COST & MANAGEMENT ACCOUNTING – DBS, YR1 SEM11 2024

LABOUR COSTING

Labour represents cost of services of human resources - the most valuable asset of an organization.
Labour refers to the cost of services of personnel involved in the production either directly or indirectly by
providing auxiliary services (support services).

Costing for labour

It means determining labour cost. Determining of labour cost includes the study of different methods of wage
computation ie time rates, piece rates and other forms of incentive wage systems.
Total wages to be paid to different types of workers are determined by personnel department on the basis of
job evaluation.
Job evaluation refers to the scientific methods of determining relative worth of different jobs.
Labour cost refers to direct wages of factory workers. Labour is also a main element of cost.

Labour cost consists of;

a) Basic pay ie daily, weekly or monthly wages
b) Labour related costs e.g holiday pay, overtime premium, etc.

Methods of remuneration /computing wages

This refers to the basis of determining what is to be paid to an employee for his services.
The methods include;
 Time rate method
 Piece rate method or system
 Premium or bonus plans ( Incentive schemes)
 Co-partnership and profit sharing schemes

(A) Time rate method

Under this method, payment is made on the basis of time that may be an hour, a day, a week or a month. A
certain sum of money is set for each of the above unit of time.
Mostly, workers are paid according to number of hours worked during a particular week or month. Hourly rate
is decided in advance at the time a worker is employed. This hourly rate is multiplied by the number of hours
worked during a particular month and the resultant figure is the wage for that month.

Advantages of time rate method.

(i) It is a convenient method and wages can be calculated easily.
(ii) Employees can forecast their income and they are ensured to receive this income.
(iii) This method eliminates the need to measure the performance of the workers.
(iv) This is more suitable for such jobs where work cannot be divided into smaller units e.g the work of a
driver, a typist, or any other office workers.

Disadvantages of time rate method

(i) It discourages the more efficient workers because they receive the same amount with inefficient and lazy
employees.
(ii) It requires close supervision of employees otherwise they do not show interest in their work.

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(B) Piece rate method

In this method, an employee is paid per unit of product, article or per job completed.
This method is used only if the work can be divided into uniform pieces as is often possible for factory jobs. If
the work is paid shs 10,000 for every 10 units produced, then this method is known as piece rate method.

Advantages of piece rate method

(i) It provides an incentive to more efficient workers. They are paid according to work done so they get
more income.
(ii) It does not require close supervision of workers.
(iii) It provides the employers an easy way of determining labour cost per unit of a product.

Disadvantages of piece rate method

(i) The workers can provide inferior or poor quality products in order to produce greater quantity in short
time.
(ii) This method cannot be applied to those jobs which are not easy to divide in small pieces.
(iii) This method does not ensure a stable monthly income of workers.

Other methods of computing wages

These methods are mainly the combination of time rate method and piece rate method.
(i) High time rate for overtime.
Under this method, normal working hours are paid at the normal time rate but for over time worked during
week days and at weekends, a higher rate is paid in order to induce the workers to work for more hours.
Usually, normal working hours from Monday to Friday are 8 hours per day and for Saturday 5 hours. It means
weekly normal working hours are 45.

During week days, for extra time worked, hourly rate is 50% higher than the normal hourly rate. For Sundays it
is double than the normal hourly rate.

Example
We assume Ogwang’s hourly rate is shs. 10,000. During a particular week, he worked for 60 hours including 8
hours on Sundays. His wage for this particular week will be as follows;

At normal hourly rate = 45 hours

At 50% above normal hourly rate = 7 hours
At double hourly rate = 8 hours
Total hours worked 60 hours

Wages shs
Normal hours = 45 X shs 10,000 = 450,000
Overtime
Week days = 7 X shs 15,000 = 105,000
Sundays = 8 X shs 20,000 = 160,000
Total wages 715,000

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(ii) Piece rate with guaranteed time rate

Under this method, a specific amount is paid to the worker on daily or monthly basis irrespective of units
produced by him during that period but if his output exceeds beyond a minimum limit then he is paid
according to piece rate method.

This method ensures a specific daily or monthly income of the workers. Lower output in a specific period may
result due to some reasons not related to the efficiency of workers e.g shortage of materials, power failures,
machinery break downs, etc. in such cases, the guaranteed wage is paid to workers.

