ACCOUNTING FOR LABOUR

Intended Learning Outcomes •

At the end of the chapter, you will able to
1.Distinguish between the direct and indirect labor cost
2. Understand the various facets of labor cost control
3. Understand the concepts like labor turnover, time keeping,
time booking and idle and overtime
4. Know the various methods of remuneration including
incentive plans
5. Understand the pay roll accounting and disbursement of
wages.
 Meaning of labour cost
Like material labour is also one of the prime inputs of
production system.Human efforts used for conversion of materials
into finished products or doing various jobs in the business are
known as labour. Payment made towards the labour is called labour
cost. Labour cost is the significant element of the total cost of
production.
Labour Cost, representing the human contribution to
production, is an important cost factor which requires constant
control, measurement and analysis.”
MATZ, CURRY & FRANK
 Types of Labour
DIRECT LABOUR:-
Direct labour is that types of labour who is engaged directly in
manufacturing of a product, job or services. The cost of which can be
conveniently allocated to the job or production units. In other word labour
which is directly used for conversion of materials into finished products in the
production of goods and services called direct labour.
Such as;
1. Labour engaged in conversion of materials into finished products
2. Labour engaged in a Construction job
3. Compositors engaged in printing press.
4. Drivers and conductors Engaged in a transportation.
5. Helpers attending the machine operation
INDIRECT LABOUR
Indirect labour is that types of labour which can not be easily
and conveniently allocated to the job,process or production units.it
represent labour which is not directly engaged in the production of
goods and services but which indirectly helps to the direct
labour who engaged in production.
Such as …
1.Labour employed as supervisor,inspectors, foreman,
2. Labour employed cleaners, gardener, watchman etc.
 Different between direct and indirect
labour
Bases Direct Indirect
Meaning Which is directly involved in the Which is not directly involve in the
production production
Volume of production Deepened on the volume of Does not deepened on the volume of
production production
Separation It can be separate into cost, cost It can not be separate.
centre, or unit cost.
Nature of expenses It is direct expenditure It is indirect expenditure
Use It is use to convert raw materials in It is use to assist to convert raw
to finished product. materials in to finished product.
Part It is a part of prime cost It is a part of overhead
 Labour Costs
The payment made to the labour in exchange for his/her service is
called labour cost . It consists a major part of the total cost of
production. Labour cost is commonly known as wages. Labour cost
represents the expenses incurred on both direct and indirect labour.
labour costs is not just wages only but it is more then just wages. it
includes monetary and non monetary benefits given by the concern to
all its worker and employee for their time and effort use physically and
mentally to converting ra material into finished product. The
 financial benefits
Total amount of financial benefits represent the various items
of expenditure incurred on workers by the employer and would
include the Monetary Benefits and non Monetary Benefits
(а) Monetary Benefits
●(i) Basic Wages
●(ii) Dearness Allowance;
●(iii) Employer’s Contribution to Provident Fund;
●(iv) Employer’s Contribution to Employees’ Insurance Scheme;
●(v) Production Bonus;
●(vi) Profit Bonus;
●(vii) Old Age Pension;
●(viii) Retirement Gratuity.
 Non Monetary Benefits/ Fringe Benefits

Non-monetary benefits /fringe benefits are indirect forms of

employee compensation. The total of these benefits given to
workers should be sufficient to attract the labour force. In other
words, the will to work among workers should be created with the
consequent increase in efficiency.
Non-monetary /Fringe benefits such as;
(i) Subsidised Food;
(ii) Subsidised Housing;
(iii) Subsidised Education to the children of workers;
(iv) Medical Facilities;
(v) Holidays Pay;
(vi) Recreational Facilities.
 Need of labour cost control
1) Labour cost is a second major element of cost of product of
services. Under the present political conditions with a impatient
labour in organized industry, it is very difficult to reduce labour cost.
Therefore, proper control and accounting for labour cost is one of
the most important problems of a business enterprise. But control of
labour cost presents certain practical difficulties then the control of
material cost.
2) Labour costs represent a significant portion of the total cost of a
product. Labour cost may be excessive due to inefficiency of labour,
high labour turnover, idle time and unusual overtime work, inclusion
of fake workers in the wages sheet and many other related factors.
cont
3) Inefficiency of labour is also a cause of excessive material and
overhead costs. Therefore, economic utilisation of labour is a need
of the present day to the industry to reduce the cost of production
of the products or services . Therefore the primary objective of
management is to efficiently utilize the labour as economically as
possible.
4) Hence, control of labour costs is an important objective of
management and the realisation of this objective depends upon the
cooperation of every member of the supervisory force from the top
executive to the foreman.
 Importance of labour cost control
The importance of labour cost control arises to fulfill the
following purpose.
To make economic utilization of labour
To obtain better quality out put with the least effort and time
of worker.
To reduce total cost of production of a product or services.
To ensures the satisfaction of the workers with good working
environment.
To reduce the labour turnover.
Department involved in labour cost control

