UNIT III

ELEMENT OF COST
INTRODUCTION TO COST ACCOUNTING
Definition of cost:
Cost is the amount of expenditure incurred on or attributable to a given thing -LC.M.A.
London

Cost = Usage x price

Definition of cost Accountancy:

ICMA London has defined Cost Accounting as ―the .application of costing and cost
accounting principles, methods and techniques to the science, art and Practice of cost control and
the ascertainment of profitability. It includes the presentation of information derived there from
for the purpose of Managerial decision – Making
ELEMENTS OF COST
Elements of cost are three types:
1) Materials
2) Labour
3) Other Expenses

Materials:
Materials cost are divided into two types
 Direct Materials
 Indirect Materials
Direct Materials:
They are those materials which can be identified and can be measured and directly
charged to a particular product.
Example: Timber in furniture making, bricks in building a house, paper used in note books,
leather in shoe making cloth in garments, clay in bricks.
Direct Labour:
They are those Labours which can be conveniently identified or attributed wholly to a
particular job, product or process expended in converting raw materials into furnished goods.
Example: Wages paid to workers who are directly engaged i production:

Direct expenses or chargeable expenses:

Include all expenditure other than direct material or direct labour that are specifically
incurred for a particular product or Process.
Example: Excise duty, Royalty, cost of rectifying defective work, surveyor's fee, Expenses
of designing or drawing a model. (Prime cost=Direct material + Direct labour + Direct
expenses)
The aggregate of Direct material Direct labour and Direct Expenses are called prime cost.

Overhead or on cost:
The Aggregate of indirect material, Indirect labour and Indirect expenses is termed as
overhead. Overheads cannot be conveniently be charged to specific cost unit.
(Overheads = Indirect Materials + Indirect labour + Indirect Expenses)

Division of overheads:
Overheads are divided into 3 groups.
1. Production overhead
2. Administration overhead
3. Selling and Distribution overhead.
Production overhead or works overhead or factory overhead:
It includes all indirect cost which is connected with the manufacture of a product.
It consists of 3 elements:
Indirect material:
Example Lubricants, soaps, Water powder, Cotton waste, thread.
Indirect wages:
Wages of supervisor, Salary of works manager, Foreman salary
Indirect expenses:
Factory rent, Rates, Deprecation on Machinery, Power light, heat, Insurance of factory building.
Administration overhead:
These are the expenses incurred in the garment and administration of the business.
Examples:
Indirect Materials:
Office forms, Stationery, Printing.
Indirect Labour:
Office manager salary, clerk salary, Audit fee
Indirect Expenses:
Rent & Rates of office building, Electric? *- legal charges Depreciation on office furniture
Selling and Distribution overheads:
Selling overheads are incurred in promoting and securing orders.
Examples:
Indirect Material:
Printing & Stationery, order form.
Indirect Labour:
Salaries of Salesman, Sales manager.
Indirect Expenses:
Advertisement, Showroom expenses,
Distribution overheads:
Distribution overheads are incurred from the time of the product is complete and put in storage
for dispatch until it reaches customer.
Example:
Packing costs, salaries of dispatch clerk, Warehouse Rent, Depreciation oh delivery van.
SPECIMEN OF ELEMENTS OF COST:
Rs.
Direct materials XXX
Direct Labour XXX
Direct Expenses XXX
Prime cost XXX
Add Factory overhead XXX
Factory cost XXX
Add Office & Administration overhead XXX
Cost of Production XXX
Add Selling & Distribution overhead XXX
Total cost (or) cost of sales XXX
MEANING OF MATERIAL:
The first and the most important element of the product cost is material. Material is a substance, an integral
part, from which the product is made. And constitutes a significant component of total cost. Depending
upon the type of product manufactured, the material cost may go up to 70-80% of the total cost. Material
may be classified in three broad categories:

SEMI RAW
FINISHED MATERIAL

MATERIAL
RAW MATERIAL: Materials entering the production process at the very beginning in their natural or raw
form. The materials might be appearing in the final product, for example raw cotton (KAPAS) in the
Production of Cotton textile or disappearing in the production process without forming a tangible part of the
output, for example, Coal.

SEMI FINISHED MATERIAL: Partly finished materials purchased from outside or produced within the
organization for assembling into a final product, e.g., unpolished furniture purchased from outside and
polished in-house before sale.

FINISHED MATERIAL: Finished Material are products that are used in the form they are manufactured
without any further value addition, e.g., an automobile is a finished product used directly by the consumer.
However, finished components can also be used as raw materials or semi-finished materials for
manufacturing of the final product Example Tyers, batteries, engine, and other components are finished
material used by automobile manufacturers.

Material Cost may be either direct or indirect:

 INDIRECT

DIRECT

MATERIAL

DIRECT MATERIAL:
Direct Materials are those that can be conveniently and wholly identified with specific units of output/
product/Job/ contract/ processor operations. These become the part of finished product itself. Example:
Leather in leather products, Wood in Furniture production etc. At times, certain materials of small value
though traceable to specific cost unit are treated as indirect material because the time, energy and cost
involved in record keeping of such small value is not worth achieving a slightly higher accuracy in
ascertaining the costing. Glue, nails, nut bolt etc.in furniture production. However, material, of whatever
value, used in contracts performed as special sales outside the factory are ascertained as direct materials as
they are for specific contract only.
INDIRECT MATERIAL:
All those materials that cannot be classified as direct material are called indirect materials. Indirect
materials, generally, do not physically constitute a part of the product as direct material do. Indirect
materials include:

Materials, though used in production, which have so small or complex consumption that it is not feasible
to try to trace them to specific products.
Production supplies & materials which cannot be identified with specific cost units e.g., Grease,
lubricating oil, scrap, small tools etc. used in a factory.

Material forms an important part of the cost of the product and, therefore, proper control over material is
necessary from the time the order is placed with the supplier till they are consumed. The segregation of
materials into direct and indirect categories facilitates control. The direct material having high value, require
direct control while indirect materials having low value need not require excessive controls. An efficient
material control system leads to significant reduction in production cost.

MEANING OF MATERIAL CONTROL:

Material Control is a system which ensures the provision of the right quantity of material of the right
quality, at the right time with a minimum amount of investment. It is a systematic control over the
procurement, storage, and usage of materials so as to maintain an even flow of materials and at the same
time avoiding excessive investment in inventories. The essentials of a good system of material control
include scheduling the requirements of purchasing, receiving, inspecting, maintaining stock records and
material accounting and recording. In fact, Material control is a matter of coordination among the purchase
department, receiving and inspection department, store keeping department, product control department and
stock Control department. The success of a business concern largely depends upon the efficiencyof its
Material Control System.
OBJECTIVES OF MATERIAL CONTROL:
Continuous supply of materials for uninterrupted flow of production: Situation of production stoppage
due to materials running out of stock should be avoided. Such production stoppage is very costly in terms
of overheads, denial of sales or panic purchases. Optimum investment in materials: Excessive investments
due to over stocking of materials reduce profitability of the business as it locks large capital without any
returns as well as increased storage cost.
Economy in purchasing: Material should be purchased at the lowest possible cost without sacrificing the
quality, regularity, and dependability of supplies.
Strict quality control: There should be a strict system of quality control. The order of supplies of
right quality of raw materials should be authorized. Material should be tested at the time of their receipt and
a report should be generated initialed by the person who has tested them for fixing responsibility.
Minimum handling cost and time: Material should be stored at such a place and in such manner, that:
Material can be located at ease
Made available to the user departments with least efforts
Time consumed in tracing material and making them reach the user department should be
the least.
Control on payment for materials: Ensure that no payment is made for materials not ordered though
received, or for material not received or for materials of defective quality.
Authorized issues: Ensure that no issue from the store takes place without a proper authorization.
The store keeper has to be made accountable for all issues.
Minimize wastages: Minimizing wastages in handling at the time of receipt of materials in stores, during
their issues and during use in the user department. Norms should be fixed for wastages at each stage and
wastages above the norms should be investigated.
Control on the pilferages and leakages and other losses: A system should be put in place to ensure that
pilferages of material do not take place. Special control is required to be put in place for material prone to
pilferage.
Detect the slow moving and fast-moving materials: The system should detect, on a regular basis, the items
of material which are slow moving and items which are not moving at all. This will help in regulating
further purchases of such materials and prevent losses. Many times, disposal of non-moving items is better
than keeping them in sores and incurring storage cost.
Control on misappropriations: Ensure that no misappropriation of materials take place as once leakages
develop in the system, they tend to become recurring in nature.
Regular and dependable information about materials: There should be regular and dependable record of
information of each type of material- the stock position, minimum level, maximum level, special problems
with respect of certain materials and the list of dependable suppliers. This will help in placing order of the
right quantity at the right time and to the right supplier.

INGREDIENTS/ ESSENTIALS OF SOUND MATERIAL CONTROL SYSTEM

Organization for Material Control: There should be a proper coordination and internal check between
sales, production, purchases, receiving, testing, and storage and issue functions.
Material Planning: Material requirement should be determined in advance. Through the adoption of
perpetual inventory system, the quantity of material in hand and its value is always available, which helps in
avoiding the situation of over and under stocking.
Material Purchasing and Receiving: Exploration of different sources of materials and its reliable suppliers
should be regularly reviewed and revised. A proper system should be laid down for comparing quotations,
receiving and inspection of materials and testing the quality of materials received.
Storage of Material: Location and layout of the stores should be such that the time and transportation cost
involved in receiving and issue of materials to the users is least. It should facilitate strict control on the
stores by adopting perpetual inventory Bin card system.
Issue of Material: Materials should be issued only against a proper Material Requisition slip. Surplus
material, if any, should only be returned to the Stores department and direct transfer of surplus material
from one job to another should be discouraged.
Material Accounting and Reporting: A complete record of all purchases, issues, returns, transfers and
losses of material should be prepared and an efficient system of internal audit should be established.

INVENTORY SYSTEMS

PERIODIC
INVENTORY
SYSTEM
PERPETUAL

Inventory records in quantity and value can be maintained asper any of the following system:

Periodic inventory system: In this case the value and amount of inventory is found out only at the end of
accounting period after having physical verification of units in hand. This system does not continuously
provide information regarding quantity and value of material in stock.
Perpetual Inventory system: In this system, the quantity of stock in hand and its value is available after
each issue or receipt of material. The system thus provides a rigid control over the stock of materials as
physical stock can be verified anytime with stock records.

ADVANTAGES OF MATERIAL CONTROL:

Wastages in the use of material are reduced to minimum. Risk of loss from
fraud and theft is almost eliminated.
The records maintained under material control cycle facilitate the preparation of proper and
accurate reports for the management.
Cost of storage is reduced. Investment in
inventories is reduced.

