Chapter 3. Direct Labour and Direct Expenses – Cost Accounting

3

Direct Labour and Direct Expenses

LEARNING OBJECTIVES

After studying this chapter you should be able to:

  1. Understand the meaning of direct labour and indirect labour.

  2. Explain the terms: time-study, motion study, job analysis and job evaluation.

  3. Know the various records that are in use for recording attendance and time of workers.

  4. Account for holiday pay, idle time and overtime in cost accounts.

  5. Understand the factors associated with labour turnover.

  6. Appraise the different methods of wage payment.

  7. Understand the salient features of different incentive plans.

  8. Ascertain the wage payable to workers under different methods of wage payment.

  9. Understand the meaning of direct expenses.

  10. Know the characteristics of direct expenses

  11. Explain the meaning of certain important key terms.

Another important element of cost is “labour”. Labour may be said to be the key stone of an industrial concern. A reduction in labour cost would make any organization competitive. Till the advent of technological advancement, labour cost constituted the major portion of the total production cost. With the increase in mechanization, automation and the like, the importance of labour is not yet minimized. Indeed, mechanization also depends on highly-skilled labour. However, whatever may be the situation, the study on all related factors regarding labour has gained much importance because the productivity of all other resources depend to a greater extent on the productivity of an employee. Further, in our country, all SMEs (small- and medium-sized enterprises) are dependent upon labour alone for their entire operations. In this chapter, we are going to discuss the meaning of direct labour, accounting and controlling of the labour costs, labour turnover and all related factors on labour in detail.

3.1 MEANING AND DEFINITION OF LABOUR COST

The term “labour cost” represents wages paid to the workers employed in business organizations for producing goods or rendering services. It also represents the various payments made to an employee (worker), which are as follows:

  1. Immediate monetary benefits:
    1. Basic wages
    2. Dearness allowance (DA)
    3. Production bonus
  2. Deferred monetary benefits:
    1. Employer’s contribution to Provident Fund (PF)
    2. Employer’s contribution to Employees’ State Insurance Corporation (ESIC)
    3. Retirement benefit like gratuity
    4. Profit bonus
  3. Fringe benefits:

    Free or subsidized food, housing, transport to office, medical facilities, canteen, recreational activities and the like. Fringe benefits categorized under ‘c’ are generally treated as manufacturing overheads. The labour cost may be classified into:

    Direct labour costs and

    Indirect labour costs

3.1.1 Direct Labour Cost

Direct labour is “where employees are employed directly in making the product and their work can be readily identified in the process of conversion of raw materials into finished goods”.

The cost incurred on direct labour is known as “direct labour cost”. Direct labour is the time spent by workers in making the product. Their work can be readily identified in the process of conversion of raw materials into finished goods. All other labour is “indirect labour”. Direct labour can be easily identified and charged to a single costing unit.

3.1.2 Indirect Labour Cost

This refers to the labour expended that does not alter the construction, composition or the condition of the product. Wages which cannot be readily identifiable with a job, process or operation are called “indirect labour cost”.

Examples:

General indirect labour like inspectors, supervisors, wages for maintenance workers, idle-time wages, overtime and the like.

Indirect labour is treated as part of the factory overhead. For the purpose of cost analysis and cost control, the need arises to distinguish between direct labour cost and indirect labour cost. The distinction should be made for:

  1. Ascertaining accurate labour cost which provides a basis for proper control.
  2. Computing labour efficiency.
  3. Allocating overheads.
  4. Ascertaining total labour costs.
  5. Introducing new incentive schemes.
3.2 TIME-RECORDING

Recording of time involves two purposes, namely, “time-keeping” and “time-booking”. It is essential for any type of workers–direct, indirect, casual, hired and outworkers.

Time-keeping is necessary to:

  1. Record attendance and time.
  2. Calculate wages.

Time-booking is necessary for

  1. Cost analysis and
  2. Cost apportionment

When time-keeping and time-booking tally, record keeping will be perfect and accurate.

3.2.1 Time-Keeping

When a worker enters a factory, his attendance is recorded at the factory entrance. This function is performed by a person known as the “time-keeper” and at the place called “time-office”. The date and time of arrival are noted. This process of making the attendance of workers, the time of arrival and departure is known as “time-keeping”. The methods employed for time-keeping are clock card, check or disc.

3.2.1.1 Purposes of Time-Keeping

As already explained, the underlying purpose of keeping time-records is to provide the necessary basic data for the payroll department to compute and prepare the pay roll. Time-keeping has the following aims:

  1. Payroll purposes:

    To show the number of hours worked.

    To disclose absence or tardiness.

    To measure overtime and calculate extra pay.

    To provide evidence of compliance with legal requirements.

     

  2. Cost Purposes

    To know the quantity of work done on each job

    To know the cost of work done.

Wages paid on the piece-rate basis, for casual-labour-hired workers and the like would also require that attendance be recorded for the following reasons:

Recording of attendance is essential for ascertaining cost.

To compute overhead rates based on the labour rates.

To ensure discipline among the workers.

To avoid or reduce idle time.

To comply with the production schedule.

To calculate any financial benefits such as overtime, DA, bonus, PF, pension and the like.

To provide statistical data.

3.2.2 Time-Booking

Workers may be deputed on different operations or jobs or processes. Time spent by each worker in activities entrusted with them, is an important factor. The process of recording the time spent in a working day on various operations, jobs or processes is known as “Time-Keeping”. Job cards, piece-work tickets, time-tickets are used for marking the time-in and the time-out in each activity where a worker works.

Objectives underlying time-booking are:

To ascertain the labour cost of various products and jobs.

To evaluate the labour performance.

To ascertain the time spent on each job.

To analyse idle time.

To apportion overheads.

To determine the overhead rates of absorbing the overhead expenses as per the labour-hour and machine-hour methods.

3.3 LABOUR TIME-RECORDS

Maintenance of Labour Time-Records.

It is necessary to maintain the following records in a factory for the purpose of attendance, time spent on jobs, and the output of a worker:

3.3.1 Clock-Card

This is used for recording the date and time of entry and departure of workers. Each worker is given a clock-card. At the time of entry or departure, this card is inserted in a specific place in the time-recording clock and the date and time of entry and departure would be punched on it. Now a days, time-clocks are connected to main-frame computers. This provides input data to the computer for preparation of daily attendance reports and payroll at the end of the wage period.

 

Specimen of Clock-Card

3.3.2 Job Cards

This document is used for recording the time spent by various workers on each job. When a job is commenced, a job number is allotted to it. The job card moves along with the job. The starting date and time of each operation is entered in it. When the job is completed, the total time spent by the worker is calculated. Materials consumed for each operation is entered in the job card (on the reverse side). It is also called “labour-cost card”.

 

Specimen of Job Card

3.3.3 Time-Ticket

This is used for recording the time spent by each worker in the factory. Where workers are to be paid on the basis of time, time-ticket will be much useful.

 

Specimen of Time-Ticket

3.3.4 Piece-Work Tickets

Payments to workers may be made either on the basis of time spent in the factory or on the number of units produced. Payment on the basis of time is known as ‘time rate’ whereas payment on the basis of number of units produced is known as “piece rate”.

When piece rate is adopted, a piece-work card is necessary. It shows the number of units produced each day by a worker. At the same time, it is also necessary to maintain time-ticket also in order to (i) apportion the overheads based on the time worked on each job and (ii) when payment of bonus or premium is made on the basis of the time saved, both the time taken and number of units produced are required.

Piece-work card has to be reconciled with the payroll on a continuous basis.

 

Specimen of Piece-Work Ticket

3.3.5 The Check or Disc Method

Metal discs are used. In metal discs, a worker’s employment number is inscribed. At the factory entrance gate, these discs are placed on a board. When a worker enters the factory, he picks up his disc and leaves it in a box kept exclusively for this. When the reporting time is over, the box will be removed. Workers arriving late have to put their discs in a separate box. After half-an-hour intervals the foreman replaces the boxes with the new ones. This is done in order to deduct the wages on a uniform basis for each step of half an hour.

Reconciliation of time-paid for as per time-keeping records and time-booked:

The time recorded at the factory gates with the time booked on jobs must be reconciled. If the time shown in the clock-card exceeds the time booked on different jobs, the difference is reported as “idle time.” On the other hand, if the total time booked exceeds the time recorded on the clock card, the difference is reported as “error”. This has to be corrected.

Reconciliation serves two purposes:

  1. To exercise control over wastage of labour time and
  2. To prevent dummy workers’ inclusion in payroll.
Specimen of Idle-Time Report
3.4 ACCOUNTING OF LABOUR COST

The payments made to labour have to be properly accounted for as it constitutes a significant portion of the total cost. Sufficient care to be taken from the stage of recruitment till they leave the firms. Proper care of labour will reduce the cost of production. Hence, the labour cost has to be controlled effectively for which the following departments will assist the task. They are:

  1. Personnel department
  2. Time-keeping department
  3. Engineering and work-study department
  4. Payroll department
  5. Cost Accounting department

Before dealing with the accounting of labour cost, one has to understand that the cost incurred on workers consists of a numbers of items. These may be broadly grouped into the following three heads:

  1. Monetary benefits
  2. Non-monetary benefits (or) Fringe benefits
  3. Deferred monetary benefits (or) Terminal benefits

3.4.1 Monetary Benefits

The following items are included in this category:

  1. Basic wages: This is the basic rate of pay. It is fixed on the taking into account the employee’s position (hierarchy level) in a firm.
  2. Dearness allowance: The payment of dearness allowance (DA) is usually linked with the cost of living index. This is paid in order to compensate a rise in the cost of living. This amount is fixed on basic wages by way of certain percentage on it.
  3. House rent allowance: This is another constituent of wage. As firms could not provide house for each worker, HRA is awarded.
  4. Overtime pay: This is paid for the extra hours they worked.
  5. Profit-sharing bonus: This is a scheme of sharing profit between the employer and the employee. It is governed by the payment of Bonus Act, 1965. Minimum bonus is 8.33%. The maximum bonus is 20%.
  6. Incentive bonus: This is otherwise known as production bonus. Employees are rewarded with this type of bonus for their efficiency which exceeds the standard. This varies from firm to firm.
  7. Contribution to PF: Any organization has to contribute 10% of the worker’s pay (Basic wages + DA) to PF compulsorily. A similar amount of contribution comes from the worker. This scheme is governed by the Employees Provident Funds Act, 1952.
  8. Contributions under ESIC: It is compulsory for any organization to contribute a certain percentage of monthly wages (Basic pay + DA) of employees to Employees’ State Insurance Corporation (ESIC). This scheme is governed by the Act.
  9. Contribution of superanuation/pension fund
  10. Holiday pay
  11. Special incentives
  12. Special allowances–night shift, children’s educational allowance and so on.

3.4.2 Non-Monetary Benefits

In this category, the employer does not pay any money to its employees but extends benefits such as hospital facilities, subsidized food, subsidized or free transport and recreational facilities to employees. The employer bears the cost.

3.4.3 Deferred Monetary Benefits or Terminal Benefits

The benefits under this category are not paid each month but in future. For example, pension, gratuity, and so on.

3.4.4 Accounting of Labour Cost

Any payments made to both direct labour and indirect labour should be accounted for. For Direct labour (or direct workers), the following two different ways of accounting for labour cost are followed:

  1. Only two items as described in the previous paragraph, that is, basic wages and DA are charged to jobs or units produced by using an hourly rate while the remaining monetary benefits and the cost of non-monetary benefits are treated as an overhead. The formula for computing the rate per hour is as under:
  2. The other method involves the charging of monetary as well as the cost of non-benefits to jobs or units produced by using an hourly rate as follows:

For Indirect Labour (Indirect Workers), both the costs of monetary as well as non-monetary benefits are charged to overheads.

Illustrations

Illustration 3.1

Model: Ascertainment of labour cost

From the following particulars, you are required to prepare a statement of labour cost showing the cost per day of 8 hours:

  1. Monthly salary Rs. = 5,000.
  2. Leave salary = 10% of salary.
  3. Employer’s contribution to PF = 10% of (a) & (b).
  4. Employer’s contribution to ESI = 2% of (a) & (b).
  5. Pro-rata expenditure on amenities to labour = Rs. 20–50 per worker, per month.
  6. No. of working hours in a month = 200.

Solution

Step 1: All costs (monetary & non-monetary benefits) of items are to be added (i.e., (a) to (d)).

Step 2: The sum of costs will be the total cost.

Step 3: The sum total arrived at Step 2 is to be divided by no. of working hours (i.e., (f) 200 hrs).

Step 4: Labour cost per hour as calculated in Step 2 is to be multiplied by the no. of hours (i.e., 8) to determine the labour cost per day.

Statement of Labour Cost per month

 

Step 1: Add all the items:

Rs.

(a) Salary =

5,000

(b) Leave salary (10% of Rs. 5,000) =

500

(c) Employer’s contribution to PF – 10% on (a) + (b) i.e., 10% of (Rs. 5000 + Rs. 500) =

550

(d) Employer’s contribution to ESI – 2% on (a) and (b) i.e., 2% (Rs. 5,000 + Rs. 500) =

110

(e) Pro-rate expenses on the amenities to labour =

    20.50

Step 2: Total labour for the month (200 hrs) (Add Step 1 (a) to (e)) =

6,180.50

Step 3: Labour cost per hour (Step 2 ÷ 200 hours Rs. 6,180 – 50 ÷ 200) =

30.90

Step 4: Labour cost per day for 8 hrs: 8 hrs × Rs. 30.90 (as in Step3) =

247.20.

Illustration 3.2

Model: Labour cost to employer

  1. Monthly salary (Basic wages) = Rs. 6,000.
  2. DA = 10% of (a).
  3. Leave salary payable to workman = 15% of (a) and (b).
  4. Employee’s contribution to PF = 8% of (a) and (b).
  5. Employer’s contribution to ESI = 5% of (a) & (b).
  6. Employee’s contribution to ESI – same as (e).
  7. Pro-rata expenditure on amenities to labour = Rs. 50 per head per month.
  8. No. of working hours in a month = 200 hours.

From the above data, prepare a statement showing the cost per day of 8 hours of engaging a particular type of labour.

Solution

Labour cost per day to the employer is to be calculated.

Important Note

Employee’s contribution to PF or ESIC should not be taken into account for computation of labour cost.

Step 1: Basic calculation to be done:

In this problem, the calculation of working days in a month is to be calculated as under:

No. of working hours in a month (given in the problem) = 200 hours.

Working hours per day (given) = 8 hours.

Working days in a month (i) ÷ (ii) (200 ÷ 8 hrs) = 25 days.

Step 2: Preparation of statement of labour cost

Particulars Rs. Paise

(i) Step (a) Basic wages per day: .


240

    Step (b) DA: per month: per day: Rs.10% of 6,000 .


24

    Step (c) Leave salary: (15% of 240+24) (15% of 6,000+600÷25).

39
60

    Step (d) Employer’s contribution to ESIC: (5% of 6,000+600÷25).

13
20

    Step (e) Amenities to labour: (Rs. 50÷25days).

2
00

(ii) Add I (a) to (e): Cost per man day

318
80

Illustration 3.3

Model: Cash needed for wage payment

From the following particulars, find the amount required for cash payment of wages in a factory for a particular month:

  Rs.

Wages for normal hours worked

3,00,000

Wages for overtime worked

10,000

Leave wages

8,000

Deduction for ESI

6,000

Employee’s contribution to PF

30,000

House rent to be recovered from 50 employees at Rs.100 per month. Employer also contributes an equal amount towards PF and ESIC.

Solution

Important Note

Employee’s contribution to PF and ESIC should not be taken into account while computing wages. First, the gross wages payable is determined. Then, from this, the employee’s contribution to PF, ESI and HRA to be recovered are to be deducted because such expenditure is not needed now by the management. That is, there is no actual disbursement.

The statement showing wages payable in cash is as follows:

Particulars Rs. Rs.

Step 1: (ADD:)

 

 

    Wages for normal working hours

 

3,00,000

    Wages for overtime worked

 

10,000

    Leave wages

 

8,000

Step 2: Gross wages payable

 

3,18,000

    (Add : Step (i) to (iii))

 

 

Step 3: (Deductions:)

 

 

    Employee’s contribution to ESIC

6,000

 

    Employee’s contribution to PF

30,000

 

    House rent to be recovered from 50 employees @ Rs.100 p.m.

5,000

41,000

Step 4: Amount required for cash payment of wages for a particular month Step 2 – Step (i + ii + iii)

2,77,000

Illustration 3.4

Model: Computation of normal and overtime wages

Calculate the normal wages and overtime wages payable to a workman from the following data:

Days Hours Worked

Monday

12

Tuesday

10

Wednesday

10

Thursday

9

Friday

8

Saturday

4

 

53

Normal working hours: 8 hours per day.

On Saturday: 4 hours per day.

Normal rate: Rs. 2 per hour.

Overtime rate: Up to 9 hours in a day at single rate and over 9 hours a day at double rate

(or)

Up to 48 hours in a week at single rate and over 48 hours at double rate whichever is more beneficial to the workers.

 

[Madras University B.Com (modified)]

Solution

Following steps are to be followed:

  1. Normal working hours.
  2. Overtime working hours at single rate.
  3. Overtime working hours at double rate have to be determined for each day and for the week as well.

Next, computation of total wages to be made:

  1. On day’s work basis.
  2. On week’s work basis.

STAGE I: Preparation of statement showing normal and overtime hours and wages

Out of 53 hours worked in a week:

44 hours are normal working hours

4 hours are overtime at single rate

5 hours are overtime at double rate

STAGE II: Computation of total wages on a day’s work basis

 

 

Rs.

Step 1: Wages for normal working hours – (44 hours × Rs. 2) –

88

Step 2: Wages for overtime wages:

 

    (i) At single rate: 4 hrs × Rs. 2:

8

    (ii) At Double rate: 5 hrs × Rs. 4:

20

Step 3: Total Wages (Add 1 and 2 (i) & (ii))

116

STAGE III: Computation of total wages on a week’s work basis.

 

Step 1: Normal rare wages (44 + 4 hours) 48 hours × Rs. 2 =

96

Step 2: Overtime wages: 5 hours × Rs. 4 =

20

Step 3: Total wages (Add 1 and 2)

116

Step 4:

 

Decision: Total wages under both the approaches are same, that is, Rs. 116.

Hence, both methods are equally beneficial to the worker.

Illustration 3.5

Model: Allocation of wages

Rajeev, a worker in a manufacturing unit, is paid at the rate of Rs. 20 per hour. His working hours constitute 48 hours over 6 days a week. Time allowed per day as approved absence for personal needs and so on is 20 minutes.

Rajeev’s card for the week ended in a particular month shows that his time during the week is chargeable as follows:

Job No. X: 25 hours

Job No. Y: 15 hours

Job No. Z: 3 hours

The time unaccounted for is due to a power failure. You are required to show Rajeev’s wages for the week and how they would be dealt with in Cost Accounts?

Solution

STAGE I: Basic calculations:

Step 1: Computation of normal idle time:

Normal idle time: 6 days × 20 minutes each day

                    = 120 minutes

                    = 2 hours.

Step 2: Computation of abnormal idle time:

 

Abnormal idle time

=

Working hours in a week – Hours actually spent

 

=

48 hours – (X: 25 hrs + Y: 15 hrs + Z: 3 hrs + 2 hrs (normal idle time)

 

=

48 hrs – 45 hrs

 

=

3 hrs.

Step 3: Normal idle-time (i.e., wages for approved absence) wages to be recovered as factory overhead:

Step 4: Abnormal idle time wages have to be treated as abnormal loss and charged to costing P&L A/c:

Wages for abnormal idle time:

STAGE II: Preparation of a statement showing allocation of worker’s wages

Illustration 3.6

Model: Worker’s earnings – Labour cost and its allocation to jobs

Calculate the earnings of worker P and Q for a month and allocate the earnings of each to job X, Y and Z.

  P Q

(i) Basic wages

Rs. 400
600

(ii) DA

50%
50%

(iii) PF (on basic wages)

10%
10%

(iv) ESI (on basic wages)

2%
2%

(v) Overtime

10 hrs

(vi) Idle time and leave

16 hrs

The normal working hours for the month are 200 hrs. Overtime is paid at double the normal rate of wages plus DA. Employer’s contribution to ESIC and PF are at equal rate with an employee’s contribution. The month contains 25 working days and one paid holiday. Two workers were employed on Jobs X, Y and Z in the following proportions:

Overtime was done on Job Y.

