Professional Documents
Culture Documents
Labour
Labour
DIRECT INDIRECT
LABOUR
The architect who visits the site to check that plans are followed
Factory manager
Office receptionist
The main thing to remember when deciding if labour costs are direct or indirect is whether the work
done was directly involved in producing the product or service.
When direct labour (produc on) workers receive holiday pay and sick pay, this is treated as an
indirect labour cost.
Another indirect labour cost is idle me. This is when employees are unable to work when it is not
their fault, but they are s ll paid. An example of when idle me might occur is when a machine breaks
down, and work cannot start un l it’s fixed.
Generally, the basic pay of direct workers is a direct cost, and all other costs of direct workers are
indirect costs. All costs of indirect workers are indirect costs. A bonus paid to direct workers is an
example of an indirect cost paid to direct workers.
Here are some direct worker costs that require further classifica on:
Sarah earns $15 per hour for each hour she works in a café. Her standard shift is for 7 hours.
Sometimes Sarah’s boss needs extra help and asks Sarah to work longer than her shift, paying her
an additional 50% per hour for this.
Today, Sarah worked 9 hours.
Calculate her total pay, and classify it as direct and indirect costs.
Answer:
$ Classification
Basic pay 9 hours × $15 135 direct
overtime premium 2 hours × $15 × 50% 15 indirect
Total pay 150
Basic pay is the total hours worked mul plied by the basic rate
Sarah’s basic pay is 9 hours mul plied by $15, which is $135.
This would be classified as direct labour cost to the café
Overtime premium i
The extra $7.50 on over me hours Sarah earns is called the over me premium.
over me premium of $ 15 that Sarah made is an indirect labour cost to the café.
The main thing to remember when deciding if labour costs are direct or indirect is whether the work
done was directly involved in producing the product or service.
If the reason for the OT is the work load from the company
=> OT Premium= Indirect LC
If over me is requested specifically by a customer (to rush product delivery, etc.),
= > then the basic rate and over me premium
= Direct LC
EXAMPLE -1
The following information is available regarding direct workers of a company:
Answer:
Direct labour cost Indirect labour cost
$ per hour $ $ per hour $
900 basic hours:
850 active hours 7.50 6,375
50 idle time hours 7.50 375
EXAMPLE -2
Remont employs 15 workers in a factory at an hourly rate of $3.60. A working day is 9 hours, and
usually 20 working days in a month. The firm budgets 6 hours per unit.
During October, there were only 14 working days because of a hurricane. To compensate for lost
production, each worker worked 45 hours over weekends for an overtime premium of 50%. Actual
production for October was 430 units, 20 units fewer than budgeted.
Calculate the direct labour cost for October.
The idle time, which arose due to a power cut, increased the hours of overtime worked due to general
work pressures.
The overtime premium and the cost of idle time are indirect labour costs.
Job sheets − these are often known as task-related timesheets and are used to list the
time spent on one particular job by several employees. The total time spent on a job can be
determined and accounted for at the end of the job.
Recording Labour Costs in Accounts
The first step in accounting for labour costs is to record the gross pay, net pay and any deductions in
the wages control account.
Paying Wages
Payment of net pay to employees
Dr Salaries control (expenses)
Cr Bank / Cash (net pay)
Payment of employee deductions and employer contributions to external entities
Dr Salaries control (expenses)
Cr tax PAYE / employee benefits
Labour costs are then accounted for using the same principles applied to direct and indirect
materials costs.
Direct labour costs are debited to the work-in-progress account
Indirect labour costs are debited to the production overhead control account
Both direct and indirect labour costs are credited to the wages control account.
remuneration methods
Remuneration methods are the different ways an
organisation can pay its employees for their work.
Time-Based System
Payment is based on the hours an employee works.
If they work overtime, they are usually paid a higher rate.
Salary: Organisations pay salaried employees an agreed amount per month
Wages: Waged employees are paid based on an agreed hourly rate, depending on how
many hours they work
Overtime premiums are paid to persuade workers to work longer hours than normal. An
overtime premium will be in addition to the standard pay rate.
