Department of Business Administration

BBA Program
Cost Accounting (ACC4705)
Controlling and Accounting for Labor Cost
Labor cost is an important element of the total cost of production that represents
human contribution. Control of labor cost requires a completely different approach
from those required for control of other elements of cost, because it relates to human
behavior, and it cannot be stored for future, like materials. This chapter will guide
you determine the best approach of paying labor and controlling the labor cost also.

TYPES OF LABOR
Different types of labor engaged by industrial undertakings are:
a. Regular labor- those who are recruited on the basis of permanent requirements.
b. Casual labor- those who are recruited on temporary basis as and when required.
c. Hired labor- those who are hired through labor contractors or agents.
d. Out workers- those who are recruited as regular or casual labor but sent to sites or customers’
premises.
Besides the above classification, workers of all categories may be classified into skilled labor and
unskilled labor.

BASIC CONCEPT RELATED TO LABOR COST

1. Basic pay also called the base rate or job rate.
2. Fringe benefits include the benefits in addition to basic salary like employer’s contribution to
provident fund, vacation pay, overtime premium pay, pension costs, dearness allowance etc.
3. The control of labor cost means the control of labor cost per unit. If more output can be
obtained against the same amount of remuneration, unit cost is reduced. Thus, reduction in
labor cost does not mean wage-cut. It may mean more output for the same wage or more output
for higher wage so that the unit cost is reduced.
4. Productivity may be defined as the measurement of production performance using the
expenditure of human effort as a yardstick. It is the amount of goods and services a worker
produces. Productivity could also be described as the efficiency with which resources are
converted into commodities and/or services. Greater productivity can be achieved by better
processes, improved or modern equipment, or any other factor that improves the utilization of
the work force.
5. Idle Time: Idle time represents the time of a worker for which wage is paid but no work is
obtained against the payment. Some amount of idle time is inevitable in spite of efficient
management, because men are not machines. The idle time cost offers a problem for control as
far as possible, but not for total elimination. Idle time may be of the following two types:
a. Normal idle time – idle time which cannot be avoided and which remains within the
normal limit according to the nature of the industry. Examples of normal idle time are: time
lost between factory gate to the department for personal needs, tea breaks, tool setting, and
machine adjustments. Time lost due to waiting for instructions, jobs, materials, tools, and
power are also normal idle time.
b. Abnormal idle time- idle time which is not normal and which occurs due to some
unexpected reasons. Thus, idle time due to breakdown of machinery, long-time power
failure or load-shedding, sudden strike or lock-out, closing of factory during natural
calamities etc. are abnormal idle time.
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 6. Labor Turnover: Labor turnover is defined as the ratio of the number of workers leaving an
organization during a given period to the average number of workers of that organization
during the same period. High labor turnover ratio indicates unstable workers due to any reason
and the position is not desirable in any organization. The formula to calculate labor turnover
ratio is: ×100
The following are the principal causes of labor turnover:
(i) Avoidable causes: 1. Bad working conditions, 2. Lack of job satisfaction, 3. inadequacy of
welfare measures, 4. lack of scope of training and promotion, 5. long hours of work, 6.
lack of facilities for recreation, children’s education etc., 7. management’s inhumane
attitude, 8. lack of understanding amongst the workers etc.
(ii) Unavoidable causes: Unhealthy atmosphere of the locality, social unrest, retirement and
death, leaving on a better chance, retrenchment during off-season in case of seasonal
industries, disablement due to disease or accident inside or outside, marriage of female
workers, change of place due to political reasons or on the ground of health etc.
7. Time-keeping: Time keeping means the recording of the time of workers’ presence in the plant
from arrival to departure for the purpose of attendance and preparation of wage sheet. The
following are the different types of time keeping:
a. Manual method:
i. Hand recording– an attendance register is kept under the custody of the timekeeper. At the
time of arrival and leave workers are to put their signature in the register.
ii. Disc or token recording – each worker is allocated a metal disc with identical number.
These discs are hung on out-board before opening time. As a worker enters the factory, he
takes his disc from out-board and places it in the in-board. After the normal attendance
time, if any workers would like to enter the factory, he is to take a metal disc from the
timekeeper
b. Mechanical methods – Time card.

PROCEDURES FOR LABOR COSTING

Labor costing procedures involve the following:
1. Maintain the employment history of each worker such as: date hired, wage rate, initial
assignment, promotions, lateness, sickness, and vacations;
2. Accumulate the number of hours worked each day by each employee;
3. Convert labor hours into Taka using the regular rate and overtime rate of each employee;
4. Compute and subtract any deductions form gross wages for each employee;
5. At the end of the period (usually a week) summarize in a payroll sheet the gross earnings,
deductions, and net pay for each employee;
6. Prepare voucher on the basis of the totals of the payroll sheet;
7. Issue check for the total net payment;
8. Prepare journal entries charging work in process for the direct labor cost and factory overhead
for indirect labor; and
9. Using the payroll sheet, post the gross earnings, deductions, and net pay for each employee in
the individual earnings record.