Thus, there is a need to make a perfect synchronization between the availability of Material and its
utilization. The quantitative and financial aspects of Material Control are mutually complementary in nature
as the control on physical units of Material at the time of purchasing, storage and use in production will also
result in lower investment. Material Control helps in reconciling the conflict in the objectives of the
Purchase department, Production department and the Finance department. The purchase department is
interested in bulk purchase at the lowest price and overhead cost, though this may lead to large investment
in materials.
The production manager is interested in having regular supplies so that production never stops or slows
down due to inadequate supplies of materials, which also may lead to large investment in inventories. On
the other hand, the finance Manager aims at cutting unnecessary investment in inventories. His objective is
to facilitate smooth production with minimum necessary investment in inventories. Thus, Material Control
entails synergy through managing the conflicting interests of these departments and reaching an optimal
solution.
MATERIAL CONTROL
Material control is defined as safeguarding of company's property in the form of materials by a
proper system of recording and also to maintain them at the maximum level. Materials control may be
defined as a system which ensures availability of the required quantity of material of proper quality at
the proper time and at the same time avoidance of unnecessarily blocking up of capital in stores. The
system of material control should be so comprehensive that it covers the whole procedure from the
point when order is placed with the suppliers up to the stage until the materials are consumed in
production.

OBJECTS OF MATERIALS CONTROL:

No overstocking: Investment in materials must be kept as low as possible.
Minimum wastage: proper storage facilities must be provided for different type of materials in order
to avoid losses arises due to theft, deterioration.
Economy in purchasing: Materials should be purchased at favourable price.
No under stocking: Investment in materials under stocking will lead to delay or stoppage in
production. It may result in to loss of profit.
Information about materials: This system should give complete and up to date accounting
information about the availability of materials.
Availability: The various materials and stores necessary for carrying on production smoothly should
always be available. This means not only ensuring supplies of the main raw materials and the chief
stores which are required but also of small and inexpensive but necessary materials. For example, in a
cotton textile mill supplies of cotton and coal will always be looked after, but it is also necessary that
the proper lubricating oil for machines is also always available. Stoppage of production due to any
reason is very costly and the person in charge of supply of materials and stores must see to it that
production is not interrupted for want of any item of materials and stores.
Proper Quality and Price: While purchasing the materials and stores, care should be taken to see
that the requisite quality of materials is purchased and that the price paid is reasonably low. It is no
use purchasing goods of inferior quality or of very superior quality. For every product or job there is a
particular quality of materials which is needed and that quality alone should be purchased. For
printing text books, for example, neither art paper nor newsprint is to be used; white printing paper of
reasonable weightage will be needed. But a book containing art pictures and priced quite high must be
printed on good quality art paper; newspapers have to use newsprint as otherwise the cost will be too
high. Prices also must be unnecessarily high although in certain cases it may be the company’s policy
to encourage certain supplies by paying them a price higher than prevailing in the market; but this can
be only for a short period and in special cases.
Minimum Wastage: While various materials are being stored in the god owns, the loss of or damage
to the various items must be kept as low as possible. The losses usually are pilferage or damage due to
rust dust dirt or water. All these losses must be thoroughly kept under control.
No Overstocking: Investment in stocks of materials and stores must be kept as low as possible. This
means that unnecessarily large stocks must not be maintained.
Information about Availability of Stocks: Information must be continuously available regarding
stock. This will ensure proper planning of work and also replenishment on time.
Minimum Loss during Process: While the materials are being used in the factory the wastage must
be kept at the minimum possible level. Some wastage is bound to be there, but efficiency demands
that the wastage must not be allowed to go above the minimum level.
Stock levels: In order to avoid under stocking and overstocking a scientific system of stock level is to
be adopted in the business.
The stock levels are
a) Maximum stock level,
b) Minimum stock level,
c) Re-order level,
 d) Average stock level,
e) Danger level

Maximum stock level: It means the maximum quantity of an item of, materials which ban be held
in stock at any time.
Formula: Maximum stock level=Reorder level + Re-order Quantity - [Minimum consumption x
Minimum re-order period]
Minimum stock level: This represents the minimum quantity of materials which must be maintained
in hand at all times.
Formula: Re-order level - (Normal Consumption x Normal re-order period)
Re-order level: If is the level of materials at which a new order f material is placed. This level is
above minimum level but below maximum level.
Formula: Reorder level = (Maximum consumption x Maximum Re-order period)
Re-order Quantity: It is the quantity for which order is placed who material; reaches at re-order
level.
Average stock level:
Formula: Average stock level=Minimum stock level +1/2 of Re-order Quantity
(or)
=Minimum stock level + Maximum stock level \ 2
Danger level: It is a level of which issue of material are stopped and issues are made only under
specific instructions. It is below the minimum level, (emergency)
Formula: Danger level: Average Consumption x Maximum re-order period for emergency
purchase.
Problem:1
Two Components X and Y are used as follows
Normal Usage - 600 Units per week each
Maximum usage - 900 Units per week each
Minimum Usage - 300 Units per week each
Reorder Quantity - X4800 units, Y 7200
units Reorder period: - X=4to6Weeks Y = 2 to 4
weeks.
Calculate for each Component:
A. Reorder Level
B. Minimum Level
C. Maximum Level
D. Average Stock Level
Solution:
Reorder Level = Maximum Consumption x Maximum Reorder
period. Component X: 900 units x 6 weeks =5400 units.
Component Y: 900 units x 4 weeks = 3600 units.
Minimum Stock Level = Reorder Level - [Normal Consumption x Normal Reorder
Period] X= 5400 units (600 units x 5 weeks) = 5400 - 3000 units=2400 units.
Y= 3600 units- (600 units x 3 weeks) = 3600-1800= 1800 units
MaximumStockLevel:
Reorderlevel+ReorderQuantity-(MinimumconsumptionxMinimumReorder period]
X=5400 units + 4800 Units - [300 units x 4 weeks] 10200 units -1200 = 9000 units
Y = 3600 units + 7200 units - (300 units x 2 weeks) 10800 units - 600 units =10200 units.
Average Stock Level: Minimum Stock Level +1/2 Reorder
quantity X= 2400 units=l/2 x4800 units= 2400+ 2400 =4800
Units.
(OR)
= Minimum level+Maximum Level / 2
 = 2400 + 9000 / 2 = 11400 units / 2 = 5700 units.

y = 1800 units+1/2 of7200 units. = 1800 + 3600 = 5400 units

(OR)
1800+10200 / 2 = =12000 / 2 = 6000 units.

Problem: 2
Normal usage: 50 units per week. Minimum Usage: 25 units per week Maximum usage: 75 units per
week Reorder quantity: 300 units, Reorder period = 4 to 6 weeks.
Calculate: Minimum level and Maximum level
Solution:
Reorder level: Maximum consumption x Maximum Reorder
period. 75 units x 6 weeks = 450 units
Minimum stock level: Reorder level - (Normal consumption x Normal Reorder period)
=450 units - (50 units x 5 weeks) 450 units-250 units = 200 units
Maximum Stock level:(Reorder levels + Reorder Quantity) – Maximum consumption x
Maximum Reorder period.
= (450units + 300 Units) - (25 units x 4 weeks) =750 units -100. units = 650 units.
Average Stock Level: Minimum stock Level +1/2 Reorder Quantity =200 units+ 150(300/2) =
350 Units.
[Or]
Minimum level + Maximum Level / 2 = 200+650 / 2 = 425 units

Essentials of Material Control:

The process of material control is divided into four stages – Purchase control, Stores control, Issue control and
Control of material losses.
1. Co-Ordination:
Effective control of material requires effective co-ordination among the departments involved in purchasing –
receiving, and inspection, storage, production, sales and accounting departments so that adequate materials are
available for continuous production and sales. At the same time excessive investment in materials and over
stocking are avoided.
2. Centralised Purchasing:
In order to economise the buying and to avoid reckless buying of raw materials the purchasing function is to be
centralised.
3. Proper scheduling of materials requirements ensures availability of materials at the right time.
4. Classification and codification of material leads to easy identification and proper control of materials.
5. Receipt of Materials:
Checking and inspection of material by receiving department ensure correct quantity and quality of material as
ordered by the organisation.
6. Usage of Forms:
Standard forms are to be designed and used for purchase requisition, purchase order, receiving of materials,
requisition of materials and transfer of material from jobs to stores or to other jobs.
7. Storage of materials should be entrusted to a qualified store keeper to plan effective storage and avoid losses due
to obsolescence, pilferage and theft.
8. Issue of Materials:
A good method of issue of materials to various jobs, processes and orders should be devised to ensure delivery of
right material at the right time and right quantity and quality for smooth flow of production.
9. Stock Taking:
Perpetual inventory should be followed for stock verification to reveal differences in stock due to pilferage theft
and wastage. Moreover, perpetual inventory system avoids closing down of factory for stock verification and
valuation.
10. Levels of stocks are to be maintained in the form of reorder level, maximum level and minimum level to avoid
shortage and over stocking of materials.
11. Economic ordering quantity is to be operated for each type of materials to optimise the cost of buying and
storage.
12. Pricing of Issues:
A suitable method of pricing is to be followed for correct, valuation of material cost of jobs, orders, processes and
valuation of closing stocks.

13. Control of Materials during the Production Process:

Proper Accounting and records are to be maintained to avoid wastage of materials during consumption.
14. Suitable reporting system helps management to take decisions regarding investment in materials and avoidance
of obsolete, dormant and slow-moving materials.

Selective Management Control:

The principle of Management by Exception is better suited here. Items of inventory are classified into A, B, C, or
other classes for selective management control. Controls exercised selectively contribute to better management, in
most cases avoiding wastage of precious management time and, more importantly avoiding the confusion resulting
from excessive controls. The degree and the character if the controls to be exercised by the management should
depend upon

(1) the necessity of the control,

(2) the relative importance of the material to be placed under control, and

(3) the particular characteristics of the material.

Materials may be divided into three categories or classes for selective management control. More than three
gradations in materials will not be fruitful. The division of materials into three grades, for selective management
control purposes, is known in general as the ABC classification. The alphabets A, B and C stand for the three
different classes.

ABC analysis is based on the relative importance of the materials. Therefore, there are various bases for ABC
classification: A material’s price, its criticality, its non-availability its size Vs weight etc. For various situations,
various characteristics are more or less important. That is why there are a number of ways of classifying the
materials on the ABC scale.

ABC Method of Inventory Control

It has become an indispensable part of a business and the ABC analysis is widely used for unfinished good,
manufactured products, spare parts, components, finished items and assembly items. Under this method, the
management divides the items into three categories A, B and C; where A is the most important item and C the least
valuable.

ABC inventory analysis is based on the Pareto Principle. The Pareto Principle states that 80% of the sales volume
are generated from the top 20% of the items. It means that the top 20% of the items will generate 80% of the
revenue for the business. It is also known as the 80/20 rule.

This method is significant to identify the top category of inventory items that generate a high percentage of yearly
consumption. It helps the managers to optimize the inventory levels and achieve efficient use of stock management
resources.
Need for Prioritizing Inventory

Item A:

In the ABC model of inventory control, items categorized under A are goods that register the highest value in
terms of annual consumption. It is interesting to note that the top 70 to 80 percent of the yearly consumption value
of the company comes from only about 10 to 20 percent of the total inventory items. Hence, it is crucial to
prioritize these items.