From functional point of view, control of labour costs is

affected in a large industrial concern by the co-ordinated
efforts of the following five departments:
1. Personnel Department,
2. Engineering Department,
3. Time-keeping Department,
4. Pay-roll Department, and
5. Cost Accounting Department.
 Personnel Department
Personnel department play a very important role in controlling
of labour cost.it is primarily concerned with the recruitment
and selection of workers, providing them training and placing
them to the jobs they are best suited.
 Engineering Department,
This department is primarily concerned with maintaining
control over working condition and production method for
each job, department or process it perform the following
function

◦ Preparation of plan and specification of each job.

◦ Maintaining safety and efficient working condition
◦ Making time and motion study
◦ Conduct job analysis, job evaluation and merit rating
◦ Conduct research and experimental work
 Time-keeping Department
This departement is concern with follouing two importance activity
1.Time Keeping records •
In time keeping system, maintaining record of each
worker’s time in and time out during regular working
period .In this basic aim is responsible for recording the
attendance time of each worker accurately. •
Methods of time keeping:
. Clock cards
. Disc Method
. Attendance Records
 2. Time Booking records
In time keeping system ,maintain the records of
each worker’s productive time spent by the
workers in the factory.
Methods of Time Booking :
• Daily Time Sheet
• Weekly Time Sheets
• Job Ticket
• Labor Cost Card
• Time and Job Card
• Idle time card
 Pay-roll Department

This is one of the importance department which is

responsible for computation ,prepration and payment of
wages to all employee of the organization. It maintains all the
functions related to the wages and salaries of the employees.
 Cost Accounting Department

The cost accounting department is responsible for the collection

and classification of all labour cost with the time cards , job
cards , labour cost of various jobs , work orders , etc.
The main function of cost department are
To accumulate different cost information from different cost
center
to determine the cost of job
To calculate labour cost considering time cards , job cards and
pay role
To provide necessary cost information to the management in a
regular manner
 SYSTEM OF WAGES PAYMENT
A system of wage payment, which takes care of
both, i.e. providing guarantee of minimum wages as well as
offering incentive to efficient workers helps to motivate the
workers to a great extent.
The principal method of wage payment are as follows;
1. Time rate system
2. Piece rate system
3. Incentive wage system
 Time rate system
Under this system, the amount of remuneration or the total wages
payable to the workers depends on the time for which he is employed. This is
simple and common method of wages payment. In this method, the workman
is paid an hourly, daily, monthly or yearly rate of wages. Thus the worker is
paid on the basis of time and not on his performance or unit of output.
Cont.
The amount of wages payable to a workman under this method is to be
calculated as follows:
Total wages = actual time take x time rate
Or
Total wages = Total hours worked x wages rate per hour
Or
Total wages = T.T. x T.R.