METHODS OF REMUNERATION
A. Remuneration on Time Basis
1. Simple Time Rate System: Under this system, a worker is paid on his attendance at a
specified rate irrespective of his output. The rate specified may be in terms of hour, day, week
or month.

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 Md. Tahidur Rahman, Associate Professor, BAIUST
2. Differential Time Rate System: Under this system different time rates are fixed for different
levels of efficiency. A percentage of efficiency is fixed up to which a worker gets normal time
rate. If he crosses that percentage of efficiency his time rate shall increase step by step.

B. Remuneration on Result Basis

1. Straight piece work plan: Under this method, a fixed rate is paid for each unit produced, job
performed or number of operations completed, and the workers' wages thus depend upon their
output and not upon the time they spends in the factory. In this method, managerial supervision
is not much needed for production, since each worker assumes responsibility for his/her own
time output. Its problem is that under this system workers emphasize on quantity than quality of
the product.
2. Tailor’s differential piece rate system: This was introduced by F. W. Taylor, the father of
scientific management. In this system, there are two wage rates, a lower one for output below
standard and a higher one for above standard performance. This system aims to discourage
below average workers by providing no guaranteed hourly wage and by setting low piece-rates
for low level production, and a high rate resulting in high earnings if an efficient level of
production is attained.
3. Gantt Task and Bonus Plan: Under this system day wages are guaranteed. A high standard or
task is set. A worker who does not attain the standard is paid the guaranteed minimum wages,
but a worker who attains or exceeds the standard is paid at a high piece rate which includes a
bonus equal to 20% of the time rate or 20% of ordinary piece rate. Gantt task bonus system
therefore requires fixation of time rate, piece rate, and standard performance. This is, therefore,
a combination of time wage and piece wage system. This plan provides incentives and
opportunities to those who reach high level production. At the same time it provides security
and encouragement to less skilled workers.

C. Premium Bonus Plan:

1. The Halsey Scheme: The principle of the Halsey scheme is that the worker receives a fixed
proportion of any time which he can save by completing the job in less than the allowed time.
The most common fixed proportion is 50% but this can be varied. This plan ensures that an
employee receives time wages until he produces in less than standard time. For above
standard production, savings are shared with the employer. The cost per unit decreases when
production exceeds standard.
2. The Rowan Scheme: This scheme is similar to the Halsey plan in that a standard time is fixed
for the completion of a job and the bonus is paid in respect of the time saved. But a ceiling is
applied to the size of the bonus. The bonus hours are calculated as a proportion of the time
taken which the time saved bears to the time allowed, and is paid for at time-work rates. The
bonus may be computed as follows:
Bonus = × Time taken × time rate

PROBLEM-1: In a factory, workers are paid on a differential piece work system. The differentials
applied are 80% piece rate below standard and 120% piece rate at or above standard. From the
following particulars calculate daily earnings of the workers- A, B, and C:
Standard production: 10 units per hour.
Time rate: TK 20 per hour
Production in a day of 9 hours:
A– 75 units; B– 90 units; C– 110 units

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Solution: Standard production per hour: 10 units and time rate per hour: TK 20
Normal piece rate: = TK 2.00

Low piece rate below standard: TK 2.00× = TK 1.60

High piece rate at or above standard: TK 2.00× = TK 2.40

Standard production per day: 9×10= 90 units
A will get low piece rate while B and C will get high piece rate.
Daily earnings:
A 75 units @1.60 per unit =TK 120
B 90 units @2.40 per unit =TK 216
C 110 units @2.40 per unit =TK 264

PROBLEM-2: Form the following details calculate the total earnings of a worker and the
effective hourly rate of labor wages where bonus is paid under: (a) the Halsey (50%) scheme;
and (b) the Rowan scheme.
Basic rate of wages per hour TK36
Time allowed for the job 16 hours
Time actually taken 12 hours
Solution: Under Halsey Scheme (50% sharing):
Normal time wage: 12 hrs. @ TK 36.00 = TK 432.00
Bonus: of (time save × time rate)
= 72.00
i.e. of (4 × TK36.00)
TK504.00
Effective hourly rate = = TK 42.00

a. Rowan Plan:
Normal time wage: 12 hrs. @ TK 36.00 = TK 432.00
Bonus: (time taken × time rate)
i.e. × (12 × TK36.00) = 108.00
TK 540.00