Item B:

These are items that have a medium consumption value. These amount to about 30 percent of the total inventory in
a company which accounts for about 15 to 20 percent of annual consumption value.

Item C:

The items placed in this category have the lowest consumption value and account for less than 5 percent of the
annual consumption value that comes from about 50 percent of the total inventory items. 

Note: The annual consumption value is calculated by the formula: (Annual demand) × (item cost per unit)
Policies Governing the ABC Method of Inventory Management

The idea behind using the ABC analysis is to leverage the imbalances of sales. This means that each item must be
given the appropriate amount of weight depending on their class:

Item A:

a) These are subjected to strict inventory control and are given highly secured areas in terms of storage

b) These goods have a better forecast for sales

c) These are also the items that require frequent reorders on a daily or a weekly basis

d) They are kept as a priority item and efforts are made to avoid unavailability or stock-out of these items

Item B:

a) These items are not as important as items under section A or as trivial as items categorized under C

b) The important thing to note is that since these items lie in between A and C, they are monitored for potential
inclusion towards category A or in a contrary situation towards category C

Item C:

a) These items are manufactured less often and follow the policy of having only one of its items on hand or in
some cases they are reordered when a purchase is actually made

b) Since these are low demand goods with a comparatively higher risk of cost in terms of excessive inventory, it is
an ideal situation for these items to stock-out after each purchase
c) The questions managers find themselves dealing with when it comes to items in category C is not how many
units to keep in stock but rather whether it is even needed to have to these items in store at all.

Uses of ABC Analysis

The ABC analysis is widely used in supply chain management and stock checking and inventory system and is
implemented as a cycle counting system.  It is most important for companies that seek to bring down their working
capital and carrying costs. This done by analysing the inventory that is in excess stock and those that are obsolete
by making way for items that are readily sold. This helps avoid keeping the working capital available for use rather
than keeping it tied up in unhealthy inventory.
When a company is better able to check its stock and maintain control over the high-value goods it helps them to
keep track of the value of the assets that are being held at a time. It also brings order to the reordering process and
ensures that those items are in stock to meet the demands.
The items that fall under the C category are those that slow-moving and need not be re-ordered with the same
frequency as item A or item B. When you put the goods into these three categories, it is helpful for both the
wholesalers and the distributors to identify the items that need to be stocked and those that can be replaced.
For Example- ‘H&M’ manufactures 80% of its retail inventory in advance and introduces the remaining 20%
based on the most current market trends.

Similarly, ‘Amazon’ does not keep stock of every single item offered on its website. The stocks of only the popular
items that are frequently purchased are maintained. If there is an order for an unpopular item, then Amazon would
request it from its distributor, who would then ship it to the company.
Advantages of Implementing the ABC Method of Inventory Control
This method helps businesses to maintain control over the costly items which have large amounts of capital
invested in them.
It provides a method to the madness of keeping track of all the inventory. Not only does it reduce unnecessary staff
expenses but more importantly it ensures optimum levels of stock is maintained at all times.
The ABC method makes sure that the stock turnover ratio is maintained at a comparatively higher level through a
systematic control of inventories.
The storage expenses are cut down considerably with this tool.
There is provision to have enough C category stocks to be maintained without compromising on the more
important items.
Disadvantages of using the ABC Analysis
For this method to work and render successful results, there must be proper standardization in place for materials
in the store.
It requires a good system of coding of materials already in operation for this analysis to work.
Since this analysis takes into consideration the monetary value of the items, it ignores other factors that may be
more important for your business. Hence, this distinction is vital.

VALUATION OF MATERIALS
ISSUING OF MATERIALS
Various products, jobs, processes, contracts, etc. are charged with the cost of materials used by them. In
case, the materials have been exclusively purchased for a job or a contract, these can be charged at the same
rate at which these materials were purchased. But if, the raw materials have been issued from the stores it
becomes necessary to decide about the price which is to be charged for a material requisition to be
used for a particular job or a contract.

MATERIAL REQUISITION:
It is a formal request by the user department to the store keeper for the issue of material. This request should
be duly signed by an officer authorized to make such request. It serves as an authority to the store keeper to
issue materials. It is prepared in triplicate. All the three copies are signed by the store keeper. One copy is
returned to the requisitioning department along with the materials. Second copy is retained by the store
keeper which helps him completing its own record of issue in Bin Cards/ Store Ledger. The third copy is
sent to the costing department as a basis of debiting the requisitioning department. This copy facilitates
the ascertainment of the cost of the job, products and processes for which these materials have been used.

METHODS OF PRICING ISSUES:

The problem of pricing the issues arises only when large quantities of materials purchased at different prices
remain in the stock for a period of time making it difficult to identify which unit of material was purchased
at what price and hence which price is to be charged for which issue. The pricing of issues only deals with
the assigning of pricing to the issues. It has nothing to do with the actual physical movement of materials.
The objective of material pricing is:

To provide satisfactory basis for the evaluation of closing stock to prepare the final accounts. To charge the
cost of material used for measuring the cost of production and cost of sales. When materials are issued from
the stores to the various production departments, the pricing of the issued materials can be done according
to different methods. Each method has its own area of suitability depending on the nature of materials, price
trends and the management policy.

FIRST IN FIRST OUT (FIFO):

Under this method, issues are priced on the assumption that materials purchased first are issued first. The
actual physical movement may or may not follow this pattern. Materials issued are priced at the oldest price
recorded in stores lodger for materials in stock. So, the closing stock of material is valued at the price of the
latest purchases.

The method is particularly suitable in case of perishable materials and in the period of falling prices. The
issues are priced at oldest prices which are higher and hence facilitate the recovery of higher costs. The
closing stock is valued at the latest prices which are lower. These results in lower value of closing stock and
hence lower book profits thereby lower tax liability. In case of rising prices, the effect is the reverse.

Advantages:

Most suitable in Perishable product as pricing method more on less corresponds with actual movement of
Materials.
Simple to understand.
All issues are priced at cost price, hence entire cost of materials is recovered.
The method results in lower book profits and hence lower tax liability during the period of
falling prices.
The value of closing stock is realistic as it is valued at the price of latest purchases.
Disadvantages:
The issue price differs for different issues of the same quality of raw material at the same time.
Therefore, cost comparisons get distorted.
During the period of rising prices, it results in higher book profits and therefore high tax liability. This is
because closing stock appearing on the credit side is valued at higher prices and the cost of production
appearing on the debit side is valued lower prices.
For pricing one material requisition more than one price may be involved and hence leads to higher
probability of clerical errors.

LAST IN FIRST OUT (LIFO):

Under this method, issues are priced on the assumption that material purchased last are issued first, though
the actual physical movement of materials may not follow this pattern. Issues are priced at the price of latest
purchases of materials remaining unissued at per records. As a result, the closing stock gets priced at the
price of the earliest purchases of materials lying unutilized as per records. The method is particularly useful
in the case of rising prices. The production is charged at the price of latest purchases while the closing stock
at the earliest prices which are lower. This leads to lower book profit and hence less tax liability. In case of
falling prices, the effect is reverse.
Advantage:
Method gives good matching of sales and cost of sales. Method is
simple to understand.
Issues are priced at cost and hence entire cost of material used is recovered from production.
It results in lower book profits and hence lower tax.
Disadvantages:
The issue price differs in different issues and hence distorts cost comparison.
During the period of falling prices this method gives high profits and higher tax liability. For pricing are
material requisition more than one prices may be involved and hence higher probability of clerical errors in
calculations.

AVERAGE COST METHOD:

Average costs methods are based on the assumptions that the material purchased in different lots are stored
together and their identity gets lost. Therefore, these materials should be charged to production at an
average price. This issue price can be calculated either on the basis of simple average method or on the
basis of weighted average method.

Total of different prices of Materials in the

stock from which the materials are
Simple average Price = No. of prices used in calculating total
value.
The method is very simple but is unscientific and can offer highly misleading and absurd results. This
method can also result in large under absorption or over absorption of material cost.
Therefore, this method is generally not used except when all the purchases made are more or less
in equal lot size. In such situations, simple average method will give the same result as weighted
average method.

Weighted average Price = Total Cost of material in the stock as on the issue date
Total quantity of material in the stock
This method considers the prices as well as the quantity of different lots of material in stores. Before
each issue new weighted price is calculated.
Advantages:
The method is systematic and not subject to manipulations. The
method recovers full cost of materials from the production.
It smoothens the fluctuations in the issue prices. So different material requisitions will be
charged almost the same price.
The issue price is generally close to market price.
Disadvantages:
Fresh rate needs to be calculated after every fresh receipt of materials, which generally
comes in fraction.
Issue price is different from the actual cost of materials for the individual’s issues and so some
nominal profit or loss will appear simply because of the use of average method.

Illustration 1: From the following transaction prepares stores ledger account using FIFO: 2016
Receipts 2016 Issues
July1 opening balance 2000units @Rs10 July 3 SRN 160 800unit
July4 purchases GRN75 3000units @Rs11 July 6 SRN 168 1500unit
July8 purchases GRN82 2500units @Rs13 July 11SRN 181 1700unit
July15 purchases GRN91 1500units @Rs15 July 13 SRN 187 1200unit
July16 purchases GRN93 1000units @Rs16 July 17 SRN 194 1800unit
July18 purchases GRN96 1200units @Rs17 July 19 SRN 197 2200unit
July24 purchases GRN112 4000units @Rs19 July 21 SRN 201 500unit
July 27 SRN 210 2900unit
Solution:

Stores ledger account (FIFO)

Receip Issu Balance

ts e
Date Ref. Qty Rate Amou Date Ref. Qty Rat Amou Qty Rat Amou
nt e nt e nt
2016 Unit Rs. Rs. 2016 Unit Rs. Rs. Unit Rs. Rs.
July 1 Bal. - - - - - - - - 200 1 20000
b/d 0 0
- - - - - July SRN 800 10 8000 120 1 12000
3 160 0 0
July 4 GRN7 3000 11 33000 - - - - - 120 10 12000
5 0 11 33000
300
0
- - - - - July SRN 120 10 120 270 1 29700
6 168 0 11 00 0 1
300 330
0
July 8 GRN 2500 13 32500 - - - - - 270 11 29700
82 0 13 32500
250
0
- - - - - July SRN 170 11 18700 100 11 11000
11 181 0 0 13 32500
250
0
July SRN 100 11 11000 230 1 29900
13 187 0 13 2600 0 3
200
July GRN 1500 15 22500 - - - - - 230 13 29900
15 91 0 15 22500
150
0
July GRN 1000 16 16000 - - - - - 230 13 29900
16 93 0 15 22500
150 16 16000
0
100
0
- - - - - July SRN 180 13 23700 500 13 6500
17 194 0 150 15 22500
0 16 16000
100
0
July GRN 1200 17 20400 - - - - - 500 13 6500
18 96 150 15 22500
0 16 16000
100 17 20400
0
120
0
- - - - - July SRN 500 13 6500 800 16 12800
19 197 150 15 22500 120 17 20400
0 16 3200 0 - -
200 -
July SRN 500 16 8000 300 16 4800
21 201 120 17 20400
0
July GRN 4000 19 76000 - - - - - 300 16 4800
24 112 120 17 20400
0 19 76000
 400
0
- - -- - - July SRN 300 16 4800 260 1 49400
27 210 120 17 20400 0 9
0 19 26600
140
0
Illustration 2. Prepare stores ledger account materials on LIFO from the information given in
Illustration 15.
Solution:
Stores Ledger Account (LIFO)
Issu Balance
Receip e
ts
Date Ref. Qty Rate Amou Date Ref. Qty Rat Amou Qty Rat Amou
nt e nt e nt
2016 Unit Rs. Rs. 2016 Unit Rs. Rs. Unit Rs. Rs.
July 1 Bal. - - - - - - - - 200 1 20000
b/d 0 0

