Accounting for Labour Essay

Lecture 2 – Accounting for Labour Page 1 of 3 Universiti Tunku Abdul Rahman UBAM1013 Financial Information for Management (October 2012) Lecture 2 – Accounting for Labour 1. Remuneration method Time-based scheme Piecework scheme Bonus/incentive scheme 2. Remuneration methods have an effect on the following:The cost of finished products and services The morale & efficiency of the employees 3. Time-based scheme An employee is paid for the hours attended, regardless of the amount of work achieved (i. e. disregard of number of units produced).

The method thus operates by recording the amount of time the employee spends at the workplace. Overtime is commonly paid at the premium of between 25 and 100 per cent above normal hourly rate. Wages = hours worked x wage rate per hour 4. Piecework system An employee is paid according to the output achieved. A range of basic piecework pay for a range of daily target level of activity. Employees to be paid a higher rate per unit for achievement of higher target. Wages = no. of units produced x piece rate per unit. 5. Bonus/Incentive scheme A variety of bonus and incentive schemes exist.

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They are designed to increase productivity. The schemes rely on setting of a target and the comparison of actual performance with that target. The savings which results from the employee’s greater efficiency are then shared between employees and the employer on a proportionate basis (usually employees receives between 30 and 60 per cent of the time saved ) 6. Accounting for the cost of labour Direct labour cost – basic pay for normal hours – basic pay for overtime hours Indirect labour cost – overtime premium – pay for idle time due to machine breakdown, electricity power off, strike, etc. – group bonus/incentive scheme

UBAM1013 FIM (October 2012) Lecture 2 – Accounting for Labour Page 2 of 3 Example 1: The following data relate to work at a certain factory: Normal working day 8 hour Basic rate of pay per hour RM6 Standard time allowed to produce 1 unit 2 minutes Premium bonus 75% of time saved at basic rate What is the labour cost in a day if 340 units are made? Answer: Standard time for 340 units (2 mins x 340 units) Actual time spent (8 hours x 60 mins) Time saved Premium bonus = 75% x RM 6 x 3. 34hrs = RM 15. 00 Therefore, total labour cost = Day basic salary + Premium bonus = (8 hrs x RM6/hr) + RM15 = RM63 80 minutes 480 minutes 200 minutes = 3. 34 hrs Example 2: The following cost information is given about a factory: Standard production 80 units per week No. of workers in the group 20 Actual production 110 units For every 25% increase in production, a bonus of RM100 will be shared pro-rata by the 20 members of the group. Calculate the bonus payable to each member of the group. Answer: Actual production Standard production Extra production 110 units 80 units 30 units Increase in production ratio = 30/80 x 100% = 37. 5% Bonus for 37. 5% increase in production = RM100/25% x 37. % = RM150 Each team member = RM150 / 20 members = RM7. 50 UBAM1013 FIM (October 2012) Lecture 2 – Accounting for Labour Page 3 of 3 Example 3: Normal pay : RM 4/hr Hrs/week : 36 hrs Overtime premium : ? of normal pay Bonus payment : RM 30 Total hrs worked : 42 hrs Calculate the direct and indirect labour costs. Answer: Basic pay for normal hours worked Salary at basic rate for overtime work Overtime premium Bonus payment under group bonus scheme Direct labour cost = RM 168, Indirect labour cost = RM 36 36 hrs x RM4/hour 6 hrs x RM4/hour 6hrs x ? x RM4/hour = RM144 (Direct) = RM24 = RM6 (Direct) (Indirect) = RM30 (Indirect)