Accounting for labour

MANAGEMENT ACCOUNTING
Learning objectives

Calculate direct and indirect costs of labour

Explain the methods used to relate input labour costs to work done

Prepare the journal and ledger entries to record labour costs inputs and outputs

Interpret entries in the labour account

Describe different renumeration methods: time- based system and individuals, group incentive schemes

Calculate the level and analyse the costs and causes of labour turnover

Explain and calculate labour efficiency, capacity and production volume ratios
 Time-related systems :

• Employees are paid a basic rate per hours, day, month;

• Overtime can be paid at a premium if any extra hours are worked;
• The formula for a time-based system is as follows:

Total wages = (total hours worked × basic rate of pay per hour) +
(overtime hours worked × overtime premium per hour)

Renumeration Output related systems

methods A piecework system pays a fixed amount per unit produced. The formula for
a piecework system is as follows.

Total wages = (units produced × rate of pay per unit)

• A guaranteed minimum wage is often required due to minimum wage

requirements.

• Piecework is often combined with a time-based system to provide an

added incentive to employees.
Illustrati
on
Incentive
scheme
Measured day work – the allowed time is 1 hour per unit and that the
average time taken by an employee over the last three months is 50
minutes. If the normal rate is $12/hour, then an agreed incentive rate of
$14/hour could be used. Incentive
scheme
Share of production – plans are based on acceptance by both
management and labour representatives of a constant share of value added
for payroll
Direct labour costs make up part of the
prime cost of a product and include the
basic pay of direct workers.

Direct workers are those employees

who are directly involved in producing
Direct
the output of the business. labour
Indirect labour costs make up part of the
overheads (indirect costs) and include
the basic pay of indirect workers.

Indirect workers are those employees

who are not directly involved in
Indirect
producing the output of the business, labour
Indirect labour cost also include – bonus
payments, benefit contributions, sick pay
Accounting for labour costs
Labour turnover
Labour –
efficiency,
capacity and
production
volume ratios