- - - - - July SRN 800 10 8000 120 1 12000

3 160 0 0
July 4 GRN7 3000 11 33000 - - - - - 120 10 12000
5 0 11 33000
300
0
- - - - - July SRN 150 11 1650 120 10 12000
6 168 0 0 0 11 16500
150
0
July 8 GRN 2500 13 32500 - - - - - 120 10 12000
82 0 11 16500
150 13 32500
0
250
0
- - - - - July SRN 170 13 22100 120 10 12000
11 181 0 0 11 16500
150 13 10400
0
800
- - - - - July SRN 800 13 10400 120 10 12000
13 187 400 11 4400 0 11 12100
110
0
July GRN 1500 15 22500 - - - - - 120 10 12000
15 91 0 11 12100
110 15 22500
0
150
0
July GRN 1000 16 16000 - - - - - 120 10 12000
16 93 0 11 12100
110 15 22500
0 16 16000
150
0
100
0
- - - - - July SRN 100 16 16000 120 10 12000
17 194 0 15 12000 0 11 12100
800 110 15 10500
0
700
July GRN 1200 17 20400 - - - - - 120 10 12000
18 96 0 11 12100
110 15 10500
0 17 20400
700
120
0
- - - - - July SRN 120 17 20400 120 10 12000
19 197 0 15 10500 0 11 8800
700 11 3300 800 - -
300 -
- - - - - July SRN 500 11 5500 120 10 12000
21 201 0 11 3300
300
July GRN 4000 19 76000 - - - - - 120 10 12000
24 112 0 11 3300
300 19 76000
400
0
- - -- - - July SRN 290 19 55100 120 10 12000
27 210 0 0 11 3300
300 19 20900
110
0
Illustration 3: Prepare stores ledger account by simple Average Method and Weighted Average
Method from following information:

Receipts Issued
2016 2016
July1 GRN30 4000units @Rs5 July 4 MRN 101 1200unit
July5 GRN 37 2000units @Rs6 July 7 MRN 112 1800unit
July11 GRN 42 1000 units @Rs11 July 12 MRN 119 1600 unit
July15 GRN 46 1500 units @Rs14 July 17 MRN 127 900unit
July20 GRN 51 3000 units @Rs13 July 21 MRN 132 2800unit
July25 GRN 56 2500 units @Rs13 July 28 MRN 138 2600unt

Solution:
Stores Ledger Account (Simple Average Method)

Receip Issu Balance

ts e
Date Ref. Qty Rate Amoun Dat Ref. Qty Rate Amoun Qty Rat Amoun
t e t e t
2016 Unit Rs. Rs. 2016 Unit Rs. Rs. Unit Rs. Rs.
July 1 GRN 4000 5 20000 - - - - - 400 5 20000
30 0
- July MR 120 5 6000 280 5 14000
4 N 0 0
101
July 5 GRN 2000 6 12000 - - - - - 280 5 14000
0
37 200 6 12000
0
- - - - - July MR 180 5.5 9900 100 5 (26000-
N 0 0
7 112 (5+6) 200 6 9900)=
0
/2 16100
July GRN 1000 11 11000 - - - - - 100 5 16100
0
11 42 200 6
0
100 11 11000
0
- - - - - July MR 160 7.33 11728 140 6 (27100-
N 0 0
12 119 (5+6+11) 100 11 11728)
0 =
/3 15372
July GRN 1500 14 21000 - - - - - 140 6 15372
0
15 46 100 11
0
150 14 21000
0
- - - - - July MR 900 10.33 9297 500 6 (36372-
N
17 127 (6+11+14) 100 11 9297)=
0
/3 150 14 27075
0
July GRN 3000 13 39000 - - - - - 500 6 27075
20 51 100 11
0
150 14
0
300 13 39000
0
 - - - - - July MR 280 11 30800 200 14 (66075-
N 0
21 132 (6+11+14+ 300 13 30800)
13) 0 =
/4 35275
July GRN 2500 13 32500 - - - - - 200 14 35275
25 56 300 13
0
250 13 32500
0
July MR 260 13.33 34658 600 13 (67775-
N 0
28 138 (14+13+13 250 13 34658)
) 0 =
/3 33017
Simple Average Method is considered unscientific and can lead to absurd results:
On July 7, 1800 units are issued at the simple average price of 5.5 ((5+6)/2) at the issue amount of 9900 i.e.
(1800*5.5). The total purchase value of materials on the same day is 26000 (2800*5+2000*6). The question
arises, that if we suppose FIFO along with simple average then the cost of these 1800 units is 9000 (1800*5)
while we are charging 9900 according to the method. So, the units are overcharged by 900.
The cost of the units remained in the balance are of the value of 17000 (1000*5+2000*6) but the balance
has been written as 16100 (26000-9900) according to the mathematical formula. Hence, the balance of
materials in the store ledger as on July 7th is undervalued by 900.
These disadvantages have been discussed only on the basis of assumption that oldest stock has been
issued first. This weakness of over valuation/undervaluation will be there in all the methods in which the
price is derived from the actual prices paid for the purchases.

Stores Ledger Account (Weighted Average Method)

Receip Issu Balanc

ts e e
Date Ref Qty Rat Amou Dat Ref. Qty Rate Amou Qty Rate Amou
. e nt e nt nt
2016 Unit Rs. Rs. 2016 Unit Rs. Rs. Unit Rs. Rs.
July GR 400 5 20000 - - - - - 400 5 20000
1 N 0 0
30
- July MR 120 5 6000 280 5 14000
4 N 0 0
101
July GR 200 6 12000 - - - - - 480 5.4167 26000
5 N 0 0
37
- - - - - July MR 180 5.4167 990 300 5.4167 16250
7 N 0 (26000/48 0 0
112 00)
July GR 100 11 11000 - - - - - 400 6.8125 27250
11 N 0 0
42
 - - - - - July MR 160 6.8125 10900 240 6.8125 16350
12 N 0 (27250/40 0
119 00)
July GR 150 14 21000 - - - - - 390 9.5769 37350
15 N 0 0
46
- - - - - July MR 900 9.5769 8619 300 9.5769 28731
17 N (37350/39 0
127 00)
July GR 300 13 39000 - - - - - 600 11.288 67731
20 N 0 0 5
51
- - - - - July MR 280 11.2885 31607 320 11.288 36124
21 N 0 (67731/60 0 5
132 00)
July GR 250 13 32500 - - - - - 570 12.039 68624
25 N 0 0 2
56
July MR 260 12.0392 31302 310 12.039 37321
28 N 0 (68624/57 0 2
138 00)

SELECTION OF PRICING METHOD:

All the methods of pricing of issues have advantages and disadvantages and are suited under different
situations. An appropriate method is one which gives good matching of costs against revenues and produces
meaningful cost figures for effective cost control and analysis. No single method can be appropriate under
all circumstances. The choice of the method depends upon the following factors:
Nature of materials Management
desire.
Fluctuation in the prices of materials. Frequency of
purchases and issues.
Nature and size of business.
Generally, if prices are falling FIFO is preferred. If prices are rising, LIFO is preferred while if prices
are fluctuating, weighted average price method is preferred.

LOBOUR
Labour is the work force which contributes towards the completion of the manufacturing process of any
organization. Without manual horse power only machines cannot complete the process. Labour can be
bifurcated in two parts; direct labour and indirect labour. Labour which is directly associated with a
manufacturing process or his contribution is directly identifiable with a particular process will be called as
direct labour while when the contribution of the labour cannot be associated with a particular
manufacturing process or specifically not identifiable with a particular product or process is called as
indirect labour. For example, in a factory of readymade garments, wages paid to a tailor are direct wages.

While in some cases it is very complicated to differentiate between direct and indirect labour. A worker
might be engaged in doing a particular work concerned with manufacturing commodity and after an hour
the same worker might be placed on a different job say time-keeping, repairing etc. In aforementioned
scenarios initial one hour will be treated as direct and later hours will be treated as indirect.
CONTROL OVER LABOUR COST
Labour majorly contributes to the growth and development of any organization. Without efficient and
effective utilization of man power resources organization cannot achieve the goal of profit maximization
by reduction in cost and improvement in quality of the products. Generally, following five departments are
established by the organization to control cost.

Personnel Department
Engineering and Works Study Department Time-
Keeping Department
Pay- Master’s Department Cost
Accounting Department

PERSONNEL DEPARTMENT
The personnel department is responsible for hiring the right person at the right place at the right time. Role
of personnel department is not over with the hiring of the workforce rather they have to train them before
sending them to the workplace. Whenever a new worker is employed, the Personnel Department sends a
notification to the time keeping department and paymaster department for their compensations.
Personnel department maintains following important records:
The personnel department first receives the following requisition slip from the concerned departments who
are having need of the workforce. After receiving the requisition records will be checked by the
personnel department about the availability of the employees in the required category. If required
employees are not available in the organization then action will be taken to recruit more employees.
Following is the format of Labour Requisition Slip.

ENGINEERING DEPARTMENT
This department is committed to provide congenial work environment to its employees also controlling
over the production methods and processes followed in the various departments. This department is
majorly involved in planning and conducting motion studies, work studies, time studies, job analysis and
setting piece rates, providing safe and efficient working conditions, supervising production activities in
various production departments.

Work Study

Work study may be defined as a technique of management which involves analytical study of
jobs/operation with the object of determining the exact operations to be performed and measuring the
work content of jobs. The object of work study is overall improvement by saving time, reducing loss of
materials, developing new methods of work, etc...
Time Study

Time study is helpful in determining the standard time for an operation on the basis of the observations of
the ongoing operations. Its major motive is to control the labour time and cost also to run the operations
smoothly.

Motion Study

Motion study is conducted by recording the movement of the workers and machines on the job. The
purpose of the motion studies is to replace the ineffective processes or methods of work by introducing
effective, efficient and least tiring processes. Motion studies are conducted through observing various
factors like use of both hands without undue straining, linking motions to each other in the most
economical sequence, using equipment which would both speed up the work and make it easier to perform.

