TOPIC FOUR

ACCOUNTINGF FOR LABOUR

4.1 INTRODUCTION
At the end of the topic students should be able to;
➢ Distinguish between direct and indirect labor
➢ Recording of labour
➢ Remuneration systems
➢ Incentive schemes

Labor is the cost related to a use of human resources employed by the business.
The cost considered is Remuneration and fringe benefits;
➢ Remuneration refers to that which is regularly paid including basic wages,
overtime, various allowances and bonus.
➢ Fringe benefits are those which are not paid regularly including subsistence
allowances, training costs and medical allowances.

4.2 DIRECT AND INDIRECT LABOUR COSTS

➢ Direct labor cost: Cost of employees who are directly involved in the production
process e.g. wages of machine operators.

➢ Indirect labor cost: labor cost of all employees in the factory who are not directly
involved in the production process and not economically feasible to trace labor cost
to specific unit. e.g. wages of supervisors and Storekeepers

4.3 METHODS OF REMUNERATION

There are two main categories of remuneration methods;

➢ Time based method
➢ Output or performance related methods

4.3.1 TIME BASED METHOD

This is the method of remuneration based on the time spent by an employee on the work.
There are three main types of time based method:
➢ Flat time rates
➢ High day rate
➢ Measured day rate

a) Flat Time Rate

➢ This is the basic system where employees are paid for the number of hours worked
at a basic rate per hour.
➢ If employees work beyond the normal working hours they are paid at higher rate
(overtime premium).
➢ Remuneration= Hours worked x rate per hour

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Advantages:
➢ Simplicity
➢ Encourages quality
Weaknesses:
➢ Danger of creation of slacks in order to spend more time and get overtime premium
➢ Demoralize hard working employees
➢ Requires close supervision

b) High Day Rate Method

➢ Incentive for high performance is provided by paying a higher rate than the basic
pay rate.
➢ Demands high standards of performance and special interest and effort in the work.
➢ Overtime work is not encouraged.

Advantages:
➢ High wages attracts good workers
➢ Promotes efficiency
➢ Simple to understand

Disadvantages:
➢ Requires close supervision
➢ May cause other employers to raise rates to attracts good workers, the benefits may
not be realized.

c) Measured Day Rate

➢ Agreed levels of wages are paid for a specified level of performance and wages
cannot go below a certain level.

Appropriateness of the method:

➢ Where output standards based on detailed work- studies and negotiations and
agreement between employer and employees.

4.3.2 OUTPUT OR PERFORMANCE RELATED METHOD

Payment is related to output. Some of the methods are related to individual workers and
others relate to groups of employees. Under output related methods we have;
➢ Straight piecework method
➢ Differential piece rate
 75-100 Proportional Scheme
➢ Output is easily measurable and is contributed by a group of workers.
➢ Dangers: When original targets are not met or when earnings are not effected.
➢ NOTE: Under all time based remuneration methods employer;
 Bear loss arising on employees’ inefficiency.
 Benefit from gains arising from the employee’s improved efficiency.

a) Straight Piecework Method

➢ Payment is based on the number of units produced
Pay rate per unit is given by: Number of units x piecework rate per unit

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 ➢ This method is accompanied by guaranteed time rates per day to safeguard earnings
of employees in situations where non-production is unavoidable.

Advantages:
➢ Increase of productivity
➢ Less supervision is required if quality is not an important
➢ Employees are satisfied; labor turnover is low.

Disadvantages:
➢ Establishment of output standards and piece rates is time consuming and difficult.
Requires work study techniques.
➢ Quality may decrease
➢ Close supervision and quality control are imperative
➢ Incentive effect declines at higher levels of output because a flat piece rate is used.

b) Differential Piece Rate

➢ 75-100 Proportional Scheme
➢ This method is designed to eliminate the last disadvantage of the straight piecework
scheme by providing incentive at higher levels of output.
➢ This scheme sets a standard performance at 100 but bonus starts when 75 is reached.
➢ The bonus is 331/3% of the job rate
➢ For performance below 100 and varies in direct proportion for performance above
100.
➢ There is no theoretical limit to the bonus that may be earned by employee.

