Chapter 4: Elements of

Cost Labour
Reporter: Michelle V. Mapaye
Chapter Contents

 a. Job evaluation, merit rating, work study, methods study and work measurement

 b. Time-keeping and Time-Booking Functions

 c. Treatments of overtime and idle time in labour costing

 d. Basic methods of remuneration

 e. General features of incentive schemes including computation of individual incentive scheme

 f. Labour Cost Accounting

 g. Labour Turnover
Objectives
After studying this chapter, readers e. distinguish between direct
should be able to: labour cost and indirect labour cost;
a. explain labour as a factor of f. compute overtime premium and
production; explain the various treatments of
b. explain what constitutes
overtime premium;
recruitment cost; g. explain group incentive
c. explain the methods of labour
schemes and;
timing and assessment; h. prepare payroll of employees for
d. compute labour cost using the
organisation.
various methods of remuneration;
 Labour
• is the second element of cost
after materials.

Labour cost represents the

remuneration for employees' effort in
the production process. Controlling
labour cost involves complex
procedures since it involves human
beings and controlling human
behaviour is complex.
This chapter will explain the
processfor determining and
controlling labour cost
 LABOUR ADMINISTRATION AND
DOCUMENTATION
Labour as a Factor of Production
• Factors of production are resources or inputs that are used to
facilitate the production of goods and services. Labour is the
effort of employees required to transform raw material into
finished goods and services.

Labour Recruitment Process

• Labour recruitment refers to the process of engaging employees
in the organization for their services.
Labour Induction and Placement
• This is a programme carried out to ensure that new employees
are as soon as possible integrated into the culture of the
organisation by becoming familiar with the values and norms of
the organisation. Employees are then placed according to their
experiences, qualifications and competencies. Training may
thereafter be provided to ensure enhanced performance.

Labour Timing and Assessment

• After employees have been engaged and they begin to work,
there isthe need to time them as they work so as to assess their
performance and also to make it possible to cost the work that
they do.
Job Evaluation
This is a technique which seeks to show the relative worth of each job so as to
rank it against other jobs and ultimately establish the appropriate weight of
remuneration to attach to the job. Job evaluation analyses the content of each job
using yardsticks such as degree of responsibility, decisions involved, training and
experience required, working conditions etc., awarding points for each yardstick.

Merit Rating
Whilst job evaluation assesses the worth of the job, merit rating measures the
jobholder's performance so as to determine whether the employee should be
promoted, demoted or given a special award. It also uses its own yardsticks on the
performance and attributes of the employee like accuracy, initiative, level of
responsiveness, willingness, etc.
Work Study
This is a system of increasing or maximizing the productivity of an operating unit
by reorganizing the work of that unit. Work study is sub-divided into two major
methods namely methods study and work measurement.

This is the recording and critical

As the name suggests, work
examination of existing methods
measurement seeks to measure
of doing work and comparing
Method Work the time required for a qualified
same with proposed methods
study measurement worker to complete a specific
with a view to coming up with
assignment at a specified level
easier methods which would be
of performance.
more effective and cheaper on
the long run.
 LABOUR COST COMPUTATION
There are two basic methods of remunerating labour; time based remuneration
and output based remuneration.

The amount earned by the employee is based

on the number of hours spent at his place of
Under this method, the amount
work and not on the quantity of work produced. earned by the employee is based
The gross wage is calculated as Hours Worked
× Rate per hour. However, when overtime is on the number of units produced.
worked, the payment to the Piece Rate Method
Time Rate Piece rates can be examined
employee will also include premiumon the or Payment by
Methods of Result Method of
Remuneration overtime hours. Remuneration under three headings, namely:
Example: • Straight Piece Rate
Hours worked = 50 hours
Rate per Hour = ¢2,000
• Differential Piece Rate
Gross wage = ¢2,000 x 50hours • Piece Rate with guaranteed
= ¢100,000
time Rate
 Differential
Under straight piece rates the Piece Rate
payment to the employee
is computed thus: No. of units
produced ×Rate per unit.
Piece Rate
with
Guaranteed Piece Rates
Day Rate Method
During an 8 hour day, 'B' completes 90 units and 'S' 60 units. Calculate the earnings of
each employee.