Job Analysis

Job analysis is concerned with the preparation of job description. Job description refers to the skill set
required to perform a particular job smoothly and efficiently.
Job Evaluation

Job evaluation is done to analyze the worth of a particular job whether the job is useful for the organization
or not.

TIME-KEEPING DEPARTMENT
The time-keeping department plays important role in the accounting and controlling of labour cost. The
main function of this department is to accurately record the time spent by each worker on the work place
and it will be forwarded to the pay-master department then this department will process it further to
prepare the compensations of the employees.
There are various methods of time keeping. Some most prevalent methods are as follows:
Attendance register
Token or disc method
Time-recording clocks Biometric
time clock
PAYROLL DEPARTMENT

The payroll department is concerned with the compensation of the workers. This department takes data
from the time keeping department and computes the salaries of the employees at the end of every month.
COST ACCOUNTING DEPARTMENT

Cost accounting department is the final destination of the all types of costs related to labour be it
direct cost or indirect cost. For the purpose of collecting the data it makes use of clock cards, daily or
weekly time sheets, payroll sheets etc.

The cost accounting department collates, analyses and present a report reflecting the true picture of
direct labour cost and indirect labour cost in front of management to take decision.

Time keeping
Time keeping Department is to keep a record of each worker entering and leaving time
in the factorials considered important to record the time, of workers entering arid leaving the
factory. It is the recording of each worker's time of coming in and going out of the factory for the
purpose of attendance and wage calculations.
The objects of time-keeping:
1. To mark attendance of each worker to satisfy legal requirements.
2. To prepare wage sheets.
3. To maintain discipline in the factory.
4. To ascertain the labour cost chargeable to jobs.
5. To control labour cost.
6. To have a correct record of attendance for meeting statutory requirements.
7. Overhead distribution, if it is based on wages or labour hours.

Methods of Time-keeping:
The methods of time-keeping can be broadly classified into two categories:
a) Manual methods
b) Mechanical methods

a) Manual Methods:
There are two manual methods. These are:

Attendance Register or Muster Roll:

This is the oldest method of time keeping. This register may be kept in time office not
with the foreman in the department Attendance may be marked by the time-keeper or the
foreman. Under this method a register is maintained for worker ‘s attendance. This method is
very simple and cheap to operate. But it can be used in very, small factories. Records may not
be accurate. Chances of disputes and mistakes will arise.

Token or Disc Method:

Under this system, every worker is allotted a disc or token bearing his identification
number. All such discs are hung on a board at the entrance of the factory. As and when a
worker enters, he removes his disc from the board and puts it into the box or hangs it on another
board which is specially kept for this purpose.
After the expiry of the time, the first box is removed and replaced by another for late
comers. Alternatively, workers coming late may be required to report at the time office so that
the exact time of their arrival can be noted. After the factory gates are closed, the, time clerk
marks the attendance in register on the basis of tokens in the boxes. The absentees are indicated
by the missing tokens in the box.
This system is improvement on the attendance register method. It is difficult to check one
worker inserting two discs into the box, one of himself and the other of his friend. It involves a
large amount of clerical work and there is a possibility of mistakes.

Mechanical Methods: It is classified into three.

i. Time Clock Method:
Under the mechanical methods, time clocks are used to record the worker's attendance. In
this system the attendance is recorded on a clock card. When a worker enters the gate, he picks
up his card from the "out" rack, inserts it into the clock and the time is stamped at the relevant
space. He takes his card out and keeps it in the "In" rack. This process is reversed when he goes
out of the factory.
Thus, every worker is allotted a card which bears the worker's identification number. These
cards are kept in racks lying outside the factory gate. There are usually two racks denoting 'out'
and 'in' racks. The cards left in the 'Out' racks indicate absent workers.
Advantages:
 It provides for correct recording of attendance.
 Changes of false and fraudulent entries are reduced.
 Work in connection with the preparation of wage sheets becomes is very easy.
 The clocks produce a definite record.

ii. Dial Tune Recorders:

This consists of a mechanism with a dial having a number of holes about the
circumference. When a worker enters the factory, he presses the dial arm into a hole which
denotes his particular number and die time is recorded automatically on an attendance form
placed inside.
This attendance sheet forms a part of the payroll and there is no-need of copying out the
record. But this method has the following defects
a) The time of worker's arrival and departure are widely separated on the paper,
 making the calculation of worker's total time cumbersome.
b) The capacity of this machine is very much limited as the number of holes is only
about 150.

iii. Key Recorder System:

This is a mechanism with a number of keys, each key bearing the number of a worker.
When a worker enters the factory, he inserts his particular key in the key-hole and gives a turn,
the ticket number and the clock time are recorded on a sheet of paper.

Time Booking:
It is a process of recording the time spent by a worker on differ jobs carried out by. In
during his period of stay m the factory,

The objects of time booking:

1. To ascertain die cost of work done.
2. To ensure that time for which worker has been paid is properly utilized.
3. To provide a basis for the appointment of over-heads, and
4. To ascertain the idle time so as to control it.
Time booking may be done manually or mechanically depending, upon the size of the
organization. Large organizations, use time recording clocks for recording time on each job.

Methods of Time Booking

There are five methods of Time booking. They are

Daily Time Sheet System:

This is a daily record of the work done by a worker, showing the jobs on which, he
worked and the time spent against each. One sheet is allotted to each worker and a daily
record is made therein. This can be used in small organizations where the number of workers as
well as the number of jobs are very much limited.

Weekly Time Sheet:

This is similar to Daily Time sheet. The difference is that instead of recording the work
done for a day only, record of time for all jobs is done weekly. Here Weekly Time Sheets are
kept. The weekly time sheet gives a consolidation of the total hours worked during the week
and this total can be checked against the total shown in the clock cards. This method is useful-
where there are a few jobs in a week.

Job cards:
This card is prepared for each job. This card is allotted to each worker whenever a worker
takes up a particular job. Worker enters this card the time of starting the job as well as tune of
finishing the job.
Time and Job Card:
This system provides a card which consists of two sections, one to be filled up as a job
and the other as a time card. This card records the attendance time and the time spent on different
jobs on the same form. It consists of two sections - one for recording attendance and the other for
recording the work time. Thus, tins records both the attendance time and work time of a worker
on the same sheet.
Labour Cost Card:
This is a type of circulating job card it meant to record the time taken on the job by all the
workers employed on it Instead of allotting one card to each worker, the same card is passed
round and the time taken by each worker on that job is recorded on it Thus, this card gives the
total labour cost of a job.
Piece-Work Card:
 Where workers are paid on piece rate system, piecework card is used. Such a card is
maintained for each job separately.
Wages Abstract:
This is a summary prepared weekly or monthly, showing the amount of time spent by a
worker on different jobs. This shows an analysis of wages paid during a period of time on
different jobs.
The Wages Abstract is a medium of allocation of labour cost to different jobs. It provides
a basis for writing job ledger.
Write short notes on:
(a) Out workers
(b) Casual workers
a) Out workers:
Out workers are those workers who work outside the factory on behalf of the company.
b) Casual Workers:
These are temporary workers who are appointed on daily basis in order to meet increase
in production or to replace the absentee workers. These are known as casual workers. Such
workers are known as casual workers as they are not regular workers of the organization.
Overtime Wages
Work done beyond the normal working hours is known as overtime work. According to the Indian
Factories Act, no worker should be allowed to work for more than 9 hours a day or 48 hours a week.
Suppose a worker works for more than 9 hours in a day or more than 48 hours in a week he has to be
paid for his overtime at double the normal rate of wages. Overtime work involves extra cost as it has
to pay at double of pauses of idle time Treatment of Overtime Costs.
1. If overtime is required to make up any shortfall in production or for meeting urgent
orders, the overtime premium should be treated as overhead cost of the department
concerned.
2. When the customer agrees to bear the entire charge of overtime due to urgency of
work, it should be charged direct to the job or work order concerned.
3. Where overtime is worked due to seasonal nature, it should be treated as general
overhead.
4. Overtime worked on account of abnormal conditions like floods, earth quakes, etc.,
should be transferred to Costing Profit and Loss Account.
5. Overtime work is work done beyond normal working hours. The Factories Act provides
for payments of overtime wages at double the norms rate wages.

Control of overtime:
 All overtime work should be duly authorized by higher officials.
 Overtime cost should be recorded separately and shown against the department
incurring it. It will help in proper planning in future.
 If overtime is due to limited capacity of plant, new plant may be installed
Idle time
Give reasons for idle time, how you treat idle time in cost accounting.

Meaning of Idle time:

Idle time is that time for which wages are paid but no production is obtained. Idle time
may be defined as that time for which are paid but no production is obtained. This is the time
which cannot be attributed directly to any productive work. Idle time may represent loss of time
of labour, machines of equipment’s due to lack of material, breakdown of machinery, failure of
power supply, etc.

Causes of idle time:

a) Productive Causes.
 b) Administrative causes
c) Economic causes
Productive causes:
The productive causes may further be classified as follows:
1. Idle time due to machine break down.
2. Power failures.
3. Workers waiting for raw materials and tools.
4. Workers waiting for work.
5. Workers waiting for instructions.
In all the above cases, idle time can be controlled by proper planning in advance.
Administrative causes:
Idle time is frequency caused by administrative decisions. Sometimes administrative
decisions are also responsible for idle time. For example, in case of a surplus capacity of plant
and machinery, management may decide not to work fully and there may be some idle time.
Therefore, such idle time arises out of abnormal situations, and it cannot be helped.
Economic causes:
Idle time, may arise due to sever competition or seasonal nature of industries. Idle time
may arise due to seasonal nature of industries. For example, in the case of woolen goods, ice-
cream industry, production cannot be evenly distributed throughout the whole year. It is not
possible to employ a number of workers in the busy season and to leave them during slack
season.

Treatment of Idle Time Cost

Normal Idle Time Abnormal Idle time

Normal Idle Time:

It refers to that loss of time which is generally unavoidable and is incidental to production.
For example:
a. Time taken from the factory gate to the department where worker is engaged and the
reverse journey at the end of the day.
b. Time which elapses between completion of one job and commencement of the next.
c. Time spent in machine maintenance.
d. Tea breaks (if any), personal needs, etc.
Thus, normal idle time is of such a nature that it cannot be avoided and its cost is an
expense which the employer must bear.
Treatment of Normal Idle Time:
a) It is directly charged to factory overhead account.
b) Wage rate may be inflated so as to make allowance for normal loss of labour time.
Abnormal Idle Time: This type of idle time arises due to inefficient of management bad luck
or reasons beyond control.
Examples: Strikes and lockouts, major breakdown of machinery, fire, flood, and power failure
delay in material supply, etc. Measurement of Labour Turnover here are three different methods
of measurement of labour turnover
Treatment of Abnormal Idle Time: Cost of abnormal idle time should be collected separately
and written off to costing profit & loss Account. It cannot be regarded as a cost of production.
Control of Idle Time: For control purpose, idle time should be divided into three categories:
Idle time controllable by foremen, e.g., waiting for instructions, waiting for tools, faulty
tool setting, interrupted flow of work, etc.
Idle time beyond the control of foreman but controllable from the standpoint of factory,
etc. Shortage of raw material, power failure.
Idle time essentially beyond control, e.g., unforeseen accidents, shortage of work due to
economic conditions, failure of power supply, work stoppage due to strike, etc.
The different causes which lead to idle time should be properly analyzed and
responsibility should be fixed on appropriate persons to control it.