Example
We assume the guaranteed wage of Patrick is shs. 150,000 and he is paid shs.500 per unit produced. Find out
his monthly wage on the assumption that he produced in a month;
a) 500 units
b) 270 units

a) 500 units
Total wage for 500 units is 500 X shs 500 = 250,000
This wage is more than guaranteed wage so he will receive shs. 250,000

b) 270 units
Total wage for 270 units is 270 X shs 500 = 135,000.
This wage is less than guaranteed wage, so he will receive shs. 150,000

(iii) Differential piece rate

Under this method, piece rate varies at different levels of output. If the worker produces more units then he
gets higher piece rate beyond a specific level of output.

Example
We assume Ronald is paid shs. 500 per unit upto 100 units, shs 600 per unit for 101 to 200 units and shs. 700
per unit produced in excess of 200 units.
We further assume he produced 250 units during a particular month. His wages for this month will be;

100 units at shs. 500 per unit =100 X shs. 500 =50,000
100 units at shs. 600 per unit = 100 X shs. 600= 60,000
50 units at shs. 700 per unit = 50 X shs. 700 = 35,000
Total wages 145,000

(C) Premium and Bonus schemes (Incentive Schemes)

The premium bonus is paid to the workers according to hours saved. The employers assign some jobs to
workers to complete within a specific number of hours. If the workers complete these jobs in less than time
allowed then there are some savings to the employers.
The workers are paid according to hours worked.

There are three common premium bonus schemes namely; Halsey, Halsey weir and Rowan schemes.
The formula for the workers total pay is;
Day rate wage + Bonus based on time saved.
Time saved = Time allowed – Time taken
If the time taken exceeds the time allowed then there is no time saved. In this case, there is no bonus and
wage rate is only paid for the time taken.

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The formula for the bonus earned is as follows;

1. HALSEY
Bonus = ½ (Time saved X wage rate)
2. HALSEY – WEIR
Bonus = 1/3 (Time saved X wage rate)
3. ROWAN
Bonus = Time taken X Time saved X wage rate
Time allowed
Example
John completed a job in 45hoursfor which 60 hours were allowed. His wage rate per hour is shs 16,000.
Calculate john’s total wage according to;
(a) Halsey scheme
(b) Halsey – weir scheme
(c) Rowan scheme.

Time allowed (T.A) = 60 hours

Time taken (T.T) = 45 hours
Time sae (T.S) = 15 hours
Wage rate per hour = shs.16, 000
Basic wage = 45 X shs. 16,000 =720,000

(a) Halsey scheme

Bonus = ½ X T.S X wage rate.
= ½ X 15 X shs.16, 000 = shs 120,000
Total wage = basic wage + bonus
=shs.720, 000 + shs.120, 000
=shs.840, 000

(b) Halsey –weir scheme

Bonus = 1/3 X T.S X wage rate
1/3 X 15 X shs.16, 000 = shs.80, 000
Total wage = basic wage + bonus
=shs.720, 000 + shs.80, 000
= shs. 800,000

(C) Rowan scheme

Bonus = T.T X T.S X wage rate
T.A
= 45 X 15 X shs. 16,000 = shs. 180,000
60
Total wage = basic wage + bonus
= Shs.720, 000 + 180,000 = shs. 900,000

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Example 2
Total output of Okello for one week was 480 units. He was allowed 8 minutes per unit. He completed
these units in 52 hours. His wage rate per hour is shs. 18,000.
Calculate Okello’s total wage according to;
a) Halsey
b) Rowan scheme

Solution
Units completed = 480
Time allowed per unit = 8 minutes
Time allowed for 480 units = 480 X 8 = 3,840 minutes
= 3,840 = 64 hours
60
Time saved = 64 hours – 52 hours = 12 hours
Basic wage = 52 X shs.18, 000 = shs. 936,000
a) Halsey scheme
Bonus = ½ X T.S X wage rate
= 1/2 X 12 X 18,000 = shs.108, 000
Total wage = basic wage + bonus
= 936,000 + 108,000 = shs.1, 044,000
b) Rowan scheme
Bonus = T.T X T.S X wage rate
T.A
= 52 X 12 X 18,000 = shs.175,500
64
Total wage = basic wage + bonus = 936,000 + 175,500 = shs.1, 111,500

Example 3
Moses produced 600 units in a week but 40 units were rejected. Time allowed per unit is 6 minutes. No
payment is made beyond the time allowed but the bonus is paid on accepted units only. No penalty is
imposed on the rejected units. Moses produced 600 units in 48 hours. His wage rate per unit is shs. 1,500.
Calculate his total wage on the basis of Halsey bonus scheme.