4.4 PREMIUM BONUS SCHEME

4.4.1 INDIVIDUAL BONUS SCHEME
Premium bonus scheme combine piece rate and time rate methods
➢ Employer and employee share gains or losses in labor efficiency Premium paid to
employee depends on the difference between actual hours and standard time
allowed.
➢ Under this system, when employee fails to complete a job within time allowed, he
is paid based on time rate.
➢ There are three premium bonus scheme;
 Halsey scheme;
 Halsey-Weir scheme; and
 Rowan scheme

Halsey and Halsey- Weir schemes

➢ A worker is paid fixed percentage of time saved as bonus. In Halsey this
percentage is 50% and in Halsey-Weir the percentage is 33 1/3 %.
➢ Time saved = time allowed – time taken

Example:
Time allowed 40 hrs
Time used 30 hrs
Rate per hour 5,000/=
Required: Total earnings by using;
a. Halsey- Weir scheme

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 b. Halsey scheme.

Rowan scheme
➢ This scheme pays bonus as in the Halsey- Weir scheme except that the bonus is not
fixed.
➢ The percentage bonus is variable calculated as;
% bonus =Time saved x 100
Time allowed
➢ The percentage calculated is then applied to gross wage i.e. time taken x hourly rate
➢ Example;
From the following data calculate total earnings of employee using Rowan Scheme.
Time allowed to complete job 40 hrs
Time taken 30 hrs
Rate of pay per hour (Tshs.) 5,000/=

4.4.2 GROUP INCENTIVE SCHEMES

These are incentive schemes which are applicable to employees working as a team [where
individual efforts can not be measure]. These are also applicable where a worker cannot
increase his output without the cooperation of his fellow worker.
Group is likely appropriate where:
✓ Production is based on a group
✓ Production is integrated and all efforts are directed towards the same end.
✓ It is difficult to measure the performance of individual.

Advantages of Group incentive scheme

✓ A strong loyalty exists within the group which should result in reduced absenteeism
and increased output.
✓ The scheme can apply to all workers both direct and indirect
✓ Wages calculation are usually straight forward
✓ Less time is spent on individual wage negotiation as there should be overall
agreement for the factory or group.

Disadvantages of Group incentive schemes

✓ Efficient and inefficient employees are paid the same.
✓ Problem may arise when apportioning savings over large numbers of employees.
✓ There may be a delay in payment of the bonus.
✓ There is no individual incentive.

Conditions for an Effective Incentive scheme

✓ Its objectives should be clearly stated and within reach of employees reasonable
effort.
✓ The rules and conditions of the scheme should be easy to understand and not prone
to misinterpretation.
✓ It must win the full acceptance of everyone concerned including of course, Trade
unions
✓ It should be seen to be fair to employees and employers.

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 ✓ The bonus should ideally be paid soon after the extra effort has been made by the
employees.

4.5 WAGES PROCEDURE

The main purposes of establishing wages procedures in the organization are the following;
➢ Calculate the wages earned by each employee in terms of employment and numbers
of hours worked.
➢ Fulfill legal requirements like deductions of income tax and NSSF.
➢ Take into account other deductions like Pension contributions and repayment of
loan.
➢ Provide adequate information to Cashier to enable him/her to pay the amounts due
to workers.
➢ Complete the accounting records regarding the wages paid.
➢ Ensure the proper use of amounts deducted for various reasons.

4.6 RECORDING OF LABOUR

▪ The personnel department is responsible for recruitment of employees and
maintenance of proper records with respect to employees.
▪ The department prepares personnel record card or file. This card or file is used to
keep personal details of employees such as:
➢ Full name and qualifications
➢ Position and type of work
➢ Starting date (date of engagement)
➢ Starting salary, etc.
▪ Four records are important for recording attendance time and records for operations
showing time taken and output produced.
▪ These four records are:
➢ Clock cards
➢ Time sheets
➢ Job cards or job tickets
➢ Piecework tickets

4.6.1 CLOCK CARD

➢ Are used to record time spent by workers at their work place.
➢ Is maintained for each employee and a time recording clock is kept at the entrance.
➢ Each card is required to show the time of entry and departure for the employee.
➢ Costing department must reconcile these cards with other time records maintained.
➢ Clock cards are common in the factory, not normally used in office work.

4.6.2 TIME SHEETS

➢ Are records which are filled by the employee .Showing how he/she spent time
during a period
➢ The purpose is to know how much time an employee spent on a particular job.
➢ Time sheets are the basis for determining labor costs chargeable to jobs.
➢ To ensure accuracy time sheets should be countersigned by supervisor and must be
reconciled with clock cards.

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 ➢ May be used for payroll, client billing, and increasingly for project costing,
estimation, tracking and management.

4.6.3 JOB CARDS OR JOB TICKETS

➢ Is a ticket given to an employee containing instructions to perform a job
➢ When employee completes his part of work on the job he signs the ticket and
forward to supervisor for signature.
➢ The ticket indicates time the employee spent on the job.
➢ Job card contains entries for numerous employees on a single job.

