labor costing

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CHAPTER THREE

Labor costing


Labor costing• Labor represents cost of services of human

resources/manpower.• So, labor costing means determining cost for

labor.

• Total wages to be paid to different type of workers are determined by the personnel department on the basis of job evaluation

• Job evaluation is the scientific method of determining relative worth of different jobs.

workers are classified into different pay scale on the basis of qualifications, experience, skills, responsibilities, work hazards, working conditions etc.


Job evaluation

• It should be accepted by all employees• It should be flexible to adapt to changes• It should be economical to use• It should stabilize the labor turn over• It should provide for incentive wage plan• It should minimize absenteeism• It should be understood by all workers


Characteristics of good wage system

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Methods of computing wagesTime Rate method:•Under the time rate system, the unit of measurement is time. This system disregard the output of workers. The wage rate of workers may be determined on hourly, daily, weekly or monthly basis. An hourly rate is determined in advance at the time a worker is employed. This rate is then multiplied by the number of hours worked in a day, week or in a month. For instance if there are 8 working hours in a day and the wage rate per hour is Shs. 2 then the workers basic pay per day is Shs.16


Methods of computing wagesAdvantages of time rate are; It is simple to be understood by workersEasy to calculate It is readily acceptable by labor unions as it takes

care of he interests of average workersWorkers concentrate on the quality of jobs and not

quantity of jobs The main dis-advantage is workers become lazy and

it discourages competent workers because there is less incentive for hard workers

Methods of computing wagesPiece rate method:•Under this method an employee is paid per unit of product, article or job completed. This method can be used only if the work can be divided into uniform pieces. If workers is paid Shs. 1000 to every 20 units then this method is known as piece rate method.



Methods of computing wages Advantages of piece rate; It provide incentives to more efficient worker It does not require close supervision of employee. The main dis-advantages are the workers can produce

inferior goods and the workers have no guarantee of their monthly income

Methods of computing wagesOther methods of computing wages•High time rate for overtime: Under this method, normal working hours are paid at the normal time rate but for overtime worked during week days and at weekends, a high time rate is paid in order to induce to the workers to work for more hours.


Methods of computing wages• Example: If normal working hours are 8 hrs. from

Monday to Friday per day, and for Saturday 5 hrs. extra time during week days is 50% higher than the normal hourly rate. And for Sundays double the rate. The hourly rate is 10 sh. If Kidire worked for 60 hrs. including 8hrs on Sunday what will be his total wage in a week?


Methods of computing wages• Piece rate with guaranteed time rate: Under this method, a specific amount is paid to the

worker on daily basis irrespective of units produced by him during that period but if his output exceeds beyond minimum limit then he is paid according to piece rate method. This method ensures a specific daily or monthly income to the workers. This is because some times lower output might not be workers fault, shortage of material, power failure and machinery breakdown may be the reasons for lower output.


Methods of computing wagesFor example if the guaranteed wage for Kilodi is Shs. 1500 and he is paid Shs 5 per units. Find out his monthly wage if he produces. i) 500 units ii) 270 units per month


Methods of computing wages• Differential piece rate: Under this method piece

rate varies at different levels of out put. If the workers produces more unit then he get higher piece rate beyond a specific level of output.

• Example: K. lamis is paid Shs 5 per unit up to 100 units, Shs 6 per unit for 101 to 200 units and Shs 7 per unit produced in excess of 200 units. Calculate her wage if she produced 300 units.

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Premiums bonus schemes• Premiums bonus schemes: A premium bonus is

paid to the workers according to hours saved. According to premium bonus schemes, the savings accruing to employers out of time saved by the workers should be shared between the employers and the workers. Premium bonus schemes guarantees the worker a minimum wage per hour but pays a premium for production in excess of the stipulated wages.

Total pay of the worker =minimum wage+ bonus on time saved

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Premiums bonus schemes• Three common types of premium bonus

schemesHalsey: This scheme was originated by F.A Halsey.

Under this system if the worker completed the job in less then the standard time or time allowed, he is paid bonus in additional to a minimum hourly wage.

Halsey scheme= ½ (time saved*wage rate). Where; time saved=(time allowed-time taken)


Premiums bonus schemesHalsey-weir: Under this scheme a worker shares

1/3% of the time saved. Halsey- weir= 1/3 (time saved*wage rate)Rowan: Under this system the workers obtain a

bonus as = time taken/time allowed* time saved*wage rate

• Example: Nurumi completed a job in 45 hours for which 60 hours were allowed. His wage rate is Shs 16. calculate Nurumi’s total wage using all schemes.


Premiums bonus schemesCentralized Advantages;• Less staff required; Paper work is reduced• Less risk of duplication of items of stock• Control of stock level is easy and simpleDisadvantages;• Higher transport cost.• Possibility of breaking down of transport vehicle• Delay in supply of material to branches and

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Store keeping Decentralized stores: When material are held by sub

stores in each department or branch then it is called decentralized stores.

Advantages;• No transport cost• No delay in supply of goodsDisadvantages• Many staff are required• Series of formalities and paper works• Difficulty in stock control


Store keeping• Imprest stores: In this store material are held

in central store and issued to the sub stores under imprest system.


Stock control• Stock includes raw material, finished goods,

equipment, components, office stationary, goods purchased for resale etc.

• Stock control means making sure that the business has the right quantity of goods, at the right place and in the right time.

• Objectives of stock control:1. It prevent under-stocking and over-stocking.2. Minimizes storage costs3. Protection of materials from loss and wastage due to

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Stock control• Stock levels:Some stock levels are set up by enterprise as a policy

matter:These are as under:Maximum stock level: Represents the upper level

beyond which the quantity of any item is not allowed to rise.

Formula:Max stock level= R.L+ RQ+( Min C*Min RP)


Stock control• Minimum stock level: This is the lower limit below

which the stock of any item should not be allowed to fall. This is technically known as safety or buffer stock.

• Formula:Min stock level= RL- (NC* NRP)


Stock control• Re-order level: Is fixed between minimum

and maximum stock level. When stock of material is reached at this level, the store keeper should initiate actions for the purchase of material.

Formula:Re-order level= Max C* Max RP


Stock control• Re-order quantity: This is the quantity for which a

purchase order is placed.Formula:Re-order quantity= Max SL- Min SL- (Min C* Min RP)ORRe-order quantity = EOQ• Average stock levels= Min S.L+ Max S.L /2


Stock controlWhere;Max C = Maximum consumptionMin C = Minimum consumptionNC = Normal consumption ; average of max C and Min CMax RP= Maximum re-order period or lead time.NRP = Normal Re- order periodR.Q = re-order quantityMin SL = Minimum stock levelMax SL = Maximum stock level•.


Economic order quantity• The quantity at which cost of having stocks is

minimum is known as economic order quantity.• =√2*c*o/h

where; c= annual consumption/demand o=ordering cost per order h= holding cost per unit• .


labor costing

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