Solution
Time allowed per unit = 6 minutes
Units produced = 600
Units rejected = 40
Units accepted 560

Time allowed for units accepted =560 X 6 = 3,360 minutes

= 3,360 = 56 hours
60
Time taken = 48 hours
Time saved = 56 hours – 48 hours = 8 hours
Basic wage = 48 X shs 1,500 = shs 72,000
Bonus = ½ X T.S X wage rate
= ½ X 8 X 1,500 = shs. 6,000
Total wage = Basic wage + bonus
= shs.72, 000 + shs.6, 000 = shs.78, 000

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Principles of a good incentive scheme

(i) The incentive plan should be understood by all employees before installation or hiring
(ii) The method should not be open to manipulation and there must be adequate checks on times, quantities
and quality of production
(iii) The basis for calculating the bonus must be clear
(iv) No limits should be placed upon the amount of additional earnings under the scheme.
(v) The employees should not be penalized for matters outside their control.
(vi) The cost of establishing and operating the incentive plans should be reasonable.
(vii) The scheme should be reasonably permanent.

Advantages of the incentive schemes

(i) The rate of production is increased induced by extra pay for extra units produced
(ii) They help to reduce labour turnover.
(iii) These are beneficial for employer and employees

Disadvantages of incentive schemes

(i) These involve extra work
(ii) There is possibility of exploitation
(iii) The scheme disputes may become source of friction

(D) Profit Sharing and Co-ownership

Profit sharing is the payment to employees of a portion of the company’s trading profit. Co-ownership relates
to a scheme under which employees own shares in the company. These may be bought by the workers or
given to them without any payment. These two schemes aim to make employees partners in the enterprise
but the employees mostly prefer to be paid well instead of becoming partners.

Job evaluation
This is a technique of analysis of jobs to determine their relative value within the firm so that a fair wage or
salary structure can be established for the various job positions.
The evaluation helps in providing a rational and equitable basis for differential salaries and wages for different
categories of workers.

Merit rating
It’s a technique for determining any addition that should be made to an individual’s normal wage rate to
reward him for above average service.

Payroll section
This is a section under human resource department responsible for the preparation of pay-sheets or payrolls.

The main functions and responsibilities of this section include the following;
(i) To compute employee wages
(ii) To maintain individual employee payroll records
(iii) To calculate payroll taxes, deductions and related payroll liabilities under the Acts.
(iv) Ensuring a suitable internal check in preparing and paying out of wages and salaries
(v) To pay employees and for prompt and accurate reporting of wages and salaries to employees.
(vi) To compute bonus for different employees

Payroll contains different columns which are used to record some specific figures. One line is used for one
worker. A separate wage sheet is prepared for each month.

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Example
From the following information, prepare a payroll for the month of January 2024
Clock no Name Number of hours worked Rate of pay Advance paid
Shs Shs
5012 Ronald 180 1,000 per hour 50,000
5016 Musoke 200 1,400 per hour 70,000
5011 Akello 190 1,200 per hour 60,000
5015 John 210 1,000 per hour 80,000
5013 Wokorac 200 1,600 per hour 80,000
5014 Peter 170 1,300 per hour 50,000
Additional information
(a) Normal working hours per month are 180
Overtime payable for extra hours at the rate of 50% above normal pay rate
(b) P.A.Y.E to be deducted at the rate of 10% of gross wage
(c) N.S.S.F to be deducted shs.8, 000 for each employee.

PAYROLL FOR JANUARY 2024

S.No Name Total Rate Gross P.A.Y.E N.S.S.F Total Net wage Advance Balance
hours wage deduction
worked s
Shs Shs Shs Shs Shs Shs Shs Shs
(‘000’) (‘000’)
5011 Akello 190 1,200 234 23,400 8,000 31,400 202,600 60 142,600
5012 Ronald 180 1,000 180 18,000 8,000 26,000 154,000 50 204,000
5013 Wokorac 200 1,600 336 33,600 8,000 41,600 294,400 80 214,400
5014 Peter 170 1,300 221 22,100 8,000 30,100 190,900 50 140,900
5015 John 210 1,000 225 22,500 8,000 30,500 194,500 80 164,000
5016 Musoke 200 1,400 294 29,400 8,000 37,400 256,600 70 186,600
1,490 149,000 48,000 197,000 1,293,000 390 903,000

Workings
1. Akello
180 hours X shs.1,200 = 216,000
10 hours X shs.1,800 = 18,000
Total = 234,000
2. Ronald
180 hours x 1,000 = shs.180, 000
3. Wokorac
180 hours X 1,600 = shs 288,000
20 hours X 2,400 = 48,000
Total shs. 336,000
4. Peter
170 hours X 1,300= shs.221, 000
5. John
180 hours X 1,000 =shs.180, 000
30 hours X 1,500 =shs.45, 000
Total = shs.225, 000

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6. Musoke
180 hours X shs.1,400 = shs.252,000
20 hours X shs.2,100 =shs.42,000
Total =shs.294, 000

TREATMENT OF IDLE TIME, IDLE CAPACITY AND OVERTIME

 IDLE TIME
Idle time is that time for which a worker has been paid without giving any production to the employer. It
represents unproductive time caused by, for example machine break downs, power shortage and shortage of
material or inefficient scheduling.
The cost of idle time is classified as an indirect rather than direct cost. This arises when the workers are paid
on time basis. Usually, the number of hours paid for is different from the time worked because of the idle
time.