4.6.4 PIECEWORK TICKETS

➢ Are maintained for each operation and are used to show the quantity of items
produced.
➢ A job will have a number of operations or stages of processing.
➢ The cards are used in calculation of employees’ wages.
➢ Danger: Inflate quantity at the expense of quality.
➢ Should be signed by the supervisor and / or the quality inspector.

4.7 PAYROLL

Introduction to Payroll Accounting

It's a fact of business–if a company has employees, it has to account for payroll and fringe
benefits.

In this context of payroll accounting, we will introduce payroll, fringe benefits, and the
payroll-related accounts that a typical company will report on its Statement of Profit or
Loss and other Comprehensive Income and Statement of Financial Position. Payroll
and benefits include items such as:

• salaries
• wages
• bonuses & commissions to employees
• overtime pay
• payroll taxes and costs
o Income tax
o Social Security Contribution (PSSF,NSSF,etc)
o Health Insurance (NHIF, AAR etc)
o Trade Union Contributions (RAAWU, TUGHE, CWT, TALGWU,
TUICO, FIBUCA, TRAWU, CHODAWU etc)
o Skills Development Levy

• employer paid benefits

o holidays
o vacations
o sick days
o insurance (health, dental, vision, life, disability)
o retirement plans
o profit-sharing plans
• Other deductions according to employees directions

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 o Saving Plans( eg WADU)
o Loan Deductions (e.g Higher Education Students Loan Board)
o Internal Contribution deductions

Salaries, Wages, & Overtime Pay

In this section of payroll accounting, we focus on the gross amounts earned by the
employees of a company.

Salaries
Salaries are usually associated with "white-collar" workers such as office employees,
managers, professionals, and executives. Salaried employees are often paid semi-monthly
(e.g., on the 15th and last day of the month) or bi-weekly (e.g., every other Friday) and their
salaries are often stated as a gross annual amount, such as "Tshs.48, 000,000 per year." The
"gross" amount refers to the pay an employee would receive before withholdings are made
for such things as taxes, contributions to various institutions, and savings plans.

Since salaried employees earn a specified annual amount, it is likely that their gross pay for
each pay period is the same recurring amount. For example, if a manager's salary is Tshs.
48,000,000 per year and salaries are paid semi-monthly, the manager's gross pay will be
Tshs. 2,000,000 for each of the 24 pay periods.

Wages
Wages are often associated with production employees (sometimes referred to as "blue-
collar" workers), non-managers, and other employees whose pay is dependent on hours
worked. The pay for these employees is generally stated as a gross, hourly rate, such as
"Tshs. 13,520 per hour." Again, the "gross" amount refers to the pay an employee would
receive before withholdings are made for such things as taxes, contributions, and savings
plans.

Employees receiving wages are often paid weekly or biweekly. To determine the gross
wages earned during a work period, the employer multiplies each employee's hourly rate
times the number of work hours recorded for the employee during the work period. Due to
the extra time needed to make calculations for each employee, hourly-paid employees
typically receive their pay cheques approximately five days after the work period has ended.

Bonuses & Commissions Paid to Employees

Throughout our explanation, bonuses paid to employees and sales commissions paid to
employees will be considered to be part of salaries.

Overtime Pay

Overtime refers to time worked in excess of 40 hours per week (for the case of Tanzania
government employees). Whether or not employees are paid for overtime depends on each
employee's job responsibilities and rate of pay—some employees are exempt from overtime
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pay and some are not. For example, executives are considered to be "exempt"; their
employers are not required to pay them for their overtime hours because (1) their
compensation is high, and (2) they can control their work hours. Executives do not need
state or federal wage and hour laws to protect them from company abuse.

Payroll Withholdings: Taxes & Benefits Paid by Employees

This section of payroll accounting focuses on the amounts withheld from employees' gross
pay

The Tanzania income tax system—as well as most state income tax systems—requires
employers to withhold payroll taxes from their employees' gross salaries and wages. The
withholding of taxes and other deductions from employees' salary affects the employer in
several ways: (1) it reduces the cash amount paid to employees, (2) it creates a current
liability for the employer, and (3) it requires the employer to remit the withheld taxes to the
Tanzania Revenue Authority by specific deadlines. Failure to remit payroll taxes in a timely
manner result in interest and penalties levied on the employer; flagrant violations trigger
more severe consequences.

