LABOUR COSTING With Answers
LABOUR COSTING With Answers
LABOUR COSTING With Answers
Points to remember
• Production is the quantity or volume of output produced. Productivity
is a measure of the efficiency with which output has been produced. An
increase in production without an increase in productivity will not
reduce unit costs.
• Standard hour of production means the number of hours required by
one worker to produce one unit of finished good, working in the
standard way.
• Budgeted hours is the expected total time required to produce
budgeted output of product
• If an employee works for more hours than the basic daily requirement
he may be entitled to an overtime payment. Hours of overtime are
usually paid at a premium rate
• The overtime premium is the extra rate per hour which is paid, not the
whole of the payment for the overtime hours.
Points to remember
• If employees work unsocial hours, for instance overnight, they may be entitled
to a shift premium. The extra amount paid per hour, above the basic hourly
rate, is the shift premium.
• Piecework remuneration system means labour is paid on the basis of output
produced by him.
• Bonus schemes were introduced to compensate workers paid under a time-
based system for their inability to increase earnings by working more efficiently.
• A profit sharing scheme is a scheme in which employees receive a certain
proportion of their company's year-end profits.
• A share option scheme is a scheme which gives its members the right to buy
shares in the company for which they work at a set date in the future and at a
price usually determined when the scheme is set up.
• An employee share ownership plan is a scheme which acquires shares on
behalf of a number of employees, and it must distribute these shares within a
certain number of years of acquisition.
Points to remember (w.r.t
•overtime)
Janitorial wages are usually classified as overhead because they
represent an indirect cost, as do payroll costs for supervisors,
security personnel, and maintenance workers.
• Appropriate classification of idle time and overtime premiums
of production workers is less obvious. For example, if three
hours of a production worker’s time are idle (i.e., not spent on
production activities) and each hour costs $20, then $60 of idle
time cost is usually charged to overhead if management feels
that the cost is a general cost of all production.
• However, if a specific job results in idle time, such as waiting for
materials because of a product design change demanded by
the customer, then the idle time could be charged to the direct
labour costs of that job.
Points to remember (w.r.t overtime)
• Whether the customer will pay for the charge of overtime depends on
the prevailing market conditions (e.g., degree of competition) or the
details of the contract with the customer.
• Overtime premiums represent the extra hourly wage rate paid to
production workers who must work above their normal time
requirements. For example, a worker might be paid time and a half for
five overtime hours. Thus, if $20 is the base rate, the five hours will have
an overtime premium of $10 per hour × 5 hours, or $50.
• Classification of the overtime as direct labour or overhead depends on
the cause of the overtime. A job-specific reason (e.g., a rush order)
dictates a direct job cost, whereas a normal overtime cost resulting from
general conditions, such as peak production needs, dictates an overhead
(indirect) charge to all jobs completed during that peak period.
Points to remember
• Under time saving allowance, direct labour cost is referred as the
labour cost on standard hours.
• Any payment made on the spoiled units will be treated as indirect
cost except for the spoilage considered as a normal loss. (will be
discussed in process costing)
• All allowances are treated as indirect cost except overtime allowance
incurred at the special request of the customer.
• In a piecework scheme, wages are calculated by output produced by
worker for example £6 per unit
• Incremental piecework schemes offer an incentive to employees to
increase their output by paying higher rates for increased levels of
production.
• Bonus schemes were introduced to compensate workers paid under
a time-based system in order to increase earnings by working more
efficiently.
• (a) Employees are paid more for their efficiency.
• (b) The profits arising from productivity improvements are shared
between employer and employee.
• (c) Morale of employees is likely to improve since they are seen to
receive extra reward for extra effort.
A bonus scheme must satisfy certain
conditions to operate successfully
• (a) Its objectives should be clearly stated and attainable by the
employees.
• (b) The rules and conditions of the scheme should be easy to
understand.
• (c) It must win the full acceptance of everyone concerned.
• (d) It should be seen to be fair to employees and employers.
• (e) The bonus should ideally be paid soon after the extra effort has been
made by the employees.
• (f) Allowances should be made for external factors outside the
employees' control which reduce their productivity (machine
breakdowns, material shortages).
• (g) Only those employees who make the extra effort should be rewarded.
• (h) The scheme must be properly communicated to employees
• Idle time has a cost because employees will still be paid their basic
wage or salary for these unproductive hours and so there should be a
record of idle time.
Labour turnover
• Some employees will leave their job and go to work for another
company or organisation. Sometimes the reasons are unavoidable.
• Illness or accidents
• A family move away from the locality
• Marriage, pregnancy or difficulties with child care provision
• Retirement or death
• Other causes of labour turnover are to some extent controllable.
