acma- 7-8

1

Dr. Ratnesh Chaturvedi, COMA, Session – 7-8

Labour Cost

Cost of all labour

expended in altering

the construction,

composition or

condition of the

product

Direct Indirect

Directly Allocable

Varies directly with

volume of output

Cost related to labour

who are not so directly

engaged in altering the

construction,

composition or

condition of the

product

Apportionment of OH

Not Variable

Labour Cost - Control

Direct

It is variable so it can be

easily controlled

Indirect

It is not variable so it requires

attention by Establishment of

Suitable Budget Dept. wise and

comparison of actual with standard.

-Production Planning

-Use of Labour Budget

-Use of Labour Standard

-Effectiveness of wage incentive

schemes

-Labour performance report

-Labour Cost AccountingDr. Ratnesh Chaturvedi, COMA, Session – 7-8

Labour Cost Control – Different Functional Activities

Personnel Dept.

Time Keeping Dept.

Payroll Dept.

Engg. & Work Study

Dept.

Cost Acctg. Dept.


Labour Turnover : Loss of employment

in an organisation

High Cost

Low Productivity

Causes of Labour Turnover :

Avoidable Causes Unavoidable Causes

-Redundancy

Dissatisfaction with job,

remuneration, hours of work,

working conditions,

Relationship with seniors and

subordinates

Personnel Policies

Personal Betterment

Illness or Accident

Move from locality

Retirement or death


2

Measurement of Labour Turnover :

Separation Method : No. of Separations in a period x 100 / Avg.

no. of workers in the period

Replacement

Method :

No. of Replacements in a period x 100 /

Avg. no. of workers in the period

Flux Method :½ (No. of Separations + No. of

Replacements) x 100 / Avg. no. of workers


Illustration - Measurement of Labour Turnover :

During Apr’05 the following information is obtained from the

Personnel Dept. of a manufacturing concern :

Labour force at beginning of the month 950 and 1050 at the end

of the month. During the month 10 persons quit while 30

persons are discharged. 140 workers were engaged – out of

which only 20 persons appointed in the vacancy created by the

number of workers separated and the rest on account of an

expansion scheme.

Calculate the labour turnover rate.


Separation Method : No. of Separations in a period x 100 / Avg. no. of

workers in the period

= 40 x 100 / (950+1050)/2 = 4%

EALT Rate = 4 x 365 / 30 = 49.67%

Replacement Method :No. of Replacements in a period x 100 / Avg. no. of

workers in the period

= 20 x 100 / (950+1050)/2 = 2%

EALT Rate = 2 x 365 / 30 = 24.33%

Flux Method :½ (No. of Separations + No. of Replacements) x

100 / Avg. no. of workers

= ½ ( 40+20) x 100 / (950+1050)/2 = 3%

EALT Rate = 3 x 365 / 30 = 36.5%


Cost of Labour Turnover :

Preventive Cost

Replacement Costs

Cost of personnel admn.

Cost of medical services

Cost of welfare services

Pension schemes

Inefficiency of new labour

Cost of selection and placement

Training Costs

Loss of output

Increased spoilage

Accident frequency

Cost of tools & machine breakages

Should be apportioned to different

departments in proportion to the

number of persons engaged in each

dept.

If due to fault of a particular dept.

charge against that dept.

Otherwise apportioned to different

departments in proportion to the

number of persons engaged in each

dept.Dr. Ratnesh Chaturvedi, COMA, Session – 7-8

3

LABOUR PRODUCTIVITY

Productivity is the index of

efficiency showing the

effectiveness of the

individual or combined

factors used in producing

goods or services.

Generally it is the ratio

between output and input.

When output is uniform :

LP = Output / Actual Hrs.

When output consists of different

types of products consuming

different amount of time :

LP = Prdn. In Standard Hrs. /

Actual Hrs. Worked


Remuneration & Incentives

Remuneration is total monetary earnings of employees. It

consists of earnings according to time or on piece rate and

includes other financial incentives.