Labour Turnover
What do you understand by Labour Turnover? How is it measured? What are the causes?
What are the remedial steps you would suggest to minimize its occurrence?

Labour Turnover:
It is rate of displacement of labour employed in an organization. It is a normal feature in
every business organization that some workers leave their jobs and some new workers take their
place. This mobility or change in the labour force is known as labour turnover, labour turnover
may be defined as the number of workers left during the period in relation to the average number
of workers on the roll during the period. In the other words,

MEASUREMENT OF LABOUR TURNOVER

There are three different methods of measurement of labour turnover:

Separation Rate Method:

This is the most commonly used method. Under this method, measurement is made by
dividing the total number of separations during a period by the average number of workers on the
roll during the period.
Labour Turnover = No. of workers left during a period / Average No. of workers in the
period x 100

Average number of workers is calculated as under:

No. of workers in the beginning of period + Number at the end / 2
Multiplying the labour turnover formula by 100; gives the rate in percentage. The period for
which labour turnover rate is calculated may be one month, six months, and one year period.

Replacement Rate Method:

This method calculates labour turnover rate by taking into consideration only the number
of workers joined.

Formula:
Labour Turnover = No. of replacement in a period / Average number of workers in the period
X 100
While calculating the number of replacements, new workers recruited because of expansion
should be taken into account

Flux Rate Method: This method takes into consideration both the number of workers left as
well as number of new workers who have joined
Formula:
Labour Turnover = No. of workers left + No. of workers replaced / Average No. of workers x
100 This method is a combination of method 1 and method 2

CAUSES OF LABOUR TURNOVER

The causes of high labour turnover may be classified in two categories:
(i) Avoidable
(ii) Unavoidable

Avoidable Causes
1. Redundancy due to seasonal fluctuations, contraction m the market lack of proper
planning.
2. Low wages and allowances
3. Unsatisfactory working conditions.
4. Disputes between rival trade unions.
5. Dissatisfaction with the job.
6. Lack of facilities like transport, medical, accommodation, etc.
7. Strained relationship with supervisors or fellow workers.

Unavoidable Causes:
1. Change of service for personal betterment, ,
2. Retirement due to old age and ill health,
3. Death,
4. Discharge on disciplinary grounds on continents long absence,
5. Marriage or pregnancy.

Effect of High Labour Turnover

Effects of Labour Turnover will increase cost of production. There are two types of Cost.
(i) Preventive cost (ii) Replacement cost

Preventive Costs:
Preventive costs refer to all those expenses and costs which are incurred by a firm to
keep the labor force contented so that excessive labor turnover may be prevented

The major items of preventive costs are:

1. Personal administration.
2. Cost of medical services.
3. Cost of welfare activities and schemes.
4. Pension and or provident fund schemes.

Replacement Costs:
Replacement costs include all such losses, wastage arising because of the inexperienced
new labor farce replacing the existing ones as well as die cost of recruitment and training of the
new workers.

It includes the following elements:

a. Loss of output due to sometime taken in obtaining new labour,
b. Loss of output and quality due to inefficiency of new labour,
c. Employment department expenses,
d. Cost of training of new workers,
e. Cost of tool and machine breakages,
f. Cost of scrap and defective work, and
g. Cost of accidents.

Reduction of Labour Turnover:

 Labour turnover rate may be reduced by taking preventive remedial measures and by
removing avoidable causes.

The various steps are given below

1. A satisfactory wage system.
2. Improving working conditions.
3. Strengthening the welfare measures.
4. A satisfactory policy for transfers and promotions,
5. Labour participation in management.
6. Efficient and impartial personnel administration.
7. A sound personnel policy for recruitment induction and training of labour
8. A satisfactory level of amenities add welfare measures like canteen facilities, medical
services, recreation etc.
9. A satisfactory security scheme like family pension, provident fund, accident
compensation, etc.
10. A satisfactory policy for transfers and promotions.
11. Labour participation m management and joint consultation scheme.

Time & Motion Study

What do you understand by Time and Motion Study?
Time study aims at determining the proper speed of movements made by the workers and
motion study aims at eliminating unnecessary movements.

Time study: It may be defined as "the art of observing and recording the time required to do
each detailed element of an industrial operation" Its main object is to determine the standard time
required to carry out a job most efficiently.

Motion Study: This study deals with one aspect of methods study, i.e., to eliminate unnecessary
movements of men and material. "Motion study is the science of eliminating wastefulness
resulting from using unnecessary, ill directed and inefficient motions". It is a detailed study and
analysis of die movements of an operation in performing an operation for the purpose of
eliminating unnecessary and useless motions:

Write notes on the following: (a) Job Evaluation and (b) Merit Rating

I. Job evaluation: Job evaluation may be defined as the rating of various jobs according to the
responsibility and skill required from them. The basic object of job evaluation is to ascertain the
relative worth of each job through an objective evaluation so that relative remuneration can be
fixed for different jobs.

II. Merit Rating: Merit rating is a systematic evaluation of the personality and performance of
each employee by his supervisors or some other labour qualified persons. It is a system by
which the performance of an employee is objectively evaluated and compared with that of others
in his work group.
Methods of Wage Payment
There are mainly three methods of labour remuneration:
a) Time Rate System
b) Piece Rate System
c) Incentive Schemes.

If a worker may be paid on the basis of time, he spends on his job is known as Time
Rate. If he may be paid on the basis of quantity of work done by him is known as piece rate.

Time Rate System: This is the oldest of the wage payment systems. In this system time is made
the basis of payment. Labour is paid for the time worked irrespective of the volume of
production during that time. The formula for calculating wages under this system is:
Time Rate (T.R) = Hours worked x Rate per hour
Payment may be based upon the hour, the day or the week, or it may be at the fixed
salary rate.

Wages = Time spent x Rate per hour (T x R)

E.g.: Mr. X is paid at the rate of Rs. 10 per hour. During the month he spends 200 hours.
Calculate Mr. X earnings.
Earnings=200 hours x Rs. 10 per hour = Rs. 2000 per month.

Types of Time Rates:

Times Rates at Ordinary Levels: In this system, time is made the basis of payment
irrespective of quantity of work done by a worker payment is made at a rate on attendance by
hour, week or a month.
Formula:
Time Rate = hours worked x Rate per hour

Time Rate at High Levels: Under this system, the worker is paid at a wage which is
substantially higher than the rate prevailing in that area or industry.

Graduated Time Rates: This system provides for variation in the wage according to changes in
the cost-of-living index. The rates are to be adjusted periodically according to index.

Advantages:
 The workers are assured of minimum wages which gives them a sense of security.
 The calculation of the number of wages is simplified.
 Workers avoid over-speeding arid thus cause less damage to equipment.
 Quality of work produced this method does not give weight to the volume of work done.
 Trade unions generally oppose tins mode of payment.

Drawback:
1. It does not distinguish between efficient and inefficient workers.
2. There is no incentive to work more.
3. From costing point of view, it creates difficulties in the calculation of labour cost per unit
as the output is quite fluctuating.
4. It needs extra provision for supervision so that workers do not waste their same.

Piece Rate System: Under this system a worker is paid a fixed amount per unit produced
irrespective of the time taken. A rate per unit of output is fixed and wages are calculated as
follows:
Piece rate = No. of units produced x Rate per unit (N x R)
Earnings = No. of Units produced x Rate per unit (N x R)
Example. X is paid at the Rate of Rs. 4 per unit He produced 500 unit during the month.
Calculate his total earnings?
Earnings = 500 Units x Rs. 4 per unit=Rs. 2000 per month.
Advantages:
 It distinguishes between efficient and inefficient workers.
  It provides a strong incentive because remuneration is in direct ratio to the worker ‘s
effort.
 Costing is simplified because the exact cost of labor per unit is known in advance.
 Strict supervision is not necessary.
Drawbacks:
1. Workers try to produce maximum quantity to increase, their wages. In the process
quality of products is ignored.
2. Minimum number of wages is not guaranteed.
3. High speed has injurious effect on the health of workers and also on equipment and
machinery.
4. Trade unions generally oppose this mode of payment.
5. It involves maintenance of larger records tor payroll.

TYPES OF PIECE RATES

Straight Piece Rates: This system makes quantity of work as the basis wage payment. A
fixed sum per unit of output is given to a worker irrespective of the time taken by him.
The formula is:
Piece Rate = Units produced x Rate per unit (N x R)
Piece Rates with guaranteed day rate: In this system, some minimum wage is guaranteed to a
worker and if his wage at piece rates, by chance, con out to be less than the guaranteed minimum
wage, he shall get the minim wage and not the piece wage.
Differential Piece Rates: Under this system, rates of wages vary at different levels of output. As
the output increases, the rate also increases. The crease in rates may be proportionate to the
increase in output or proportion a more or less than that. The object of this system is to reward
the efficient workers and at the same time to encourage the less efficient to attain standards.
Taylor, Merrick, Gantt task and Bonus and Emerson efficiency plan are used this system of
payment.

Bonus System and Incentive Schemes

The bonus system may take either of two forms - Individual Bonus System or Group Bonus
System.

Indirect Monetary Incentives:

Profit-sharing Scheme: Profit sharing schemes are those where there is an agreement between
the employer and his workers whereby the employer agrees to pay to workers, in addition to their
wages, a share of profit at an agreed rate.

Co-partnership: Workers ate given the opportunity to have a share in the capital of business
and to receive the profits accruing to their share
Non - memory benefits may be given in numerous ways like medical facilities, educational
facilities, subsidized canteen, better working conditions, housing facilities and such other
welfare measures.
Discuss the principles of a good incentive scheme. What are the advantages and disadvantages of
incentives schemes?

Incentive Wage Plan: Incentive may be defined as "the stimulation of effort and effectiveness
by offering monetary inducement or enhanced facilities" An incentive may be monetary, i.e.,
cash benefit, or non-monetary.
Principles of a Good Incentive Scheme:
1. The scheme should be simple and easily understandable by workers
2. The scheme should be fair, to both employer and employee.
3. The cost of operating the scheme should be reasonably low,
 4. The standard of performance should be scientifically set and should be within the
reasonable reach of an average worker.
5. No limit should be put on the earnings of workers.
6. The scheme should have the approval of workers and the union.
7. The scheme bonus provides a satisfactory system of supervision and production control.
8. The scheme must be relatively permanent.
9. Indirect workers should also be included under this scheme.
10. Workers should be properly educated.

