1. Paper F2 Management Accounting
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2. Chapter 7 Accounting for labour
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3. Labour costs Chapter Preview Measuring labour activity
Recording labour costs
Methods of remuneration
Accounting for labour costs
Labour turnover
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4. 1 Measuring labour activity
Production is the quantity or volume of output produced. Productivity is a measure of the efficiency with which output has been produced.
Standard hours of production
Improved productivity is an important means of reducing total unit costs.
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5. Example: Productivity and its effect on cost
Clooney Co has a production department in its factory consisting of a work team of just two men, Doug and George. Doug and George each work a 40 hour week and refuse to do any overtime. They are each paid $100 per week and production overheads of $400 per week are charged to their work.
(a) In week one, they produce 160 units of output between them. Productivity is measured in units of output per man hour.
(b) In week two, management pressure is exerted on Doug and George to increase output and they produce 200 units in normal time.
(c) In week three, Doug and George agree to work a total of 20 hours of overtime for an additional $50 wages. Output is again 200 units and overhead charges are increased by $100.
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6. 1 Measuring labour activity
Automation
Labour cost control is largely concerned with productivity. Rising wage rates have increased automation, which in turn has improved productivity and reduced costs.
Where automation is introduced, productivity is often, but misleadingly, measured in terms of output per man-hour.
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Ji Weili, JXUFE

7. 1 Measuring labour activity
Other measures of labour activity include the following.
• Production volume ratio, or activity ratio
• Efficiency ratio (or productivity ratio)
• Capacity ratio
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8. Example
Barnes Ltd budgeted to make 13,000 standard units of output during a budgeted period of 26,000 hours. During the period, the company actually made 14,000 units which took 35,000 hours.
Required: what is the efficiency ratio, capacity ratio and production volume ratio?
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9. 2 Methods of remuneration
Time-based systems
Piecework systems
Bonus/incentive schemes
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10. Remuneration methods Time work
The most common form of time work is a day-rate system in which
wages are calculated by the following formula.
Wages = Hours worked × rate of pay per hour
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11. Remuneration methods Overtime premiums
If an employee works for more hours than the basic daily requirement he may be entitled to an overtime payment.
Hours of overtime are usually paid at a premium rate.
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12. Remuneration methods Summary of day-rate systems
(a) They are easy to understand.
(b) They do not lead to very complex negotiations when they are being revised.
(c) They are most appropriate when the quality of output is more important than the quantity,or where there is no basis for payment by performance.
(d) There is no incentive for employees who are paid on a day-rate basis to improve their performance.
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13. Remuneration methods Piecework schemes
In a piecework scheme, wages are calculated by the following formula.
Wages = Units produced × Rate of pay per unit
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14. Remuneration methods
It is normal for pieceworkers to be offered a guaranteed minimum wage, so that they do not suffer loss of earnings when production is low through no fault of their own.
If an employee makes several different types of product, it may not be possible to add up the units for payment purposes. Instead, a standard time allowance is given for each unit to arrive at a total of piecework hours for payment.
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15. Remuneration methods Question
Penny Pincher is paid 50c for each towel she weaves, but she is guaranteed a minimum wage of $60 for a 40 hour week. In a series of four weeks, she makes 100, 120, 140 and 160 towels.
Required
Calculate her pay each week, and the conversion cost per towel if production overhead is added at the rate of $2.50 per direct labour hour.
2018/11/16
Ji Weili, JXUFE

16. Remuneration methods Example: Piecework
An employee is paid $5 per piecework hour produced. In a 35 hour week he produces the following output.
Piecework time allowed
per unit
3 units of product A hours
5 units of product B hours
Required:Calculate the employee's pay for the week.
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17. Example
A company pays its employees using a piecework scheme. The rate are as following:
0—100 units per work $4 per unit
101—150 units per work $4.50 per unit
151—200 units per work $5 per unit
units per work $5.50 per unit
Required: If an employee produces 163 units in week 8, what would their pay be for at the week?
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Ji Weili, JXUFE

18. Remuneration methods Summary of piecework schemes
They enjoy fluctuating popularity.
They are occasionally used by employers as a means of increasing pay levels.
• They are often seen to drive employees to work too hard to earn a satisfactory wage.
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19. Remuneration methods Bonus/incentive schemes
A bonus scheme must satisfy certain conditions to operate
successfully.
objectives ( clearly stated and attainable )
rules and conditions ( easy to understand)
win ( acceptance)
Fair( to employees and employers)
paid soon( after the extra effort has been made)
Allowances
Only (who make the extra effort should be rewarded).
properly communicated
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20. Individual bonus schemes Profit-sharing schemes
Remuneration methods
High day-rate system
Individual bonus schemes
Group bonus schemes
Profit-sharing schemes
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21. Remuneration methods Question
The following data relate to work at a certain factory.
Normal working day hours
Basic rate of pay per hour $6
Standard time allowed to produce 1 unit 2 minutes
Premium bonus % of time saved at basic rate
What will be the labour cost in a day when 340 units are made?
A $48 B $51 C $ D $68
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22. Recording labour costs
Organisation for controlling and measuring labour costs
Several departments and management groups are involved in the collection, recording and costing of labour. These include the following:
• Personnel
• Production planning
• Timekeeping
• Wages
• Cost accounting
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23. 3 Recording labour costs
Attendance time--These may be recorded as follows.
• In a signing-in book
• By using a time recording clock which stamps the time on a clock card
• By using swipe cards (which make a computer record)
Job time
Continuous production --Where routine ,repetitive work is carried out might not be practical to record the precise details .
Job costing --When the work is not of a repetitive nature the record required might be one or several of the following.
Daily time sheets .
Weekly time sheets.
Job cards .
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24. 3 Recording labour costs
Salaried labour
Even though salaried staff are paid a flat rate monthly ,they may be required to prepare timesheets.
The reasons :
Timesheets provide management with information .
Timesheet information may provide a basis for billing for services provided .
Timesheets are used to record hours spent and so support claims for overtime payments by salaried staff.
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25. 3 Recording labour costs
Idle time
Idle time has a cost because employees will still be paid their basic wage or salary for these unproductive hours and so there should be a record of idle time.
Idle time occurs when employees cannot get on with their work, through no fault of their own.
Examples are as follows.
• Machine breakdowns
• Shortage of work
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26. 3 Recording labour costs
In order to establish the labour cost involved in products, operations, jobs and cost centres, the following documents are used.
• Clock cards
• Job cards
• Idle time cards
• Payroll
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27. 3 Recording labour costs
Idle time ratio
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28. 4 Labour turnover The rate at which employees leave the company
Reasons may be controllable or uncontrollable by the company
Costs associated with labour turnover can be split into two categories:
Replacement costs
Preventative costs
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29. 4 Labour turnover
Labour turnover is a measure of the number of employees leaving /being recruited in a period of time expressed as a percentage of the total labour force.
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30. 5 Accounting for labour costs
Example: The wages control account
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31. Direct VS indirect costs
5 Accounting for labour costs
Direct VS indirect costs
Direct workers
Indirect workers
Normal Basic Pay
Direct cost
Indirect cost
General
Overtime
Basic pay
premium
Specific
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32. 5 Accounting for labour costs
Ledger accounting
Dr Wages account Gross wages
Cr Bank / PAYE / NIC accounts
Dr WIP account Direct wages
Cr Wages account Direct wages
Dr Production o/h Indirect wages
Cr Wages account Indirect wages
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33. End of Chapter 7
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