The idle time normally arises due to normal and abnormal causes;

Normal causes
This is an unproductive time which is inevitable and has to be borne by the employer. Whatever precautions
may be taken, some idle time is inherent in every situation e.g time spent in setting machines, elapses
between the completion of one job and the commencement of the next, time lost due to normal fatigue, time
taken for personal needs and time taken picking up the work for the day.

The cost of normal idle time constitutes part of the cost of the product and incase the company produces
more than one product it should be treated as a factory overhead.

Abnormal idle time.

This represents unproductive time which can be avoided or controlled had there been control mechanism in
place. It is caused by factors like power shortages, shortage of raw materials , stoppages, etc. the cost of
abnormal idle time does not make a unit cost of the product instead it is treated as an operating loss and
hence adjusted through profit and loss account.

 IDLE CAPACITY
It means that plant and machinery is available for utilization but is not fully used due to normal or abnormal
reasons.
The normal reasons for idle facilities are generally; maintenance and intermittent use of machine during
processes.

The abnormal reasons may be trade depression, floods, recession, etc.

The cost of normal idle facilities should be charged as overhead expenses and the abnormal idle facilities
should be charged to the profit and loss account.
It should be noted that idle time of labour is different from idle capacity of the plant.

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 OVERTIME
This represents time which is over and above the normal working time. When workers work beyond normal
working hours, they are entitled to extra pay (overtime payment).

The main causes of overtime are;

i) It may be due to increased level of production
ii) It may be due to the need to complete work urgently or because of rush orders by clients
iii) It may also be caused by unavoidable interruption in work during normal working due to power failure and
voltage fluctuation implying that the scheduled work may have to be completed with overtime work.
iv) Slackness during the regular working hours due to inadequate supervision may cause overtime.

This additional amounts spent on overtime is usually called an overtime premium, and such premium is
normally shown in a separate column on a payroll.

Treatment of overtime
Overtime wages and overtime premium should be treated in the cost accounts as follows;
1. When overtime is a regular feature undertaken for increasing production, the normal wage rate should be
proportionately increased so as to include the overtime premium. Overtime premium should constitute
part of labour costs.
2. If overtime is a direct result of a customer’s urgent request for the completion of the order and not due to
general pressure of factory work, then the overtime should be charged directly to the job.
3. If overtime work is caused by loss of time (abnormal idle time) which was avoidable, overtime wages
should be treated as a loss and charged to profit and loss account.
4. If overtime work is of intermittent nature i.e. caused by interruptions during the normal work time which
are beyond the control of management e.g. power failure, breakdown of machinery, it should be taken as
part of the factory overhead.

 FRINGE BENEFITS
These are additional compensations provided by an employer beyond an employee’s direct wages or salaries.
They can be monetary (such as bonuses and allowances) or non-monetary (such as subsidized meals, paid
holidays and pensions).

Fringe benefits offered can vary from organization to organization.

Examples may include;

1.Health Insurance:Coverage for medical, dental, and vision expenses.

2. Retirement Plans: Such as pension plans with employer contributions.
3. Paid Time Off: Including vacation days, sick leave, and holidays.
5. Life Insurance: Coverage for the employee's life, often with options to add coverage for dependents.
6. Wellness Programs: Subsidized gym memberships, wellness activities, or health screenings.
7. Tuition Reimbursement: Assistance with educational expenses for job-related courses.
8. Transportation Benefits: Subsidies for public transportation, parking, or commuting expenses.
9. Stock Options or Equity Grants: Ownership stakes or the opportunity to purchase company stock at a
discounted price.
10. Bonuses: Performance-based bonuses, profit-sharing, or incentives for meeting targets.