The remuneration fluctuates in direct proportion to the units produced by each employee. If time rates were
used, both employees would receive (8 hours × ¢1,600)
= ¢12,800
piece work are less than the normal Day Rate, he is paid the day rate instead of
the
PieceRate.
Example:
Rate per hour ¢15,000
Cost per unit ¢16,000
Units produced 8,000units
Calculate the piece rate with Guaranteed Day rate of remuneration assuming
that
8,800 hours were used to produce all the units.
c. Since the guaranteed hourly rate is higherthan the piece
rate, the employee is paid the
hourlywages of ¢132,000,000
 Differential
Piece Rate

Under this scheme the piece work rate changes at different

levels of efficiency or production.

Example:
• ¢10,000 per unit when production is below 7 units per hour
• ¢15,000 per unit, when production is 7-10 units per hour.
• ¢20,000 per unit when production is above 10 units per hour,
etc.

The objective of this is to provide a strong incentive to reach the

maximum rate of Piece Rate
production.
with
Guaranteed Piece Rates
Day Rate Method
 Differential
Piece Rate

It is a system adopted to
compensate employees on account
of low production, leading to earnings
under piece rate being below the
normal day rate remuneration.If an
employee's earnings according to the

Piece Rate
with Piece Rates
Guaranteed Method
Day Rate
PremiumBonus Schemes
Bonus schemes are intended to reward employees for
their efficiency in saving cost for the
organisation through the saving oftime.These are
therefore schemesforsharing extra profits
with employees.
Time allowed: This refers to the expected time to be spent in doing some piece
of Editorial
work e.g. if time set for one unit is 5 hours, then 100 units shall be 500 hours.
Time
allowed may therefore not be the same asthe hours worked.
Time taken:Thisthe number of hours actually used in performing a piece of
work.
Time saved: It isthe difference between time allowed and hours worked, when
time allowed
is greaterthan hours worked.
Premiumbonus:Thisis paid when time has been
saved; themagnitude ofthe bonustherefore
depends upon the time saved.
Types of PremiumBonus Schemes:
a. Individual Incentive Schemes
b. Group Incentive Schemes
 Individual Incentive Schemes
These are bonus schemes that reward individual employees for their
efficiencies.
These include the following:
(i) HalseyBonus Scheme
(ii) Halsey-WeirBonus Scheme
(iii) RowanBonus Scheme
Halsey Scheme:
According to thisscheme, the time saved should be apportioned equally
between the
employer and the employee.
Bonus =½×(Time Saved) × DayRate
Note: Time allowed - TimeTaken =Time Saved
Halsey-Weir Scheme:
Under thisscheme the proportion is 2:1in favour of the
employer.Thusthe employee
gets only a third oftime saved at the rate per hour.
Bonus = ⅓ (Time Saved) × Day rate
Rowan Scheme: Under this system, the bonus awarded to the employee is
the proportion between time taken andTime allowed oftheTime saved.