 

[C.A. – (Inter) Modified]

Solution

STAGE I: Statement showing wages to be prepared:

Statement showing wages of workers P and Q


Particulars
Workers
P Rs. Q Rs.

Step 1: Basic wages

400

600

Step 2: DA (50% of basic)

200

300

Step 3: Overtime:


90


Step 4: Gross wages (1 + 2 + 3)

690

900

Step 5: Deductions: (i) Employee’s contribution to PF is10% on basic wages
(ii) Employee’s ESI contribution is 2%

Step 6: Net Wages Payable

642

828

STAGE II: Computation of labour cost of workers

Particulars P Rs. Q Rs.

Step 1: Gross wages (Excluding overtime)

600

900

Step 2: Employee’s contribution to PF is 10% on basic wages

40

60

Step 3: Employee’s contribution to ESIC is 2%

8

12

Step 4: Labour cost to employer (Add 1+ 2 + 3)

648

972

Step 5: Normal working hours pm

200

200

Step 6: Labour cost per hour (Step 4 ÷ Step 5)

Rs. 3.24

Rs. 4.86

STAGE III: A statement showing allocation of labour cost to jobs

3.5 TYPES OF WORKERS

3.5.1 Casual Workers

These type of workers are employed in the place of workers who are absent. To cope up with the production, some big firms employ such labour on a temporary basis. Usually, casual workers are employed by the personnel department who maintains a panel of casual workers. These workers should follow the same procedure that is adopted for regular workers. But their names are not entered in the pay roll of the firm. They are paid preferably on a daily basis. They are not entitled to any other benefit.

3.5.2 Outworkers

These workers perform work in their own premises. They use their own tools and implements. Payment is based on the work done. No other formalities are observed for them, that is, no system of time-keeping, time-booking and so on. They are not entered in the payroll of the firm. However, materials are issued from stores to such workers, for which a proper maintenance of records by the firms is essential.

3.5.3 Hired Workers

Firms hire workers through contractors. Proper time-keeping records are maintained for them, for those engaged in the production directly. The firms make payment to the contractors, who, in turn, pay wages to the hired workers. To avoid overbilling by the contractors, the contractors’ bills are subject to verification by the firm and spot checking is usually carried out.

3.6 WORK STUDY

Meaning of Work Study

Work study is the study of work, namely human work. It consists of work measurement and method study. It is a technique for the improvement of productivity, where productivity is the relationship between output and input—usually expressed in quantitative terms. The end result of productivity improvement is lower unit cost.

Work study involves a systematic analysis of human work and the work of machines.

Objectives of work study are as follows:

  1. The most effective use of human (resources) effort.
  2. The most effective use of plant and equipment.
  3. The evaluation of human work.

Work study involves:

  1. Motion study
  2. Time study
  3. Method study

3.6.1 Motion Study

To quote Benjamin W. Niebel, “Motion study is the study of body motions used in performing an operation, with the thought of improving the operation, by eliminating unnecessary motions and simplifying necessary motions and then establishing the most favourable motion sequence for maximum efficiency”.

3.6.1.1 Advantages

  1. It enables the operations to be scientifically planned.
  2. It facilitates working in a faster and improved manner.
  3. It leads to an increase in production.
  4. It results in reduction in costs.
  5. It helps in improving the arrangement of work place; tools, implements and plans; and proper distribution of work among the employees.

3.6.1.2 Disadvantages

  1. It is a costly exercise.
  2. To enforce motions in performing an operation is very difficult as it varies from worker to worker.
  3. It takes a lot of time to set right the motions as per the desired expectations.
  4. It creates distrust and frustration among workers.
  5. Each worker’s skill is curtailed under this study.
  6. Workers are deprived of freedom.

3.6.2 Time Study

According to Benjamin W. Niebel, “Time study involves the technique of establishing an allowed time standard to perform a given task, based upon measurement of the work content of the prescribed method, with due allowance for fatigue and for personal and unavoidable delay”.

Time study determines

  1. the standard time
  2. needed by an average work
  3. working under normal conditions
  4. to carry out a given task.

3.6.2.1 Advantages

  1. It facilitates the calculation of the cost of production.
  2. It helps to implement an incentive wage-payment scheme.
  3. It facilitates budgeting, manning and production scheduling.
  4. Quotas can be fixed for hourly-rated workers.
  5. Standard labour cost can be easily established.

3.6.2.2 Disadvantages

  1. It cannot be used for non-repetitive jobs.
  2. Quality is sacrificed at the cost of quantity.
  3. Splitting-up of a task into different elements is a complex process.
  4. Subjective elements dominate the scheme.
  5. Its mathematical accuracy is not to be relied upon.

The following are the important steps involved in time and motion study:

Step 1 → Split the task into its elements.

Step 2 → Consult the basic time which has been previously set in respect of each element.

Step 3 → Conduct time and motion study where element-wise basic time does not exist.

Step 4 → A relaxation allowance is made at a certain percentage and added to the basic times, either individually or in totality. (This gives the work content of a job.)

Step 5 → Collect the technical data and values of human work, and then analyse and calculate the standard time for the task.

3.6.3 Method Study

Method study is the systematic recording, analysing and examining the methods and movements involved in the performance of a task. Its aim is to improve efficiency in performing the task by getting rid of the unnecessary work, avoidable delays and other forms of waste.

Steps involved in method study are as follows:

Step 1 → Definition of area of study

Step 2 → Collection of information

Step 3 → Alternative methods—Consideration

Step 4 → Choosing best alternatives—Decision

Step 5 → Getting feedback and monitoring the progress

3.7 JOB EVALUATION AND MERIT RATING

An organization requires people of different skills, grades, educational qualifications and experience to work in various levels. Due to these factors, the remuneration also has to vary from one level to another. Job evaluation is one of the solutions to this problem. But job analysis has to be carried out before job evaluation. Job analysis involves a proper appraisal of all jobs in an organization. Job analysis has been defined as,

“Job analysis is the process of determining, by observations and study, and reporting pertinent information relating to the nature of a specific job. It is the determination of the tasks which comprise the job and the skills, knowledge, abilities and responsibilities required of the workers for successful performance and which differentiates the job from all others”.

Obtaining detailed information from job analysis, job evaluation is carried out.

3.7.1 Job Evaluation

Job evaluation is a technique that equitably measures the relative worth of a job in a firm. It ranks jobs in a formal manner, measures the worth of a job and determines the remuneration that is suitable for each job. Using this technique, a wage structure is framed. This technique is used for determining the relative worth of a job.

One of the requirements of job evaluation is that a written description of the work operations in each job has to be done in a detailed manner.

3.7.2 Methods of Job Evaluation

3.7.2.1 Factor-Comparison Method

There are a number of factors involved in each job. Some important factors are: (1) Skill; (2) Working conditions; (3) Responsibility; (4) Mental requirements; and (5) Physical requirements. Using this method, selection of few key jobs is done and a rating scale is made on the basis of evaluating and ranking of these jobs in accordance with these factors.

3.7.2.2 Ranking Method

Under this method, job descriptions and specifications are recorded. Different jobs are compared after considering the educational requirements, skills, and so on. Jobs are ranked by comparing the said job with the same components of another job and placed in the ranked scale of jobs. It results in an arrangement of jobs in an hierarchical manner.

3.7.2.3 Paint-Rating Method

Splitting up of a job into various component factors like experience, physical requirements, skill and so on is the method. Points are allotted based on the relative weightage of these factors. Based on the points scored, the jobs are ranked. Finally, they are placed in a number of pre-determined grades. The relative worth of various jobs is determined by the comparison of point values. These point values are used for the fixation of scales of pay for each grade.

3.7.2.4 Classification Method (or) Grading Method

This is an improvement over the ranking method. Under this method, each grade has to be properly described. Based on the skill, educational qualifications, experience, type of work, responsibilities and so on, grades are fixed in advance. After establishing grades, a study is made for each job.

3.7.2.5 Merit Rating

This is a technique used for determining each worker’s fair wages on the basis of his ability and performance. An employee is evaluated individually using factors such as skill, intelligence, discipline, integrity, responsibilities, personality, sense of judgement and so on.

Merit rating may be defined “as the systematic process of performance of an employee on the job in terms of job requirements”. The main object of merit rating is to rate the performance of an employee, for promotion, award of merit and so on.

This method of evaluation is carried on a systematic basis. The performance of an individual is assessed on the job on the basis of requirements of each job.

3.7.2.6 Differences Between Job Evaluation and Merit Rating

Basis of Distinction Job Evaluation Merit Rating

1. Objective

To set up a rational wage and salary structure.

To provide a scientific basis for determining fair wages for each worker.

2. Rating

It rates the jobs.

It rates the employees.

3. Assessment

It is the assessment of the relative worth of jobs.

It is the assessment of the relative worth of a man behind the jobs.

4. Underlying purpose

It simplifies the wage administration by evolving uniformity in the wages.

It determines the fair rate of pay to the workers based on their ability & performance

3.8 LABOUR REMUNERATION

3.8.1 Principles of Labour Remuneration

Remuneration has been defined as the reward for labour and services rendered. All business organizations should have a proper method of remuneration for their employees. The management’s aim should be to achieve high productivity. So, it has to devise a method of remuneration in such a way that it promotes goodwill and satisfaction among the labourers and at the same time, increasing the efficiency, economy, and productivity of firms too.

The principles underlying the selection of a remuneration method are:

  1. The method has to ensure that fair wages are paid for a fair day’s work.
  2. It should be simple to understand and easy to practice.
  3. The workers should accept the method.
  4. It should be comparable with the wages adopted in other similar industries, in a particular geographical area.
  5. It should guarantee a minimum standard wage.
  6. The wages should have a direct relationship with their output.
  7. The skill and effort of the worker have to be duly recognized while devising a wage system.
  8. It should minimize labour turnover.
  9. It should be flexible to adapt itself to changes in skills, job content, method and technology.
  10. The quality of product is to be considered.
  11. The method should discourage absenteeism among workers.
  12. It should motivate the workers.
  13. The method should have inbuilt incentives.
  14. The administration of the method should be capable of being carried out with ease and economy.
  15. Last but not the least, a mutual trust and goodwill should be established between the employer and the employees.

3.8.2 Methods of Remuneration

3.8.2.1 Straight Piece-Rate Method

This method rewards employees based on their output. This method is based on the principle “payment by results”. This is a method of paying wages which depends on the output or units produced by the worker. A fixed rate of wage is paid for each unit produced or number of operations completed or the job completed. Time taken to complete the work is immaterial, under this method.

The wage is calculated as under:

      Wage = Number of units produced × Rate per unit.

There is generally a guaranteed hourly rates for workers who will not be able to attain the standard. It is necessary to pay minimum “day wages” in compliance with the statutory provisions of the Minimum Wages Act, 1948. This method of remuneration is suitable in the following cases:

  1. Where the production is of a repetitive nature.
  2. Where the quantity of output does not require any specialized skill.
  3. Where there is flow of work without any interruption.
  4. Where the price rate can be fixed easily.

ADVANTAGES:

  1. It promotes efficiency among workers.
  2. It reduces costs.
  3. Idle time is controlled.
  4. It leads to higher production.
  5. A fall in labour cost until the standard is reached.
  6. It reduces the need and the cost of supervision.
  7. As the cost per unit is known in advance, quotations can be made on a competitive basis.

DISADVANTAGES:

  1. This method may result in higher scrap, spoilage and waste because workers are interested in producing more units.
  2. Stricter quality control is needed to maintain the required quality of the product.
  3. Machineries may get the stage of obsolescence soon because of workers’ carelessness in handling them to maximize the output.
  4. Workforce will suffer in case of power failure, breakdown of machine, and so on.
  5. Determination of piece rate is not easy in practice.

3.8.2.2 Flat Time-Rate Method

This method is used on the basis of the attendance of workers. A fixed rate of wage is paid hourly or daily or weekly on the basis of time spent on the shop floor (in production).

Under this method, the wage is calculated as follows:

      Wage = Hourly rate × No. of hours (spent)

                                (or)

      Daily wage rate × No. of days.

This method is suitable in the following cases:

  1. Where individual skills of workers are involved.
  2. Where quality of work is the main criterion.
  3. Where work is non-repetitive in nature.
  4. Where the output of a worker cannot be measured and not under his control.
  5. Where the work can be closely monitored.

ADVANTAGES:

  1. As the workers are not in a hurry to produce more number of units, scrap and spoilage, defectives may be minimized to a great extent.
  2. Output confirms to the firm’s specified standards of quality.
  3. Quality inspection costs are minimized.
  4. Interests of workers are safeguarded in case of breakdown of machinery, power cut, and so on.
  5. As all workers are paid alike, labour unions welcome this method.

DISADVANTAGES:

  1. It is not easy to set standards for labour.
  2. Labour cost may increase.
  3. There will be a decrease in the productivity.
  4. This cannot be used for a quotation purpose.
  5. It induces more idle time.
  6. Finally, it may result in inefficiency.

3.8.2.3 Incentive Wage Plans

The motivation, the productivity and the satisfaction of workers are dependent upon the reward system. The incentive plans provide the needed reward to the workers directly in proportion to the work done. This reward induces him to earn more by producing more. Higher production reduces the unit cost of production. Incentive wage plans (incentive schemes) may be classified as follows:

  1. Direct financial plans.
  2. Indirect financial plans.
  3. Other than financial plans.

Pre-Requisites of a Sound Incentive Scheme: A good incentive scheme should fulfil the following requirements:

  1. Easy to understand: The scheme should be understood by the workers easily. They themselves should calculate their earnings.
  2. Motivation: The scheme should be so devised that it can motivate their workers to raise production.
  3. Savings in production cost: The plan should result in savings in the cost of production.
  4. Less supervision: It should be made in such a way that it can result in minimum supervision.
  5. Reward for good production: The scheme should discourage spoilage and defective work and reward good production.
  6. Comply with statutory guidelines: It should guarantee the minimum days’ wages as per the Minimum Wages Act.
  7. Time lag: The time lag between the effort and the reward should be kept a minimum.
  8. Inexpensive: The scheme should be administered with minimum expense.
  9. Labour turnover: The scheme should be so attractive that workers remain in the organization for a longer period.
  10. Equal opportunity: All workers should be provided equal opportunity to earn more. There should be no room for any nested interest
  11. Uniformity: The scheme should be devised in such a way that there should be uniformity of reward for the same amount of effort.
  12. Complementary to other control systems: The plan should facilitate the other control systems such as budgetary control and standard cost systems.
  13. Continuity and permanency: This should be based on a permanent basis and continued for a long period.
  14. Flexibility: It should be so flexible that it can accommodate any changes in future.
  15. Coverage: Indirect workers also should be covered under this scheme.

ADVANTAGES:

  1. Reduction in cost per unit: Increase in productivity will result in reduction in cost per unit.
  2. Increase in productivity: Because of incentive schemes, the work force may try to boost up production.
  3. Estimation of labour cost: Labour cost can be estimated in advance which facilitates the control of labour cost.
  4. Utilization of resources: There will be a maximum utilization of resources.
  5. Supervision: Less supervision is required.

DISADVANTAGES:

  1. Clerical work: More calculations are needed and clerks would be overburdened with such work.
  2. Deterioration of quality: By aiming an increased output, quality may not be maintained.
  3. Discontent among workers: As the rates are not uniform, it creates unrest and discontent among the workforce.
  4. Disparity among the workers: Even semi-skilled workers may earn more than the skilled labourers.
  5. Rate cutting: There may be apprehensions regarding rate cutting.

3.8.2.4 Differential Piece Rate

Under differential piece-rate method, more than one piece rate is determined. This method rewards workers on the basis of the output. Standards are set for each job. There are two piece rates. One is in respect of an average worker and another for an efficient worker. Efficient and inefficient workers are distinguished. There are many differential price-rate methods in vogue. Some are discussed as follows:

3.8.3 Taylor’s Differential Piece-Rate Method

F.W. Taylor invented this scheme. Under this method, the standard output is determined on the basis of time and motion studies. No minimum wage is guaranteed. There is a wide gap between the higher piece rate and lower piece rate. Generous reward is given to workers who produce in excess of standard. Whereas, the workers who were unable to attain the standard set are penalized.

Time factor may also be taken into account. The efficiency of the worker is determined either (1) by comparing the standard time and the actually taken time or (2) by comparing the actual output and the standard output.

ADVANTAGE: Workers are motivated to increase production.

DISADVANTAGE: Calculations are complicated.

How this method operates?

  1. The lower rate is based on 83% of the day-wage rate.
  2. The higher rate is based on 175% of the day rate + an incentive of the 50% of the day rate.

Wages are determined by applying the above criteria.

Illustration 3.7

The wage rate is Rs. 0.80 per unit. You are required to determine: (i) the low piece rate and (ii) the high piece rate by using Taylor’s differential piece-rate method.

Solution

  1. The low piece rate is based on 83% of the day wage rate.

    ∴ Low piece rate = 83% × 0.80 (day wage rate: given)

                              = Re. 0.664 per unit.

  2. High piece rate = 175% of day rate + 50% of day rate

                          = 175% × 0.80 + 50% × 0.80

                          = Rs. 1.40 + 0.40

                          = Rs. 1.80 per unit

3.8.4 Merrick’s Differential Rate Scheme (or) Multiple Piece-Rate System

This is a modification of Taylor’s scheme. Three gradual rates are determined instead of two levels in Taylor’s method. This method does not guarantee time rate. Each worker is paid according to his efficiency.

Efficiency level   Piece rate

Up to 83% → Normal rate

83% to 100% → 110% of normal rate

Above 100% → 120% of normal rate

The worker who has performed below standard will not be penalized.

Illustration 3.8

Three workers A, B and C work in a factory. The following particulars apply to them:

 

    Normal rate per hour

= Re. 0.90.

    Piece rate

= Re. 0.60 per unit.

    Standard

= 4 units per hour.

In a 40-hour week, the production of workers is as follows:

A: 100 units

B: 160 units

C: 240 units

You are required to calculate earning of workers as follows:

  1. Taylor’s differential piece-rate system
  2. Merrick’s differential piece-rate system.

Solution

First, efficiency in terms of percentage is calculated for each worker as follows:

STAGE I: This may be computed in the following method.

Standard time (hours) is taken as a base

Standard: 4 units per hour

For Worker A: 100 units produced.

Time taken to produce hours (for 100 units).

For Worker hours (to produce 160 units).

For Worker hours (to produce 200 units).

Normal working hours = 40 hours/week (given).

A’s efficiency

B’s efficiency .

C’s efficiency .

On the basis of efficiency level, piece rate is to be determined for these two methods.

STAGE II:

I: Taylor’s System:

Under this system,

Step (i) Low piece rate = 83% of 0.60 = 0.50 (approx.)

Step (ii) High piece rate = 175% of 0.60 = 1.05.

Step (iii) For Worker A:

Output is 100 units – Efficiency is 62.5% – Hence, wages are to be calculated under low piece rate, that is, 0.50/unit.

∴ Wages = 100 units × 0.50 = Rs. 50.

Step (iv) For Worker B:

Output is 160 units – Efficiency is 100% – Hence, wages @ Rs. 1.05 is to be calculated.

∴ Wages = 160 units × Re. 1.05 = Rs. 168.

Step (v) For Worker C:

Output is 240 units - Efficiency is 150% - Hence, wages @ Rs. 1.05/unit is to be calculated.

∴ Wages = 240 units × Rs. 1.05 = Rs. 252.

STAGE II:

Merrick System:

Under this system, wages are calculated as follows:

 

Step 1

Efficiency level

Piece rate

 

Up to 83%

Normal rate: 0.60/unit

 

83% to 100%

110% of normal rate: 110% of 0.60 = 0.66.

 

Above 100%

120% of normal rate: 120% of 0.60 = 0.72.

Step 2 Wages for Worker A (efficiency 62.5%): 100 units × Normal rate = 100 × 0.60 = Rs. 60.

 

= 100 × 0.60 = Rs. 60.

Step 3 Wages for Worker B (efficiency 100%): 160 units × 110% of Normal rate = 160 × 0.66 = Rs. 105.60.

 

= 160 × 0.66 = Rs. 105.60.

Step 4 Wages for Worker C (efficiency 150%): 240 units × 120% of Normal rate = 240 × 0.72 = Rs. 172.80.

 

= 240 × 0.72 = Rs. 172.80.