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METHODS OF RECORDING ATTENDANCE TIME

(i) Hand written registers

This is the oldest method of recording attendance time. Each employee signs a manual register upon arrival
and departure noting down time in and time out.
(ii) Time recording clocks
The most common form of attendance record is the clock card on which the employee punches the time at
which he/she comes in and leaves the work place. Each week/month a new card is prepared for each
employee on the payroll. At the end of the period, the cards are collected and transferred to the payroll
department for calculation of the gross earnings. Clock cards provide a record of the total hours employees
were on the job.
(iii) Disc or Token or check method
Under this method, each worker is allotted a metal disc or metal bearing his identification. On each disc the
name and the number of the worker is engraved or painted. A board containing hooks on which employees
discs are attached is kept near the entrance of the plant. On arrival, the employee removes his disc and places
it in a box, or alternatively hooks it on a second board against his number. Immediately after the scheduled
time for entering into the premises of the factory, the board is removed and a list is prepared of all such discs
or tokens not collected and dropped into the box by the workers. The late comers collect their discs and hand
them personally to the time keeper.
(iv) Job time booking
Time booking like time keeping is equally important.
Time booking means recording the time spent by a worker on each job, process or production.

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LABOUR TURNOVER
It is expressed as the number of staff who leave the organization over a specific period of time ie six month or
one year as a percentage of the total number of employees.

It’s the rate of displacement of personnel employed in an organization.

Labour turnover is normally measured as the ratio of the number of persons leaving the company in a period
to the average number on the payroll.

In calculating the ratio of labour turnover, all persons who leave must be included, whether they leave
voluntarily or are dismissed and irrespective of whether they are replaced.
For example, we assume that 50 workers out of a total 200 workers leave the organization in a particular year;
in this case, labour turnover is 25%.

ie 50 X 100 =25%
200
Labour turnover leads to high costs and low productivity. It is therefore important that labour turnover is kept
as low as possible since high labour turnover results in low morale with the attendant costs associated with
demoralized staff.

Low labour turnover rate is an indication of;

(i) Well managed organization
(ii) Strong and well organized trade union exerting considerable influence over the management.
(iii) Absence of alternative avenues for better employment
(iv) Higher preventive costs being incurred by the management for the satisfaction of employees.
(v) Widespread unemployment
(vi) Considerable state regulatory control over the policy of the management in respect of employment and
retrenchment.

Causes of labour turnover

They may be divided into; personal, avoidable and unavoidable causes
(a) Personal causes
Sometimes workers leave the organization at their own will and management can do nothing in this regard.

These are known as personal factors and include;

(i) Change for a better job
(ii) Marriage, especially female workers or later on child birth
(iii) Domestic responsibility, say to look after old parents
(iv) Premature retirement due to ill health and old age
(v) Discontentment over the job or working environment

(b) Avoidable causes

The causes may be eliminated by taking suitable measures by the business firm
(i) Low wages and earnings
(ii) Dissatisfaction with job
(iii) Bad relations among workers and between workers and supervisors
(iv) Unsuitability of the job
(v) Long and odd working hours
(vi) Unfair methods of promotion and lack of promotional avenues

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(vii) Lack of planning and foresight on the part of management, seasonal nature of industry, non-availability
of raw materials, power, etc.
(viii) Bad working conditions.

(c) Unavoidable causes

This is a situation where workers have to leave the organization because of management requirements and
actions;
(i) Dismissal or discharge due to insubordination, negligence, inefficiency, indiscipline, misbehaviour
(ii) Accident or illness rendering workers permanently incapable to work.
(iii) Retrenchment or lay off due to shortage of resources, low demand, seasonal nature of business.
(iv) Change in plant location.

Effects of labour turnover

The higher rate of labour turnover results in increased cost of production.
This is due to;
(a) Interruption of production
(b) Increased cost of new recruitment & training
(c) Losses due to wastage, spoilage and defectiveness of new employees
(d) The new workers are more prone and are liable to cause more damage to machinery, tools than old
employees.

Measurement
Labour turnover is measured by any of the following methods;

(a) Replacement method

This method takes into consideration only the actual replacement of labour irrespective of the number of
persons leaving. If new workers are employed on accoujt of expansion of business, they are not included in
replacements.

It’s therefor calculated as;

Labour turnover = Number of replacement in a period X 100
Average number of workers in the period

(b) Separation method

This method takes into account only those workers who have left during a particular period.

Labour turnover = Number of workers left during the period X 100

Average number of workers in the period

(c) Flux method

It denotes total change in the composition of labour force due to addition and separation of workers.

Labour turnover = number of separation + number of addition X 100

Average number of workers in the period

Average number of workers in the period = Number of workers at the start of the period + number of workers
at the end of the period
2

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Among the three methods, the separation method is preferred, as it is more appropriately a long term
indicator.

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