F2:Management Accounting

Designed to give you knowledge and application of: Section D: Cost accounting techniques D1. Accounting for materials D2. Accounting for labour D3. Accounting for overheads D4. Marginal and absorption costing D5. Job and batch costing D6. Process costing D7. Service/operation costing

Learning outcomes D2: Accounting for labour  Describe the different remuneration methods: time-based systems, piecework systems and individual and group incentive schemes. [1]  Calculate the level, and analyse the costs and causes, of labour turnover. [1]  Explain and calculate labour efficiency, capacity and production volume ratios. [1]

Accounting for labour cost method Time cards, Time sheets and Job cards The timekeeping department is responsible for recording & maintaining time records, which help in preparing payrolls, control costs, analysis & determination of labour productivity Personnel department  Engagement, transfer & discharge of employee  Remuneration schemes offered to employees of different departments  Maintenance of personal records of employees  Issuing reports to management regarding employees performance, timekeeping, overtime, leave, disciplinary action taken, turnover etc Ways of recording Measuring the time each worker spends in the factory Measuring the time each worker spends on a job Accounting for labour cost method

Description of different remuneration methods Remuneration methods Time-based systems (TS) Piece work systems (PS) Combination of TS and PS

Time-based systems:payment on the basis of time spent on work. Minimum time wages are guaranteed under this system. Time based systems Example of straight time rate system Roger works for 8 hours a day and the wage rate per hour is $6. His daily wages under the time based system will be calculated as: 8 hours x $6 = $48 per day Differential time rate systems Basic time wages paid up to certain level of efficiency Hourly wage rates rise as efficiency increases Straight time rate systems Wages = Hours worked x Wage rate per hour Time-based systems of Remuneration

 Tory produces 100 units, which is more than 100% of the normal output (i.e. 100% of 80 = 80 units). His efficiency = number of units produced by him / normal output x 100 = 100/80 x 100 = 125%.  As a result, he will be paid at the higher wage rate of $11 since as per the policy of the company anyone who produces above 100% of normal output will be paid at a higher wage.  The wages for Tory for the week will be calculated as = $11 x 40 hours = $440 Example for Differential time rate system The normal standard output per week of 40 hours is 80 units. Tory produces 100 units in a week. Calculate his wages under the differential time wages system if the company’s policy is to pay a fixed time rate of $9 per hour if the normal output level is achieved and $11 per hour if output is above 100% of the normal output.

Question A time-based system of remuneration focuses on quality of output rather than quantity of output. A. True B. False Answer The correct option is A. Under a time-based system workmen are paid on the basis of time spent on the work and not on the basis of their output. Workers are not worried about the volume of output and hence quality is the focus.

Piecework systems pay employees based on the number of units they produce. The output level is measured by calculating the number of acceptable completed units produced by a worker. Differential Piecework systems Workers are given a chance to earn a bonus / incentive as their productivity increases Hourly wage rates rise as the efficiency increases Straight Piecework systems Wages = Number of acceptable units produced x Piece rate per unit Merrick differential piece rate system The Merrick differential or multiple piece rate system provides for three differential rates as follows: Wage rates under the Merrick differential piece rate system Up to 831/3% (83.33%) of efficiency Normal piece rate applicable Above 831/3% but up to 100% 10% above normal piece rate Above 100% 20% above normal piece rate Differential Piecework systems include Merrick system and Taylor system Piecework systems

An example of this type of system is the Gantt task bonus system. The remuneration under this method is calculated as follows: 120% of ordinary piece rateOutput above standard Bonus of 20% (usually) of time rateOutput at standard Time rate (guaranteed)If output is below standard PaymentOutput Combination of TS and PS Workers are generally guaranteed minimum time wages for the hours worked An additional amount is paid if the worker exceeds the minimum standard output  Both the time rate system and the piecework system have deficiencies.  These deficiencies are overcome by adopting schemes that are a combination of time rate and piecework systems. Combination of time and piece rate

Labour turnover Rate at which individuals move in & out of organisation Costs of labour turnover Preventive costs: Incurred to reduce labour turnover Replacement costs which arise due to high labour turnover Level, costs & causes of labour turnover Refer to Learning Outcome 5 on D2.20 Causes of labour turnover Unavoidable  Better prospects elsewhere  Early retirement due to ill health  Disciplinary action against employees  Business is seasonal Personal reasons Avoidable  Lack of job satisfaction  Low payment, not in line with industry standards

 Needs to be measured in every organisation in order to know if the available labour resources are being utilised efficiently  This happens when a higher number of units are manufactured in the same number of hours Productivity is of immense importance in any organisation since it is a tool for reducing cost. An increase in productivity alone could also reduce costs. Labour productivity

Labour ratios: Help compare actual performance with budgeted performance Labour ratios Labour efficiency ratio: Measures the efficiency level of employees Labour capacity ratio: Measures ratio of actual hours worked, compared to budgeted hours Production volume ratio: Measures standard hours of work produced, compared to budgeted

RECAP  Describe the different remuneration methods: time-based systems, piecework systems and individual and group incentive schemes?  Calculate the level, and analyse the costs and causes, of labour turnover?  Explain and calculate labour efficiency, capacity and production volume ratios?