ACCOUNTING FOR LABOUR

Slides By Nelson Pande

 LECTURE OBJECTIVES
By the end of this session you should be able to:
Calculate direct and indirect costs of labour
Explain the methods used to relate input labour costs to
work done
Prepare the journal and ledge entries to record labour
costs inputs and outputs
Describe 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
and answer questions relating to these areas.
 REMUNERATION SYSTEMS
Labour remuneration are different ways in which employs
are paid for example
Annual salaries
Hourly rates of pay
Overtime
Piecework payments
Guaranteed minimum payment
Incentive (bonus) schemes
 ANNUAL HOURLY RATES
SALARIES OF PAY
•Normally paid •Many
to production
management and manual
and non- workers will be
production paid for every
staff. hour that they
work.
 OVERTIME
These are hours worked over and above
the normal working hours

Example:
James works a normal 8 hour day, On day
2 James worked 12 hours.
Calculate the overtime
 OVERTIME OVERTIME
PAYMENT PREMIUM
•The total •The extra paid
amount paid above the
for the hours normal rate
worked above for the
the normal overtime
number of hours
hours.
 EXAMPLE
An employee is paid at an hourly rate of
$10.00 for a 35 hour week with any
overtime hours paid at time and a half.
During week 22 the employee worked for
40 hours.

Calculate the employee’s pay

PIECEWORK PAYMENTS

Employees are paid

per unit of output
produced.
 EXAMPLE
An employee is paid on a piecework basis as follows.
Up to 100 units per week $2.40 per unit
101 to 120 units per week $2.70 per unit
121 units or more per week $3.00 per unit

Only the additional units qualify for the higher rate.

In a week when the employee produced 130 units, what

would be the
employee's gross pay for the week?
 PRACTICE QUESTION
An employee is paid on a piecework basis as follows.
Up to 100 units per week $4.00 per unit
101 to 120 units per week $5.00 per unit
121 units or more per week $6.00 per unit
Only the additional units qualify for the higher rate and
rejected units do not qualify for payment.
In a week when the employee produced 135 units of which
11 were rejected what would be the
employee's gross pay for the week?
GUARANTEED MINIMUM
PAYMENT
A minimum take
home wage which is
not determined by
hours worked or units
produced.
 EXAMPLE
A company operates a piecework system of
remuneration, but also guarantees its employees
80% of a time-based rate of pay which is based on
$20 per hour for an eight hour working day. Each
unit should take 3 minutes to produce (standard
time). Employees are paid based on the number of
hours their output should have taken them (standard
hours). Piecework is paid at the rate of $18 per
standard hour.
If an employee produces 200 units in eight hours on
a particular day, what is the employee gross pay for
that day?
 PRACTICE QUESTION
A company operates a piecework system of
remuneration, but also guarantees its employees
80% of a time-based rate of pay which is based on
$20 per hour for an eight hour working day. Each
unit should take 3 minutes to produce (standard
time). Employees are paid based on the number of
hours their output should have taken them (standard
hours). Piecework is paid at the rate of $18 per
standard hour.
If an employee produces 100 units in eight hours on
a particular day, what is the employee gross pay for
that day?
GENERAL RULES FOR
INCENTIVE SCHEMES
Should be closely related to the effort expended
by employees.
Should be agreed by employers/employees before
being implemented.
Should be easy to understand and simple to
operate.
Must be beneficial to all of those employees taking
part in the scheme.
 COMMON SCHEMES

HALSEY BONUS SCHEME ROWAN BONUS SCHEME

The proportion paid to the employee is based on the

The employee receives 50% of the time saved. ratio of time taken to time allowed.
PRACTICE QUESTION
The following data relate to Job 101.
Employee’s basic rate = $10 per hour
Allowed time for Job 101 = 1 hour
Time taken for Job 101 = 40 minutes

The employee is paid the basic rate for the allowed

time for the job and then the bonus based on any
time saved.

Halsey scheme – Total payment for Job A = $

Rowan scheme – Total payment for Job B = $

In an examination you will be given clear instructions on
any bonus scheme in operation.
You should follow the instructions given carefully in order
to calculate the bonus payable from the data supplied.
 DIRECT AND
INDIRECT LABOUR
 Basic pay of direct
workers (including
the basic pay for
any overtime)

Direct Overtime premiums

when worked at a
customer’s specific
Labour request

Part of the prime

cost of a product

Pass Tuition Centre

Basic pay of
indirect
workers (for Overtime Bonus
Time spent by
example, premiums payments, idle
direct workers
maintenance when due to time, sick pay,
doing Indirect
staff, factory general benefit
jobs
supervisors pressures contributions
and canteen
staff).

Indirect Labour
Pass Tuition Centre
Which one of the following should be classified as direct
labour?

A Supervisors' salaries in a factory

B Maintenance workers looking after equipment in a
hospital
C Bricklayers in a house building company
D Wages of cleaning and housekeeping personnel
 EXAMPLE
Kitana is a direct labour employee who works a standard 40
hours per week and is paid a basic rate of $10 per hour.
Overtime is paid at time and a half. In week 1 she worked 56
hours and received a $30 bonus.
Complete the following table:
DIRECT LABOUR INDIRECT
COST LABOUR COST
$ $
Basic pay for standard hours