Salary, wages and overtime are time-based remuneration systems: payment is based on the time
employee’s work.
Advantages Disadvantages
Piece-work system
Payment is based on the number of products that an employee produces.
DIFFERENCIAL STRAIGHT
Straight piecework - employees are paid a set amount for each unit of product they produce.
Here if you either produce 20 or 100 you will only receive the payment for actually produced
Differen al piecework - employees are paid different rates per unit depending on how many units
they have produced. They may be rewarded with higher rates as their produc on level increases
above agreed targets
Here when the produced goods exceeded the targed then we may receive incen ves for the produc ons extras
Within a piecework system, employees may receive a guaranteed minimum wage despite the number of
units produced. This is known as piecework with a guaranteed minimum wage.
EXAMPLE
Furniture Co pays its employees using a differential piecework scheme that includes a guaranteed
wage.
Details of the scheme are:
$5 per unit for up to 20 units per day
$5.20 per unit for each unit between 21 and 25 per day
$5.50 per unit for units 26 and each further unit per day
There is a guaranteed wage of $90 per day.
Calculate three different employees' wages based on producing the following in a day using
the above information:
Rohan produced 17 units
Divya produced 22 units
Solomon produced 27 units.
ROHAN: 17 units * 5 = 85
EXAMPLE
Sarah Kowalski carves wooden animals for a small company supplying the tourist market. In week
26, her production was as follows:
Deer 2 hours 6
Owls 1 hour 12
Eagles 2 hours 6
She is paid $6 per standard hour of production (irrespective of actual time worked).
Calculate Sarah's earnings for week 26
Incentive-based systems
Employees may be paid a bonus if they have reached targets set by their employers.
These can be either individual or group-based schemes.
Employees may be given incentives to produce output more quickly than expected.
They are usually rewarded with extra pay (a bonus).
These are also known as bonus schemes and may be for individuals or teams (groups).
Incentive schemes can be either
o output- or
o performance-based remuneration schemes.
They are designed to encourage employees to work harder or more efficiently.
Profit-sharing Employees are given a share of the profit made by the organisation in
schemes the year.
Advantages Disadvantages
Labour turnover
Labour turnover is the rate at which employees leave an organisation.
Employees may look for new jobs for various reasons:
Offered a higher salary elsewhere
Non-conducive work environment or inflexible working hours.
Seeking a better social environment.
looking for a new challenge or career advancement.
Seeking a more secure position during a challenging economic period.
Retirement or extended leave.
Pay competitive salaries and research to work out what figures are
competitive
Answer:
Repacement = 45
Avg emp; (300 + 500) / 2
N
LTR = 45 / 400 = 11.25%
Efficiency Ratio
The efficiency ratio measures whether the production output took more or less direct labour time than
expected.
A ratio > 100% indicates more labour hours were worked than budgeted.
A ratio of < 100% indicates fewer labour hours were worked than budgeted.
EXAMPLE - 1
A company has 2,000 hours available (budgeted) to make 20,000 units of a product in
March. The company produced 18,000 units which took the workforce 1,750 hours.
Calculate the efficiency, capacity, and production volume ratios for March
EXAMPLE -2
Brownie Co budgeted to make 100 units of output in June. Each unit was expected to
take 3 hours of direct labour.
The actual production volume in June was 110 units, which took 350 hours of direct
labour.
For June,
What is the labour efficiency ratio for Brownie Co?
What is the capacity utilisation ratio for Brownie Co?
What is the production volume ratio for Brownie Co?
Show the relationship between the ratio
EXAMPLE -3
A company budgeted to make 800 units of output in December. Each unit was
expected to take 1 hour and 30 minutes of direct labour.
The actual production volume in December was 760 units, which took 950 hours of
direct labour.
For December,
What is the labour efficiency ratio?
What is the capacity utilisation ratio?
What is the production volume ratio?
Show the relationship between the above ratios.
s.