It therefore followsthat ifthe employee savesmore time, he gets a greater

bonus.
Example
Time allowed = 12 hrs.
Day rate = ¢18,000
Time taken byA = 6 hrs
Time taken byB = 9 hrs
Required:
Calculate the Bonus to be awarded to both employees
Employee B
Many business organisations determine their bonuses through
negotiation with employee groups.The factorsthat influence the
size ofthe bonusinclude the following:
· Time saved by employees
· Costsaved by employees
· Improved productivity
· The amount ofsuper profitsmade by the business organisation
· The achievements of other budgetary targets, etc.
- Market demand for the product
Overtime Remuneration Schemes
Overtime is the time spent beyond the normal working hours or
days. Overtime wage rates
are expressed astime plus a fraction orinmultiples oftime, e.g.
(i) Time and one half
(ii) Time and one third
(iii) Double time
(iv) Time and one fifth, etc.
a. Meaning of Time: Time refers to the basic rate e.g. if the normal rate of pay
is ¢500
an hour, then the time is ¢500.
Meaning of Additional Rate The additional rate is called the overtime premium
and
whatever it is the amount involved is arrived at by multiplying the description
by the
basic rate e.g. The overtime rate is time and one half, the basic rate is ¢500.
The
premiumshall be ¢250 = ½× ¢500.
b. Overtime Premium: It is the portion of the overtime pay over and above the
basic
rate of pay. Basically, overtime premium istreated asindirect wages.The only
Idle Time Or Waiting Time
Idle time or waiting time is defined in the CIMA terminology as “the period of time
for
which a workstation is available for production but is not utilised due to shortage
of
tooling, material and operators”. From the definition, idle time is the time lost for
which
there is no production. In most cases, employees received payments for the lost
production
created because of idle time.
Idle time can be classified into:
1. Normal idle time; and
2. Abnormal idle time
Normal idle time is uncontrollable while abnormal idle time is controllable.
Therefore,
Management should ensure that all facilities are in good condition and materials
The basic working week is 42 hours. Hours in excess are paid at time
and half. X completes his
unitsin 45 hours andYhisin 39 hours(but works a full week). Because
of defective material, 6 of
X's units and 4 ofY's units are subsequently scrapped although all
units produced are paid for.
You are required to calculate for each of X andY:
(a) the amount of bonus payable
(b) the total gross wage payable.
(c) the wages cost per good unitmade.
(a) Solution
XY
(i)Time allowed 20 ×189 15 × 204
60 60
= 63 hrs. = 51hrs.
TimeTaken 45 hours 39 hours
Wages cost/good unit 11,100 9,600
183 200
= ¢60.66 ¢48
Illustration 4.3
Kokonsekyi Ltd. presents the following information which relates to a week's
work of 3 of its
employees
Employee
Mumu Opi Adam
Work issued (units) 400 600 120
TimeAllowed (hrs. per unit) 0.2 0.1 0.4
OutputRejected (units) 60 90 40
The basic working week is 40 hours; the first 6hours overtime are paid time
plus ½ and the
next
10hours at time plus ¾. Hours worked by Mumu, Opi and Adam were 52, 45
Solution
(a) KULANG TO
Hours worked × rate/hours 52hrs × ¢30 45hrs × ¢40 40hrs × ¢25
= ¢1,560 = ¢1,800 =¢1,000
Overtime premium: 6hrs×½30 = 90 5hrs×½×¢40 = 100 135
6hrs×¢¾× ¢30 = 1650
Basic wages(including overtime ¢ 1900 ¢1135
(c)Bonus ½ × ¢30 × 28 hrs. ½× ¢40 × 15 hrs. ½× ¢25 × 16 hrs.
= ¢420 = ¢300 = ¢200
(d) Gross wages:
Basic wages 1,785 1,900 1,000
Bonus 420 300 200
¢2 205 ¢2,200 ¢1 200
(e) Direct labourfor good, unit accepted:
Good units 400-60 600-90 120-40
Summary of answers
Mumu Opi Adam
(a)Bonus hours 28hours 15hours 16hours
(b)Basic wages ¢1,650 ¢1,900 ¢1,135
(c)Bonus earnings 420 300 200
2,070 1,335
(d)Gross wages 2,200 1,135 (e)
Direct wages per unit ______
(i)Regular overtime 4.59 3.53 10
(ii)Requested overtime 5.25 3.75 10
Illustration 4.4
ACompany's basic wage rate is ¢0.45 per hour and its overtime rates are:
Evenings- 11/3
Weekends- double time
During the previous yearthe following hours were worked:
Normal time 440,000 clock hours
Time plus 1/3 40,000 clock hours
Double time 20,000 clock hours
The following times have been worked on the stated jobs
Job X JobY JobZ Clock
Clock Hours Clock Hours Clock Hours
(KULANG TO TABLE)
You are required to calculate the labour cost chargeable to each job in
each of the following
circumstances:
(a) Where overtime is worked regularly throughout the year as
company policy due to labour
shortage.
(b) Where Overtime is worked specifically at the customer'srequest to
expedite delivery.
Solution:
Job X JobY JobZ
(a) Hours worked 6,800 hrs. 11,300 hrs. 10,700
× HourlyRate(¢) × 0.45 × 0.45 × 0.45
=¢3,060 = ¢5,085 = ¢4,815
