CHAPTER 3 (Part 2)

COSTING FOR LABOUR

Dr Hartini Jaafar
Jabatan Perakaunan dan Kewangan
Fakulti Pengurusan dan Ekonomi
hartini@fpe.upsi.edu.my
015-48117453

Control Procedures for

Labour Cost
Labour cost is one major cost in an organisation,
thus vital for it to be kept under control.
How can we control labour cost? Various methods
exist but the basic procedures include:
1. ensure labour times are recorded accordingly
and accurately
2. determine the correct time spent by employees
on production
3. accurately calculate wages paid to employees in
accordance to their payment scheme

Recording Labour Times

It is important to record labour times
so that accurate data is available for:
1. Calculating wages
2. Analysing time spent for costing
purposes
3. Planning and control purposes

Methods for Recording Labour Times

Attendance record
a clock card given to each employee, a time recording clock
will record time entering and time leaving the premises

Time sheet
daily or weekly records filled in by the employee and
countersigned
shows how the employee spent his/her time during the day
or week
objective is to reconcile all the time in attendance (recorded
on clock card) with time bookings either to jobs or operations

Job card
relates to single jobs or batch and contain time spent on a
particular job by several employees.
completed job cards will have a full record of times and
quantities involved in the job or batch

Methods for Recording Labour Times

Operation card (piecework tickets)
Provided to each operation or stage of manufacture. Hence,
a job to manufacture one item may have several operation
cards
Contains data such as Batch quantity, Quantity produced,
Number of rejected units etc

Idle time card

simply record the amount of time a particular employee is
left idle, or unoccupied
also records the reason for idle time, for example machine
breakdowns, material shortages or bottlenecks

Employment record card

records the personal details of an employee, for example,
address, employee number, payment scheme, pay rate,
contact numbers, skills etc.

Labour Cost
Can be classified into:
1. Direct - the portion of wages and
salaries which can be identified and
charged to a single cost unit
charged to activity/job/product

2. Indirect cannot be directly traced to

a specific goods or service charged
to overhead accounts and allocated
later to product

Methods of Remuneration
1. Time rate
2. Payment by result or piecework
3. Premium schemes

1. Remuneration on time
basis
The wages is measured on the basis
of unit of time i.e. hourly, daily,
weekly or monthly.
A premium is paid for working
overtime.
The formula is as follows:
Earnings = Hours worked * rate per
hour

Example
If a worker is paid RM10 per hour and
has spent 300 hours during a
particular month in a factory, his
wages will be..
300 hours x RM10 = RM3000

Advantages
It is simple and easy to calculate
It provides a regular and stable
income to the worker and thus
creates a sense of security
It is beneficial to the average as well
as the below average workers
It avoids many complex negotiations
in case of most of the incentive
schemes

Disadvantages
This leaves no incentive for an
efficient worker. An inefficient as well
as efficient workers are paid the
same wages under this method
In absence of incentives and
schemes, a stricter supervision
becomes necessary for ensuring the
required level of output from the
workers

Disadvantages
Since the orders are certain about
their wages they may consume more
time for producing the same quantity.
It means a higher level of labour cost
and a higher level of overhead

Time rate is suitable where

The quality of work is more important
than quantity
The nature of work is such that it is
difficult to measure e.g. cleaners,
supervisors
The work is not repetitive in nature
The volume of production is not within
the control of workers
The amount of output cannot be
measured, counted or standardised

2. Remuneration on piece
work
Under this system, wage are paid on
the basis of production (output).
The formula is as follows:
Earnings = Number of unit produced *
rate per unit

Example
If a worker is paid RM15 per unit and
he produces 20 units in 7 hours the
total wages will be calculated as
20 units x RM15 = RM300

Variations of piecework
scheme
1. Piecework with guaranteed day rate
. This method guarantees a day rate if the
piece rate earnings fall below the day rate
earnings, the day rate earnings are paid
instead.
. Workers are paid a guaranteed minimum
and not penalised on low production
through circumstances beyond control
e.g. low quality materials, machine
breakdowns etc.