Effective hourly rate = = TK 45.00

PROBLEM-3: A worker takes 80 hours to do a job for which the time allowed is 100 hours. His daily
rate is TK 2.50 per hour. Calculate the total manufacturing cost of the job under the following method
of payment of wages:
i. Time rate ii. Piece rate iii. Halsey plan (50% sharing) and iv. Rowan plan
Additional information:
Material cost TK 120
Factory overhead 125% of wages
Solution: Calculation of wages under different methods:
(i) Time Rate
Wages for 80 hrs (actual time taken) @ TK2.50 = TK 200
(ii) Piece Rate
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 Md. Tahidur Rahman, Associate Professor, BAIUST
Wages for 100 hrs (time allowed for the job) @ TK 2.50 = TK 250
(iii) Hasley Plan
Normal time wage: 80 hrs @ TK 2.50 = TK200
Bonus: of (time save × time rate)
= 25
i, e of (20 × TK2.50)
TK225
(iv) Rowan Plan
Normal time wage: 80 hrs @ TK 2.50 = TK200
Bonus: (time taken × time rate)
of (80 × TK2.50) = 40
TK 240
Statement of comparative total manufacturing cost
Time Piece Halsey Rowan
Rate Rate Plan Plan
Materials 120.00 120.00 120.00 120.00
Direct wages 200.00 250.00 225.00 240.00
Prime cost 320.00 370.00 345.00 360.00
Factory overhead (125% of direct wages) 250.00 312.50 281.25 300.00
570.00 682.50 626.25 660.00

PROBLEM-4: From the following particulars, you are required to work out the earnings of a
worker for a week under: (i) Straight piece rate (ii) differential piece rate (iii) Halsey premium
scheme (50% sharing) (iv) Rowan Premium scheme:
Weekly working hours 48
Hourly wage rate (TK) 18.00
Piece rate per unit (TK) 6.00
Normal time taken per piece 20 minutes
Standard output per week 120 pieces
Actual output for the week 150 pieces
Differential piece rate 80% of piece rate when output is below normal and
120% of piece rate when output above normal.

(i) Earnings under the Straight Piece Rate System

= Weekly output × Piece Rate per unit = 150 unit × TK 6.00 = TK 900

(ii) Earnings under the Differential Piece Rate System

Since the output is above standard, a high differential piece rate (120%) is applicable that is
(TK 6.00 × 120%) = TK 7.20 per piece.
Earnings = 150 unit × TK 7.20 = TK 1,080.
(iii) Earnings under the Halsey Plan (50% sharing):
Standard hours for actual production = × 150 = 60 hours.
Time saved = 60 hours - 48 hours = 12 hours
Earnings:
Normal time wage: 48 hrs @ TK 18.00 = TK 864.00
Bonus: of (time save × time rate)
= 108.00
i, e of (12 × TK18.00)

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 TK972.00
(iv) Earnings under the Rowan Plan:
Normal time wage: 48 hrs @ TK 18.00 = TK 864.00
Bonus: (time taken × time rate)
=
× (48 × TK18.00) 172.80
TK1,036.80

PROBLEM-5: Pixel Company employs its workers for a single shift of 8 hours for 25 days in a
month. The company has recently fixed the standard output for a mass production and introduced an
incentive scheme to boost output. Details of wages payable to the workers are as follows:
i. Standard output per day per worker: 40 units
ii. Basic wages: TK 2 per unit subject to a guaranteed minimum wages of TK60 per day.
iii. Dearness allowance: TK 40 per day.
iv. Incentive bonus up to 80% efficiency: Nil
v. Incentive bonus for efficiency above 80%: TK 50 for every 1% increase.
The details of performance of four workers for the month of June 2019 are as follows:
Worker No. of days worked Output (units)
A 25 820
B 18 500
C 25 910
D 24 780
Calculate the total earnings of each of the workers.

Solution: Incentive of workers:

Worker Efficiency Incentive @ TK 50 for each 1% increase
in efficiency above 80%

A ×100 = 82% TK 50 × 2 = 100

B ×100 = 69% -

C ×100 = 91% TK 50 × 11 = 550

D ×100 = 81% TK 50 × 1 = 50

Statement of total earnings of each worker

Basic Dearness Total
Days Output Wages Allowance Incentive Earnings
Worker Worked (Units) (TK) (TK) (TK) (TK)
A 25 820 1,640 1,000 100 2,740
B 18 500 1,080* 720 - 1,800
C 25 910 1,820 1,000 550 3,370
D 24 780 1,560 960 50 2,570
*Note: The worker B has been guaranteed minimum wages @ TK 60 per day, since his piece work
wage is only TK 1,000 that is (500 × TK 2).