In Fixing Remuneration following considerations are

important :

-The wages paid to employees of same type of organisation

-The ability of the employers to pay

-The needs of employee – Standard of living


Remuneration & Incentives

Why Incentive Scheme ??????

-To increase the volume of production

-To improve or at least maintain, the quality of product

-To reduce the cost of production, and

-To raise morale and increase efficiency of staff

Factors in An Incentive Scheme :

1. Productivity 2.Effect on Workers 3. Incidence of fixed

OH


Principles Applicable to all Incentive Schemes

Remuneration Systems

Time Rates Piece Rates Bonus

Systems

Indirect

monetary

incentives

Non-

monetary

incentives

-At Ordinary

Levels

-At High

wage levels

-Graduated

Time Rates

-Straight

Piece Rates

-Piece-rates

with

guaranteed

day rates

-Differential

piece rates

-Individual

bonus for direct

workers

-Group bonus

for direct

workers

-To indirect

workers

-Profit

Sharing

-Co-

partnership

Welfare –

Health,

Sports, etc.


4

Time Rates

-At Ordinary

Levels

-At High

wage levels

-Graduated

Time Rates

Earnings = Hrs. Worked x Rate /Hr.

More than above i.e. with incentive

Adjusted time rate w.r.t. cost of living

index

Piece Rates

Earnings = No. of units x Rate/unit

Or, Std. Hrs. of work produced x Rate per std.

Hr.

-Straight

Piece Rates

-Piece-rates

with

guaranteed

day rates

-Differential

piece rates

Earnings = Guaranteed time rate plus a piece

rate payment for output above a stated minimum


Differential

Piece Rates1. Taylor 2. Merrick 3. Gantt task & Bonus

1. Taylor Differential Piece Rate System – Not Popular & modified by Gantt & Merrick

Two Piece Rates :

High Piece Rate – for output above standard (150% of low rate)

Low Piece Rate – for output below standard

2. Merrick Differential Piece Rate System – Modification of Taylor System

Three Rates :

Output percentage Standard Payment

a) Up to 83% Ordinary Piece Rate

b) 83% to 100% 110% of Ordinary PR

c) Over 100% 120% of Ordinary PR


Differential


3. Gantt task & Bonus Plan : Combined time, bonus & piece rate

Three Rates :

Output Payment

a) Output below standard (High Task) Time Rate (Guaranteed)

b) Output at standard Bonus @ 20% of the Time Rate

c) Output over standard High Piece Rate on worker’s whole output


Differential


Illustration: The following is the output of workers A, B and C in a particular 40 hour

week :

A – 64 units, B – 74 units and C – 84 units

Guaranteed time-rate Rs. 5 / hour

Low Piece Rate – Rs. 2 per unit, High Piece Rate – Rs. 3 / unit, High task 80 units / week

Table Showing Earnings and Labour Cost Per UnitWorker Output / % of Task

Week (80Units) Earnings Cost/unit Earnings Cost/unit Earnings Cost/unit

A 64 80 128 2 128 2 200 3.125

B 74 92.5 148 2 162.8 2.2 200 2.70

C 84 105 252 3 201.6 2.4 252 3

Merrick System Gantt Task SystemTaylor System


5

Bonus

Systems

Individual bonus

System

Premium Bonus System is an incentive system in which the gain resulting from the

increased output is shared between the employer and employees in agreed

proportions. The premium bonus to be paid is calculated on the hours saved I.e. on

the difference between the time allowed and the time taken.

1. Halsey Premium Plan Under a 50-50 sharing

Earning = Hrs. Worked x Rate per Hr. + 50 / 100 (Time

Allowed – Hrs. Worked) x Rate per

3. Rowan SystemEarning = Hrs. Worked x Rate per Hr. + Time Saved /

Time Allowed x Hrs. Worked x Rate per Hr.


