of net wages – gross wages
minus voluntary and statutory deductions
Wage Sheet
42
Wage Sheet Analysis
43
Accounting Entries
44

N$3 755
Accounting Entries
45
Accounting Entries
46
Accounting Entries
47
Accounting Entries
48
Accounting Entries
49
Accounting Entries
50
 Holiday Pay Accounting Entries
51

The amount provided for as holiday pay is handled

like employer contributions
Dr Payroll control account xx
Cr Leave pay provision xx
Amount paid as holiday pay
 In wage sheet included as part of gross wage
 In analysis of wage sheet in seperate column –
holiday pay
Dr Leave pay provision xx
Cr Payroll control account xx
 Summary
52

Labour cost consists of direct and indirect

labour
Employees remunerated by means of different
systems
Idle time handled as part of overhead
Overtime premium handled as part of overhead
Labour cost in wage sheet
Labour cost analysed into direct and indirect
labour
 Revision Question
53

Jac Mart’s basic rate is N$80 per hour and overtime

rates are time and half for evenings and double for
weekends. The following details have been recorded
for three jobs.
Job X321 Job X786 Job X114
Normal time 480 220 150
Evening time 102 60 80
Weekend 10 30 16
 Required
54

Calculate the labour cost chargeable to each of the

jobs in the following circumstances:

 Where overtime is worked occasionally to meet

production requirements (6 marks)

Where overtime is worked at the customer’s

request to bring forward delivery time. (12 marks)