3.8.5 Gantt’s Task and Bonus Plan

Under this method, time wages are guaranteed to every worker. Standards are set. Bonus is allowed up to 20% at 100% efficiency. (Standard Time → 100% efficiency). If a worker takes the standard time to perform the task, he is given wages for standard time and bonus of 20% on wages earned. If the worker completes the task in less than the standard time, he is given wages for the actual output and a bonus of 20% of the wages for standard time.

Illustration 3.9

You are required to compute the earnings of workers and labour cost per unit under Gantt Task Bonus Wage System from the following data:

Standard output – 20 units per hour

No. of hours in day – 8

Time rate – Rs. 10 per hour

Output of workers:

    X – 120 units

    Y – 180 units

    Z – 220 units

Standard output per day – 160 units

Solution

First wage rate per unit (piece) is to be calculated.

Standard output         = 20 units/hour

Time rate                   = Rs. 10/hour

*1∴ Wage rate per unit =

As per Gantt’s Task Bonus Plan,

 

*2Higher wage rate

=

(Lower) Standard rate + 20% Bonus

 

=

Re. 0.50 + 20% of 0.50 = Re. 0.60.

Higher wage rate is allowed if the worker’s output exceeds the standard output, that is, 160 units.

Answers are shown in the following table:

Statement showing wages earned by the workers and the unit cost

Important Note

  1. Till the productivity reaches the standard level, the labour cost per unit would be less.
  2. Thereafter, the labour cost per unit will remain constant. (Now, refer the table and compare the results there of.)

3.8.6 Baum’s Differential Scheme (or) Milwakee Scheme

This method is a combination of Taylor’s differential piece-rate system and Halsey plan, where as time rate is guaranteed under Halsey plan alone. This system provides incentives at different levels of efficiency.

3.9 PREMIUM BONUS PLANS

Generally, under a piece-rate system, it is the workers who gain or lose. But under the time-rate system, the employer will be benefited by the gains of efficient workers and the losses of inefficient workers.

Under the Premium Bonus Plans, the gains will be shared by the employer and the employees in agreed proportions. In addition to the minimum guaranteed wages, the efficient workers are rewarded bonus which is related to the time saved. Some of the important premium bonus plans are discussed as follows:

3.9.1 Emerson’s Efficiency System (or) Empiric System

Main features of the system are as follows:

  1. Minimum day wages are guaranteed.
  2. Efficiency is rewarded by way of bonus
  3. A standard time is set for each job or operation. Or sometimes, the volume of output is taken as the standard.
  4. Standard is set on the time and motion study.
  5. Level of efficiency and piece rate is determined as follows:

     

    Levels of efficiency

     

    Piece rate

    Up to



    Guaranteed time rate

    From 66⅔% to 90%

    Time rate + 10% as Bonus

    From 90% to 100%

    Time rate + 20% as Bonus

    Above 100%

    Time rate + 20% as Bonus + Additional bonus of 1% for every increase of 1% beyond 100% efficiency.

     

  6. Efficiency for this purpose is to be calculated as follows:
  1. On Time basis:
  2. On Production basis:

ADVANTAGES:

  1. Under this plan, slow workers are encouraged and an account of this slow work is avoided.
  2. ‘Payment by results’ principle dominates the scheme.
  3. Work is done at a uniform rate.

DISADVANTAGES: Incentive allowed beyond the standard is not encouraging the efficient workers.

Illustration 3.10

From the following information, you are required to calculate the bonus and earnings under Emerson’s efficiency bonus plan:

Standard output in 10 hours: 50 units.

Actual output in 10 hours: 40 units.

Time rate: Re. 0.80 per hour.

If the actual output is 60 units, what will be the amount of bonus and earnings?

Solution

Step 1 → The formula to compute earnings under Emerson’s plan = Earnings = T×R + P (T× R).

Step 2 → Bonus under this scheme varies as follows:

  1. Up to efficiency – Time wages only.
  2. From to 100% – A bonus increasing from 0.01% to 20% above the basic wages on 100% 3 efficiency.
  3. Above 100% – A bonus of 20% above basic wages + 1% for each 1% increase in efficiency.

Step 3 → Efficiency is to be computed.


Efficiency (on the basis of output)

 

Illustration 3.11

ABC Ltd is engaged in the manufacture of a particular product. The guaranteed daily wage rate is Rs. 12. The standard output fixed for the month is 600 units which represents 100% efficiency. Workers whose efficiency is below will not be paid any bonus. Bonus is payable in a graded scale after this level of efficiency as follows:

 

Efficiency
Bonus
90%
10%
100%
20%

There are two workers X and Y who have worked for 25 days in a month, and their output is 360 units and 600 units, respectively. You are required to compute the earnings of workers under Emerson’s plan.

Solution

  Worker X Worker Y


Step 1 → Efficiency

Step 2 → Earnings

 

Bonus has to be computed

 

No Bonus 25 days × Rs. 12 =Rs. 300

 

 

= 300+60=360


Step 3 → Labour Cost/unit:

Result: Labour cost per unit falls from Re. 0.833 to Re 0.60 per unit, as the productivity increases from 360 units to 600 units.

3.9.2 Bedauxe Scheme or Points Scheme

This system requires a very accurate time study and work study. Time wages are guaranteed. Under this scheme, each minute of standard time is called the Bedauxe Point or “B”. Each operation to be performed can be expressed as being so many B’s and the payment is made on the basis of number of B’s. Standing in the credit of the workers, to put in other words, ‘B’ means a standard work performed in a standard minute. One ‘B’ unit represents the amount of work—an average worker will do under normal level. Bonus is rewarded at 75% of B’s saved.

If the bonus is given to the extent of the value of the entire time saved, then this plan is known as 100% Bedauxe plan. If nothing is mentioned, it is 75% known as 75% Bedauxe plan.

ADVANTAGES:

  1. A healthy competition motivates higher productivity.
  2. It serves as a tool of managerial control.

DISADVANTAGES:

  1. Material costs cannot be controlled.
  2. Increase in cost due to additional clerical work.

Illustration 3.12

The following are the particulars with respect to a job. You are required to calculate bonus and earnings under Bedaux Point Premium System.

Allowed time for the job: 720 B’s

Time taken: 600 B’s

Rate – Re 0.90 per hour.

Solution

  1. Formula:

     

    T: Time Taken:


    =


    10hr

                      R: Rate

    =

    0.90/hr

            P = 720 − 600

    =

    120 B−s.

    Substituting the values in the formula we get,

  2. When 100% scheme is operated:


    Earnings


    =

     


    =

    10 × 0.90 + × 0.90

     

    =

    Rs. 9 + 1.80

     

    =

    Rs. 10.80.

3.9.3 Barth Scheme

Under this scheme, the day wages are not guaranteed. Wages are calculated by the formula:

ADVANTAGE:

This scheme is suitable for less-efficient people.

DISADVANTAGE:

Efficiency is not encouraged.

Illustration 3.13

Hourly rate = Rs. 3.

Time allowed for a job = 10 hours.

Actual time taken by a worker:

             A – 8 hours

             B – 10 hours

             C – 12 hours

You are required to calculate the wages of workers under Barth Premium Scheme and ascertain the labour cost per hour.

Solution

Substituting the values, we get the earnings for different workers, which is tabulated as follows:

 

Statement Showing Earnings Under Barth Scheme

Labour cost per hour is calculated as follows:

 

    Total wages paid

= Rs. 89.69.

    Total number of hours worked

= 30.


    Labour cost per hour

 

= Rs.2.989.

3.9.4 Halsey Scheme

Main features are as follows:

  1. Standard time is fixed for each job.
  2. Time rate is guaranteed and, hence, the worker will receive the guaranteed wages and it is immaterial whether he completes the work within the time allowed or not.
  3. In case, if a job is completed within the time allowed, such worker will be paid a bonus of 50% of the time saved.

    Earnings = Time taken × Hourly rate + of Time saved × Hourly rate

ADVANTAGES:

  1. Since day wages are guaranteed, the interests of workers are safeguarded.
  2. It is easy to operate.

DISADVANTAGES:

  1. 50% of bonus is shared by the employer.
  2. Quantum of incentive offered is insufficient.

Illustration 3.14

 

  Normal hour rate

: Rs. 5.

  Time allowed for a job

: 8 hours.

  Time taken

: 6 hours.

You are required to compute the total earnings under Halsey Scheme.

Solution

Formula:


Total wages


=

Time taken × Hourly rate + (Time saved) × Hourly rate

 


=

(6 × Rs. 5) + (8 − 6) × 5

 


=

Rs. 30 + (2) × 5

 

=

Rs. 30 + 5

 

=

Rs. 35

3.9.5 Halsey–Weir Scheme

Under this scheme, the bonus will be of the standard time saved, whereas it is 50% under Halsey plan. Except this, all the other aspects of these schemes Halsey and Halsey–Wair are similar to each other.

Total wages = Time taken × Hourly rate + (Time saved) × Hourly rate.

Illustration 3.15

Based on the same figures as in the previous illustration, calculate wages under the Halsey-Weir scheme.

Solution

Total wages = Time taken × Hourly rate + (Time saved) × Hourly rate

3.9.6 Rowan Scheme

David Rowan introduced this scheme in 1901. Bonus is paid on the basis of time saved. Unlike a fixed percentage as in the schemes of Halsey and Halsey–Weir, proportionate basis is adopted under this scheme.

Formula:

 

Total wages = Time taken × Hourly rate + × Hourly rate

In this method, the bonus may be calculated in two ways:

  1. By adding bonus to the normal time wages.
  2. By adjusting the hourly rate.

Irrespective of the way to be adopted, the result will be the same under both the following approaches:

Approach 1 :

Approach 2:

Illustration 3.16

Time Taken:    4 hours.

Time allowed:  5 hours.

Rate per hour:  Rs. 5.

You are required to calculate total earnings under Rowan scheme.

Solution

Approach 1:

Formula:

Approach 2:

Illustration 3.17

In a factory, guaranteed wages at the rate of Rs. 2.40 per hour are paid in a 48-hour week. By time and motion study, it is estimated that to manufacture one unit of a particular product 40 minutes are taken. The time allowed is increased by 25%. During one week, a worker produced 240 units of a product. Calculate his wages under each of the following methods:

  1. Time rate.
  2. Piece rate with guaranteed weekly wage.
  3. Halsey Premium Bonus.
  4. Rowan Premium Bonus.

Solution

  1. Time rate:

     

    Earnings

    =

    Total hours × Rate per hour

     

    =

    48 × Rs. 2.40

     

    =

    Rs. 115.20.

     

  2. Piece rate:

    1. Earnings = No. of units produced × Rate per unit

Rate per unit is to be calculated as follows:

Step (i) Time taken = 40 minutes.

Step (ii) Incentive allowance at

Step (iii) Standard time to produce one unit, Add (i) + (ii) = 50 minutes.

Step (iv) Rate per minute

Step (v) Rate per unit = 50 × 0.04 = Rs. 2.

           (Step (iii) and Step (iv))

Step (vi) Now substitute the values in the formula (i)

            Earnings = 240 units × Rs. 2 = Rs. 480

3.9.6.1 Halsey Premium Bonus Plan

Formula:

where

T

=

Total hours in a week; R = Rate per hour.

 

S

=

Standard Time; T = Actual time taken.

Standard time is calculated as follows:

Time taken to produce one unit = 50 minutes (Ref (b) – Step (iii))

Time taken to produce 240 units = 240 × 50 = 12,000 minutes

Or

Now, substituting the values in the formula, we get,

(iii) Rowan Premium Plan:

3.9.6.2 Accelerating Premium Bonus Scheme

Under this method, workers are rewarded on the basis of their output. It is based on the principle: “Payment by Results Scheme”. The bonus offered in this scheme rises at a rapid rate. This scheme offers a high incentive. This scheme is suitable for supervisors.

There is no standard formula for this scheme. It varies from one industry to another. To understand the scheme, the graph of the function y = 0.8x2 may be used, where y = wages and , as follows:

3.10 GROUP-BONUS PLANS OR SCHEMES

This method of remuneration is used where the production system requires collective efforts, preferably by a group of workers. As such, individual efforts cannot be measured. Under this scheme, payment is made by results to all the workers in the group. In the initial stages, the production of group of employees is measured and the total bonus is calculated. After a certain period, the bonus is distributed equally or on the basis of an agreed proportion among the workers belonging to the group. The proportions are based on time rates or some previously agreed ratios.

ADVANTAGES:

  1. This scheme fosters team spirit among workers.
  2. Self-discipline is developed.
  3. Each and every worker is totally involved in the output and due to this, the production is increased.
  4. Cost of production decreases.
  5. Supervision may be reduced to a minimum level.
  6. Spoiled and defective goods can be brought down to a greater extent.

DISADVANTAGES:

  1. The quantum of incentive is very meagre.
  2. Efficient workers are not distinguished from inefficient workers. They are treated at par.
  3. Time lag between effort and reward is too much.

Some of the group-incentive plans are as follows:

3.10.1 Priestman’s Production Bonus Plan

Standard output is established to be attained for each department. This is stated in points or units. When the workers produce in excess of the standard, they are paid bonus in proportion with the increase. For instance, if the standard output is 50 units and the actual output is 70 units, the workers would receive a bonus equal to 40% of their basic wages (70 units ÷50 units × 100 = 140%). This is over and above their basic wages.

3.10.2 Rucker’s Plan

This is also known as “cost-saving–sharing plan”. In this method, the bonus to be paid to the workers is linked to the value added. Value added is the excess of sales value over the cost of purchase of materials and services. It includes the profit. Bonus will be a fixed proportion of the value added, which is calculated on a monthly basis.

Only two-thirds of the bonus earned is distributed. The remaining one-third is transferred to the reserve fund. When the actual performance falls below the standard, the amount kept in reserve fund is utilized. The standards are set on the basis of past trends.

3.10.3 Scalon Plan

This is similar to Rucker’s plan. The main difference is that it uses the ratio of direct labour cost of the sales value of production to compute the bonus.

3.10.4 Towne’s Gain-Sharing Plan

Under this method, bonus depends on the reduction in labour cost when compared with the standard set. Bonus is computed as follows: Bonus is based on the 50% of direct labour costs saved. For example, if time allowed is 8 hours, time taken is 5 hours and base rate is Rs. 30 per hour, then the bonus will be = 50% × (8–5hrs) × Rs. 30 = Rs. 45.

3.10.5 Budgeted Expenses Bonus

Under this scheme, the bonus is linked with the savings in the expenses. The actual expenses are compared in total with the budgeted expenses in order to ascertain the savings in the expenses. By using a pre-determined percentage, the bonus is computed by multiplying the pre-determined percentage with the savings achieved actually.

3.11 INCENTIVE PLANS FOR INDIRECT WORKERS

Indirect workers should not be neglected for providing incentives. Their role is also equally important in enhancing the productivity. To attain the maximum efficiency, enlisting the cooperation of indirect workers is essential. But devising an incentive scheme for indirect workers is not easy. The main reason is that the output of indirect workers cannot be quantified accurately. Their contribution to attain a higher level of performance cannot be underestimated.

3.11.1 Principles Governing the Incentive Plan for Indirect Workers are

  1. Establish standards for repetitive activities: Repetitive activities can be measured to a certain extent. Such measurable repetitive activities are loading, unloading, packing of standard products, bill processing and so on. Standards may be set in respect of such activities. Incentives can be rewarded when the actual performance is higher than the standard.
  2. Forming a part of the collective plan: Indirect workers should be included in the collective plan with the direct workers. Incentive payment should be made to them proportionate to the total incentive earnings of the direct workers.
  3. Provision for linking incentive with the direct workers: In certain circumstances, the efficiency of direct workers is dependant upon the quality of work rendered by the indirect workers. The incentive paid to the indirect workers must be linked to the incentive earned by the direct group of workers.
  4. Reward and efforts: The scheme should be devised in such a way that rewards should be related to the efforts of the indirect workers.
  5. Regular intervals: The bonus is to be payable at regular intervals without much time lag between effort and reward.

Besides these basic principles, incentive plan should be devised for certain category of indirect workers. They are:

  1. Material-handling staff: Important elements involved in material handling are loading, unloading, movement from stores to production department and the like. In such cases, an overall group-incentive scheme may be envisaged.
  2. Office staff: Office staff also should get motivated by way of incentive schemes. Incentive paid to direct workers may serve as a basis for computing bonus for the office staff.
  3. Inspection staff: Same basis may be adopted as in the case of office staff for rewarding the inspection staff
  4. Maintenance staff: Standards can be set with respect to routine maintenance staff. Incentives should be linked to such standards. If it is not possible, a group-bonus plan may be envisaged.

3.11.2 Indirect Monetary Incentive Schemes

Besides direct incentives, workers are given some indirect incentives to attain the maximum productivity. Indirect incentives are of two categories: (i) Monetary incentives and (ii) Non-monetary incentives.

  1. Monetary incentives: Incentives that are given in terms of money are known as “monetary incentives”. For example, monetary incentives include profit sharing, co-partnership and so on.
  2. Non-monetary incentives: Incentives which are given in kind (other than money) are known as “non-monetary incentives”. They include canteen facilities, medical facilities, leave-travel concession, free uniforms and the like.

3.11.3 Monetary (Indirect) Schemes

3.11.3.1 Profit Sharing

Profit sharing has been defined as, “an agreement freely entered into, by which an employee receives a share, fixed in advance, of the profits”. Or it may be said, “where an employer rewards its employees with special current or deferred sums on the basis of overall prosperity of the business – it is known as profit sharing”. Such amount would be paid over and above his regular pay. The profit percentage is predetermined. Profit-sharing scheme should comply with the statutory provisions envisaged in the payment of Bonus Act, 1935. Profit-sharing plans may be classified under the following categories:

  1. Cash plans: Employees are rewarded with a certain amount of cash periodically. The quantum of amount depends on the overall profit of the business. Such amount is an extra reward to the workers in recognition of their high performance.
  2. Deferred credit plans: Under this scheme, the firm invests a part of the profit on a periodic basis. On the date of retirement or resignation of an employee, he will be paid that amount. As the time lag is wide between the effort and reward, the workforce will not accept this plan wholeheartedly.
  3. Combined plan: This plan is a combination of the above two methods. A certain percentage of the share of the profit is invested and the remaining part is paid in cash.

ADVANTAGES:

  1. Employer–employee relationship: This method is based on the assumption that profit is shared by all the employees, irrespective of their efficiency. This results in a better employer–employee relationship.
  2. Industrial peace: Workers and the management in unison try to maximize the productivity. Profit-sharing motive causes less friction between the two. Hence, there may not be any room for industrial unrest.
  3. Low labour turnover: As every worker gets his share of profit in addition to wages, periodically, labour-turnover ratio would be low.
  4. Enhancement of labour morale: The workforce may concentrate mainly in productivity which in turn enhances their morale.
  5. Team spirit: Better cooperation and high team spirit will prevail.
  6. Effort and reward: There exists a better relativity between effort and reward, as every worker is motivated in such a way to maximize his efficiency, which in turn is rewarded by a share in profits.
  7. Sense of belonging: Psychologically, every worker feels that he is a part and parcel of the firm. Each one shows his maximum talent, handles materials and machinery carefully, exercises his role to control the activities and the like factors to develop a sense of belonging to the firm.
  8. Efficient work force: This scheme attracts the efficient workers. Qualified and skilled workers are not only encouraged to join the firm but they are retained for a relatively longer period.

DISADVANTAGES:

  1. Basis of distribution of profit: Sometimes, the management may not adopt a suitable basis for apportionment of profit among the workers, which may result in distrust with the management.
  2. Role of labour unions: On account of this scheme, each labourer is concentrated on his own work. This attitude alienates the workers from unions. Hence, labour unions may oppose vehemently.
  3. Uncertainty: As profits depend on many factors, which are in fact not within the control of the workers, profit is not an assured factor. In the absence of profit, effort of workers may not be rewarded suitably.
  4. Non-recognition of efficient workers: This scheme fails to distinguish between the efficient and inefficient workers. This will have an impact on the efficient workers.
  5. Fluctuations in bonus: This scheme cannot pre-determine the quantum of amount. Profits may fluctuate and sometimes loss will also arise. In such situations, the workforce may get dejected and indulge in unfair activities.
  6. Time lag between effort and reward: Workers have to wait till the end of the year and this wide gap between effort and reward may dampen their enthusiasm.
3.12 CO-PARTNENSHIP

Instead of cash, labour will be given a share of profit in the form of shares. This type of profit sharing is known as “co-partnership”. Under this scheme, the workers of the firm will get a part of the capital and profits accruing. But these shares may or may not carry the voting rights. In case they do not have such rights, employees may feel inscure because of the restrictions imposed on them.