2. Halsey Weir Premium

SystemSame as above

ILLUSTRATION :

During one week the workman X manufactured 200 articles. He

receives wage for a guaranteed 44-hour week at the rate of Rs.

15/hour. The estimated time to produce one article is 15 minutes

and under incentive scheme the time allowed is increased by 20%.

Calculate his gross wages under each of the following methods of

remuneration :

A. Time Rate B. Piece-work with a guaranteed

weekly wage

C. Rowan Premium Bonus D. Halsey Premium bonus, 50 %

to workman


A Time Rate E = HW x RH = 44 x 15 660

B Piece Rate E = NU x RU = 200 x 4.50 900

NU = 200

Time for one unit = 15 + 15x20/100 = 18 mins.

Rate per minute = Rs.15 / 60 = Re.0.25

RU = 18 x 0.25 = Rs.4.50

C Rowan Premium Bonus:

E = HW x RH + (TA - HW)/TA x HW x RH

= 44 x Rs.15 + (60-44)/60 x 44 x 15

= Rs. 836

D Halsey Premium Bonus (50-50 sharing)

E = HW x RH + (50 x (TA - HW) x RH) / 100

= 44 x Rs. 15 + (50 x (60-44) x 15) / 100

= Rs. 780

4. Barth Variable Sharing

Plan Earning = Rate per Hour x Standard Hrs x Act. Hrs. worked

5. Emerson Efficiency

Bonus

Earning = Hours worked x Rate per Hour + Emerson Bonus

percentage x Hours worked x Rate per hour

= HW x RH + (E.B.P./100) x HW x RH

Schedule of Bonus

Efficiency Bonus

i) Below 66.67% efficiency No bonus, only time rate wages

ii) 66.67% to 100% A bonus at first very small but increasingly rapidly to

20% above basic wages on 100% efficiency

iii) Over 100% A bonus of 20% above basic wage plus 1% for each 1%

increase in efficiency


6

ILLUSTRATION :

Standard time allowed for a job is 10 hours and hourly rate is

Rs.10 for each worker. Actual time taken by worker A 12 hours,

worker B 10 hours and worker C 8 hours. Calculate the total

earnings and earning per hour under the Barth variable sharing

plan.


Computation of Earnings :

Worker Total Earning (Rs.) Earnings per hour (Rs.)

A 12 x 10 x 10 = 34.64 =34.64 / 12 = 2.89

B 10 x 10 x 10 = 31.62 =31.62 / 10 = 3.16

C 8 x 10 x 10 = 28.28 =28.28 / 8 = 3.54

ILLUSTRATION :

From the following information calculate the bonus and earning

under Emerson efficiency bonus :

Standard Output in 10 Hours - 120 units

Actual Output in 10 Hours - 132 units

Time Rate - Rs. 10/Hour

Efficiency Percentage = 132 x 100 / 120 = 110%

Bonus Percentage = 20 + (110-100) x 1 = 30%

Bonus = (30/100) x 10 x Rs. 10 = Rs. 30

Earnings = 10 x Rs. 10 + (30/100) x 10 x Rs. 10 = Rs. 130



Group Bonus System – In many cases output of individuals

can not be measured but output of group of workers can be

conveniently measured. The total bonus determined according to

productivity can then be shared equally, or between workers of

differing skills in different specified proportions.

i) Budgeted Expense Bonus – Bonus is based on the savings in

actual total expenditure compared with the total budgeted

expenditure.

ii) Cost Efficiency Bonus – Bonus paid for the reduction either of

total cost or of specific element of cost.

iii) Priestman System – Bonus based on achieving certain

standard.

iv) Waste Reduction Bonus – This system provides incentive to

workers with a view to reducing material waste to a minimum. Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

Indirect Monetary Incentives –

i) Profit Sharing – In profit sharing schemes there is an agreement between the employer and his workers whereby the employer pays them, in addition to wages, a predetermined share of the profits of the undertaking.

ii) Co-partnership – In co-partnership or co-ownership scheme employees get the opportunity to share in the capital of the business and to receive the part of profits that accrue to their share ofownership.