Payroll withholdings include:

1. Employee portion of Social Security contribution

2. Employee portion of Health Insurance
3. Income tax
4. Court-ordered withholdings
5. Other withholdings

1. Employee portion of Social Security Contribution

A key component of payroll accounting is the Social Security Contribution. Social
Security Contribution is withheld from an employee's salary or wages and is matched by a
contribution from the employer. In other words, the employer is responsible for remitting
to the Social Security Funds the amount of Social Security Contribution withheld from each
employee. According to the prevailing law the total contribution of employer and employee
should not be below 20 percent of gross pay of employee. There could be variations on the
contribution from employee and employer but should make 20 per cent in total at the end
.

2. Employee portion of Health Insurance

Health Insurance is also withheld from an employee's salary or wages and is matched by
a contribution from the employer. In other words, the employer is responsible for remitting
to Health Insurance funds amount of Medical Insurance withheld from each employee. As
a result, Medical Insurance is both an employee withholding and an employer expense
3. Income tax
Another part of payroll accounting involves the employees' income tax known as Pay as
You Earn (PAYE) and is made progressively. An employer is required to withhold the
federal income tax that an employee is expected to owe based on salaries or wages.

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The amount withheld for PAYE is based on the employee's salary or wages as well as
personal information that the employee is required to provide the employer on TRA form
including marital status and the number of dependents claimed as exemptions. In cases
where an employee is paid low wages and/or has a large number of personal exemptions, it
may not be necessary for the employer to withhold any income tax. The person earning
minimum wage is not subjected to PAYE

Amounts withheld from employees for federal income taxes are reported on the employer's
balance sheet as a current liability. When the employer remits the amounts to the federal
government, the current liability is reduced.

4. Court–ordered withholdings

Payroll accounting also involves withholdings for items other than payroll taxes. For
example, courts of law may order employers to garnish (withhold money from) an
employee's salary or wages for purposes such as paying child support or repaying debts.

The amounts withheld from employees for court-ordered withholdings are reported on the
employer's balance sheet as a current liability. When the employer remits the amounts to
the designated parties, the liability is reduced.

Some court orders may include a small fee to be withheld from the employee in order to
reimburse the employer for administrative expenses.

5. Other withholdings

In addition to the mandatory withholdings that an employer makes for taxes and court
orders, payroll accounting often includes amounts that employers may be willing to
withhold at the direction of its employees. These voluntary withholdings can include such
things as:

▪ union dues
▪ charitable contributions
▪ insurance premiums

Net Pay
Net pay is the amount that remains after withholdings are deducted from an employee's
gross pay. Net pay is also referred to as "take home pay" or the amount that an employee
"clears." From the company side of the transaction, it is the amount of cash the company
will pay directly to the employees on payday.

It should also be understood that the employer incur some cost in relation to its employees
as being benefits granted to them as statutory requirements or internal agreement between
the employer and employees as incentive to them

Journal Entries

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Since Payroll cost is like other expenses of business, the company/factory need to establish
the liability before paying the same. This means that if the organisation is paying it
employees on weekly, half monthly or monthly basis when the salary/wages is due it should
be recognised as liability pending to payment and the following entry needs to be raised

The following are common journal entries in payroll:

Salaries Expense XX,XXX
Payroll Control XX,XXX
Payroll Control XX,XXX
Payroll Deductions (Various Accounts) XX,XXX
Cash XX,XXX

Payroll Tax Expense XX,XXX

Payroll Taxes Payable (Various Accounts)
XX,XXX

Tanzania’s applicable PAYE for the year 2023/2024

Income Range (monthly) Tax rate (PAYE)

Tshs %
0 – 270,000=00 NIL
270,001– 520,000=00 8% of the amount in excess of Tshs. 270,000=00

520,001– 760,000=00 Tshs. 20,000=00 plus 20% of the amount in excess of

Tshs. 520,000

760,001 – 1,000,000 Tshs. 68,00 plus 25% of the amount in excess of Tshs.
760,000

1,000,000 and above Tshs. 128,000 plus 30% of the amount in excess of Tshs.
1,000,000

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 PAYROLL CALCULATION FOR THE MONTH OF………………

EARNINGS DEDUCTIONS

Social Total
EMPLOYEE'S BASIC ALLOWAN OVERTI GROSS Income Security Trade Union Health Deducti NET
S/N NAME SALARY CES ME PAY Tax Fund Contribution Insurance ons PAY

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The following procedure is adopted to prepare a payroll;
➢ Number of hours worked are multiplied by wage rate per hour. Overtime
worked is multiplied by wage rate which is applicable to the overtime
worked.
➢ Gross wage of each employee is recorded into gross wages column.
➢ The income tax payable is calculated under the system of P.A.Y.E. This
tax amount is entered in P.A.Y.E. column of payroll.
➢ Contributions of each employee regarding the N.S.S.F and PPF are
shown in respective columns
➢ Total deductions for each employee are shown in separate column
➢ Total deductions are subtracted from the gross wages and Net wages are
entered in to another column
➢ Any advance taken by employees or loan repayments are subtracted to
find out the wages payable.