ADVANTAGES:

  1. Owners of the firm: Employees have a share in the capital. They attain the status of owners of the firm.
  2. Low labour turnover: As workers are made as co-partners in the company, labour-turnover ratio will be low.
  3. Cooperation and team spirit: There will be greater cooperation between workers and a good team spirit will be developed among them.

DISADVANTAGES:

  1. Time lag between effort and reward: The underlying factor behind the incentive itself is negated as the date of the actual payment of the incentive is far away.
  2. No distinction between efficient and inefficient workers: This scheme does not distinguish between efficient and inefficient workers.
  3. Distrust: As employees are not in a position to verify such allotment of shares, distrust and ill-will will develop between the employer and employee.

3.12.1 Other Non-Monetary Incentive Schemes

This type of incentive is given to all employees. These are provided entirely at the cost of the management (free) or the employees may be asked to contribute towards such incentives at a very low margin. In fact, some of the incentives are rewarded to comply with the statutory regulations. Strictly speaking, these incentives are not provided for any kind of super performance of the workers. Some of such incentives are: (i) PF contribution; (ii) Gratuity; (iii) Pension; (iv) Protective measures to workers; (v) Medical facilities; (vi) Subsidized services; (vii) Leave-travel concessions; (viii) all welfare measures; (ix) housing facilities; and so on.

ADVANTAGES:

  1. As these incentives are labour oriented (management is not benefited), workers welcome such incentives
  2. Employees feel secured on account of incentives like PF, Pension and Gratuity.
  3. Labour-turnover ratio gets reduced.
  4. A good reputation of the company emerges.
  5. Workers feel contended by such incentive schemes.
3.13 LABOUR TURNOVER

Employees may join and leave an organization for a change in job for any of the following reasons:

  1. For personal betterment.
  2. When new opportunities are available.
  3. Due to present firm’s decision.
  4. For any other compulsion.

In such cases, the leavers have to be replaced by new employees. Due to this, there is a change in the composition of labour force. Labour turnover may be defined as the rate of change in the labour force in an organization during the specified period. The change in the composition of labour force may also arise on account of death, retirement, resignation, and so on. This is measured by dividing the number of workers leaving during the period by the average total number of employees.

Example:

50 employees leave an organization in a year and the average total number of employees is 500. Then the

Here, the average figure means simple average. Simple average is the average of the number of employees at the beginning and at the end of the specified period.

3.13.1 Causes of Labour Turnover

Various causes of labour turnover may be grouped under two heads:

  1. Avoidable causes.
  2. Unavoidable causes

3.13.2 Avoidable Causes

These causes can be avoided. The management may take proper measures to minimize or eliminate these causes to avoid the labour turnover. The management has to undertake cost–benefit analysis.

Avoidable causes include the following:

  1. Unsatisfactory working conditions.
  2. Lack of job satisfaction.
  3. Low wages and benefits.
  4. Lay-offs, overtime and inconvenient working hours.
  5. Lack of basic amenities—transport, medical reimbursement, etc.
  6. Relationship with superiors.
  7. Relationship with fellow workers.
  8. Lack of incentives and promotion.
  9. No proper placement of job.
  10. Lack of training.

3.13.3 Unavoidable Causes

Under this category, the causes for labour turnover cannot be minimized or eliminated by the management. These include:

  1. Personal betterment.
  2. Marriage, in case of women workers.
  3. Retirement.
  4. Death.
  5. Health grounds.
  6. Dismissed by management for genuine reasons.
  7. Redundancy.
  8. Family circumstances.
  9. Disability.

3.13.4 Effects of Labour Turnover

Labour turnover results in an increased cost of production which is due to the following reasons:

 

(x)

Increased cost of selection, training and so on of new workers.

(xi)

Increase in cost of scrap and defectives.

(xii)

Decrease in the overall production on account of time lost between turnover and recruitment.

(xiii)

Increase in the cost of plant maintenance due to mishandling of equipments by new workers.

3.13.5 Measurement of Labour Turnover

There are various methods in use for measuring the labour turnover. They are as follows:

  1. Accession method:

    (Accession = Nos. at the end of period - Nos. at the beginning + Nos. that have left during the period)

  2. Separation-rate method:

    Formula:

  3. Replacement method

    or

    Net labour-turnover-rate method:

    Formula:

  4. Flux method:

    Formula:

A low turnover ratio is desirable. But a very low turnover ratio is not desirable. It indicates the existence of inefficient workers. It reflects the scenario—absence of flexibility. Flexibility may be related to redeployment of workers, change in the ratio of experienced workers to the total number of workers and so on.

A high turnover ratio indicates that the employees are leaving an organization rapidly.

Selection of a suitable method for computing labour-turnover ratio is importance. Once a method is chosen, it should be followed consistently to facilitate the comparison of ratios.

Illustration 3.18

From the following data given by the personnel department, calculate the labour-turnover rate by applying

  1. Separation method
  2. Replacement method
  3. Flux method

Number of workers on the pay roll:

At the beginning of the month:  2,700

At the end of the month:           3,300

During the month, 30 workers left, 120 workers were discharged and 450 workers were recruited. Of these, 75 workers are recruited in the vacancies of those leaving while the rest were engaged for an expansion scheme.

 

[I.C.W.A. (Modified)]

Solution

Step 1: Basic figures that are necessary for computation of labour-turnover ratio are to be found out as follows:

  1. Average number of workers:
    1. First, write the formula:
    2. Next, substitute the given figures in the formula as
  2. Number of separations:

    NOTE: Separations include:

    1. workers left and
    2. workers discharged.

    In this problem, workers left were given as 30 and workers discharged were given as 120.

    Hence, number of separations = 30+120 = 150.

     

  3. Number of replacements:

    NOTE: Students should exercise caution while dealing with replacements:

    1. Generally “replacement” means the total number of workers recruited. This principle has to be applied for “flux method”.
    2. But it differs in certain circumstances. Here, “replacement” means those who are recruited in the regular vacancies. It ignores the other type of workers who are recruited for the expansion scheme or any other special scheme. Hence, only workers who are recruited in the vacancies are included in “replacement”. This principle is followed in “replacement method”.
    3. Number of replacements for “replacement method” is only 75 out of 450 workers recruited.
    4. Number of replacements for “flux method” is 450. It includes all the workers who are recruited. It is immaterial whether it is a regular vacancy or an expansion scheme.

(I) Computation of labour turnover by applying separation method:

  1. Write the formula:
  2. Substituting the figures in the formula, we get:

(II) Computation of labour turnover by applying replacement method:

  1. Write the formula:
  2. Substituting the figures in the formula, we get:

NOTE: This is replacement method. Hence, the number of replacements include only those who are recruited in vacancies. This ignores the recruitment for expansion.

(III) Computation of labour turnover by applying flux method:

  1. Write the formula:
  2. Substitute the figures in the formula, we get;

NOTE: This is flux method. Hence replacement includes all the workers who are recruited.

Illustration 3.19

The cost accountant of a company has computed labour-turnover rates for the period that ended on 31 December 2009 as 20%, 10% and 5% under flux method, replacement method and separation method, respectively. If the number of workers replaced during that period is 40, you are required to find out the number of

  1. Workers left and discharged.
  2. Workers recruited and joined including replacements.

Solution

First, the average number of workers on the roll has to be found out, because this figure is necessary irrespective of the method to be applied to compute the labour-turnover rate.

  1. Take the formula (replacement method):

    (or)

    10 × Average No. of workers on roll = 40 × 100

    Average No. of workers on Roll =

  2. Computation of number of workers left and discharged:

    Labour-turnover ratio (separation method)

    (or) 100 × No. of separations = 5 × 400.

    No. of separations

    ∴ No of workers left and discharged = 20.

     

  3. Computation of number of workers recruited and joined:

    Labour turnover (Flux method)

    ∴ No. of workers recruited and joined (including replacement) = 60.

3.13.6 Cost-Labour Turnover

One should realize that labour turnover too has its costs. These costs of labour turnover is grouped under two heads as follows:

  1. Preventive costs.
  2. Replacement costs.

3.13.6.1 Preventive Costs

Preventive costs, as the very name suggests, are incurred in order to retain the employees. They prevent the employees from leaving the organization. These costs include the following:

  1. Costs of welfare: Subsidized canteen facilities, sports facilities and the like.
  2. Costs of personnel administration: Personnel department is entrusted with the responsibility of establishing cordial relations between the workers and the management.
  3. Costs of pension and gratuity schemes: Expenses that are incurred for superannuation benefits on the retirement of employees.
  4. Costs of medical benefits: Expenses which are incurred for providing medical benefits, reimbursement of medical expenses and the like.

3.13.6.2 Replacement Costs

These costs are incurred in respect of new employees who are recruited in the place of employees who have left the organization. Such employees will have to be recruited, inducted, trained and absorbed into the organization. Costs incurred for recruitment and training and production loss, scrap, defective and so on are included in this type of replacement costs. They are:

  1. Costs of recruitment.
  2. Costs of induction and training.
  3. Tools and machine breakdown costs.
  4. Costs of production loss till new workers are recruited.
  5. Scrap, defective works and their costs.
  6. Costs of additional supervision.
  7. Costs of accidents.
  8. Decline in output.
  9. Decline in quality.

3.13.6.3 Accounting Treatment

The costs incurred under both the categories, as explained above, are added together and the cost of the labour turnover is determined by using the formula:

Cost of labour turnover is an indirect cost. Hence, it should be treated as an overhead. Replacement costs should be charged to products. Preventive costs should be charged to the departments based on the strength of the employees.

Illustration 3.20

From the following data relating to a firm, you are required to calculate (a) labour-turnover ratio and (b) profit foregone due to labour turnover:

  Rs.

(a) Sales value

1,00,000

(b) Variable costs:

 

    Direct material

40,000

    Direct wages

21,000

    Variable overheads

20.000

(a) – (b): Contribution

19,000

    Less: Factory overhead

10,000

    Profit before tax

9,000

The direct labour hours worked during the period were 3,500. This included 1,500 hours for newly recruited workers, who were undergoing training and whose productive time was only There was some delay in finding new employees to replace the workers who had left and the time lost was 500 hours. Costs incurred to replace the leavers were as follows:

  Rs.

Cost of recruitment

1,500

Cost of selection

2,500

Cost of training

3,000

Cost of separation

2,000

Solution

The figures needed to compute the profit foregone which has to be calculated in the following way:

Step 1: Computation of labour-turnover ratio:

As figures are given in direct-labour hours, the same can be used and the labour-turnover ratio is calculated as follows:

Step 2: Productive work hours is calculated as:

  1. Direct labour hours (given)             = 3500 hours
  2. Less: Unproductive time:

    Unproductive time:

    Training hours: 1500 hours


    = 500 hours.

    ∴ Productive work hours

Step 3: Time lost is calculated as follows:

 

(i)

Training hours:

500 hours

(ii)

Add: Delay in recruitment:

500 hours

 

∴ Time lost:

Step 4: Direct wage rate per hour is calculated as follows:

Formula: Direct wage rate per hour

Step 5: Contribution foregone due to lost hours is calculated as follows: Contribution

Formula: Contribution per productive hour

∴ Contribution foregone due to lost hours

=

Rs. 5.4286 × 1,000 hours (Ref: Step3)

 

=

Rs. 5429

Step 6: Computation of profit foregone due to labour turnover:

 

 

 

Rs.

Step (a)

Cost of labour turnover [Add: All replacement costs given as separation + Recruitment + Selection + Training] 2,000 + 1,500 + 2,500 + 3,000.

= 9,000

Step (b)

Cost of training hours 500 hours × Rs. 6 (Ref Step 4)

= 3,000

Step (c)

Contribution foregone due to lost hours:1000 hrs × 5.4286 (Ref: Step 5)

= 5,429

Step (d)

Profit foregone due to Labour turnover [Add = Step (a) + (b) + (c)]

3.14 IDLE TIME

Idle time represents the difference between the time for which the workers are paid and the time spent on the job. Idle time is loss of productivity time. The loss of time for which the employer pays for which no benefit is derived is known as idle time. Idle time represents the time during which the worker was idle but wages are paid for such idle time.

3.14.1 Causes of Idle Time

The causes of idle time may be grouped under the following broad categories:

  1. According to controllability
  2. According to functions.

(i) According to controllability category, the causes for idle time are: (a) normal idle items that occur on account of unavoidable causes and (b) abnormal idle time that occurs due to avoidable causes.

  1. Normal idle time includes: (i) the time lost between the factory gate (card-punching time) and place of work; (ii) the time interval between one job and another; (iii) the refreshment break; (iv) tool-setting time; and so on.
  2. Abnormal idle time includes: (i) break-down time; (ii) supply of raw materials; (iii) strike and lock out; (iv) negligence of supervision; and so on.

3.14.2 The Grouping of Categories According to Functions May Further be Classified as Follows

  1. Productive causes
  2. Administrative causes
  3. Economic causes.
  1. Productive causes include:
    1. Waiting for raw materials.
    2. Waiting for instructions.
    3. Waiting for tools.
    4. Power-cut.
    5. Breakdown of machineries.

    These may be controlled if proper planning is made in advance in anticipation of such causes. Proper remedial measures may be undertaken to rectify such causes.

  2. Administrative causes include:
    1. Inadequate planning.
    2. Unutilized capacity.
    3. Untimely delayed instructions.
    4. Improper policies of management.
  3. Economic causes include:
    1. Products having seasonal demand.
    2. Mismatch of supply and demand.
    3. Lock-outs and strikes.

3.14.3 Accounting Treatment

  1. Normal idle time cost may be charged against the respective jobs at an inflated rate.
  2. Idle-time cost arising on account of productive causes is charged as an item of departmental overhead.
  3. Idle-time cost arising due to administrative causes is charged as a part of general works overhead.
  4. Idle-time cost due to economic causes is charged to costing P&L account. The reason is that such idle time does not form the part of cost of production.

3.14.4 Control of Idle Time

The measures that should be undertaken to control idle time are as follows:

  1. Preventive maintenance of plant, machinery and equipment.
  2. Proper production planning and control.
  3. Proper analysis of labour utilization report.
  4. Timely procurement of raw materials.
  5. Designs and drawings should be done on time.
  6. Installing balancing equipment to reduce imbalances that are existing in production facilities.

Illustration 3.21

A worker is paid Re.1. per hour and the 5 days of working week contains 40 hours. The daily allowance for approved absence from his place of work, maintenance of machine and so on is 6 minutes and his job card shows that his time chargeable during the week to various jobs is as follows:

Job No. 102   18 hours

Job No. 110   12 hours

Job No. 125   7 hours

The unaccounted time is caused by a power failure. Show how his wages for the week would be dealt with in cost accounts.

 

[B.Com (Hons) Delhi – Modified]

Solution

  1. First, the normal idle time has to be found out as:

    6 minutes per day. For 5 days = 6 × 5 = 30 minutes = hour.

  2. Second, abnormal time has to be calculated as:

    Add all working hours + idle time (normal): (Job No. 102 = 18 hrs + Job No. 110 = 12 hrs + Job No. 125 = Rs.7) + hour (as above) = 37 hrs.

    Total working hours = 40 hrs (given).

    Abnormal idle time

    ∴ Unaccounted time due to power failure

  3. Wages are calculated as follows:

 

 

Rs.

Step 1:

(A) Wages payable for the week = 40 hrs × Re 1

= 40

Step 2:

(B) Allocation of wages:

 

 

(i) Chargeable to Job No. 102 = 18 hrs × Re 1

= 18

 

(ii) Chargeable to Job No. 110 = 12 hrs × Re 1

= 12

 

(iii) Chargeable to Job No. 125 = 7 hrs × Re 1

= 7

 

(iv) Normal idle time: (Ref: (i): hr × Re 1)


= 0.50

 

(v) Abnormal idle time (Ref: (ii): × Re 1)


= 2.50

Step 3:

(C) Total: [Add Step (2) (i) to (v)] (A) and (C) will have to tally.

3.15 OVERTIME AND SHIFT WORK

3.15.1 Meaning of Overtime

Owing to the exigencies of situation, the workers may have to work beyond the normal working hours. The Factories Act and the Shops and Establishment Act, 1949 prescribes normal working hours, defines overtime, the rate of overtime and the maximum hours of overtime. Accordingly, a worker working more than 8 hours a day or 48 hours a week in a factory has to be paid double the wages for the extra hours he has worked. This is known as “overtime wages”.

Overtime consists of two parts: normal wages and additional wages. Normal wage denotes wages paid at a normal wage rate. Additional wage represents wages paid for extra time. Additional wages for extra time is known as “overtime premium”.

3.15.2 Causes of Overtime

  1. Acceptance of rush orders.
  2. Failure to achieve planned production within normal time.
  3. Unexpected reasons resulting in loss of production like fire, flood, strike, lockout and so on.
  4. Labour shortage.

3.15.3 Disadvantages of Overtime

Overtime results in:

  1. Increase in administrative cost.
  2. Increase in production cost.
  3. Decrease in productivity.
  4. Decrease in efficiency.
  5. Break-down of plant and machinery.
  6. Rapid deterioration—wear and tear of plant and equipments.
  7. Increase chances of accidents.
  8. Deterioration of health among workers leading to high incidence of absenteeism.
  9. Uneven distribution of works creating discontent among the workers.
  10. Increase in cost of labour.

3.15.4 Control of Overtime

How overtime may be controlled?

  1. Budget for overtime: Overtime has to be carefully budgeted for. Proper steps should be taken to monitor and control it.
  2. Production planning and control: Production planning and control have to be so devised that production can be scheduled evenly and thereby, minimizing overtime work.
  3. Higher authority to sanction: Overtime working should be sanctioned by higher authorities and there should not be any bias in sanctioning overtime.
  4. Statutory adherence: Statutory requirements should be complied strictly.
  5. Recruitment: More workers should be recruited if shortage of labour is a cause for overtime working.
  6. Sub-contracts: In case of inadequate machinery or resources, jobs may be subcontracted.
  7. Reporting by causes and responsibility centres: There should be a system of reporting overtime to higher management on regular intervals by people taking responsibility over causes and responsibility centres.

3.15.5 Accounting of Overtime

Normal overtime wages are to be treated as direct labour cost. They are charged to respective jobs, orders or processes. The treatment of overtime premium will be as follows:

  1. Overtime premium in general is to be treated as factory overhead. It is to be recovered by way of overhead absorption rates.
  2. Rush orders: Overtime premium should be charged directly to the respective jobs.
  3. Abnormal causes: If overtime premium is paid due to abnormal causes, it should be charged to the costing P&L account.
  4. Negligence of department: Where overtime premium arises on account of delay of negligence of workers of a particular department, the same should be charged to the concerned departments.

Illustration 3.22

An analysis of the time card of a worker on a machine shows that of the total 40 hours he worked, 38 hours (including 3 hours’ overtime) was on production and that 2 hours was the idle time due to the machine breakdown. The rate of work is Rs. 1.50 per hour and overtime is paid 100% extra.

You are required to allocate the total wages paid to the worker between direct and indirect labour.

Solution

First the total wages paid to the worker is calculated and then allocation of wages to direct and indirect workers have to be shown.

I: Total wages paid to the worker:

  Rs.

(i) Total hours × rate/hour (40 × Rs. 1.50)

= 60.00

(ii) Add: Overtime allowance (3 hours × Rs. 1.50 + (100% of 1.50))

= 9.00

(iii) Total wages paid to the worker

= 69.00

II: Allocation of wages:

 

(i)

Time spent on production: This is direct (38 hours × Rs. 1.50) =

57.00

(ii)

Overtime allowance: This is indirect (3 hours × Rs. 1.50 + 100% of 1.50) 3 × 3 =

9.00

(iii)

Abnormal idle time: (break down) (2 hours × Rs. 1.50) =

3.00

 

 

69.00

Additional Illustrations

Model-Wise

Illustration 3.23

Model: Group-Piece Rate

In an assembly shop of a factory, 4 workers P, Q, R and S work together as a team and are paid on group-piece rate. They also work individually on day-rate jobs. In a 48-hour week, the following hours have been spent by them om group-piece work:

P – 40 hours

Q – 25 hours

R – 20 hours

S – 15 hours

The balance of the time has been booked by each worker on day-work jobs. Their hourly rates are:

P – Re. 0.50

Q – Re. 0.80

R – Rs. 1.50

S – Rs. 2.00

The group-piece rate is Rs. 2 per unit and the team has produced 100 units. Calculate the gross-weekly earning of each workman taking into consideration that each one is entitled to a DA of Rs. 35 per week.

