ACCOUNTING FOR LABOUR

One of the most important distinctions of labour is between direct and indirect costs. Direct
labour is one directly involved in production. Indirect labour is not directly involved in
production (e.g. Canteen staff, factory supervisors, maintenance staff).

- Production is quantity or volume of output produced.

- Productivity is a measure of the efficiency with which output has been produced.

Example: If during a week, the employee makes 126 units in 40 hours of work. Assume that the
standard rate of productivity is 3 units per hour.

Production is 126 units.

Productivity : Std: 126 units x 1hr/3units = 42 hrs

Actual : 40hrs

Productivity ratio = (42/40) x 100% = 105%

If the productivity ratio is above 100% , it means the actual efficiency was better than the
expected level of efficiency.

Indirect labour costs include: Bonus payments, idle time, sick pay, employers’ NAPSA
contributions.

- Idle time is the amount of time spent in the factory without work due to any of the following:

 Shortage of materials

 Machine down time

 Production for the day has been achieved.

 No electricity

Remuneration methods

- There 2 basic approaches to remuneration are time related and output related. The two
methods are time-based and piecework systems.
1. Time - based systems:
o Employees are paid a basic rate/hr, day, week or month. Basic time-based systems
do not provide any incentives for employees to improve productivity and close
supervision is often necessary.

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 o Basic Pay = Hrs worked x basic rate of pay
o Total wages = Basic pay + (OT hrs worked x OT premium/hr) + bonus +
allowances.

Overtime

- When employees work overtime, they receive a basic pay element and an overtime
premium.
- Overtime premiums are normally treated as indirect costs but if work is carried out at a
specific request of a customer because they want a job to be finished as soon as possible,
it becomes direct cost.
- Any allowances paid to employees are to be treated as indirect labour costs.

Example 1: B is a direct labour employee who works a standard 35 hrs per week and is
paid a basic rate of K12/hr. Overtime is paid at time and a third. In week 8 she worked
42hrs and received a K50 bonus.

Required: Calculate the Gross pay for week 8.

Solution:

K
Basic pay: 42hrs x K12 per hour 504.00
Overtime: (42hrs – 35hrs) x K16 per hour 112.00
Bonus 50.00
Gross pay (Total pay) 666.00

2. Piecework systems:
o Pays a fixed amount per unit produced. The basic formula for a piecework
system.
o Total wages = Units produced x rate of pay/unit

Example 2: MM is paid K5 for each towel she weaves, but she is guaranteed a minimum wage of
K600 for a 40 hour week. In series of four weeks, she makes 100, 120, 140 and 160 towels.
Calculate her pay each week, and the conversion cost per towel if production overhead is added
at the rate of K25 per direct labour hour.

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Solution:

Week Output (units) Pay (K) Prod. OH (K) Conversion cost (K) Unit conversion cost
(K)
1 100 600 1,000 1,600 16
2 120 600 1,000 1,600 13.33
3 140 700 1,000 1,700 12.14
4 160 800 1,000 1,800 11.25

Differential piecework scheme

- This offers an incentive to employees to increase their output by paying higher rates for
increased levels of production.
For example:

Rate per unit

Less than 100 units per week K5
100 units to 200 units per week K6.5
201 units to 300 units per week K7
301 units to 400 units per week K7.5
Above 400 units per week K8

Example : Using the data above , calculate the dues for Mr Banda who produced 400 units in
week 3.

Solution:
200 units @ K6.5 = K1,300
100 units @ K7 = K700
100 units @ K7.5 = K750
Total pay = K2,750

Incentive schemes
- Incentive schemes can apply either to groups or and individuals.
- Premium bonus plans:
o These bonus schemes pay a basic time rate, plus a portion of the time saved as
compared to some agreed allowed time.
o Halsey – the employee receives 50% of the time saved.

Bonus = (Time allowed – Time taken) X Time rate

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 o Rowan – the proportion paid to the employee is based on the ratio of time taken to

time allowed.

Bonus = Time taken X Time rate X Time saved

Time allowed

Example : The following data relate to Job A. Employees’ basic rate is K4.80/hr. Allowed time
for Job A is 1hr. Time taken for Job A is 36 minutes. Calculate the bonus using both Halsey and
Rowan methods.
Solution:
1. Halsey:
Bonus = [50% of (TA – TT)] x TR
Bonus = [50% of (1 – 0.6) x K4.8/hr = K 0.96
2. Rowan
Bonus = TT/TA x TR x TS
Bonus = 0.6/1 x K4.8 x 0.4 = K1.15

Labour Turnover
- This is a measure of the proportion of people leaving relative to the average number of
people employed.
- Formula: Number of leavers who require replacement
Average number of employees

Example: At 1st January a company employed 3,641 employees and at 31st December employee
numbers were 3,735. During the year, 624 employees chose to leave the company. What was the
labour turnover rate for the year?
Solution:
Labour Turnover Rate = [624/ 50% of (3,641 + 3,735)] x 100% = 16.9%

Causes of labour turnover:

 Poor remuneration, poor working conditions, lack of training opportunities, lack of

promotion prospects, bullying in the workplace. ( all these causes are avoidable)

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  Retirement, illness or death, family reasons (eg pregnancy), relocation (all these causes
are unavoidable).

Costs of labour turnover:

- Replacement costs
o Advertising costs, cost of selection (time spent interviewing) training new
employees, reduced efficiency until the new employee reaches the required skill.
- Preventive costs
o Pay competitive wages and salaries, if remuneration is poor
o Improve poor working conditions
o Offer good training opportunities
o Make sure promotion prospects arise as necessary
o Stamp out bullying in the workplace.
o Investigate high labour turnover rates objectively.

‘All work and no play make Jack a dull boy’.

Compiled by Enos R Chiyongwe FCCA FZICA