Effective Rate = Total wages

T.T.
Cont.
This method is suitable to be applied in the following circumstances:
• Where the quality of work is more important than production.
• Where the volume of production is not within the control of labour.
• Where it is difficult to fix the unit of output..
• The nature of work is such that there is no basis for incentive plan.
• Where the amount of output cannot be accurately measured, counted and
standardized.
Illustration

solution
total working hour (time taken)= working hour per day working days
= 6 X 32
=192 hours
we know that, total wage using time rate method= time taken X time rate
=192 X 16.75
= Rs3216

Effective rate =Total wage = 3216 = 16.75

Time taken 192
Advantages of time rate system
a. Simplicity
b. Guarantee of minimum wages
c. Quality production
d. Unity among workers
e. Economical

Disadvantages of time rate system

a. No incentive to the efficient workers

b. Go-slow policy
c. Dissatisfaction among the efficient workers
d. Payment for idle time
e. High cost of supervision
 Piece rate system

In this method, wages are paid to the employees after

completion of work. Under it, a worker is paid on the basis of
output. Not the time by him to perform the work. This is one of the
simplest and most commonly used systems of wages payment. In
this system, the wage rate is expressed in terms of per unit of output,
per job or per work-order. This amount of wages payable to a
workman under this method is to be calculated as follows:
formula
Total wages = Total output x wages rate per unit of output
or
=output units x unit rate
or
=actual yield x piece rate
Cont.
This system is suitable in the following cases:
• Where a work is of a repetitive natures.
• Where the measurement of work is simple.
• Where the quality and accuracy of output is not very
important.
• Where strict supervision is not possible.
 Illustration

Soluation
We know that, total wages using piece rate=total production unit X piece rate
= 1000 X 8
= Rs8000
Working note
1) to convert time rate into piece rate we use
this formula
Effective rate = total wages
piece rate= time rate per hour time taken
production per hour = 8000
piece rate = 80 = 8 per unit
10
100
2) time taken = total production = 1000 = Rs 80 per hour
productin per hour 10

=100 hours
Advantages of piece rate system
a. Simplicity
b. Incentive to workers
c. Ascertainment of accurate labor cost
d. No payment for idle time
e. Proper care and use of machine and tools

Disadvantages of piece rate system

a. Less attention to quality
b. Inefficient use of machine and materials
c. No guarantee of minimum wages
d. Dissatisfaction among inefficient workers
e. Adverse effect on worker's health
Difference between time rate and piece rate
system of wages payment

and
 Incentive wages payment plan

To remove the defects of both time rate and piece rate systems
of wages payment, incentive plans have been developed. Under these plans,
the advantages of time and piece-wages system are combined, and
incentives are provides to workers to work hard.
Characteristics of Incentive wages payment plan

The characteristics of these plans are as follows:

i. Incentives by way of bonus and other are given to efficient works for time
saved.
ii. A standard time is fixed and the worker is to perform the given work within
the standard time. The standard time is set after making time studies for the
performance of specific job.
 The incentive plans should be selected according to the nature
of work and other circumstances. It should be accepted by the
management as well as labour otherwise it does not function
successfully. The payment of wages may be made according to any
of the following plans:

A. Individual bonus plan B.Group bonus

plan

1. Halsey premium plan

1.Priestman’s plan
2.Rowan premium plan 2.Scanlon plan
3.Taylor’s differential piece rate system 3. Rucker plan
4.Gantt’s task and bonus plan
Individual bonus plan

According to individual bonus plan, the bonus of each worker is calculated

separately
A) Halsey premium plan
B) Rowan premium plan
C) Taylor's differential piece rate system
D) Gantt's task and Bonus Scheme
 Halsey premium plan

This plan was originated by F.A. Halsey. Under this scheme, an hourly
rate is guaranteed to all workers. At first a standard time is fixed for the job on
the basis of time and motion studies and the worker is paid the agreed hourly rate
of wages for the actual time taken plus a fixed percentages of bonus on the time
saved. The amount of bonus payable to the workers in one-half of the wages of
the time saved.
Requirements for calculating total wages or total earning of the worker
under Halsey premium plan are:
T. A. / ST = time allowed/ standard time or normal time
TT = Time Taken
SR = standard time rate of wages/ TR
Time saved TS = (TA –TT)
 Formula (Halsey)
Total wages = Time Taken x Time Rate +1Time Save x Time
Rate
Or 2
Total wages = TT x T R +Bonus

Effective Rate = Total wages

T T
Bonus( Halsey plan) = 1 time save X Time rate
2
Illustration

Effective rate = total wages

time taken
= 90
8
= 11.25
Advantages of Halsey premium plan

i. It is simple to understand and operate.