Solution

Step 1 → Basic time earnings for all the workers is calculated as follows:

Worker Wages (No. of Hours × Hourly Rate)
P
(40 hours × 0.50) – Rs. 20
Q
(25 hours × 0.80) – Rs. 20
R
(20 hours × 1.50) – Rs. 30
S
(15 hours × 2.00) – Rs. 30

Step 2 → Ratio is Rs. 20 : Rs. 20 : Rs. 30 : Rs. 30

            2 : 2 : 3 : 3.

On the basis of this ratio, the total group-piece wages will be apportioned among the workers.

Step 3 → Group-piece wages = No. of units × Rate per unit

 

= 100 × Rs. 2 = 200.

Step 4 → Day work will be calculated as follows:

P: (Total hours – Group hours): (48 hours – 40 hours) = 8 hrs × 0.50 = 4.00.

   Q: (48 - 25 hrs) : 23 hrs × 0.80 = Rs. 18.40.

   R: (48 - 20 hrs) : 28 hrs × 1.50 = Rs. 42.00.

   S: (48 - 15 hrs) : 33 hrs × 2.00 = Rs. 66.00.

Step 5 → These figures are tabulated with DA and added together, we get the desired results:

Illustration 3.24

Model: Balance of debt system

From the following data, calculate the amount of wages payable to Mr Alex for each of the two days of week under “Balance of Debt system”.

 

  Standard rate per hour

Rs. 5.

  Standard rate per piece

Rs. 7.

  Hours of work in a day:

8 hr.

Mr. Alex produces 5 pieces on the first and 6 pieces on the second day.

Solution

Step 1: Wages payable on the first day is calculated as follows:

 

(i)

Wages payable as per piece-wage system:

Rs.

 

(No. of pieces produced × Rate per unit)

 

 

                = 5 × Rs. 7

35

(ii)

Wages payable as per time-wage system:

 

 

(No. of hours × Hourly rate)

 

 

                = 8 × Rs. 5

40

Step 2: Payment

Under this system, Mr. Alex will be paid based on time-wage system. As per this system he gets Rs. 40, whereas he gets Rs. 35 only under the piece-wage system. Rs. 5 is higher in the time-wage system than in the piece-wage system. However, he will be paid Rs. 40 and the excess of Rs. 5 is to be deemed as a debt due by Alex to the firm. This excess amount is to be recoverable from his future earnings, when his piece wage will exceed the time wage.

Step 3: Wages payable on Day 2

 

(i)

Wages payable as per piece-wage system:

  Rs.

 

                  6 pieces × Rs. 7

  42

(ii)

Wages payable as per time-wage system:

 

 

                  8 hrs × Rs. 5

  40

Step 4: Payment

On the second day, his piece wage exceeds by Rs. 2 (Rs. 42 – Rs. 40). This Rs. 2 will be adjusted against the debt Rs. 5 incurred on the first day. So, Mr. Alex will be paid Rs. 40 instead of Rs. 42. But, he still owes to the firm Rs. 3 (Rs. 5 – Rs. 2). This will get adjusted in future.

Illustration 3.25

Model: Comparison of Halsey and Rowan plans

You are required to calculate the earnings of a worker under (a) Halsey plan and (b) Rowan plan from the following particulars:

Hourly rate of wages guaranteed at Re 1.00 per hour.

Standard time for producing one Gel pen: 4 hours.

Actual time taken to produce 100 Gel pens: 360 hours.

 

[C.A. Inter – Modified]

Solution

Basic data to compute earnings are calculated first:

Step 1 → Time allowed to produce one Gel pen = 4 hrs.

∴Time allowed to produce 100 pens = 100 × 4 = 400 hrs.

Step 2 → Time saved is to be computed:

 

(i)

Standard time to produce 100 pens (as per Step 1)

= 400 hrs.

(ii)

Less: Actual time taken to produce 100 pens

= 360 hrs.

(iii)

Time saved

Step 3 → Earnings of a worker under Halsey plan is computed as follows:

  1. Formula: Total Earnings: Hours worked × Rate per hour + Time saved × Rate per hour
  2. Substituting the values in the formula, we get

        = 360 hrs × Re 1 + × 40 (Step 2) hrs × Re 1.

        = Rs. 360 + Rs. 20

        = Rs. 380

Step 4 → Computation of earnings under Rowan plan:

  1. Formula: Earnings = Hours Worked × Rate/hr +
  2. Substituting the figures in the formula, we get


    Earnings


    =

    360 hrs × Re 1 +

     

    =

    Rs. 360 + Rs. 90

     

    =

    Rs. 450

Step 5 → Result → The worker earns more under Rowan plan than under Halsey plan, according to the present level of parameters.

Illustration 3.26

Model: Comparison of straight piece-rate and Merrick’s multiple piece-rate system

Calculate the earnings of workers X, Y and Z under straight piece-rate system and Merrick’s multiple piece-rate system from the following particulars:

Normal rate per hour Rs. 6.

Standard time per unit: 2 minutes.

Output per day is as follows:

            Worker X: 200 units.

            Worker Y: 220 units.

            Worker Z: 360 units.

Working hours per day are 8.

 

[C.A. (Inter) – Modified]

Solution

First, the basic data are calculated as follows:

Step 1: Normal wage rate per unit is computed.

  1. Normal rate per hour : Rs. 6.
  2. Standard output per hour

    (2 minutes/unit ∴ For 60 minutes):

  3. Normal wage rate/hour

Step 2: Level of efficiency of workers is found out as:

Step 3: Wages under straight piece-rate system are as follows:

 

Worker X:

200 units × 0.20/unit:

Rs. 40.00

Worker Y:

220 units × 0.20/unit:

Rs. 44.00

Worker Z:

360 units × 0.20/unit:

Rs. 72.00

Step 4: Wage rate applicable under Merrick’s multiple piece-rate system are:

 

 

Re

(i)

Up to 83% efficiency = Ordinary piece rate

0.20

(ii)

From 83% to 100% = 110% of ordinary piece rate:

0.22

(iii)

Above 100% = 120% of ordinary piece rate:

0.24

Step 5: This rate has to be applied in the computation of wages under Merrick’s system, which is shown as follows:

Illustration 3.27

In a factory Vas and Dev produce the same product using the same input of the same material and at the same normal wage rate.

Bonus is paid to both of them in the form of normal wage time adjusted by the proportion which time saved bears to the standard time for the completion of the product. The time allotted to the product is 50 hours. Vas takes 30 hours and Dev takes 40 hours to produce the product. The Factory overhead rate is Rs. 24 per hour. The factory cost of the product for Vas is Rs. 9,300 and for Dev is Rs. 9,840.

You are required to calculate: (a) normal wage rate, (b) cost of material used for the product and (c) the input of material if the unit material cost is Rs. 40.

 

[B.Com (Hons) Delhi – Modified]

Solution

Step 1: Cost of material and normal rate of wages are not given in the problem. Let X be the cost of material and Y be the normal rate of wages per hour. Based on X and Y, the factory cost of workmen is calculated as follows:

Step 2: Factory cost of workman Vas.

Step 3: Factory cost of workman Vas.

Step 4: We get from Step (3) and Step (4) the following two equations:

 

 

X + 42Y + 720 = Rs. 9,300

(1)

 

X + 48Y + 960 = Rs. 9, 840

(2)

(1) – (2), i.e., Subtracting equation (1) from equation (2), we get

 

 

6Y + 240

=

540

or

          6Y

=

540 − 240 = 300


or


           Y


=

Substituting the value of Y in equation (1), we get

 

 

X + 42 × 50 + 720

=

9,300

or

   X + 2,100 + 720

=

9,300

 

                          X

=

9,300 − 2,820

 

 

=

6,480

Step 5:

  1. Normal wage rate is Rs. 50 (Y).
  2. Cost of material used for the product is Rs. 6,480 (X).
  3. Input of material:

Illustration 3.28

Model: Total labour cost

An article passes through five-hand operation as follows:

The factory works 40 hours a week and the production target is 450 dozens per week. Prepare a statement showing for each operation and in total the number of operators required, cost per dozen and the total cost per week to produce the total targeted output.

 

[C.A. Inter – Modified]

Solution

First, number of operators required for each operation is calculated as follows:

Simple formula to be used is:

        Total no.of workers

(Production is given in dozen. It has to be multiplied by 12 to know the number of articles)

Operation No.

(Number of workers rounded off to the nearest number)

Based on these figures, the labour cost has to be calculated as follows:

 

Statement of Labour Cost

Illustration 3.29

Model: Labour-turnover rate

The following information relates to the personnel department of a factory for the month of June 2009:

 

No. of workers on 1 June 2009

900

No. of workers on 30 June 2009

1,100

No. of workers who quit the factory in June

20

No. of workers discharged in June

30

No. of workers engaged in June (including 100 on account of expansion scheme)

150

You are required to calculate the labour-turnover rate and the equal annual rate under the different methods.

 

[B.Com (Modified)]

Solution

  1. Replacement method:

    (i) Write the formula:

    Important Note

    In this problem, it is shown that 100 workers are employed an account of expansion, that is, a new business. Those 100 workers should not be included in the replacement category. As such only 50 workers are to be shown as number of replacements (150–100).

    (ii) Substituting the values in the formula we get,

    Equivalent annual turnover rate: .

  2. Separation-rate method:

    Equivalent annual turnover rate

  3. Flux-rate method:

    Equivalent annual turnover rate

Illustration 3.30

Model: Profit foregone due to labour turnover

The management of a company wants to have an idea of the profit lost/foregone as a result of labour turnover last year.

Last year, the sales accounted to Rs. 3,30,000 and the Ratio was 20%. The total number of actual hours worked by the direct labour was 17,250. As a result of the delays by the personnel department in filling the vacancies due to labour turnover, 3,750 potential productive hours were lost. The actual direct labour hours included were 1,500 hours attributable to training new recruits, out of which half of the hours were productive. The costs incurred consequent upon labour turnover revealed on analysis the following:

  Rs.

Settlement cost due to leaving

2,500

Recruitment costs

1,150

Selection costs

950

Training costs

1,400

Assuming that the potential production lost due to labour turnover could have been sold at the prevailing prices, ascertain the profit foregone last year on account of labour turnover.

Solution

The basic figures that are required to compute the profit lost will be calculated one by one as follows:

 

Step 1: Actual productive hours

=

Actual hours worked – Unproductive training hours

 

=

17,250 hrs (given) − 50% of 1,500 (given)

 

=

17,250 − 750

 

=

16,500 hours.

Step 2: Sales per productive hour

Step 3: Potential productive hours lost 3,750 hrs (given).

 

Step 4: Sales foregone

=

3,750 hrs (Step 3) × Rs. 20 (Ref. Step 2)

 

=

Rs. 75,000.

Step 5: Contribution foregone = Sales foregone × p/v ratio

(P/v ratio concept is explained in detail in the chapter Marginal Costing – Cost Volume Profit analysis. Students may refer this chapter included in the book.)

 

= 75,000 × 20%
= Rs. 15,000.    

Step 6: Computation of profit foregone:

 

Statement of profit foregone due to labour turnover
  Rs. Rs.

Step A → Contribution Foregone (Ref: Step 5)

 

15,000

Step B → Add:

 

 

    (i) Settlement cost

2,500

 

    (ii) Recruitment cost

1,150

 

    (iii) Selection cost  

950

 

    (iv) Training cost   

1,400

6,000

Step C → Total profit foregone (Step A + Step B)

 

21,000

Illustration 3.31

Model: Overtime wages

You are required to calculate the normal and overtime wages payable to a workman from the following data

Days Hours Worked

Monday

10 hrs

Tuesday

8 hrs

Wednesday

10 hrs

Thursday

9 hrs

Friday

11 hrs

Saturday

4 hrs

Normal working hours

8 hrs per day

Normal rate

Rs. 1.50 per hour

Overtime rate

Up to 9 hours in a day at single rate and over 9 hrs a day at double rate.

 

(or)

 

Up to 48 hours at single rate and over 48 hours at double rate, whichever is more beneficial to the workman.

[B.Com – Madras University – 2008]

Solution

Important Note

In the question, two options are given in respect of overtime. Whatever option is adopted, the overtime wages will be the same. Hence, students may choose any basis to compute overtime.

First, the number of hours worked, normal, overtime at single rate and overtime at double rate are to be worked out as follows:

On this basis, the wages will be calculated as follows:

 

 

 

Rs.

(i)

Normal wages for 44 hours (Ref. Col 3 above) at the rate of Rs. 1.50 (given)

= 66

(ii)

Overtime wages:

 

 

(a) At single rate (Rs. 1.50 per hour) for 4 hours (Ref: Column 4 in the above table)

= 6

 

(b) At double rate (Rs. 1.50 × 2 = Rs. 3) for 4 hours (Ref: Column 5 in the above table)

= 12

(iii)

Total wages: (Add I + ii (a) + ii (b))

Illustration 3.32

Model: Wages for financial books and department labour-hour cost

A factory department has 90 workers who are paid on an average of Rs. 35 per week (48 hours), DA per month (208 hours) of Rs. 260, PF deduction is @ 8% on gross, of which is for family pension fund and half the number of workers with ESI being at Rs. 2.50 each. The employer contributes an equivalent amount. The company gives only the minimum bonus of and allows a statutory leave of 2 weeks per year with pay. You are required to show the weekly-wage summary for the financial books and the department labour hour costs for job costing.

 

[M.Com – Annamalai University]

Solution

The basic data needed are to be worked out as follows:

*1. Dearness allowance rate per week:

*32. Leave pay per week:

Family pension is applicable to half of the workers only. So, calculations are to be made accordingly. For the balance (other half) workers, total PF rate is used. Bonus will not be included to calculate the leave pay. Provision is to be made for the estimated bonus at the time of preparation of final accounts. Bonus payment is in accordance with payment of Bonus Act, 1965.

STAGE I: Now, the calculation of weekly-wage summary for financial books is made as follows:

 

Statement of Weekly Wage Summary for Financial Books
  Rs. Rs.

Step 1: Wages: No. of workers × Wage rate = 90 × Rs. 35.

3,150

Step 2: DA: No. of workers × DA = 90 × Rs. 60*1

5,400

*2Step 3: Gross earnings (Step 1+ Step 2).

 

8,550

Step 4: Less: Eligible deductions

 

 

   (i) P.F.:

292

 

   (ii) P.F.: 8% × 50% of 8,550.

342

 

   (iii) Family pension: of 50% of 8,550.

50

 

   (iv) ESI − 90 workers × Rs. 2.50.

225

909

Step 5: Net earnings for the week. (Step 3 − Step 4) (Total of all)

 

7,641

STAGE II:

 

Statement of Department Labour Hour Cost
  Rs. Rs.

Step 1: Gross earnings (Ref. Step 3 in the above table)

 

8,550.00

Step 2: Add:

 

 

   (i) PF employer’s contribution (@ 8% for Rs. 8,550.

684

 

   (ii) ESI contribution (employer’s) = (90 × Rs. 2.50).

225

 

   *3iii) Leave pay

328.85

 

   (iv) Minimum bonus of Rs. 8,550


712.50


1,950.35

Step 3: Labour cost per week (Add Step 1 + Step 2)

 

10,500.35

Step 4: Labour hours per week: 90 × 48 hr

 

4,320 hr

Step 5: Labour cost per hour =

 


= Rs. 2.4306

PROFESSIONAL COURSE STUDENTS

Illustration 3.33

Model: Cost of conversion and Computation of saving

A factory undertakes production to customer’s satisfaction. Worker A was entrusted with the production of 200 units of product AA’ in 100 hours and worker B was asked to produce 100 units of product BB’ in 200 hours. The ruling rate of wages is Rs. 5 per hour which is guaranteed irrespective of the standard of efficiency. If the work given is finished within the time allotted, the worker gets Rs. 6 per hour for the time taken. Time saved is rewarded by an incentive bonus of 50% of wages earned per hour. A completes the job in 80 hours and B in 120 hours.

Assuming that the prevailing overhead rate is Rs. 10 per labour hour, indicate the impact of the system of wages coupled with the incentive scheme on the profits of the company when compared to a straight piece rate at Rs. 6 per hour. The fixation of hourly rates is understood to provide for a saving of 20% of the time fixed when the work is carried out by an efficient worker under normal conditions.

Pass your comments on the basis of rate fixation in the circumstances.

 

[C.S. Inter – Modified]

Solution

The cost of conversion of production is to be computed.

 

STAGE I:

 

Straight Piece Rate
Particulars Product AA′ 200 Units Product BB′ 100 Units

Step 1: Time allowed.

100 hrs
200 hrs

Step 2: Wages @ Rs. 6/hr (Step 1 × Rs. 6).

Rs. 600
Rs. 1200

Step 3: Overhead @ 10 rupees per hour (assumed that there will be 20% saving in time).

100 hrs − 20%
= (80 hrs × 10) = Rs. 800
200 hr − 20% = 200 − 40
= 160 × 10 = Rs. 1,600

Step 4: Total (Step 2 + Step 3).

Rs. 1,400
Rs. 2,800

STAGE II:

 

If the Company Adopts Incentive Bonus Scheme
Particulars Product AA′ Product BB′

Step 1: Wages for time taken @ Rs. 6/hr.

80 × Rs. 6 = Rs. 480
120 × 6 = Rs. 720

Step 2: Incentive bonus @ Rs. 3 per hour of time saved (50% of Rs. 6 = Rs. 3).

20 hrs × Rs. 3 = 60
80 hrs × Rs. 3 = 240

Step 3: Total wages (Step 1 + Step 2).

Rs. 540
Rs. 960

Step 4: Overhead @ Rs. 10 per hour of time taken.

80 × 10 = 800
120 × 10 = 1,200

Step 5: Cost of conversion (Add Step 3 + Step 4).

Rs. 1,340
Rs. 2,160

Saving [Step (4) in Stage I − Step 5 in Stage II]

Rs. 1,400 − Rs. 1,340 = Rs. 60
Rs. 2,800 − Rs. 2,160 = Rs. 640

Comment: The company will save in terms of costs of incentive bonus system is installed.

STAGE III:

 

When There is No Incentive System
  AA′ BB′

Step 1: Time allowed.

100 hrs
200 hrs

Step 2: Wages @ Rs. 6 per hour.

Rs. 600
Rs. 1,200

Step 3: Overtime @ Rs. 10 per hour (labour & overhead cost at normal hours at straight-piece rate)

Rs. 1,000
Rs. 2,000

Step 4: Total cost

Rs. 1,600
Rs. 3,200

STAGE IV:

 

When There is Incentive System

(Ref. Stage II results) Total cost (↓)

Rs. 1,340
Rs. 2,160

Compare the total cost when there is no incentive (Stage III) and when there is incentive (Stage IV), and you can find that the total cost is also less if the incentive system is introduced in the company.

Illustration 3.34

Model: Piece-work premium and Selling price

2 fitters, one labourer and one boy undertake a job on piece for a rate of Rs.1,890. The time spent by each of them is 110 ordinary working hours. The rates of pay on time-rate basis are Rs. 3.00 per hour for each of the two fitters, Rs. 2 per hour for the labourer and Re 1.00 per hour for the boy.

You are required to calculate as follows:

  1. The amount of piece-work premium and the share of each worker when the piece-work premium is divided proportionately to the wages paid.
  2. The selling price of the above job on the basis of the following additional data:

    Cost of direct materials = Rs. 3,110.

    Work overhead at 20% of prime cost.

    Selling overhead at 10% of works cost.

    Profit at 20% on the cost of sales

[I.C.W.A. – Modified]

Solution

  1. First wages are computed as follows:

     

     

     

            Rs.

    (i)

    2 fitters at Rs. 3 per hour for 110 hrs each (2 × (110 × Rs. 3))

            = 660

    (ii)

    1 labourer at Rs. 2 per hour for 110 hrs (110 × Rs. 2)

            = 220

    (iii)

    1 boy at Re.1 per hour for 110 hrs (110 × Re. 1)

            = 110

     

     

    *Total = 990

     

  2. Piece-work premium is calculated as follows:

     

    (i)

    Total wages agreed on piece-rate basis (given)

    = 1,890

    (ii)

    Less: *Wages computed on time basis (Ref: Step A)

    = 990

    (iii)

    Piece-work premium

    = 900

     

  3. Amount of piece-work premium will be divided proportionally to the wages paid, i.e., 660 : 220 : 110 or 6 : 2 : 1 as follows:
    1. 2 fitters: × Rs 900       = Rs. 600
    2. 1 labourer: × Rs 900     = Rs 200
    3. 1 boy: × Rs 900             = Rs. 100
  4. Computation of selling price is as follows:
    Particulars Rs.