INCENTIVE SCHEMES
Under Incentive schemes, time rate and piece rate systems are combined in such a way
that workers are induced to increase their productivity. Various Incentive plans are

Halsey Plan:
This plan was first introduced by F.A. Halsey, a mechanical engineer in America, in
1891. This is a simple combination of time and piece basis of payment. Under this plan, bonus is
paid on the basis of time saved. The amount of bonus depends upon die time saved by the
worker. Were,
Time saved = standard time - Actual Time taken
A standard time is set for each job. If a worker takes the standard time to do it or even
exceeds the standard time limit, he gets normal wages calculated at die time rate. If he completes
his job in less than the standard time, he gets a bonus equal to 50% of the value of time saved.
Therefore, die total earnings of a worker under this system are wages for the actual time spent
plus a bonus equal to 50% of the. Value of time saved.
The formula: Bonus 50% of [Time saved x Time rate]
Total earnings - Time rate x Time taken +50% [Time saved x Time rate]
Example: Time rate = Re. 1.00; Time allowed = 7 hours’ Time taken = 6 hours and Time saved
= I hour. Bonus = 50% [Time saved x Time rate]
= 50% [1 hour x Re. 1.00]
= 50% [Re. 1.00]- 50 paisa
Total earnings - (6 hour \ Re. 1.00 + 50 paisa - Rs. 6.50

Advantages:
 It is easy to understand and simple to operate.
 This plan provides a strong incentive to improve efficiency.
 The worker earns bonus on every job individually and the time saved by a worker on
one-job is not set off against the excess tune taken on some other job.
 It guarantees minimum wages according to time rate and thus provides a sense of
security to workers.
 The benefit of time saved is equally distributed between workers and employers.
 It provides a strong incentive to increase production.

Disadvantages:
 Incentive is not as strong as with piece rate system. Generally, the harder the worker
works, the lesser he gets per unit.
 It does not give full protection to employer against wrong rate setting.
 Workers do not welcome the sharing principle.

Problem: 1
Rate per hour =Rs.4
Time allowed for Job =40 hours
Time taken =32 hours
Solution:
Time saved =40hours-32hours = 8hours
Bonus = 50% of time saved = 8 hours =4
hours Bonus= 50% Time saved x Rate per
hour
= 4hoursxRs.4=Rs. 16
Time wages = Actual time taken x Rate per hour
= 32 hours x Rs.4 = Rs. l28
Total Earnings = Rs. 128+ Rs. 16 = Rs.
144.

Problem: 2
Calculate earnings of a worker, Under Halsey Premium
Plan Time allowed = 70 hours
Time taken = 60
hours Rate per hour =
Rs. 3
Time saved = Standard Time - Actual time
= 70 hours - 60 hours =10 hours
Bonus = 50% Time Saved x Rate per our
= 10hours / 2 x Rs.3 =Rs. 15
Wages = Actual time x Rate per hour
= 60 hours x Rs. 3 = Rs. 180
Total Earnings = Actual wages + Bonus = 180 + 15 = Rs. 195

Halsey Weir Plan: This system was introduced by G.T. Weir and is a modified form of the
original Halsey plan. The only difference between the two is that under the Halsey Weir plan
the bonus is equal to 30% of time saved. E.g.:
Standard time = 40
hours Actual time =
34 hours Rate per hour =
Rs.10 Calculate Halsey
weir plan?

Bonus = 30% of Time saved x Rate per hour

40 – 34 hours = 6 hours x 30 / 100 x Rs.l0 = Rs.
18
Wages = 34 hours x Rs.10 = Rs. 340
Total Earnings = Rs.340 + 18 = Rs.358

Rowan Plan: This plan was introduced by David Rowan and is similar to Halsey Plan, except in
the calculation of the amount of bonus. Bonus is that proportion of the wages of the time taken
which the time saved bears to the standard time. Its formula is:
Bonus = Time saved / Standard time x time taken \ Rate per hour
Total earnings = (Time taken x Rate per hour x Bonus
Suppose Time Rate = Re. 1.00 per Hour; Standard time -8 hours; Time taken = 6 hours;
Time saved = 2 hours. % Of Time saved to Standard time =2/8 - 25% Bonus = 25% of Rs. 6 =
Rs. 1.50.
Total earnings = 6 hours x Re. 1.00 + Rs. 1.50 = Rs. 7.50.

Advantages:
 It provides a guaranteed minimum wage as well as incentive for efficiency.
 It provides the employer an incentive to increase production facilities as he receives a
 large share in savings achieved.
 The Rowan plan provides a better bonus than the Halsey 50% scheme.
 Up to 50% of the time saved, it provides a higher bonus than under Halsey Plan. It
offers protection to the employer when standard has not been properly fixed,
 As die bonus increases at a decreasing rate, at higher levels of efficiency, the worker is
not induced to rush through the work.
Disadvantages:
 It is more complicated and costlier than the Halsey system.
 It is not easily understood by workers and leads sometimes to disputes.
 It does not provide adequate incentives beyond a certain level.
 Where time saved is more than 50% of the standard, time, the total earnings start
decreasing.
 Bonus = Time saved / Standard Time x Rate per hour x Actual time

Problem: 3
Calculate Earnings under Rowan scheme:
Standard Time = 100 hours
Time taken = 80 hours
Rate per hour = Rs.10
Bonus = time saved / standard time x Actual time x Rate per hour
= 20 hours / 100 hours x 80 hours x 10 = Rs.160
Time wage = Actual time x Rate per hour
= 80 hours x Rs. 10
= Rs.800
Total Earnings = Rs.800 +160=Rs. 960.
Problem: 4
Calculate Halsey and Rowan Premium plan from the following
data: Time allowed = 96 hours
Time taken = 80 hours
Rate per hour = Rs. 2

Solution:
Halsey Plan:
Bonus = 50% Time saved = 96-80=16 / 2 = 8 hours
= 8 hours x Re.2 = Rs. 16
Total Earnings = Rs. 160 (80 x 2) +16 = Rs.176.
Rowan Plan:
Bonus = 16 / 96 x 80 x 2 = Rs.
26.66 Time wages = 80x2=160
Total Earnings = 160 + 26.66=Rs. 186.66
Problem: 5
A worker takes 12 hours to complete a. job on daily wages and 9 hours on a scheme of payment
by results. His day rate is Rs. 4 per hour. The material cost of the product is Rs. 6 and the
overheads are recovered at 150% of total direct wages. Calculate Factory cost of the product
under.
a) Piece Work Plan, b) Rowan Plan, c) Halsey Plan.
Solution:
a) Wages under piece work plan:
9 hours @ Rs.4 per hour = Rs. 36
b) Wages under Rowan plan:
Bonus = 3/12 x Rs.9 x 4 = Rs.9.00
 Time wages = 9 hours x 4 = Rs. 36.00

Total Earning = Rs. 45 (Rs.36 + 9)

c) Wages under Halsey plan:
Bonus = 50% 3 hours x Rate per hour
= 1 1/2 hours x 4 = Rs.6
Time wages = 9 hours x 4 = Rs.
36.00
STATEMENT OF FACTORY COST
ELEMENTS OF COST PIECE WORK ROWAN HALSEY
PLAN PLAN PLAN
Material 6.00 6.00 6.00
Wages 36.00 45.00 42.00
Prime cost 42.00 51.00 48.00
Factory overhead 150% wages 54.00 67.50 63.00
Factory cost 96.00 118.50 111.00
Taylor's Differential Piece Rate System:
This system was introduced by Taylor, who was the father of Scientific Management
Under this plan no time basis wages are guaranteed, but two-piece rates are fixed, low piece
rate and high piece rate. The lower rate is for those who are not able to achieve the standard
output and higher rate is for those whose output is at or above the standard. Under this system,
the standard job is established after careful time and motion study and two-piece rates are set.
The features of the scheme:
1) Day wages are not guaranteed.
2) A standard time for job established.
3) Two-piece work rates are fixed. If the worker does the work in less than the standard
time, he receives the higher piece rate, whereas if he takes longer time, he receives the
lower piece rate. Suppose Standard Production =100 units per day.
Piece Rates:
1) 10 paisaper unit for 100 units or more.
2) 8 paisa per unit for less than 100 units.
Therefore, a worker producing 100 units will get Rs.10 and one producing 110 units will
get Rs. 11. On the other hand, a worker producing 90 units will get at the lower rate of 8 paisa
per unit, (90 x 0.08) i.e., Rs. 7.20.

Advantages:
 This method is simple to understand and calculation of wages is not difficult. It also
provides a strong incentive to efficient workers.
 It is advantageous from the point of view of the employer since it helps much in
increasing production by offering higher rates to more efficient workers.
 It attracts efficient workers.
 Where the overheads are high its incidence per unit cost is reduced because of
increased production.

Disadvantages:
 It penalizes very slow or inefficient workers.
 It does not guarantee, the minimum day wages and this insecurity affects the morale of
workers.
 Labor cost will differ between the two levels of performance because of two different
rates.
 It makes differences between efficient and inefficient workers and thus creative rivalry.
  This system is unfair to beginners who cannot attain the standard output immediately.
Problem: 6
Standard production -200 Units per day
Low piece rate - 8 paisa per unit.
High piece rate -10 paisa per unit
Mr. X who produced 240 units and Y produced 190 units. Calculate their Earnings under
Taylor's Differential piece rate system?
Solution:
Standard output = 200 units per day
X Produced - 240 units he will get high piece
rate. X earnings = 240 units x 10 paisa = Rs. 24
Y produced = 190 units he will get low piece
rate Y earnings = 190 units x 6 paise=Rs. 15.20
Problem: 7
Calculate earnings of worker Mithilash and Sailesh under straight piece rate system and Taylor's
Differential piece rate system from the following particulars.
Normal rate per hour =Rs. 18.00
Standard time per unit = 10 seconds Differentials to be applied:
80% of piece rate below standard
120% of piece rate at or above standard
Worker Mithilesh produced 2700 units per day and worker Sailesh produced 3200 units per day, Per
day = 8 hours
Solution:
Standard production 10 seconds = 1 unit
Standard production one minute 60 seconds / 10 seconds = 6 units
Standard production per hour (60 minutes) = 6 units x 60 minutes =360 units
Standard production per day of 8 hours = 360 units x 8 hours =2880 units.

Normal rate per hour = Rs. 18.00

Normal piece rate = Rs. 18.00 / 360 units = 0.05 piece

Low piece rate = 5 paise x 80 / 100 x 0:04 paise

High piece rate = 5 paise x 120 / 100 x 0.06 paise

Earnings of worker Mithilesh:

a) Under straight piece rate system
Number of units produced x Rate per unit = 2700 units x 0.05 paise =Rs. 135
b) Under Taylor's Differential piece rate system = 2700 units x 0.04 paise =Rs.
108

Merrick's Differential Piece Rate System: It is a modified version of the Taylor's scheme and
is also known Multiple Piece Rate System. Workers producing below die standard output are not
penalised by the low piece rate. This plan lays down three rates, one for the beginner, the second
for die developing workers and the third for die highly efficient workers.

a) Up to 83% of the standard output, the workers are paid at the ordinary piece rate i.e., the
lowest of the three rates.
b) Those, whose output exceeds $3% of the standard but does not reach 100%, axe paid at 110%of
the ordinary piece rate.
c) Those whose output is 100% or above, get the highest rate which is 120% of the ordinary piece
 rate.
Features of the scheme:
a) Up to 83% of the standard output, workers are paid at the on-piece rate.
b) 83% to 100 % of the standard output, at 110% ordinary piece rate and
c) Above 100% at 120% of the ordinary rate.