• Paying a lower wage rate than is available elsewhere
• Requiring employees to work in unsafe or highly stressful conditions
• Requiring employees to work uncongenial hours
• Poor relationships between management and staff
• Lack of opportunity for career enhancement
• Requiring employees to work in inaccessible places (eg no public transport)
• Discharging employees for misconduct, bad timekeeping or unsuitability
The costs of labour turnover
• Replacement costs
• These are the costs incurred as a result of hiring new employees; they
include the following.
• Cost of selection and placement
• Inefficiency of new labour; productivity will be lower
• Costs of training
• Loss of output due to delay in new labour becoming available
• Increased wastage and spoilage due to lack of expertise among new staff
• The possibility of more frequent accidents at work
• Cost of tool and machine breakages
• Preventative costs
• These are costs incurred in order to prevent employees leaving; they include
the following.
• Cost of personnel administration incurred in maintaining good relationships
• Cost of medical services including check-ups, nursing staff and so on
• Cost of welfare services, including sports facilities and canteen meals
• Pension schemes providing security for employees
The prevention of high labour turnover
Standard 3 hours per 9 min per unit 1 hour and 15 4 units per hour
manufacturing time unit min per unit
Wage rate of labour $10 per hour $7 per hour $8 per hour $12 per hour
Bonus rate 50% of wage 50% of wage 50% of wage 50% of wage
rate rate rate rate
Answer $425 $299.25 $330 $459
•
Overtime
• Steve is a direct labour and is allowed to work for 8 hours per day. His
wage rate is £4 per hour. Overtime premium is paid at 60% of wage
rate. In a particular day he worked 10 hours.
• Required:-
• Calculate total earnings of the employees (£44.8)
• Classify what amount should be charged to direct cost and
production overheads assuming that overtime is a regular feature of
company (DC: £40, IDC:£4.8)
Q5.
• A labour is allowed to work for 8 hours per day. His wage rate is £4
per hour. Overtime premium is paid at £2 per hour. In a particular day
he worked 11 hours out of which 2 hours were recorded as idle.
• Required:-
• Calculate total earnings of the employees (£50 for the day)
• Classify what amount should be charged to direct cost and
production overheads assuming that overtime is a regular feature of
company (DC: £36, IDC: £14)
Q6.
• A labour is currently getting £2 per unit for first 200 units, £3 per unit
for the next 200 units and then £4 per unit for any output produced
thereafter. Production is expected to be 500 units in a week
• Management is considering to change remuneration scheme to
hourly rate of £14 per hour. Labour will be allowed to work 40 basic
hours however it is expected that labour will also need 4 hours of
overtime which will be paid at time and half. Production is expected
to decrease by 10%.
• Calculate change in labour cost per unit (decrease by £1.37 per unit)
Q13.
Following data is related to total labour cost of making 1,000 units in a one week period.
Number of employees Hours per employee Wage rate (£) Total cost (£)
Basic wage 24 35 7.00 5880
Overtime 24 5 10.00 1200
Total cost 7080
Management is thinking to change remuneration scheme to piecework system where employees will be paid £6 per unit for
the first 30 units and then £7.00 per unit for any output over and above. It is expected that employees will manufacture 50
units under this system.
Calculate change in labour cost per unit (decrease by £0.68 per unit)
Q14.
• The following data is given for the labour cost of direct workers in a
department of a factory for a week:
• Production hours 450
• Training hours 20
• Idle time hours 32
• Total hours 502
• There are 12 direct labours in the department and basic working week
is of 38 hours. Overtime is worked to meet general requirement of
production, and idle time and training time are regarded as normal.
Basic wage rate is of £8 per hour and overtime is paid at time and half
• What amount will be charged to indirect labour?
• ______________. ($600)
Q19.
• A company employs 100 direct workers in the factory, who are paid a
basic rate of $5 per hour for a 35 hour week. In addition to working
their normal hours last month, each worker was asked to work
additional 5 hours overtime per week to meet general production
requirements. All overtime hours are paid at time and a half. As a
result of some faulty material, 150 hours of direct labour time were
registered as idle. What is the indirect labour cost for last month,
assuming a 4 week period?
• A $750 B $2,000
• C $5,750 D $15,750
Q20.
• The following details relate to the labour in a production cost centre for a period:
• Direct personnel Indirect personnel
• Hourly rates of pay:
• Basic $10·00 $7·00
• Overtime $13·00 $9·10
• Payroll hours:
• Productive 310 118
• Idle 18 4
• Total 328 122
• Additional information:
• 1. The basic rates of pay apply to a normal working week of 38 hours
• 2. There are eight direct personnel and three indirect personnel in the cost centre
• 3. Overtime and idle time is considered as normal
• Calculate the total amounts:
• (i) paid to the direct personnel and the indirect personnel respectively; (6 marks)
• ANSWER: Direct labour pay: $3,352, indirect labour pay: $870·80
• (ii) charged as direct cost and indirect cost (overheads) respectively (6 marks)
• ANSWER: charged as direct cost: $3,100, charged as indirect cost: $1,122·80