    Step 1: Direct material (given)

    3,110

    Step 2: Direct wages (given)

    1,890

    Step 3: Prime cost (Step 1 + Step 2)

    5,000

    Step 4: Works overhead @ 20% on prime cost (20% of Rs. 5,000):

    1,000

    Step 5: Works cost (Step 3 + Step 4)

    6,000

    Step 6: Selling overhead @ 10% on works cost

    600

    Step 7: Cost of sales

    6,600

    Step 8: Add: Profit @ 20% on the cost of sales (20% of 6,600)

    1,320

    Step 9: Selling price (Steps 7 + 8)

    7,920

Illustration 3.35

Model: Computation of standard time and Computation of time allowed

The time taken for the operator “A” in the process of a manufacturing concern on three different counts was 23, 21 and 25 minutes while that of the operator “B” was 20, 24 and 22 minutes. It has been ascertained that the rating of A is and that of B is Allowance for fatigue and personal needs are assumed at 12%. Calculate on the basis of the above information as a base:

  1. The standard time
  2. The time allowed under an incentive allowance of 25% of the standard time.

[I.C.W.A. (Inter) – Modified]

Solution

For computation of the standard time, the time taken by each operator for each count is multiplied by the rating ratio to get normal time minutes. From the total normal time calculated, the average has to be found out. With this allowance for fatigue has to be added. The resultant figure will be the standard time which is arrived at as follows:

 

(a) Computation of Standard Time

Average normalized time


= 21.625 minutes.

(a)

Add: 12% allowance of fatigue (12% of 21.625)

= 2.595 minutes.

 

*Standard time

= 24.220 minutes.

(b)

Computation of time allowed under incentive

    ______

 

*(i) Standard time

= 24.220 minutes.

 

(ii) Add: 25% of standard time as an incentive (25% of 24.220)

= 6.055 minutes

 

(iii) Time allowed

= 30.275 minutes

Illustration 3.36

Model: Incentive bonus + Total earnings

A company employs its workers for a single shift of 8 hours for 25 days in a week. The company has recently fixed the standard output for a mass production item and introduced an incentive scheme to boost the output. The details of wages payable to the workers are as follows:

  1. Basic wages/piece-work wages @ Rs. 2 per unit subject to a guaranteed minimum wages of Rs. 50 per day.
  2. DA at Rs. 50 per day.
  3. Incentive bonus:

Standard output per day per worker = 40 units.

Incentive bonus up to 80% efficiency = Nil.

Incentive bonus for efficiency above 80% = Rs. 80 for every 1% increase above 80%.

The details of performance of four workers for the month of June 2009 are as follows:

Worker No. of Days Worked Output (Units)
A
25
810
B
19
450
C
25
900
D
21
720

You are required to calculate the total earnings of each of the workers.

 

[I.C.W.A. (Inter) – Modified]

Solution

First, the incentive is to be calculated as follows:


Worker
Incentive @ Rs. 80 for Every 1% Increase in Efficiency Above 80% Rs.

A

1% increase × 80 = 80

B

Nil efficiency below 80%

C

10% increase × 80 = 800

D

6% increase × 80 = 480

*1. Next, the total earnings of each worker has to be computed. As per the directions given in the problem, the piece-wage rate is given subjected to a minimum of Rs. 50 per day. So, care should be taken in computing the wages. In this problem, the worker B produced 450 units. Based on the piece rate, his wages are 450 × Rs. 2 = Rs. 900. But under guaranteed wages per day is Rs. 50 per day. He worked for 19 days. ∴ 19 × Rs. 50 = Rs. 950. So, his wages should be shown as Rs. 950 and not as Rs. 900.

 

Statement of the Total Earnings of Each Worker

Illustration 3.37

Model: Net saving in the production cost to offset losses from labour turnover

A manufacturer introduces new machinery into his factory with the result that the production per worker is increased. The workers are paid by results, and it is agreed that for every 2% increase in the average individual output, an increase of 1% on the rate of wages will be paid. At the time the machinery is installed, the selling price of the products falls by .

You are required to show the net saving in the production costs which would be required to offset the losses expected form the reduced turnover and bonus paid to workers.

Additional data:

  First period Second period

No. of workers

350

250

No. of articles produced

16,800

14,000

Wages paid

Rs. 33,600

 

Total sales

Rs. 75,600

 

[C.S. (Inter) – Modified]

Solution

STAGE I: Fall in sales value has to be computed as follows:

  1. Sales value of 16,800 articles = Rs. 75,600.
  2. Sales value of 14,000 articles (Period II)
  3. Fall in sales value = Sales value in Period ×

STAGE II: Computation of increase in wages:

No. of units produced by 350 workers = 16,800 units.

No. of units produced by 250 workers = (16,800/350) × 250= 12,000 units.

Actual production = 14,000 units.

 

Increase in wage rate = 16.666/2 = 8.333%.

Wages for 250 workers = Rs. 33,600 (given)

∴Wages for 250 workers = (Rs. 33,600/350) × 250 = Rs. 24,000.

∴ Increase in wages = Rs. 24,000 × 8.33% = Rs. 2,000.

STAGE III: Total production cost consists of:

 

Fall in sales value (Ref Stage I)

= Rs. 5,250.

Increase in wages (Ref Stage II)

= Rs. 2,000.

Result: Net saving in production cost

= Rs. 7,250.

3.16 DIRECT EXPENSES

This is another important element of cost like materials and labour. When costs are incurred in respect of services purchased from outside or available within the organization, they are called expenses. In case where an organization obtains services for a specific cost unit, the cost relating to it should be charged directly against the cost object. These expenses are known as “direct expenses”.

3.16.1 Meaning and Examples of Direct Expenses

Direct expenses are defined as, “costs, other than materials or wages, which are incurred for a specified product or saleable service”.

Direct expenses are also called chargeable expenses. It includes all the direct costs excluding the ones incurred on the direct material and the direct labour for a specific cost unit. Direct expenses include:

  1. Cost of design.
  2. Cost of drawings.
  3. Formula.
  4. Royalty and patent fees.
  5. Cost of special lay-out.
  6. Fees paid to consultant.
  7. Sub-contracting expenses for machining and allied services of contractors.
  8. Insurance and freight charges for special materials.
  9. Hire charges paid for special tools and equipments in respect of a specific job or order.
  10. Fees paid to architect and surveyor.
  11. Salesman’s commission—based on the value of units sold.

Direct expenses form a part of the prime costs. But as per the terminology of CIMA, prime cost is “the total cost of direct material and direct labour”, which is the latest trend. It should be ensured that expenses directly incurred for cost centres should be identified with those cost centres and charged to cost units as overhead. In no case they should be treated as direct expenses.

3.16.2 Accounting Treatment of Direct Expenses

  1. Consultant fees: Consultancy services relate to specific jobs or orders. They are treated as direct expenses. But such expenses are treated as overhead if they are related to regular or standard products.
  2. Royalty and patent charges: When royalty and patent charges are paid on the basis of the units of production, they may be either treated as direct charges to the cost of a product or as a factory overhead. If they are paid on the basis of sales, then they are treated as selling overhead. If they are in the form of fixed periodical charges, then they are treated as factory overheads.
  3. Cost of designs: The treatment of cost of designs vary from industry to industry. Depending upon the nature and purpose of designs, this may be treated either as direct cost or overhead.
  4. Sub-contracting expenses: Subcontracting expenses involves allowing outside agencies to carry out some of the operations of a firm.

Reasons for sub-contracting:

  1. When there is a temporary increase in demand for a firm’s products.
  2. A lower level of skill or the use of general-purpose machinery is essential because it is cost effective to use the machine and labour hours available.
  3. Some special purpose equipment or some special skill may not be available with the firm.
  4. As subcontracting expenses are related to specific orders or jobs, they are charged to them.
  5. Hire charges: When special jobs are manufactured at a customer’s request, it is necessary to hire single or special purpose tools and equipments. These expenses are charged to the specific jobs.
  6. Cost of drawings, blue-prints and so on: Generally, drawings and blue prints are prepared by the drawing office based on designs. Blue prints are copies of drawings made for the purpose of immediate use. Drawing-office expenses are related to specific jobs or orders. They are treated as direct expenses and are charged against the job or order. But incidentally, the cost of blue prints for regular products is treated as overhead.
  7. Control: As they constitute a small percentage of total cost, they are controlled by fixing standards. By comparing the actuals with the standard, the variations, causes for such variations and necessary remedial measures should be taken.

Summary

Labour is one of the important elements of cost. Labour cost represents wages paid to workers employed in business entities for producing goods or rendering services. Labour cost is classified into direct labour cost and indirect labour cost. Direct labour can be easily identifiable with costing unit whereas indirect labour can not be.

Time Recording involves two purposes—time-keeping and time-booking.

Labour Time Records: Various records—their specimen, purpose and maintenance are explained in detail (Ref: Main part of Text).

Accounting of Labour Cost: Monetary benefits, Non-monetary benefits (fringe benefits) and Deferred monetary benefits (terminal benefits). Various items included in each category and their accounting treatment are dealt with in detail (Ref: Text).

Work Study—a study of human work involves (i) Motion Study (ii) Time Study and (iii) Method Study. Meaning, definition, advantages and disadvantages for each of these have been explained in detail in the main part of the text.

Job Evaluation and Job Analysis: Job Analysis involves proper appraisal of jobs whereas Job Evaluation measures the relative worth of each job in an organisation. The various methods of Job Evaluation are: (i) Factor Comparison Method (ii) Rating Method (iii) Point Rating Method and (iv) Grading Method.

Various principles underlying the labour remuneration are explained in detail (Ref: Text)

Methods of Labour Remuneration: (i) Straight-Piece Rate Method (ii) Flat Time Rate Method (iii) Incentive Wage Plans (iv) Differential Piece Rate Method—Taylor’s Differential Piece Rate Method, Merrick’s Differential Piece Rate System, Gantt’s Task and Bonus Plan, (v) Premium Bonus Plans—Emerson’s Efficiency System, Bedauxe Scheme, Barth Scheme, Halsey Scheme, Halsey-Weir Scheme, Rowan Scheme, Accelerating Premium Bonus Scheme, Group Bonus Scheme:—Priest-man’s Production Bonus Plan, Rucker’s Plan, Scalon Plan, Towne Gain Sharing Plan, Budgeted Expenses Bonus—Each one is explained with its meaning, Salient features, advantages and disadvantages. Formula to compute value under each of the above methods by way of illustrations have been dealt with elaborately. (Ref: Text).

Labour Turnover: It denotes the rate of change in labour force in an organisation during a specified period computation of labour turnover rate is (illustrated) (No 18) made by applying (i) Separation Method; (ii) Replacement Method and (iii) Flux Method.

Idle Time: It represents the time during which the worker was idle but wages are paid for that time. Causes, accounting treatment, and control of idle time are all explained in detail (Ref: Text).

Overtime: A worker working more than 8 hours a day or 48 hours a week i.e., working beyond normal hours is called overtime and additional wages for extra time is referred to as Overtime Premium. Causes, disadvantages, control of overtime and accounting treatment of overtime all are explained in detail (Ref: Text).

Direct expenses may be defined as costs, other than materials or wages, which are incurred for a specific product or saleable service.

Accounting treatment of Direct Expenses: Ref: Text.

Key Terms

Clock Card: A document used for recoding the date and time of entry and departure of workers.

Job Card: A document used for recording the time spent by various workers on each job.

Motion Study: The study of body motions that occurred in performing an operation, aiming to establish the most favourable motion sequence for the maximum efficiency.

Time Study: Technique of establishing an allowed standard time to perform a given task.

Job Evaluation: A technique that equitably measures the relative worth of a job in a firm.

Job Analysis: A study of job in all phases for formulating the job description and job specifications.

Merit Rating: A technique used for the determination of each worker’s fair wages on the basis of his ability, skill and performance.

Idle Time: It represents the difference between the time for which the workers are paid and the time spent on the job.

Overtime: A worker who works beyond and above the normal working hours (i.e., 8 hours a day or 48 hours a week)—such time spent on a job.

Labour Turnover: The change in the composition of labour force arising on account of retirement, resignation, death

QUESTION BANK

Objective Type Questions

 

I. State whether the following statements are true or false

  1. Until recent years, labour cost constitutes a major portion of the total production cost.
  2. Labour cost is a committed cost.
  3. The time spent by a direct worker can be identified with a specific process or job.
  4. Cost per unit of a product is not influenced by labour cost.
  5. Indirect labour is charged to products.
  6. Personnel department alone is involved in labour control.
  7. Time-keeping function is performed by the timekeeper at the time-office.
  8. The main purpose of time-keeping is to ensure punctuality.
  9. The objective of time-booking is to ascertain the labour cost and evaluate labour performance.
  10. Clock card is a document for recording the date and time of entry and departure of workers.
  11. Job card is an “identity card” issued by an organization.
  12. Casual workers work on an honorary basis.
  13. Outworkers work within the premises of firms.
  14. Motion study is the study of body motions while performing an operation by workers.
  15. Time study is the study of time taken by a worker to fix his wages.
  16. Job analysis and job evaluation both represent the same meaning and they are synonymous terms.
  17. Merit rating is a technique used to determine wages.
  18. Time and motion study is conducted by the accounting department.
  19. Wages are paid for idle time.
  20. Normal idle-time wages are treated as factory overhead.
  21. Normal overtime wages are charged to costing P&L account.
  22. Labour turnover represents the total number of workers in a firm at a time.
  23. Costs incurred for recruitment, training, production loss and waste are included in “replacement costs.”
  24. Replacement costs should be charged to products.
  25. Cost of labour turnover is to be treated as overhead.
  26. Direct expenses include consultant fees, cost of designs, sub-contracting expenses, royalty and hire charges paid for tools and equipments to a specific job.
  27. Cost of tools for special use should be charged to the job in the form of depreciation.

Answers:

 

1. True

2. True

3. True

4. False

5. False

6. False

7. True

8. False

9. True

10. True

11. False

12. False

13. False

14. True

15. False

16. False

17. True

18. False

19. True

20. True

21. False

22. False

23. True

24. True

25. True

26. True

27. True

 

 

II. Fill in the blanks with apt word(s):

  1. When a work is easily identified in the process of conversion of raw materials into finished goods it is known as _____.
  2. Cost per unit of a product is influenced by _____.
  3. Direct labour is charged directly to the _____.
  4. Indirect labour is treated as part of _____.
  5. Time and motion study is the responsibility of _____ department.
  6. Time-keeping function is performed by the _____.
  7. Purposes of time-keeping are _____ and _____.
  8. A document that is used for recording the date and time of entry and departure is called _____.
  9. _____ is the document used for recording the time spent by various workers on each job _____.
  10. When workers perform work in their own premises with their own tools are called _____.
  11. For outworkers raw materials are provided by the _____
  12. Work study involves motion study, _____ and _____.
  13. _____ is the study of body motions used in performing an operation.
  14. _____ involves a proper appraisal of all jobs in an organization.
  15. _____ is a technique that equitably measures the relative worth of a job in a firm.
  16. _____ is an important technique used for determining the worker’s wages on the basis of performance.
  17. The total wages payable is calculated under Halsey plan and Halsey-Weir plan by using the formula as follows:

            = (Hourly rate × Time taken)

            + (— … × Time saved × hourly rate).

     

  18. Wages paid during normal idle time is treated as _____.
  19. Overtime wages is made up of two parts: normal wages and
  20. In case of rush orders, overtime premium should be charged to _____
  21. A change in the composition of labour force is termed as _____.
  22. Labour-turnover costs may be grouped into two heads:1 Preventive costs and 2 _____.
  23. The payment of idle time arises only when workers are paid on _____.
  24. Where the speed of production is beyond the control of a worker, _____ system of wage payment is suitable.
  25. Under Merrick’s multiple piece-rate system, 110% of the ordinary piece rate is given to the workers whose level of performance is between _____ and _____ of the standard output.

Answers:

  1. direct labour
  2. labour cost
  3. product
  4. factory overhead
  5. engineering and work study
  6. time-keeper
  7. payroll; cost
  8. Clock card
  9. Job card
  10. Outworkers
  11. firm
  12. time study; method study
  13. Motion study
  14. Job analysis
  15. Job evaluation
  16. Merit rating
  17. 50%
  18. factory overhead
  19. additional wages
  20. Specific jobs
  21. Labour turnover
  22. Replacement costs
  23. Time basis
  24. Time-rate system
  25. 83% and 100%

III: Multiple choice questions choose the correct answer

  1. Direct labour represents
    • labour which can be conveniently identified with a specific job or process.
    • the efficient labour.
    • labour which is hired directly.
    • none of these.
  2. Time-keeping means
    • a technique of recording the time.
    • analysis of time spent by employees, departments, operations, production orders or jobs.
    • time spent by workers on different jobs.
    • none of these.
  3. Time-booking means
    • time spent by workers to record their entry into the factory.
    • a technique to analyse time spent by workers in the firm.
    • time spent by workers on their jobs.
    • all of the above.
  4. Time and motion study are conducted by
    • time–office.
    • personnel department.
    • accounting department.
    • engineering department.
  5. Work study’s objective is
    • to carry out a methodical study for improving productivity.
    • to study the worker’s attitude on their activities.
    • to pricing the products.
    • to insist the workers to finish their work on time.
  6. Job evaluation is
    • evaluation of different jobs in a factory.
    • a technique that equitably measures the relative worth of job in a firm.
    • to scrutinize the application forms for jobs.
    • to assess the operations of the factory as a whole.
  7. Merit rating refers to
    • the systematic ranking of the employees.
    • the study of motions while doing an operation.
    • the systematic evaluation of an employee’s performance on the job.
    • none of these.
  8. Idle time is
    • time spent by workers to take lunch.
    • time spent by workers on their jobs.
    • time spent by workers in the factory.
    • the difference between the time for which the workers are paid and the time spent on the job.
  9. Overtime represents
    • the time worked beyond normal working hours.
    • the time worked beyond 12 noon everyday.
    • the time worked continuously without break.
    • none of these.
  10. Labour turnover represents
    • the strength of the labour in a firm.
    • the change in the labour force.
    • the efficiency of the labour force.
    • the cost of labour incurred in a specified period.
  11. Labour cost per unit can be reduced by
    • offering low rates of wages.
    • reducing the labour force.
    • higher input–output ratios.
    • all of the above.
  12. Incentive-wage plans are devised
    • to fix bombs.
    • to produce more.
    • to determine regular wages.
    • to reward workers in proportion to the work done.
  13. Differential price wages mean
    • different wages for labourers on the basis of nepotism.
    • different wages for different levels of performance.
    • Wages for the time saved.
    • All of the above.
  14. Bonus under Halsey plan if paid at
    • 50% of the time saved.
    • of time saved.
    • 100% of the time saved.
    • 83% of time saved.
  15. In the case of Bedaux system, B denotes
    • number of units produced.
    • number of workers required for a job.
    • number of hours above standard hours.
    • number of hours required for a job
  16. Time rate and piece rate are combined in
    • Halsey–Weir system
    • Emerson’s system
    • Gantt system
    • Bedaux system

Answers:

 

1. (a)

2. (b)

3. (c)

4. (d)

5. (a)

6. (b)

7. (c)

8. (d)

9. (a)

10. (b)

11. (c)

12. (d)

13. (b)

14. (a)

15. (d)

16. (c)

 

 

 

 

Short Answer Questions

  1. Define direct labour.
  2. What is meant by direct-labour cost?
  3. Define indirect labour.
  4. What do you mean by indirect labour cost?
  5. Name the departments involved in labour control.
  6. Explain the term: hiring of labour.
  7. What is meant by time-keeping? What are its purposes?
  8. Explain the term: time-booking. What is its objective?
  9. What is a clock card? What is its use?
  10. Write short notes on job card.
  11. What do you mean by casual workers?
  12. Explain the term: outworkers.
  13. Explain the term: work study. What are its objectives?
  14. Write short notes on:
    • Motion study
    • Time study
    • Method study
  15. What is the difference between job analysis and job evaluation?
  16. Name the methods of job evaluation.
  17. What are the underlying motives of introducing incentive-wage plans?
  18. How can the incentive-wage plans be classified?
  19. What do you mean by time rate and piece rate?
  20. What do you understand by differential piece rate?
  21. Explain Rowan premium bonus plan with a simple illustration.
  22. What is meant by group-incentive plan? What are its main drawbacks?
  23. What is the formula for calculating wages under standard hour plan?
  24. How does the scheme “Merrick’s multiple piece rate” operate? Illustrate.
  25. Do you advocate to adopt Bedaux point scheme? Why?
  26. Explain: accelerating premium bonus scheme.
  27. Name any four group-incentive plans.
  28. Explain the significance of pay-roll accounting.
  29. What is “idle time”? How can they be classified?
  30. What are the reasons for normal and abnormal idle time?
  31. How can you control the idle time?
  32. How would you treat idle time in cost accounting?
  33. What is meant by overtime? What is the accounting treatment of overtime?
  34. How can overtime be controlled?
  35. How would you compute an hourly rate?
  36. Explain the term: labour turnover. What are the causes for labour turnover?
  37. What are the classifications of labour-turnover cost?
  38. How will you treat labour-turnover cost?
  39. Define direct expenses.
  40. How will you treat “cost of tools”?
  41. Name the different systems of wage payments.
  42. Distinguish between time-keeping and time-booking.
  43. Distinguish between job evaluation and merit rating.
  44. “Cost of apprentice and training is a cost of investment in human assets”—comment.
  45. What are the advantages of piece-work-wage payment?
  46. How will you treat “cost of designs” in cost accounting.
  47. How would you deal with the following expenses?
    • Expenses for welfare activities and
    • Research and development cost.
  48. Explain the merits and demerits of disc method
  49. In what circumstances would you recommend the use of
    • Differential piece–work and
    • Rowan system of premium bonus
  50. How would you compute labour turnover under separation method?