Example
MMM ltd is small firm employing four individuals Mwenge, Ujamaa, Mwongozo and
Mapinduzi.
The following records were made in relation to the attendant of work.
Worker Total labour hours Job ticket hours
Mwenge 232 200
Ujamaa 232 198
Mwongozo 224 220
Mapinduzi 216 202

These records are in relation to a work four weeks [month] in which a worker is
supposed to work for 6 days a week and 8 hours a day.
Each worker is paid at a rate as follows;

Mwenge 3,000 per hour

Ujamaa 2,400 per hour
Mwongozo 2,500 per hour
Mapinduzi 2,600 per hour

All workers are given house allowance which is 20% of the basic wages and transport
equal to 200,000 per month. The law requires that each employee should contribute
towards pension an amount equal to 5% of the basic wage to which an employer has to
add 15% making a contribution to pension of every employee to be equal to 20% of the
basic wage. For simplicity let us assume that every worker is liable to pay income tax
equal to 20% of total earnings. The employer is required to pay 5% payroll levy based
on the total earnings paid to the workers. Mwongozo has taken an advance payment of
200,000. The hours worked beyond the regular hours in the month are regarded as
overtime and overtime is paid at a rate plus overtime premium of 50% of the basic rate.

REQUIRED;
Prepare a payroll for MMM ltd

Example

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The payroll liability of the business was journalized as follows;
DEBIT Wages 600,000
Overtime 120,000
House allowance 200,000
Pension 90,000
Payroll levy 36,800
CREDIT Commissioner of Income tax 220,800
Director of Pension Fund 120,000
Net pay 706,000
Required
A. Pass journal entry to record payment for the payroll liability
B. If the basic rate per hour is 1,000 determine;
I. The overtime hours if the overtime was paid at a premium of 50% of the
basic wages
II. Total hours recorded on the clock card if all wages related basic workers
III. The income tax rate if all earnings of workers are taxed
IV. The rate of pension contribution by the employee based on the basic
wages earned by employee.

4.8 ANALYSIS OF LABOUR COST

➢ Costing section uses job cards, time sheets and payroll to analyze wages paid in
order to: Determine costs to be charged to various Cost objects e.g. jobs,
departments, etc.
➢ Direct labor cost: is charged to jobs by debiting Work in progress account and
crediting wages control.
➢ Indirect labor cost: Is included as part of factory overhead cost and absorbed by
units of production through the overhead absorbed rate. (Debiting factory
overhead crediting wages control account.)

4.8.1 IDLE TIME

 Refers to lapse of time where employees are unable to perform their work.
 Causes of Idle time:
➢ Authorized breaks during the work day
➢ Machines breakdowns
➢ Power cutoff
➢ Shortage of materials
➢ Negligence

 The cost of idle time is spread over all jobs worked during the period.
 Idle time cost is treated as part of factory overhead costs.

Example:
A factory employs four individuals A, B, C and D. Worker A is supervisor for other
workers. Therefore, A is not direct worker. The particulars of the workers labour hours
for the week just ended and respective rates as follows;
WORKER TOTAL HOURS WORKED RATE PER HOUR JOB TICKET HOUR
A 56 300 NIL
B 50 240 40
C 56 210 42

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D 54 200 48

Required;
I. Compute the gross pay of the workers
II. Analyze labour hours into direct and idle time hours.
III. Analyze gross pay into direct and indirect cost.

4.8.2 FRINGE BENEFIT

➢ Fringe benefits are labor related costs paid by the company such as medical
expenses and other benefits.
➢ Some companies treat fringe benefits as indirect labor and therefore include
them as part of factory overhead costs.
➢ Other companies treat fringe benefits relating to direct labor as direct labor costs
and those relating to indirect labor as factory overhead.

4.8.3 OVERTIME PAYMENT

➢ Are made when employees work beyond their regular working hours.
➢ Overtime is important to cater for increase in demand during peak periods or
where rush orders are received.
➢ During such situations the company may hire casual labor or where specialized
skills are required the overtime become important.
➢ Overtime is paid at higher rate compared to normal rate.
➢ Overtime premium is classified as Indirect labor and treated as factory
overheads.
➢ Justification: Each job had an equal chance of being worked during overtime.
➢ However, if overtime is undertaken at the request of the customer, it becomes a
direct cost related to that job or customer’s order.

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