The earnings increase with increased efficiency, performance above the standard will be rewarded by
more than one higher differential piece rate. This plan is effective for high-level production.

Problem: 8
Calculate the earnings of worker. Sundar, Sankar, Mani straight piece rate system and Merrick
multiple piece rate system the following particulars:
Normal rate per hour = Rs. 18
Output per day of hours is as follows:
Worker Sundar 380 units.

Worker Sankar = 460 units.

Worker Mani = 540 units.

Solution:
Standard output per minute = 1 unit
Standard output per hour 1 x 60 minutes = 60 units.
Standard output per day of 8 hours = 60 units x 8 hours = 480 units
Normal rate per hour = Rs. 18.00 Normal Output per hour = 60 units.
Normal piece rate = 18.00 /60 units = 0.30 paise.

Calculation of Efficiency of workers:

% Of Efficiency = Actual output / Standard Output x 100
Worker Sundar output per day 380 units.
Sundar'sEfficiency = 380 units/ 480 units x 100 = 79%
Worker Sankar output per day 460 units
Sankar‘s efficiency = 460 units / 480units x 100 = 96%
Worker Mani output per day 540 units
Mani‘s Efficiency = 540 units / 480 units x 100 = 112.5 %
Earnings of Worker Sundar
Under Straight piece rate system:
380 units x 0.30 paise = Rs. 114
Under Merrick Multiple
system: 380 units x
0.30=Rs. 114
Worker Sankar Earnings:
Under Straight piece rate:
460 units x 0.30 = Rs. 138
Under Merrick System:
460 x 0.33paise = Rs. 151.80
Worker Mani Earnings:
Under Straight piece rate:
540 units x 0, 30 = Rs. 162.
Under Merrick System:
540 units x 0.36 paise =Rs. 194.40
Emerson's Efficiency Plan:
 This is an American scheme which combines guaranteed fixed day wage with a
differential piece rate. This system guarantees time wages even to those whose output is below
standard. Standard output is fixed to represent 100% efficiency. A bonus is paid to a worker
whose output exceeds 66 2/3 % of the standard output. The bonus increases gradually at a stated
rate so that at 100% efficiency bonus would rise to 20%. Beyond this, bonus would increase at l
% of basic rate for every 1% increase in output.
Features of the scheme:
A certain standard output is fixed for a worker for each job. A worker who is able to
attain two - thirds of standard output is deemed a normal worker and gets only guaranteed
time rate. A worker who goes above the two-thirds standard, is paid, in addition to his normal
wage, a bonus the rate of which increases as the extent of the excess of the output over two-
thirds standard increases.

Advantages:
 The system is simple to understand and easy calculation. It provides incentives for
beginners also.
 The disparity in wages among workers under the other systems is also reduced here.
 It provides security to the worker as day wage is guaranteed.

Disadvantages:
The incentive is quite small to attract very different and ambitious workers.

Problem:
Standard Output per day of 8 hours is 32 units. Actual output of a workers for 8 hours is
40 unite Rate per hour is Rs.8. Calculate wages payable for worker according to the Emerson's
Efficiency plan.
Level of Efficiency = Actual Output / Standard Output x 100.
= 40 units / 32 units x 100 = 125% efficiency
20% Bonus = 25% Bonus
= Rs. 64.00 3-31
Bonus is payable 45% efficiency
(i.e.) up to 100% Efficiency = 20%
Bonus Above 100% Efficiency = 25%
Bonus
25% [125 - 100%]
Time wages for 8 hours of
Rs.8 per hour (8x8) = Rs. 64.00 45 / 100 x 64.00 = Rs. 28.80
Total Earnings payable to worker = Rs. 92.80

Gand's Task and Bonus Plan:

This plan is a combination of time rate, piece rate and bonus. It guarantees wages
according to time basis. A high standard is set and if this standard is achieved or exceeded,
payment is made at a high piece rate. This piece rate is so fixed so as to include a bonus of 20%
over the time rate of the worker. A worker who is not able to achieve the-standard or whose
efficiency is below 100%, gets wages at time rate and is not entitled to bonus.

The main feature as of this system are:

 It is a combination of time rate, differential piece rate and bonus.
 Day wages are guaranteed.
 A standard task is set, on which a bonus may be earned if completed within the
standard time.
  The bonus is a fixed percentage on the time taken.
 A worker who attains the standard is paid a bonus, usually of 20% on his time rate.
Where he goes above the standard, he gets at a higher piece rate of the worker's whole
output.
Thus, under this system, both time and piece rates are set and normal wages are paid at the
time rate or piece rate, whichever is higher, in addition, a bonus is also given if the work is
completed within standard time.

Advantages:
 It is simple to understand and easy to operate.
 It provides an incentive to the efficient worker as well as security for less efficient by
guaranteeing the time rate.
 It is useful where the overheads are very high.
 It encourages better supervision and planning as under this scheme, foreman also
receives bonus.

Disadvantages:
 Guaranteed time rate Wage may act as a disadvantage for improved production in case
rate is fixed at a high level.

Bedaux Point Premium System:

This is premium bonus system in which standard tin determined by work study, the time
unit being the minute. A minimum allowed time is termed as Bedaux point or "B", sixty units
make in hour's work, and the number of Bedaux points being determined in respect of each job.

Example:
Allowed time for a job = 600 B's
No. of points earned = 720
Time rate = 1.80 per hour
Points earned = 720
Points allowed = 600
No. of points saved = 120

Time rate per minute is Re. 0.03 i.e., Rs. 1.80 / 60

Wages at time rate for 600 points = Rs. 18.00
Bonus = 75% of points saved at 3 paise per minute
= 120x 75% x Re.0.03=Rs. 2.70
Total wages = 18.00 + 2.70=20.70.

Problem:

Standard time required for a job is 30 hours.

Actual time taken for a job = 24 hours.
Rate per hour = Rs. 10 per hour.
Calculate worker earnings under Bedeaux point Premium plan:

Solution:

Standard time - 30 hours; one B = 1 minute

30 hours = 30 x 60 minutes = 1800 minutes

1800 B's = 1800 minutes

Actual time 24 hours
24 hours = 24 x 60 minutes = 1440 minutes
1440 B’s =1440 minutes
Time saved = Standard minutes - Actual minutes
= 1800 - 1440 = 360 minutes
360 minutes = 6 hours Bonus payable to worker 3/4 of tune saved = 6 hours x ¾
= 4 ½ hours.

Calculation of Total Earnings:

Time wages 24 hours x Rs.10 = 240
Add: bonus 41/2 hours x Rs.10 = 45
Total Earnings = 285

Group Bonus Scheme

Bonus may be given individually to every worker or collectively to a group of workers.
When it is given collectively, it is known as group bonus scheme. It is a scheme in which the
bonus is calculated on the collective production of a group of interdependent workers and
distributed among the individual members of the group on some agreed basis.

This system is employed in cases where the output of individual workers cannot be
measured and the ultimate production is dependent on the collective efforts of a group of
workers as a whole.
Group system of payment encourages co-operation and team work among the workers.
Supervision work is reduced.

Advantages:
 It infuses co-operation and team-work among the workers.
 Absenteeism is often reduced because an absent member weakens the group and most
workers do not like to let down their team
 This system requires less clerical work.
 Supervision work is reduced.
 Indirect workers can also be included in the scheme.

Disadvantages:
 This system is unfair to hard-working and efficient workers of the group as an efficient
worker is penalized for in efficiency of other members of the group.
 It is difficult to get workers acceptance of the scheme.
 There may be some practical difficulties regarding fixing the amount of incentive and
how it is to be distributed to individual workers.
 The amount paid as bonus to each member of the group is as small and that may not
prove to be an effective incentive.

ESSENTIALS OF A GOOD WAGE SYSTEM

Simplicity: The method should be simple and easy to understand by workers so that workers so
that workers can calculate their own wages.
Minimum wage: A good system should guarantee minimum wage to give workers a sense of
security.
Incentive: The scheme of payment should provide sufficient incentive to workers to work more
taking into account the quality of production.
Flexibility: The system should be flexible enough so that changes may be introduced, if
necessary.
Satisfaction: The system should be satisfactory from the point of view of both worker and the
employer.
Law labour turnover and absenteeism: A good system should reduce labour turnover
and absenteeism.
Economical: It should be economical in operation.
Approval of Trade Union: It should be acceptable to trade union.
Fringe benefits:
Fringe Benefits (Individual Monetary benefits):
Dearness Allowance
Sick Pay
Provident Fund
Employee's State Insurance
Maternity Leave Pay
Night Shift Allowance Holiday
Pay Gratuity; Pension
Annual Bonus

Fringe Benefits (Group Non-Monetary):

Subsidized Conveyance
Subsidized Canteen
Facilities Medical Care
Free Housing.

CONTROL OVER LABOUR COSTS

Labour control is primarily concerned with the proper employment and efficient
utilization of labour force. Labour cost control aims at the control of the labour cost per unit-of
production and not at the reduction of wage rates of workmen.

 Control over labour cost can be exercised in the fallowing manner:

 Production Planning: Production should be so planned as to have the maximum and
rational utilization of labour. Production plan consists of the product and process
engineering, programming, routing and direction.
 Recruitment of Efficient Workers: Proper selection and training of workers and placing
them to the jobs for which they are best suited helps in achieving the optimum output
and minimum labpur cost per unit.
 Wage Policy: Wage plan including incentive scheme should be studied to find out how
far the remuneration paid on the basis of incentive plan matches with increased
production.
 Setting up of Standards: With the help of work study time study and motion study,
standards are set for production operations.
 Labour Budgets: Labour budgets are also used for control over labour costs.
 Labour Performance Reports: Management can also exercise control on labour and
labour cost with the help of periodical labour utilization and labour efficiency reports.

Direct Expenses: (Chargeable Expenses)

A chargeable expense is an expense which is specifically incurred in connection with the
execution of a particular job or work order. If includes all direct expenses other than those-of
direct material and direct labour. It forms a part of prime cost of the product.

Examples for chargeable expenses are:

 Hire of special plant and machinery required for a. particular job product or process.
 Cost of patents and royalties.
 Cost of special layout designs or drawings.
 Experimental costs and expenditure in connection with models and pilot schemes.
  Fees paid to architects’ surveyors and other consultants in connection with a job.

Chargeable expense is that which can be allocated directly to a cost unit. But overhead