Non Monetary Incentives –

i) Education & Training,

ii) Health & Safety

iii) Canteen

7

OVERHEAD

Indirect

Material


Indirect

Wages

Indirect

Expenses

Function

Prodn. OH

Admn. OH

Selling OH

Distri. OH

Variability

Fixed OH

Variable OH

SV OH

Normality

Normal OH

Abnor. OH

Controllability

Controllable

Uncontrollable

PROCEDURE OF LINKING OF OVERHEAD


Classification

and Collection

of Overhead

Allocation &

Apportionment

of Overhead

Absorption of

Overhead

Based on some scientific and consistent

basis, collection in different headings

(groups) as suitable to organisation and

on regular basis.

Main sources from which OH are collected regularly:

1. Stores Requisition

2. Invoices

3. Wages Analysis Book

4. Journal Entries

5. Cash Book

6. Other Registers and Reports



Classification

and Collection

of Overhead

Allocation &

Apportionment

of Overhead

Absorption of

Overhead

Allocation – If the cost is directly traceable then it can be directly allocated to the particular cost centre or service centre.

Apportionment – If cost is directly not traceable then case of apportionment on some suitable basis to the cost centre and service centre.

e.g. Rent, Electricity charges, Telephone charges for the entire works

For determination of suitable basis:

i) Service or use

ii) Survey Method

iii) Ability to method



Classification

and Collection

of Overhead

Allocation &

Apportionment

of Overhead

Absorption of

Overhead

Common OH Distribution Bases

1.Canteen Exp., Time Keeping, No. of Employees or wages

General Welfare Exp., for each Dept.

Compensation and Other Fringe

Benefits, and ESI Contribution of

Employer

2. Depreciation of Plants, Capital Values

Machinery and equipments,

Fire Insurance

3. Electric Light No. of Light Points, Floor Space,

Hours Used, meter readings

4. Delivery Expenses Weight, Volume, Tonne-Km

5. Audit Fees Sales or Total Cost

8

The following figures are extracted from the accounts of a

manufacturing concern for the month of Sep'05:

Indirect Materials Rs.

Production Dept. P1 950



Maint. Dept. S1 1500

Stores Dept. S2 400

Indirect Wages Rs.




Maint. Dept. S1 1000

Stores Dept. S2 650

Power and Light 6000

Insurance on Assets 1000

Rent & Rates 2800

Meal Charges 3000

Depreciation 6% on capital value of assets, p.a.. From the

above prepare a primary distribution summary with thefollowing primary departmental data:

Items

P1 P2 P3 S1 S2

Area (sq. m.) 4000 4000 3000 2000 1000

Assets Value 100000 120000 80000 60000 40000

Kilowatt Hours 4000 4400 1600 1500 500

No. of Employees 90 120 30 40 20

Prdn. CC Service CC

Dr. Ratnesh Chaturvedi, COMA, Session – 9-10Dr. Ratnesh Chaturvedi, COMA, Session – 9-10

Primary Distribution Summary

Items Basis of Total

Apportionment P1 P2 P3 S1 S2

Indirect Material Allocation 4250 950 1200 200 1500 400

Indirect Labour Allocation 3950 900 1100 300 1000 650

Power & Light Kilowatt Hours 6000 2000 2200 800 750 250

Depreciation Value of assets 2000 500 600 400 300 200

Insurance Value of assets 1000 250 300 200 150 100

Rent & Rates Sq. m. 2800 800 800 600 400 200

Meal Charges No. of Employees 3000 900 1200 300 400 200

Total 23000 6300 7400 2800 4500 2000

Prdn. CC Service CC

acma- 7-8

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