(b) 6,800 hrs. × ¢0.45 11,300 hrs.×¢0.45 10,700×¢0.45
= 3,060 = 5,085 = 4,815
Overtime premium:
· Employer'ssocialsecurity fund contribution
· Bonuses paid to employees
· Overtime premium paid to employees where the overtime is worked
regularly as company policy, etc.
Wages cost incurred on indirect workersisindirect wages.
Illustration 4.5
Mame Coins employs on her farm 120 workers as direct labour and 15
workers as indirect
labour.The farmremuneratesitslabour asfollows:
a. Direct labouris paid regularly on the basis of units of output at the rate of
¢12,250 per unit
b. Indirect labouris paid regularly on the basis of hours worked at the rate of
¢14,000 per hour
c. Overtime premiumis paid to allfactoryworkers on the hours worked at the
following rates
i. ¢26,000 per hourfor direct labour
direct and indirect labourin the ratio of 4:1
g. PAYETAX is appropriately 8% ofmonthlyGrossIncome
During the month of June 1999, the farm produced 30,000 units of products during regular
working time of 8 hours a day for 22 days a month. The farm worked overtime of 6 hours a day
for 4 days during themonth and produced 3,200more units of products.
;You are required to determine:
i. the cost to Mame Coins of farm labour for the month of June 1999 distinguishing
between direct and indirect labour costs
ii. the total net wages paid to the workersforJune 1999 ( 20 marks)
ICAG NOV. 1999
Solution
Analysis ofWages
DirectWorkers IndirectWorkers
No of units produced in normal time 30,000 units -
Overtime production 3,200 units -
Total units produced 33,200 units -
Hours worked regulartime 120 x 176 hrs. 15 x 176 hrs.
= 21,120 hrs. = 2,640 hrs.
Overtime hours
Wage rate
24hrs x 120 = 2880hrs. 24 hrs. x 15
¢12,250/unit
= 360 hrs.
¢14,000/hrs.
Indirect worker 3000 hrs.@14,000 - 42,000 42,000
Basic wages 406,700 42,000 448,700
Overtime premium
Direct workers(3200 x11,150) 35,680 - 35,680
Indirect workers(360 hrs. x 14,000) 5,040 5,040
Premiumfor workman compensation 6,000 1,500 7,500
Employer SSF 10% of basic wages
Direct worker 40,670 - 40,670
Indirect workers 4,200 4,200
Total labour cost 489,050 52,740 541,790
DIRECTWORKERS INDIRECTWORKERS PAYROLL
¢¢
Basic wages 406,700 42,000
SSF contribution 5% 20,335 2,100
Other allowances:
386,365 39,900
Overtime premium 35,680 5,040
Taxable pay 422,045 44,940
PAYE8% (33,763.6) (3,595.2)
Local union (6,000) (1,200)
Net wages 382,281.4 40,144.8
Net wage per employee 382,218.4 40,144.8
120 15
= 3185.68 2676.32
4.8 LabourCostMinimizationTechniques
LabourTurnover
a. Meaning
Thisis a term which signifies percentage change in labour force during a given
period. It
can be measured by using the following formula:
Number of employeesleaving during a period x 100
Average number of employees for the same period
The percentage calculated isreferred to asthe labourturnoverratio (orrate)
The details below relate to themonth ofMarch.
Total number of employees at the beginning ofmonth 201
Number of employees who started during themonth 3
Number of employeesleaving during themonth 5
Calculate the labourturnoverrate
Labourturnov
Note: Average number of employees
Number of employees Number of employees
number of employees, a high ratio will emerge. An increase in the number of
employees
leaving or a reduction in the total workforce will cause an increase in the rate
compared with
previous periods. The effect of a high rate is reflected in loss of output, lowering
of morale
and higher cost. Loss of output occurs because of:
(a) The gap between the person leaving and hisreplacement;
(b) The length of time taken to train a new employee to the level of
efficiency ofthe previous employee;
(c) The reduced effort given by an employee during the days or
weeksimmediately prior
to the date of departure.
Note that two other methods of computing labour turnover are:
Flux Method: number of workers joining the organisation
plus number of workers leaving during the period
(v) Sometimes employees are discharged due to redundancy, incompetence, lateness,
absenteeismand for disciplinary reasons.
d. Reduction in theLabourTurnoverRate
In orderto reduce the rate oflabourturnover, the following should be considered:
(i) Regular statistics should be provided analysing labour turnover by cause and
indicating whether the cause was avoidable or unavoidable and whether the person
left voluntarily or was dismissed; we should however note that there are some
dangersin such an analysis because employees who leave do not always give the true
reasonsforleaving.
(ii) Seek ways in which the selection of applicants can be improved in order to prevent
situations arisingwhere employees are discontented or unsuitable.
(iii) Ensure that the labour requirements are properly planned in order to avoid