Example
Aminah produces 38 units per day. She will
be paid a minimum of RM40 daily if output
falls below 40 units per day. The rate per
unit is RM1. What will be her wage if she
produces below 40 units? What will be her
wage if she produced 45 units?
40 units = Guaranteed minimum
RM40/day
45 units = 45 x RM 1 = RM45/day

Variations of piecework
scheme
2. Differential piece rate
. The piece rates vary at different
levels of efficiency.
. The aim of this method is to provide
incentive to increase output so as to
reach the maximum production.

Example
Amin produces 200 units per day.
The rates paid will be as follows:
Up to 100 units per day RM0.50 per
unit
101 150 units per day RM0.60 per
unit
151 200 units per day RM0.70 per
unit
What will be his gross pay?

Example
100 units x RM0.50 = 50
50 units x RM0.60 = 30
50 units x RM0.70 = 35
Gross pay
= 115

Advantages
The system encourages greater
efficiency
No payment is required for the idle
time
The fixed overheads are reduced with
the increase in output
The work is completed more quickly
and time wasting is discouraged

Disadvantages
The quality of work may deteriorate
The overwork on the part of workers is
likely to result in ill-health
This may not be fair when the production
is halted because of shortage of materials,
machinery breakdown
More rigid control may be needed and
then increase cost of supervision

Piece rate system is suitable where:

The amount of work can easily be
determined and measured
The nature of work is repetitive
The productivity is closely linked to
the skill and effort of the worker

3. Premium Bonus Plan

It is to pay to the workers a basic
time rate plus a portion of the wages
equivalent of the time saved as
related to the agreed/allowed time
for the work
Time saved = the difference between
time allowed for the job and actual
time taken

Features of the scheme

Time rate is guaranteed and the
worker receives the guaranteed
wages irrespective of whether he
completes the work within the time
allowed or takes extra time for its
completion

Common types of bonus

scheme
1. Halsey: 50% of time saved x Rate per
hour
2. Halsey Weir: 33 1/3% of time saved x
Rate per hour
3. Rowan: Time taken x Time saved x Rate
per hour
Time allowed
4. Group bonus scheme

Example
The details below relate to Amin on
Job No. 1. The direct wages rate is
RM10/hour. The time allowed is 50
hours. The time taken is 40 hours.
Calculate the basic wage, bonus pay
and total pay based on the:
1. Halsey scheme
2. Halsey Weir scheme
3. Rowan scheme

Example: Group bonus

scheme
The standard production for Good
Good Trading is 240 units a day. A
group of 10 employees work on the
assembly line. For every 20%
increase in production the group will
be entitled to share a bonus of RM60
equally. On day 13, 300 units were
produced. How much will each
member of the group receive?

Advantages
The bonus encourages the workers to save
as much time as possible because the
higher the saving of time, the higher is the
bonus
Morale may be improved if extra effort is
reward
Both the firm and the employer should
benefit from the introduction of an
incentive scheme. Employees should
receive an increase in wages arising from
the increased production. The firm should
benefit from a reduction of fixed overhead
per unit

Disadvantages
Incentive schemes can be complex
and difficult to administer
Establishing performance levels
leads to frequent and continuing
disputes
The quality of the output may decline

Other issues in costing for

labour
1.Overtime
2.Labour turnover

Overtime
OT= Time worked over and above
the normal working hours/time.
OT premium?
Extra amount paid to employees for
overtime work.
Calculated as a % of extra hours worked.

OT Terminology

If a machine operator
works
for
four
overtime hours and
gets time and half,
he will be paid for a
total of SIX hours that
is:
4 hours + (50% x 4
hours) or
4 hours x 1.5

Example
A machine operator in Moi
Manufaturing worked 6 hours
overtime. The normal working time
for the week was 40 hours. The rate
per hour is RM5. He is paid at time
and a half for overtime. The
overtime is worked to increase
output. Calculate the:
1. Overtime premium
2. Gross pay

Labour Turnover
Frequent changes in employees are
costly.
The cost of labour turnover include:
1.
2.
3.
4.

Loss of production
Cost of advertising
Cost of recruitment
Cost of training

Reasons for turnover

Redundancy
Dissatisfied employee
Lack of career structure
Lack of training or day release
Personal advancement
Retirement
Marriage, pregnancy
Discharge

Labour Turnover Rate

Number of employees replaced per
period
Average total number of employees in
the period