Essay Questions

  1. What are the factors to be considered for the introduction of a wage-payment scheme? Explain.
  2. Enumerate the general principles to be borne in mind in distinguishing the wage-incentive scheme.
  3. State the essential of a good incentive-wage plan? In the light of your answer, discuss any two incentive-wage plans you are familiar with.
  4. Explain: group-bonus scheme. What are its advantages and disadvantages?
  5. What are the objectives of incentive plans of wage payments? Explain the conditions necessary for their success.
  6. Explain labour turnover. How is it measured? What are the avoidable causes and unavoidable causes of labour turnover?
  7. What are the advantages and limitations of piecework-wage payment?
  8. As a cost accountant in a new factory employing 5,000 employees, you are asked by the General Manager to introduce a good system of recording attendance and payment of wages to workers. Describe briefly the procedures you will adopt and indicate how you would prevent payment to dummy workers and other possibilities of fraud.
  9. The desirable objective is “mobility” for the nation and stability for the firm. Discuss. Bring out the causes and cost aspect of large-scale labour turnover.
  10. Western Manufactures Ltd. manufacturing various engineering goods in a sequence of operations on a conveyor-belt system wants to introduce a suitable system of labour remuneration as an incentive scheme in place of flat time-rate system. Write a report, as a cost accountant of the firm, outlining the general principles governing any incentive scheme and describing a broad outline of a suitable system.

Exercises

 

Part I (For B.Com Students)

[Model: Labour turnover]

1. From the following particulars supplied by the personnel department of a firm, calculate labour turnover

 

Total no. of employees at the beginning of the month

2,010

No. of employees who are recruited during the month

     30

No. of employees who left during the month

     50

Total no. of employees at the end of the month

1,990

[Madras University & Madurai University]

[Ans: Labour-turnover rate as follows:

  1. Separation method : 2.5%
  2. Replacement method : 1.5%
  3. Flux method : 4%]

2. Calculate labour-turnover rate from the following particulars:

 

No. of workers in the beginning

  8,000

No. of workers at the end

10,000

No. of separations

  1,500

No. of replacements

  1,200

 

[Osmania University]

[Ans: (i) Separation method : 16.67%

           (ii) Replacement method : 13.33%

           (iii) Flux method : 30%]

3. The following information is extracted from the records of a company for the month of October:

 

    No. of employees at the beginning of the month

   950

    No. of employees at the end of the month

1,050

    No. of employees resigned

     10

No. of employees discharged

     30

No. of employees replaced in the vacancies

     20

No. of employees appraised due to expansion scheme

   120

Calculate the labour-turnover rate.

 

 

[Madras University]

[Ans: (i) Separation method – 4%;

           (ii) Replacement method – 2%; and

           (iii) Flux method –18%]

4. Raghavendra Metal Company gives the following information:

 

No. of employees at the beginning of the year

200

No. of employees at the end of the year

240

No. of employees resigned

  20

No. of employees discharged

    5

No. of employees replaced

  18

Calculate the labour turnover by applying three methods

 

[Madras University & Bharathidasan University]

[Ans: Labour-turnover rate as follows:

  1. Separation method : 11.36%
  2. Replacement method : 8.18%
  3. Flux method : 19.55% ]

[Model: Allocation of wages]

5. A machinist employed in a factory which works for six days in a week is paid Rs. 50 per day. Plus DA at 60% of the basic wages. He is allowed to take 30 minutes off for lunch during his 8-hour shift. During a week, his card showed that his time was chargeable to:

 

Job No. 1   :   10 hours
Job No. 2   :   15 hours
Job No. 3   :   12 hours

The time not booked was because of power failure. Allocate his weekly wages to the different jobs and other appropriate accounts.

[Ans:

  1. Total wages for the week Rs. 480
  2. Hourly rate 10 hours
  3. Wages chargeable to Job 1: Rs. 100

    Wages chargeable to Job 2: Rs. 150

    Wages chargeable to Job 3: Rs. 120

  4. Normal idle-time wages chargeable to factory overhead = Rs. 30
  5. Abnormal idle-time wages chargeable to costing P&L A/C = Rs. 80.]

[Model: Normal and overtime wages]

6. The time card of a worker reveals that in a normal week of 48 hours, he worked for 53 hours at the rate of Rs. 20 per hour. Taking an overtime premium at 150% of normal time rate, calculate the gross wages.

 

[Madras and Madurai – Modified]

[Ans: Rs. 1,110 (i.e., 48 hrs × Rs. 20 + 5 hrs × Rs. 30 (150% of Rs. 20))]

7. Calculate the normal and overtime wages payable to a workman from the following data:

Days Hours worked

Monday

8

Tuesday

10

Wednesday

9

Thursday

11

Friday

9

Saturday

4

Total

51 hours

Normal working hours: 8 hrs per day

Normal rate: Re 1.00 per hour

Overtime rate: Up to 9 hrs in a day as single rate and over 9 hrs in a day as double rate

(or)

Up to 48 hrs in a week at single rate and over 48 hrs at double rate, whichever is more beneficial to the workmen.

 

[Bharatiar University – Modified]

[Ans: Total wages = Rs. 54.

  1. On a day basis: (44 × 1.00) + O.T (4 × 1 + 3 × 2) = Rs. 54.
  2. On a week basis: (48 × 1.00 + (3 × Rs. 2) = Rs. 54.

    In this case, the wages are Rs. 54 on both the bases.]

8. From the following particulars, you are required to calculate under the “average wage rate” the labour cost chargeable to Job No. A which was completed in 1990:

The basic wage rate is Rs. 2 per hour and the overtime rates are as follows:

Before or after working hours = 150% of basic wage rate.

Sundays and holidays = 200% of basic wage rate.

During the year 1990, the following hours were worked:

Normal time = 2,00,000 hours.

Overtime before or after working hours    30,000 hours.

Overtime on Sundays and holidays           20,000 hours.

                                               Total   2,50,000 hours

For Job A, 3,500 hours were spent as follows:

Normal time = 3,000 hours.

Before and after working hours = 300 hours.

Sundays and holidays = 200 hours.

 

[Calcutta University B.Com (H)]

[Ans:

  1. Average rate per hour: Rs. 2.28 (Rs. 5,70,000 ÷ 2,50,000).
  2. Labour cost chargeable to Job A: Rs. 7,980 (3500 hrs × Rs. 2.28).

[Model: Cash required for wage payment]

9. From the following particulars, find the amount of cash required for the payment of wages in a factory for a particular month:

 

 

  Rs.

(a) Normal wages

20,500

(b) Overtime wages

  2,200

(c) Leave wages

  1,700

(d) Deduction of employee’s share to ESI

     500

(e) Deduction of employee’s contribution to PF

  1,600

(f) House rent is to be recovered from 30 employees @ Rs. 300 per month

 

[Sri Venkateswara University and Madras University – Adapted]

[Ans: Cash required for payment of wages: Rs. 22,000]

10. From the following details, ascertain the amount of cash required for payment of salaries in a firm for a particular month:

  1. Normal time salaries = Rs. 65,000
  2. DA = 20% of (i) above
  3. Leave wages = 5% of (i) and (ii) above
  4. Employee’s contribution to ESIC and PF = 3% and 5% respectively on (i) and (ii) above
  5. Income tax deduction at source = Rs. 4,000
  6. Deduction for insurance premium = Rs. 5,000
  7. Festival advance to be recovered from 60 employees at Rs. 100 per employee

[Ans: Cash required for payment of salaries: Rs. 60,660]

[Model: Labour cost to the employer]

11. From the following data, prepare a statement showing the cost per day of eight hours of engaging a particular type of labour:

  1. Monthly basic salary plus DA = Rs. 400
  2. Leave salary = 5% of (a)
  3. Employer’s contribution to PF = 8% of (a) and (b)
  4. Employer’s contribution to ESIC: of (a) and (b)
  5. Pro–rate expenditure on amenities to labour = Rs. 35 per head per month
  6. No. of working hours in a month = 200.

[Madras University, Periyar University and Bharathiyar University]

[Ans: Cost per day (for 8 hours) = Rs. 19.96]

12. A worker’s

  1. Basic wage rate = Rs. 300 pm.
  2. DA = 80% on basic wages.
  3. HRA = 20% on (i) and (ii).
  4. Overtime wages = Rs. 170.
  5. Deduction towards PF = 6% on (i), (ii) and (iii).
  6. ESI premium deduction = 1.5% on (i), (ii) and (iii).
  7. The employer is also contributing to PF but is contributing only 2% towards ESIC.
  8. Cost of labour amenities is Rs. 35 per worker per month.

Find out the (i) wages payable to worker and (ii) labour cost per month.

 

[Sri Venkateswara]

[Ans: (i) Rs. 804.40; (ii) Rs. 904.84]

Following are the steps to be followed:

  A B

(a) Basic wages

Rs. 100
Rs. 100

(b) DA % on basic wages

50%
50%

(c) PF on basic wages

8%
8%

(d) ESI (on basic wages)

2%
2%

(e) Overtime

10 hours

(f) Idle time and leave

16 hours

The normal working hours for the month are 200. Overtime is paid for at double the normal rate plus DA. Employee’s contribution to ESI and PF are at equal rates with the employer’s contribution. The month has 25 working days and one paid holiday.

The two workers were employed on jobs X, Y, and Z in the following proportions:

Overtime was done on Job Y.

 

[Madras University]

 

A
B

[Ans: (i) Earnings of workers

Rs. 155
Rs. 145

(ii) Labour cost (excluding OT)

Rs. 160
Rs. 165

(iii) Labour cost of Jobs:

X: Rs. 146;
Y Rs. 96;

 

Z Rs. 97.50]

 

[Model: Labour cost per hour]

13. Calculate the labour cost per hour for a worker from the following information:

Basic pay = Rs. 2,000 p.m

DA = Rs. 1,500 p.m

CCA + HRA = Rs. 1,000 p.m

No. of working days per year = 300

Leave rules : 30 days paid leave with full pay:

20 days sick leave with half pay

Usually, sick leave is fully availed off.

 

[Madras –Adapted]

[Ans:

Labour cost per hour : Rs. 26.25

 

Net labour cost per year : Rs. 52,500

 

Effective working days per annum : 250 days]

14. From the following data, prepare a statement showing the cost per day of 8 hours of engaging a particular type of labourers:

  1. Monthly salary (Basic + DA) = Rs. 20,000.
  2. Leave salary to the workmen = 5% of salary.
  3. Employer’s contribution to PF = 8% of (a) and (b).
  4. Employer’s contribution to ESIC = of (a) and (b).
  5. Pro-rate expenditure on labour amenities Rs. 179.50 per head per month.
  6. No. of hours in a month = 200.

[Bharathiar, Periyar and Madras–Modified]

[Ans: Labour cost per hour = Rs. 12.50

           Labour cost per day = Rs. 100

           Labour cost per month = Rs. 2500]

[Model: Worker’s earnings, labour cost and its allocation to jobs]

15. Calculate the earnings of workers A and B from the following particulars for a month and allocate the earnings to each Jobs X, Y, and Z:

 

 

A
B

(i) Basic wages

Rs. 1,000
Rs. 1,000

(ii) Dearness Allowance

50%
55%

(iii) Provident Fund (on basic wages)

8%
8%

(iv) Employee’s state Insurance (on basic wages)

2%
2%

(v) Overtime

10 hours

(vi) Idle Time and Leave

16 hours

The normal working hours for the month are 200 hours. Overtime is paid at double the normal wages plus dearness allowance. Employer’s Contribution to state insurance and provident fund are at an equal rate with employee’s contributions. A month has 25 working days and one paid holiday. The two workers employed on jobs. X, Y, and Z in the following proportions:

Overtime was done on Job Y.

 

[Ans:

Earning of workers: A: Rs. 1,550; B: Rs. 1,450

 

Labour Cost (excluding OT): A: Rs. 1,600;

 

B: Rs. 1,650

 

Labour Cost of Jobs:

 

X: Rs. 1,465

 

Y: Rs. 960

 

Z: Rs. 975]

[Model: Methods of remuneration and incentive systems – time and piece wages]

16. Mr. Menon works in a factory where the following particulars apply:

Normal rate per hour = Rs. 7.50

Normal piece rate = 20% more of time rate

Expected output = 20 units per hour

Mr. Menon produces 157 units in an 8-hour day. Calculate his wages for the day on (a) time basis and (b) piece basis.

 

[Kerala University]

[Ans: (a) Time wages: Rs. 60

            (b) Piece wages: Rs. 70–65]

17. A company has set 5 units per hour as the standard output, each unit having a piece rate of Rs. 3. In a normal day of 8 hours, X produces 35 units and Y produces 50 units. The usual hourly rate applicable to all workers is Rs. 15. Find out the earnings of X and Y:

  1. If only time-rate system is used
  2. If only piece-rate system is used
  3. If piece rate with guaranteed time rate is applied.

[Ans: (a)         X: Rs. 120       Y: Rs. 120

            (b)         X: Rs. 105       Y: Rs. 150

            (c)         X: Rs. 120       Y: Rs. 150]

[Model: Taylor’s differential piece-rate system]

18. With the help of the following information, you are required to ascertain the wages paid to workers X and Y under Taylor’s differential-piece-rate system:

Standard time allowed = 10 units per hour

Normal wage rate = Re 1 per hour.

Differential rates to be applied:

75% of piece rate when below standard

125% of piece rate when at or above standard

The workers have produced in a day of 8 hours as follows:

X: 60 units Y = 100 units

 

[Madras University and Andhra University]

[Ans: Standard output in a day of 8 hrs = 80 units

           Ordinary piece rate: Re. 0.10

           Earning: X = Rs. 4.50; Y = Rs. 12.50]

19. Calculate the earnings of workers A and B under straight piece-rate system and Taylor’s differential piece-rate system from the following particulars:

Normal rate per hour : Rs. 1–80

Standard time per unit : 20 seconds

Differentials to be applied:

80% of piece rate below standard

120% of piece rate at or above standard

Worker A produces 1,300 units per day and Worker B produces 1,500 units per day.

 

[Calicut University and Madras University]

[Ans:

 

A

B

 

 

Rs.

Rs.

 

Straight piece-rate system

13

15

 

Taylor’s differential piece-rate system

10.40

18]

[Model: Merrick’s multiple piece-rate system]

20. On the basis of the following information, calculate the earnings of A, B, C and D under Merrick’s differential piece-rate system:

Standard production per hour = 12 units

Normal rate per hour Re 0–60

In an 8-hour day:

A produced: 64 units

B produced: 96 units

C produced: 84 units

D produced: 100 units

 

[Sri Venkateswara University and Madras University]

[Ans:

A: Rs. 3.20;

B: Rs. 5.28;

 

C: Rs. 4.62;

D: Rs. 6]

21. Calculate the earnings of three workers A, B and C under Merrick’s differential piece-rate system:

 

Standard production

= 360 units

    A produced

= 270 units

    B produced

= 300 units

    C produced

= 390 units

Ordinary piece rate

= 0.10 per unit

 

[Madras University – Modified]

[Ans: A: Rs. 27;     B: Rs. 33;      C: Rs. 46.80]

[Model: Gantt’s task and bonus plan]

22. From the following information, calculate the earnings of three workers X, Y, and Z under Gantt’s task bonus plan.

  1. Time rate : Rs. 15 per hour
  2. High task per day of 8 hours: 80 units
  3. High piece rate = Rs. 2 per unit
  4. Day’s output: X = 70 units; Y = 80 units; Z = 90 units

[Karnataka University]

[Ans: X: Rs. 120;    Y: Rs. 144;    Z: Rs. 180]

23. From the following information you are required to fix a high piece rate and calculate the earnings of X, Y and Z who complete the job within 12, 10 and 9 hours, respectively.

Standard time – 10 hours for a job

Rate per hour – Re 1

Below 100% efficiency – Time wage

At 100% efficiency – Time wage plus 10%

Above 100% efficiency – Straight piece rate + 20%

What will be their effective hourly rate?

 

[Madras University – Modified]

[Ans: High piece rate: Rs. 10; Earnings: X: Rs. 12

            Y: Rs. 11

            Z: Rs. 12

            Effective hourly rate:

            X: Re 1.00

            Y: Rs. 1.10

            Z: Rs. 1.34]

[Model: Halsey plan]

24. Standard time = 10 hours

  Time taken = 8 hours

  Time rate = Rs. 2.50 per hour

  Calculate the total earnings under Halsey plan

 

[Madurai Kamaraj University and Bharathidasan University]

[Ans: Rs. 22.50]

25. In a factory, the standard output is 48 units per week for a working week of 48 hours. The hourly rate is Rs. 3. Three workers X, Y and Z produce 42, 48 and 72 units in a particular week. Find the earnings of each worker under Halsey system of wage payment.

 

[Mysore University – Modified]

[Ans: X Rs.: 144

            Y Rs.: 144

            Z Rs.: 180]

[Model: Halsey–Weir plan]

26. Calculate the wages of a worker under Halsey–Weir system from the following information:

 

        Time allowed:

48 hours

        Time taken:

40 hours

        Rate per hour:

Rs. 3

[Ans: Rs. 127–20]

27. Calculate the amount of wages and bonus earned by this worker under Halsey–Weir plan:

 

Name
Surrender

Job commenced

Monday 23
September 8 a.m.

Job finished

Saturday 28
September 1 p.m.

Quantity of pieces of work given out

= 638

Quantity of pieces of work passed

= 600

Worker’s rate

= 50 paise per hour

Time allowed

= 10 pieces per hour

Bonus

= 30% of time saved

Assume that the employee worked for 9 hours a day without any overtime.

 

[Bharathidasan University]

[Ans: Rs. 26–50]

[Model: Rowan plan]

28. Standard time allowed for a job is 50 hours. The hourly rate of wages is Rs. 2 per hour plus a DA at Rs. 2.50 per hour worked. The actual time taken by the worker was 40 hours. Calculate the total wages as per Rowan plan.

 

[Kakatiya University]

[Ans: Rs. 196]

29. Calculate the total wages payable to a worker under Rowan system from the following particulars:

 

Job No.
Time allowed
Time taken
1
25 hours
20 hours
2
30 hours
28 hours

The worker is entitled to a fixed DA of Rs. 100 per week of 48 hours and basic wages of Rs. 10 per hour.