Basic pay for overtime hours

Overtime premium
Bonus
PRACTICE QUESTION
Zed Ltd operates a factory which employed 40 direct
workers throughout the four-week period just
ended. Direct employees were paid at a basic rate of
$8.00 per hour for a 40-hour week. Total hours of the
direct workers in the four-week period were 7,000.
Overtime, which is paid at a premium of 35%, is
worked in order to meet general production
requirements. 250 hours of direct workers’ time
were registered as idle.
Required to calculate:
i. Gross wages (earnings)
ii. Direct labour cost
iii.Indirect labour cost
ACCOUNTING FOR
LABOUR COSTS
You should be able to prepare the journal and ledger
entries to record labour costs and interpret entries in
the labour account.
 EXAMPLE
The following information is taken from the payroll records
of a company.
$
Basic Pay for basic hours 25,000
Basic Pay – Overtime time hours 3,500
Overtime Premium 1,500
Housing allowance 1,000
Sick Pay 2,000
Required:
Using the information given, prepare the labour control
account.
 PRACTICE QUESTION
The following information is taken from the payroll records of a
company.
DIRECT INDIRECT TOTAL
WORKERS WORKERS
$ $ $
Basic pay for basic hours 21,000 32,500 53,500
Overtime – basic pay 5,000 5,500 10,500
Overtime – premium 1,200 1,300 2,500
Bonus 800 700 1,500
Sick pay 500 1,500 2,000
Training 1,000 1,000 2,000
Required:
Using the information given, prepare the labour control account.
LABOUR RATIOS
 LABOUR TURNOVER
Labour turnover is a measure of the proportion of
people leaving relative to the average number of
people employed.

Number of leavers who required replacement ÷

average number of employee’s × 100
List FOUR causes of a high
labour turnover ratio
 EXAMPLE
Zed Ltd had a staff of 3,000 at the beginning of 2020
and, owing to a series of redundancies caused by
COVID 19, 2,000 at the end of the year. Voluntary
redundancy was taken by 1,500 staff at the end of
June, 500 more than the company had anticipated,
and these excess redundancies were immediately
replaced by new joiners.
Required
Calculate the labour turnover ratio.
 PRACTICE QUESTION
A company had 4,100 staff at the beginning of 2018.
During the year, there was a major restructuring of
the company and 1,600 staff were made redundant
and 900 staff left the company to work for one of the
company’s main competitors. 900 new staff joined
the company in the year to replace those who went
to work for the competitor.

Required:
Calculate the labour turnover rate for 2018.
 LABOUR EFFICIENCY
The labour efficiency ratio measures the
performance of the workforce by comparing the
actual time taken to do a job with the expected or
standard time.

Standard hours for actual output ÷ actual hours

worked to produce output × 100
 EXAMPLE
Kitana budgets to make 25,000 standard units of
output (in 4 hours each) during a budget period of
100,000 hours. Actual output during the period was
27,000 units which took 120,000 hours to make.

Required
Calculate the Labour efficiency ratio.
 LABOUR CAPACITY
The labour capacity ratio measures the number of
hours spent actively working as a percentage of the
total hours available for work (full capacity or
budgeted hours).

Actual hours worked to produce output ÷ total

budgeted hours × 100
 EXAMPLE
Kitana budgets to make 25,000 standard units of
output (in 4 hours each) during a budget period of
100,000 hours. Actual output during the period was
27,000 units which took 120,000 hours to make.

Required
Calculate the Labour capacity ratio.
 LABOUR PRODUCTION/VOLUME
The labour production volume ratio compares the
number of hours expected to be worked to produce
actual output with the total hours available for work
(full capacity or budgeted hours).

Standard hours for actual output ÷ total budgeted

hours × 100
 EXAMPLE
Kitana budgets to make 25,000 standard units of
output (in 4 hours each) during a budget period of
100,000 hours. Actual output during the period was
27,000 units which took 120,000 hours to make.

Required
Calculate the labour production volume ratio.
 PRACTICE QUESTION
Zandra budgets to make 15,000 standard units of
output (in 5 hours each) during a budget period of
75,000 hours. Actual output during the period was
20,000 units which took 110,000 hours to make.

Required
Calculate the efficiency, capacity and production
volume ratios.
 PRAECTICE QUESTION

EXAM TYPE QUESTIONS

An employee is paid on a piecework basis as follows.
Up to 100 units per week $2.40 per unit
101 to 120 units per week $2.70 per unit
121 units or more per week $3.00 per unit

Only the additional units qualify for the higher rate and rejected units
do not qualify for payment.

In a week when the employee produced 133 units of which 11 were

rejected what would be the employee's gross pay for the week?
A $297
B $300
C $333
D $366
A manufacturing firm is very busy and overtime is being
worked.

What would the amount of overtime premium contained in

direct wages normally be classed as?

A part of prime cost

B factory overheads
C direct labour costs
D administrative overheads
How would the cost be recorded in the cost ledger if the
direct labour costs in a
manufacturing company are $95,000?

A Debit Work-in-progress $95,000, Credit Wages and salaries

$95,000
B Debit Wages and salaries $95,000, Credit Bank $95,000
C Debit Wages and salaries $95,000, Credit Work-in-progress
$95,000
D Debit Bank $95,000, Credit Wages and salaries $95,000
Budgeted production in a factory for next period is 4,800
units. Each unit requires five labour hours to make. Labour is
paid $10 per hour. Idle time represents 20% of the total
labour time.

What is the budgeted total labour cost for the next period?
The following information applies to the next THREE
questions

A company records the following information concerning a

product:

Standard time allowed per unit 16 minutes

Actual output in period 720 units
Actual hours worked 180
Budgeted hours 185
What is the labour efficiency ratio?

A 93.75%
B 97.3%
C 102.5%
D 106.7%
What is the labour capacity ratio?

A 102.8%
B 99.4%
C 98.6%
D 97.3%
What is the production volume ratio?

A 97.3%
B 102.5%
C 103.8%
D 106.7%
Which of the following methods of remuneration is not an
incentive-based scheme?
A Straight piecework
B Day rate
C Group bonus
D Differential piecework