redundancy
(iv) Considerthe introduction of high wages plan orsome otherformofincentives.
(v) See to it that the working environment is congenial.
(vi) Consider whether the transfer of a dissatisfied employee to another department will
remove the cause ofthe dissatisfaction.
(vii) Hold annualmedical check-upsin orderto prevent ill-health at a later date.
(viii) Consider whether the fringe benefits are competitive, e.g. pension scheme,
subsidizedmeals,sports and socialfacilities.
(ix) Develop better human relationship betweenmanagement and workers
Asit isimportant for an organisation to keep itsskilled and experienced employees, a
target labour turnover rate could be set with the personnel manager being responsible
ifthe rate is higherthan target.
PAYROLLPREPARATIONANDACCOUNTIN
G
4.10.1 Types of PayrollforLabour
The payroll is the process of determining the
net wage earnings of each employee in the
organisation. The payroll could either be
computerized or done manually. With the
manual
payroll, the earnings of each employee are
computed by human effort without the use of
the
computer. The computerized payroll uses
computer software and inputs the basic
variablesfor each employee such as:
a. hours worked
b. overtime hours
c. units produced
d. wage rate per unit or hour
e. statutory deductions
f. voluntary deductions, etc.
into the computer and the software processes the data to arrive at the net earnings of each
employee as well asthe total amount of various deductions.
4.10.2 LabourPayroll Preparation
In preparing the payroll, the following procedure isfollowed:
a. Determine the basic wages of each employee. This is done by multiplying the hours
worked or units produced by the agreed wage rate
b. Add all other allowancesto the basic wagesto obtain the gross wages
c. Calculate the various deductions to be made. These are of two types: statutory and
voluntary deductions. The statutory deductions are required to be deducted by law
and so the amount of deduction is determined by the law. These deductions include
the following:
· Social Security contributions
· Employee PersonalIncomeTax (P.A.Y.E.)
· National Health Insurance, etc.
Examples of voluntary deductionsinclude:
• Trade Union contributions
• Providentfund contribution
• Employee welfare contribution, etc.
When the total deductions are taken from the gross wages, then we obtain the net
Below is an extract of payroll information with respect to four of the company's employees
forJuly2005
Name of employee Michael Gerald Cynthia William
Actual hours worked 152 hours 144 hours 160 hours 136 hours
Wage rate per hour ¢ 45,000 30,000 37,500 54,000
Output produced - units
ProductA 168 480 - 480
ProductB 288 304 - 1,080
ProductC 368 - 200 -
The standard time per unit of each product is
Product MinutesAllowed
A6
B9
C 15
Eachminute earned is valued at ¢750 for piecework calculations
Required:
a. Calculate the earnings of each employee using the followingmethods:
i. guaranteed hourly rates(basic pay)
ii. piecework, but earnings guaranteed at 75% of basic pay
iii. premium bonus in which the employee receives (2/3) two thirds of time saved in
addition to hourly pay. (14 marks)
b. State three (3) advantages and three (3) disadvantages of individual incentive schemes
(6Marks)
Solution sa payroll clayton
.10.3 The Differences betweenLabourCostAccounting and PayrollAccounting
Labour cost accounting relates to the determination of the cost of labour
chargeable to
various jobs, customers, clients and overhead accounts. Under labour cost
accounting, the
objective is to ascertain the labour cost that can be charged to products and
services. In this
regard, the following are considered as Labour cost:
· Wages and salaries of employees
· Insurance for workmen compensation
· Employee bonuses
· Employee share schemes, etc.
Payroll accounting relates to the process of computing the amount of earnings of
employees
as well as the various payments made for and on the behalf of employees.
Examples of
 CHAPTER SUMMARY
In this chapter, we have discussed labour cost determination and control
under three
sections. Section one dealt with the preliminary issues of labour;
including: labour as a factor
of production; labourrecruitment, induction and placement; labour
behaviour and control.
Section two focused on the computation of labour cost, explaining the two
main methods of
labour remuneration; time based methods and piece rate methods. The
concept of overtime
was also explained as well as the treatment of overtime premium when
overtime is regularly
worked and when overtime is requested by a customer. Bonuses and
incentives were also
discussed. We explained the difference between group incentive schemes
T H A N K
Y O U !