 

[Bangalore University]

[Ans: Rs. 638–67]

[Model: Halsey and Rowan plans]

30. Standard time fixed for a job in a manufacturing concern is 40 hours. Time rate is 60 paise per hour. The actual time taken by workers A, B and C is 20 hours, 15 hours and 30 hours, respectively. Calculate the total remuneration of A, B and C on the basis of (a) Halsey plan and (b) Rowan plan

 

[Bangalore University]

[Model: Earnings and rate per hour]

31. The two workers A and B produced 80 and 100 pieces of a product ‘x’ on a particular day. The time allowed for 10 units of product ‘x’ is 1 hour. The hourly rate is Rs. 4.

Calculate the following:

Earnings for the day

Effective rate of earnings per hour under

Halsey premium bonus (50 % sharing)

Rowan premium bonus

 

[Madras University]

[Ans:

Under Halsey plan:

 

Earnings for the day: A: Rs. 32; B: Rs. 36.

 

Effective rate of earnings per hour: A: Rs. 4;

 

B: Rs. 4.50

 

Under Rowan plan:

 

Earnings for the day: A: Rs. 32; B: Rs. 38.40.

 

Effective rate of earnings per hour: A: Rs. 4;

 

B: Rs. 4.80]

[Model: Earnings and overheads]

32. In a factory, one work order was completed in 26 hours. The standard time for this work was 40 hours and the worker was paid at Rs. 10 per hour. The factory overhead charges were 80% of the standard time. Find out the worker’s total earnings, employer’s savings and effective earnings rate per hour under (a) Halsey plan and (b) Rowan plan

 

[Madurai Kamaraj University]

[Model: Halsey and Rowan plans – A comparative statement of earnings and savings]

33. For a certain work order, the standard time is 20 hours. The actual time taken is 13 hours. Wages per hour is Rs. 5 and the factory overheads are 80% of standard time.

Set out a comparative statement showing the effect on paying wages under

(a) Halsey system (b) Rowan incentive bonus system

 

[Madras University]

Ans:

Particulars

Halsey
Rs.
Rowan
Rs.

 

Time wages

65
65

 

Bonus

17.50
22.75

 

Total earnings

82.50
87.75

 

Effective earnings per hour

6.35
6.75

 

Savings in wages for employer

17.50
12.25

 

Savings in overheads for employer

28
28

 

Total savings for employer

45.50
40.25

[Model: Halsey and Rowan plans – combined with other systems]

34. Calculate the earnings of a worker under the following methods:

 

Time-rate method

 

Piece-rate method

 

Halsey plan

 

Rowan plan

 

Information given:

Standard time 30 hours

 

Time taken 20 hours

Hourly rate of wages Re 1. per hour + a DA @ 50 paise per hour worked.

 

[Madras University – 1999, 2004;
Periyar University – 2004;
Bharathiar University – 2004]

[Ans: Earnings: (a): Rs. 30

            (b): Rs. 40

            (c): Rs. 35

            (d): Rs. 36.67]

35. From the following particulars, work out the earnings for the week of a worker under

  1. Straight piece rate
  2. Differential piece rate
  3. Halsey premium system
  4. Rowan system

Number of working hours per week = 48

Wage per hour = Rs. 3.75

Normal time per piece = 20 minutes

Rate per piece = Rs. 1.50

Normal output per week = 120 pieces

Actual output for the week = 150 pieces

Differential piece rate: 80% of piece rate when the output is below standard and 120% when above standard.

 

[Madras University – 2008]

[Ans: Earnings of worker per week under:

            Straight piece rate – Rs. 225

            Differential piece rate – Rs. 270

            Halsey premium plan – Rs. 183.75

            Rowan system – Rs. 187.20]

[Model: Computation of factory cost]

36. A worker is allowed 18 hours to complete a job, which he accomplishes in 12 hours. His hourly rate is Rs. 2. The material cost of the product is Rs. 20. The over heads are recovered at 75% of the direct wages. Calculate the factory cost of the job under

(a) piece rate, (b) Halsey plan, and (c) Rowan plan.

 

[Bangalore University]

[Ans: Factory cost: (a) Rs. 62; (b) Rs. 72.50; (c) Rs. 76]

37. A worker takes 9 hours to complete a product on daily wages and 6 hours on a scheme of payment by results. His day rate is 75 paise an hour, the material cost of the product is Rs. 4 and the overheads are recovered at 150% of the total direct wages. Calculate the factory cost of the product under:

(a) Piece-work plan (b) Rowan plan (c) Halsey plan

 

[Bharathiar University and Madras University]

[Ans: (a) Rs. 15.25 (b) Rs. 19 (c) Rs.18.07]

[Model: Emmerson’s efficiency plan]

38. From the following information, calculate the bonus and earnings under Emerson’s efficiency bonus plan

Standard output in 12 hours – 192 units

Actual output in 12 hours – 168 units

Time rate – Re. 0.75 per hour

If the actual output is 240 units, what will be the amount of bonus and earnings?

 

[Madras University]

[Ans:

(a) when the actual output is 168 units:

 

Bonus: Re. 0.72

 

Earnings: Rs. 9.72

 

When the output is 240 units: Bonus: Rs. 4.05

 

Earnings: Rs. 13.05]

[Model: Bedeaux’s point system]

39. Calculate the earnings of a worker under Bedeaux’s plan

Standard output in 8 hours = 120 units

Actual output in 8 hours = 150 units

Time rate = Re. 0.50

[Ans: Rs. 4.75]

[Model: Barth’s variable-sharing plan]

40. Calculate the wages of workers under Barth’s variable-sharing plan:

 

 

Time allowed

36 hours

 

Time taken

25 hours

 

Rate per hour

Rs. 1.50

[Ans: Rs. 45]

[Model: Sundry premium plan]

41. Calculate the total monthly remuneration of three workers A, B, and C from the following data:

Standard production per month per worker – 1,000 units. Actual production during the month:

A: 850 units; B: 750 units; C: 950 units.

Piece rate Re. 0.10 per unit (actual production).

Additional production bonus is Rs. 10 for each percentage of actual production exceeding 80% of the standard production.

DA – Rs. 50 per month (fixed)

 

[Madras University]

[Ans: A: Rs. 185; B: Rs. 125; C: Rs. 295]

[Model: Sliding scale or Accelerated premium bonus plan]

42. What will be the earnings of a worker at Re. 0.55 per hour when he takes 140 hours to do a volume of work for which the standard time allowed is 200 hours? The plan of payment of hours is on a sliding scale as follows:

Within the first 10% saving in the standard time – bonus is 40% of the time saved

Within the second10% saving in the standard time – bonus is 50% of the time saved

Within the third 10% saving in the standard time – bonus is 60% of the time saved

Within the fourth 10% saving in the standard time – bonus is 70% of the time saved

 

[Madras and Karnataka Universities]

[Ans: Earnings: Time wages (140 hrx0.55) + Bonus (30 × 0.55) = Rs. 93.50]

[Model: Group-bonus schemes]

43. A, B and C are engaged in a group task for which payment of Rs. 725 is agreed upon:

 

Time-wage rates are:

A: Rs. 8 per day

 

B: Rs. 6 per day

 

C: Rs. 5 per day

A worked for 25 days, B for 30 days and C for 40 days. Distribute the amount to A, B and C on an equitable basis.

 

[Calicut University]

[Ans: A: Rs. 250; B: Rs. 225; C: Rs. 250]

44. In a factory, the group-bonus scheme is in use which is calculated on the basis of earnings under time rate. The following particulars are available for a group of four workers P, Q, R and S:

Output of the group – 16,000 units.

Piece rate per 100 units – Rs. 2.50 in addition to time wages.

No. of hours worked by – P: 90; Q: 72; R: 80; and S: 100.

Time rate per hour for: P: Re. 0.80; Q: Re. 1; R: Rs. 1.20; and S: Re. 0.80.

Calculate the bonus and total wages earned by each worker.

Exercises

 

Part II (For Professional Courses (Advance Level)) B.Com (Hons); M.Com; C.S; C.A; I.C.W.A

45. Calculate the earnings of A and B from the following particulars for a month and allocate the labour to each job X, Y and Z:

  A B

(i) Basic wages

Rs. 100
100

(ii) DA

50%
50%

(iii) Contribution to PF (on basic wages)

8%
8%

(iv) Contribution to ESI (on basic wages)

2%
2%

(v) Overtime hours

10
-

The normal working hours for the month are 200. Overtime is paid at double the total of normal wages and DA. Employer’s contribution to ESI and PF are at equal rates with the employee’s contributions:

[C.A. (Inter)]

[Ans:

Net wages paid: A: Rs. 155; B: Rs. 224

 

Labour cost: A: Re. 0.80; B: Rs. 1.28

 

Allocation of wages to Jobs:

 

A: X: Rs. 64; Y: Rs. 48; Z: Rs. 48 = Rs.160.

 

A: overtime Y: Rs.15 = Rs.15

 

                                = Rs.175.

 

B: X: Rs. 128; Y: Rs. 51.20; Z: 76.80 = Rs. 256.

46. The cost accountant of Tirupati Electronics Ltd. has computed labour-turnover rates for the quarter ending 31 March as 10%, 5% and 3%, respectively, under Flux method, replacement method, and separation method. If the number of workers replaced during that quarter is 30, find out the number of

  1. workers recruited and joined and
  2. workers left and discharged.

[B.Com (Hons) – Delhi]

[Ans: (a) Workers recruited and joined: 10

              (b) Workers left and discharged: 20]

47. The workmen Vishnu and Shiva produced the same product using the same material. Their normal wage rate is also the same. Vishnu is paid bonus according to the Rowan system, while shiva is paid bonus according to the Halsey system. The time allowed to make the product is 100 hours. Vishnu takes 60 hours while Shiva takes 80 hours to complete the product. The factory cost for the product for Vishnu is Rs. 7,280 and for Shiva it is Rs. 7,600. You are required to:

  1. find the normal rate of wages.
  2. find the cost of materials.
  3. prepare a statement comparing the factory cost of the products as made by the two workmen.

[C.A. (Inter)]

[Ans: (a) Normal wage rate is Rs. 20 per hour

             (b) The cost of materials is Rs. 5000]

48. The milling section of a factory engages 25 direct workers. During the month of June, they were paid for 4,800 normal attendance hours at an average rate of Rs.1.50 per hour. In addition, they also worked for 400 over-time hours at a double pay. The overtime was necessitated by abnormal circumstances in the month of April. For the purpose of reckoning labour cost, 40% for fringe benefits is to be added to the gross wages.

From the following particulars, find out:

(a) The worked-out total labour cost and allocate it to different cost elements:

Hours booked to jobs – 4,200

Allowed idle time – 12½%

There was no incidence of abnormal idle time. Actual ideal time was exactly in accordance with the standard set for the purpose.

 

[M.Com – Kerala University]

[Ans: (a) Rs. 11,760

            (b) Jobs – Rs. 8,820

            Factory overhead – Rs. 1,260

            Costing P&L A/c – Rs. 1,680]

49. The profitability position of M/s Pioneer Industries Ltd for a year is as follows:

    Rs.
(in Lakhs)

Annual turnover

 

200

Variable costs:

 

 

Direct material

60

 

Direct labour

40

 

Variable overheads

50

150

Marginal contribution

 

50

Fixed overheads

 

10

Profit for the year

 

40

The profit for the year did not match with company’s expectation and the works management attributed it to labour turnover.

Analysis of data revealed the following:

 

 

Direct labour hours

Permanent workmen worked during the year:

9,60,000

Apprentice workmen worked:

80,000

Total direct labour hours:

10,40,000

The effectiveness of direct labour hours put in by apprentice workmen was 50% and the delay in replacing against the separations resulted in a loss of 20,000 direct labour hours. Calculate the loss or profit on account of loss of production from labour turnover.

 

[I.C.W.A. (Inter)]

50. Following are the particulars for a month relating to four employees working in department ‘M’ of a factory exclusively for Job No. 120.

The normal working hours per week of six days are 48, at 8 hours per day. Sundays are paid holidays. (There are no other holidays during the month.)

PF contribution was 8% of monthly wages by an employee.

PF contribution was 8% of monthly wages by the employer.

Contribution to ESIC was 3% of monthly wages by employee and 5% of monthly wages by employer. From the foregoing data, calculate:

  1. Net wages payable by the employer for the month.
  2. The total amount of PF contribution to be deposited by the employer.
  3. The total amount of ESI contribution to be deposited by the employer.
  4. The total labour cost to the employer for the particular month chargeable to the job and
  5. The total cost for the job requiring materials valued at Rs. 6,000 and overheads at 50% of the prime cost.

[I.C.W.A. – Inter)]

[Ans: (a) Rs. 1,699.90; (b) Rs. 305.60; (c) Rs. 152.80; (d) Rs. 2,158.30; (e) Rs. 12,237.45]

51. A factory department has 180 workers who are paid on an average of Rs. 17.50 per week (48 hours), DA per month (208 hours) of Rs. 130, and PF deduction at 8% on gross; of which, 11/6 is for family-pension fund of half the number of workers and ESI being at Rs. 1.25 for each. The employer contributes an equivalent amount. The company gives only the minimum bonus of 81/3 % and allows a statutory leave of 2 weeks per year with salary. Show the weekly-wage summary for the financial books and the department labour-hour costs for cost jobing.

 

[I.C.W.A. – Inter]

[Ans: (a) Net earnings for the week: Rs. 7,641

            (b) Labour cost per hour: Rs. 1.2153]

52. The management of Sunshine Ltd. wants to have an idea of the profit lost/foregone as a result of the labour turnover last year.

Last year the sales amounted to Rs. 66,00,000 and the P/V ratio was 20%. The total number of actual hours worked by the direct labour force was 3.45 lakhs. As a result of the delays by the personnel department in filling the vacancies due to labour turnover, 75,000 potentially productive hours were lost. The actual direct labour hours included 30,000 hours attributable to training new recruits, out of which half of the hours were unproductive. The costs incurred consequent on labour turnover revealed, on analysis, the following:

 

 

 

Rs.

 

Settlement cost due to leaving

27,420

 

Recruitment cost

18,725

 

Selection cost

12,750

 

Training cost

16,105

Assuming that the potential production lost due to labour turnover could have been sold at prevailing prices, ascertain the profit foregone/lost last year on account of labour turnover

 

[C.A. (Inter)]

[Ans: Contribution foregone : Rs.3, 00,000

            Total profit foregone : Rs.3, 75,000]

53. A worker produced 200 units in a week’s time. The guaranteed weekly-wage payment for 45 hours is Rs. 81. The expected time to produce one unit is 15 minutes which is raised further by 20% under incentive schemes. What will be the earnings per hour of that worker under Halsey (50% sharing) and Rowan bonus schemes?

 

[C.A. (Inter)]

[Ans: (i). Rate per hour = Rs. 1.80.

            Under Halsey scheme:

            Total earnings: Rs. 94.50.

            Earnings per hour: Rs. 2.10.

            Under Rowan scheme:

            Total earnings: Rs. 101.25.

            Earnings per hour: Rs. 2.25.]

54. A, B and C in a particular day had produced 200, 250 and 300 pieces, respectively, of a product “p”. The time allowed for production of 25 units of “p” is 1 hour and the hourly rate of wage payment is Rs. 8. Calculate for each of these workers the following under Halsey premium bonus (50% sharing) and Rowan premium bonus methods of labour remuneration:

  1. Earnings for the day (8 hours a day)
  2. Effective rate of earnings per hour

[I.C.W.A. (Inter)]

[Ans:

  1. Halsey: A: Rs. 64; B: Rs. 72; and C: Rs. 80

    Rowan: A: Rs. 64; B: Rs. 76.80; and C: Rs. 85.33

  2. Halsey: A: Rs. 8; B: Rs. 9; and C: Rs. 10

    Rowan: A: Rs. 8; B: Rs. 9.60; and C: Rs. 10.67]

55. A worker whose day wages are Rs. 2.50 per hour received a production bonus under the Rowan scheme. He carried out the following work in a 48-hour week:

    Job 1 - 1,500 items at 4 hours per 1,000

    Job 2 - 1,800 items at 3 hours per 1,000

    Job 3 - 9,000 items at 6 hours per 1,000

    Job 4 - 1,500 items for which no “standard time” was fixed and it was arranged that the worker would be paid a bonus of 25%. Actual time on the job was 4 hours.

    Job 5 - 2,000 items at 8 hours per 1,000. Each item was estimated to be half-finished.

Job 2 was carried out on a machine running at 90% efficiency and an extra allowance of 1/9th of the actual time was given to compensate the worker. Four hours were lost due to power-cut. Calculate the earnings of the worker, clearly stating your assumptions for the treatment given by you for the hours lost due to power-cut.

 

[I.C.W.A. (Inter)]

[Ans: Total wages under Rowan plan: Rs. 168.73.

Hint:

  1. Job 2 allowance for a machine breakdown: 1/9th of time.
  2. Time taken: 44 hours.
  3. Time saved: 35 hours.]

56. In a manufacturing concern, the bonus to workers is paid on a slab rate based on cost savings towards labour and overheads. The following are the slab rates:

 

   up to 10% saving

5% of earning

   up to 15% saving

9% of earning

   up to 20% saving

13% of earning

   up to 30% saving

21% of earning

   up to 40% saving

28% of earning

   above 40% saving

32% of earning

The wages rate per hour of 4 workers – P, Q, R and S are, respectively, Re. 1; Rs. 1.10; Rs. 1.20; and Rs. 1.40. Overheads are recovered on direct wages at the rate of 200% standard cost under wages and overheads per unit of production is fixed at Rs. 30. The workers have completed one unit each in 8, 7, 5 ½ and 5 hours, respectively. Calculate in respect of each worker:

  1. The amount of bonus earned
  2. Total earnings
  3. Total earnings per hour

[I.C.W.A. (Inter)]

57. Payment of wage bonus is made in a concern on the following scale on the basis of the percentage of time saved to time allowed:

Time Saved
(% of Standard)
Bonus
(% of Time Saved)

Upto 25%

    10%

Above 25% and up to 35%

(i) plus 20% of time saved above 25% and 35%

Above 35%

(ii) plus 30% of time saved beyond 35%

Calculate the earnings of a worker (wage rate Rs. 1.20 per hour) who takes 50 hours to complete a job, the standard time allowed for which is 100 hours.

 

[I.C.W.A. (Inter)]

[Ans: Total earnings: Time wages: Rs. 60 + Bonus: Rs. 10.80 = Rs.70.80]

58. From the following particulars, calculate the group bonus payable in this case and the amount that will be paid to each member of the group. The standard production in a week is 120 units.

It is agreed that for every 10% increase in production, a bonus of 5% of the total wages payable of the week will be paid and the same will be shared by the group consisting of four members in proportion to their total wages. Total production for the week is 145 units. Wages earned by the four members of the group A, B, C and D are Rs. 80, Rs. 78, Rs. 72 and Rs. 68, respectively.

 

[I.C.W.A. (Inter)]

[Ans: Share of Bonus: A: Rs. 8; B: Rs. 7.80; C: Rs. 7.20; D: Rs. 6.80]

59. XYZ Ltd employs 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 item and introduced an incentive scheme to boost the output. Details of wages payable to the workers are as follows:

  1. Basic wages/piece-work wages @ Rs. 2 per unit subject to a guaranteed minimum wages of Rs. 60 per day.
  2. DA at Rs. 40 per day.
  3. Incentive bonus:

Standard output per day per worker : 40 units

Incentives bonus up to 80% efficiency : Nil

Incentives bonus for efficiency above 80% : Rs. 50 for every 1% increase above 80%

The details of performance of four workers for the month 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

 

[I.C.W.A. (Inter)]

[Ans: A: Rs. 2,740; B: Rs. 1,800; C: Rs. 3,370; D: Rs. 2,570]

60. Two fitters, a labourer and a boy undertake a job of piece for a rate of Rs. 1,290. The time spent by each of them is 220 ordinary working hours. The rates of pay on a time-rate basis are Rs. 1.50 per hour for each of the two fitters, Re. 1 per hour for the labourer and Re. 0.50 per hour for the boy.

Now calculate the following:

The amount of piece-work premium and the share of each worker, when the piece-work premium is divided proportionately to the wages paid.

The selling price of the above job on the basis of the following additional data:

Cost of direct material is Rs. 2,010, works overhead is at 20% of the prime cost. Selling overhead at 10% of the works cost and profit at 25% on the cost of sales.

 

[I.C.W.A. (Inter)]

[Ans: (a) Piece-work Premium: Rs. 300

             Share of 2 filters : Rs. 200

             Share of 1 labourer : Rs. 66.67

             Share of 1 boy : Rs. 33.33

             (b) Selling price : Rs. 5,445]