ii. Every worker is guaranteed minimum wages and even the
inefficient worker feel secured.
iii. It encourages efficiency among worker by inducing them to
finish their job before the standard time.
iv. The benefit from the time saved is shared equally by have
employer and the workman.
v. Generally workers do not oppose this method of wages,
payment as it rewarded time saved rather than increase
output.
Disadvantages of Halsey premium plan

i. Workers are paid only half of the wages on the time saved.
So the worker may oppose this method.
ii. The worker may perform to work in hurry by neglecting the
quality of output to save time and earn higher bonus.
iii. The standard time fixed for finished a job may not be
scientific.
 Rowan premium plan

This plan was originated by David rowan. This plan guarantees an hourly rate
to all workers. A worker is paid the fixed rate per hour for the actual time spent on
the job plus a premium or bonus based on the time saved. The amount of premium
or bonus is not a fixed percentage of the wages of time saved but it various
according to the extent of the time saved. The amount of bonus or premium payable
under this plan depends on the percentage of time saved by the workers. The bonus
is calculated the such percentage out of the basis wages.
Formula for to calculated total wages or total earning of the worker under, Rowan
premium plan:
 Formula
Total wages = Time Taken x Time Rate +Time Save x Time Taken x Time Rate
Time Allowed
Or

Total wages = TT x T R + Bonus

( ER) Effective wages rate under rowan plan = Total wages

TT
Bonus (Rowan plan ) = time save X time taken X time rate
time allowed
Illustration

solution

solution
Time save X Time taken Time rate
2 X8X10 time allowed
10
Advantages of rowan premium plan

i. This plan guarantees minimum wages and provides incentive for

efficiency.
ii. It does not induce to rush through work for increase bonus
earning because the bonus increase at a decreasing rate with
higher levels of efficiency. Thus, an automate check for limiting
production of inferior quaintly of goods is ensured.
iii. The per unit fixed cost decrease with the increase in production
iv. The per unit fixed cost decrease with increase in production
v. Under this method, the per unit cost decrease due to decrease in
per unit labour cost.
.
Disadvantages of Rowan premium plan

i. As the bonus is to be shared by employees and employees,

it is not welcomed by employees. They expect full benefit for
their extra efficiency.
ii. The calculation earnings under this method is
comparatively complicated and time consuming.
iii. The preparation of labour budget and estimated product
labor cost are made difficult by the varying labor costs under
this plan.
iv. Payment under this plan is much less than that under the
Halsey plan by way of bonus below 50% of the time saved
Why rowan plan is better than Halsey plan?

• In the Halsey plan, bonus is usually set at 50% of the time saved. It does
not serve as a strong incentive. On the other hand under the Rowan plan,
bonus is that proportion of the wages of the time taken which the time save
bears to the standard time; it serves as a strong incentive for increasing the
efficiency.
• In the Rowan plan, the quality of work is not affected much. The worker is
not induced to rush through the work because bonus increases at a decreasing
rate at higher levels of efficiency. In the Halsye plan. A worker is induced to
rush through the because he get extra wages for every 50% of the time saved.
• The effective labour rate per hour in the Rowan plan is higher up to 50% of
the time saved and falls there after whereas in the Halsey plan, the effective
labor rate per hour up to 50% of the time saved and can be double thereafter.
Usually, worker are not able to save more than 50% of the time allowed, so
worker prefer the Rowan plan for earning more wages
Taylor's differential piece rate system
This scheme was originated by F.W. Taylor, who knows a the "father of science management". Taylor suggests
that the worker producing the below standard level be paid according to the low piece rate. Similarly, the worker
producing at or above standard should be paid according to high piece rate. For this, a standard time is fixed and
the worker who finished the assigned work before the standard time or at standard are paid at a higher rate and
the worker who cannot complete the task within the standard time are paid at a lower rate. This standard should
be set up very accurately with the help of time and motion studies because it is the demarcating line for higher
and lower and lower rates of wages. Thus, two piece-rates are fixed, one for those who perform the standard
task in standard time (may be termed as efficient workers) and the other for those who perform less than the
standard task in the standard rate time (may be termed as inefficient worker). Usually rates are 120% and 80% of
the piecework rate for efficient and inefficient workers respectively.
Requirements for calculating total wages or earnings of the worker under Taylor's differential piece rate
system:

Standard output/ standard yield:

Standard rate per unit/ normal piece rate = standard wage rate for a period/ standard yield for the period
Formula
if actual production is below standard production
Total wages= actual production unit X Piece rate X 80
100
if actual production is at and above standard production

Total wages= actual production unit X Piece rate X 120

100
Solution
Advantages of Taylor's Differential piece-
rate system
The advantages of Taylor's differential piece-rate systems are
mentioned below:
i. This system provides a great incentive to workers to achieve
the standard output and the slow workers always try to
achieve greater efficiency.
ii. The system is beneficial to workers as well as employers,
since the workers get wages at an increased rate according to
units produced and the employer get increased output at
lower cost of production.
 Disadvantages of Taylor's differential piece-
rate system
i. This system is different to apply due to the fixation of different rates.
ii. The standard output cannot be justified because if a worker just fails to reach
the standard output, the low rate of wages will be given to him. However,
if the just reaches the standard, higher rate of wages will be payable to him.
iii. There is a great difference of wages between the higher and lower rates. It
creates a large variation in the earnings of the workers and confection may
emerge among them.
iv. Moreover, employer-employees relations may also be stained; tankard is put at
a very high level.
 Gantt's task and Bonus Scheme
This scheme was originated by Mr. Gantt. This scheme is a combination of
time rate, differential piece-rate and bonus system and guarantees a minimum time
rate. Under this system, minimum wages are guaranteed to workers who fail to
reach the standard. If the output of the worker is below standard, the worker is paid
guaranteed time rate . If the output of the worker is at standard, the worker is paid
guaranteed time rate with adding 20 percent in time rate . In this system, low rate
is not necessary to determine total wages for below standard and if a worker's
output is above standard, he is paid a high piece rate (output 120% of normal rate)
for the actual output. The remuneration under this method is computed as follows:
Requirements for calculating total wages/earnings of the worker under Gantt's task
bonus plan:
Standard output/standard yield
Standard rate per units/normal piece rate/guaranteed piece rate
High piece rate for at or above standard, generally=120% of normal
piece rate
Formula
if actual production is below standard production

Total wages= Time taken X Normal time rate

if actual production is at standard production

Total wages= Time taken X Normal time rate X

120
100

if actual production is above standard production

Total wages= actual production unit X high Piece

rate
Illustration
 Solution
Stander rate per Hour =45
weekly working hour= 40 hours
Actual production By C = 800 units, that is above
standard production in 10 minutes 3 unit
standard. So,wages calculated as high piece rate
so,in 60 minuts production = 3 X60= 18 unit
Total wage of C= production units X high piece rate
10
= 800 X 3
standard production in 40 hours= 18X40 = Rs 2400

=720 units
actual production by A =700 that is below stander
So, wages calculated as normal time rate basis
so , total wage of A = time taken X time tate working note
= 40 X 45 high piece rate = high time rate per hout
production unit per hour
= Rs 1800
== 45
Actualproduction By B = 720 that is at standard X120 %
So, wages calculated as time rate of 120% 18
Total wages of B = time taken X time rate = 3
= 40 X 45 X 120
100
Try yourself
Advantages of Gantt's Task and bonus scheme
The advantages of Gantt's Task and Bonus Scheme are
mentioned below:
i. This system encourages the worker to improve the level of
performance.
ii. The workers feel that they are getting the reward, which
they are entitled to. Thus, it promotes satisfactions among the
employees.
iii. This method is very useful in jobs involving engineering
activities.
Disadvantages of Gantt's Task and Bonus Scheme

i. Extreme care is to be exercised in fixing the guaranteed time rate

and determination of standard output. Any error caused due to
lack of experience will lead to unfavorable consequences.

ii. If the guaranteed time rate is fixed high, the incentive effect of the
plan will get worse.
Thank you