UNIVERSITY OF EDUCATION WINNEBA

SCHOOL OF BUSINESS
(Department of Accounting)

Lecture slides
Course Instructor: I. A. Ahmed
Course Title: Cost Accounting

Topic: Accounting for Labor

Course Code: BBAd 246

Level: 200
 Introduction
• The cost of a product includes labour (both direct and indirect).
• This cost forms part of the employment cost to an organization.
• The various issues to be discussed in this session include:
1. The constituents of labour as a cost to an organization
2. The various ways to account for labour
3. Bonus schemes and payroll accounting
4. Issues pertaining to casual workers
5. Accounting for labour cost and its treatment in books of account
What is labor cost?
• Labor cost is a significant element of cost.
• It is the cost of human endeavor in the product and requires
coordinated efforts for its control.
• The management objective of keeping labor cost as low as possible is
achieved by balancing productivity with wages.
• Labor cost is a vital factor not only affecting the cost of production but
also industrial relations of the organization.
• No organization can expect to attract and attain qualified and
motivated employees unless it pays them fair remuneration.
Classifications of labor cost
• There are basically two classifications
1. Direct labor cost
2. Indirect labor cost

Can you recollect the basis for this classification??????

Employment cost
• Employment cost is computed from the conditions of service of the
organization which is made up of:
• Remunerations: salaries, wages and allowances
• Fringe Benefits: free medical service, transportation, utilities,
accommodation etc.
• In Accounting for Labor cost, which will be included as part of product
cost, only remuneration is considered. The cost of fringe benefit is
considered a period cost.
• Note that labor cost is part of employment cost.
Accounting for labor
• It refers to the procedures and methods that will help generate
(compute) labor cost information (remuneration) to be included as
part of product cost.
• This will include:
1. How the employee’s remuneration is calculated and paid (Payroll
Accounting)
2. The Accounting treatment of the Employees remuneration in the
books of account (Labor Cost Accounting)
3. And other Labor Related Issues.
Payroll Accounting
• The Payroll is the document which contains the details of employee
remunerations.
• It broadly contains:
1. Gross pay: made up of basic salary and other payments
(allowances, bonuses)
2. Deductions from the gross pay: deductions include statutory (taxes,
SSF etc) and non-statutory (welfare, social clubs, etc).
3. Net pay: the difference between gross pay and deductions. This is
paid to the employee
What documents are used in computing gross
pay?
• Clock Card
• Time Sheet
• Job Card
• Piece work Ticket
Methods of computing Gross pay
• Remuneration is the reward for the services provided by labor.

• There are three basic methods of remunerating labor. These are:

• Time Rate System
• Piece Rate System
• Salary Scale
Time Piece Rate
• Under this system the rate per time is determined
• A worker is paid according to the time s/he works.
• Payment may be on hourly, daily, weekly or monthly basis.
• Consideration is normally not given to the quantity and quality of
work done.
• For example Wages payable if payment is made on hourly basis is
calculated as:
• (Time worked X Wage rate per hour) or (Number of hours worked X
Rate per hour)
Illustration
• Azeez worked for 20 hours 30 minutes at a rate of GHS5. What would
be his wage?

Solution
Wage = 20.5 x 5 = GHS 102.5
Piece Time Rate
• Under this system wages are paid according to the quantity of work
done (production).
• A rate per unit of production is determined or fixed
• Wage is calculated as follows:
(Rate per unit X units produced)
Variances of Piece Rate System
• Straight Piece Rate
• Piece Rate with Guaranteed Day Rate
• Differential Piece Rate
Straight Piece Rate System
• The wages are paid on the basis of the output of workers- presumably
on the basis of quantity of output.
• It is a simple and a common method of wage payment.
• The worker is paid on the basis of his work, not taking into account
the time involved.
• The wage is calculated as follows:
• (Basic Wage = Number of units produced x Rate per unit
• See illustration 4.2 and 4.3 for worked illustration
Piece Work with Guaranteed Time Rate
• This variant combines the advantage(s) of time rate and piece rate by
paying for quantities
• It assures the worker of a minimum remuneration being the Time
Rate.
• Under this if earnings or wages from piecework fall below normal day
rates, then there is a guarantee that day rates would be paid
• See illustration 4.4 and 4.5 for worked example
Differential Piece Rate
• With this variant the Piecework rate changes at different levels of
efficiency.
• It has been observed that with the Straight Piece rate, incentive effect
at higher levels of production declines as a flat rate is paid.
• This variant seeks to overcome this by increasing the rate
progressively at various production levels.
• Efficient and inefficient workers are distinguished.
• See illustration 4.6 for worked example
Salary Scale
• An Employee who is paid using salary scale is non-hourly rated nor
non-output rated employee.
• Basic Salary is paid using already prepared and agreed scale.
• The Employee knows in advance what his Basic Salary is even at the
beginning of the period unlike the other two systems.
Incentive (Bonus) Schemes
• This could be for

1. Individuals

2. Groups
• The employees’ basic pay is based on Normal Day Rate (time rate) or
Piece Rate. Thus, the worker’s Total Pay under an Incentive Scheme
is:
Wages + Bonus (based on Time Saved).
Principles of Individual Schemes
• The principles for Individual Schemes Bonus are:
• Time Allowed (TA): A standard time for completion of all jobs or work
is set.
• Time taken (TT) to complete the work is recorded
• Time Saved (TS): Bonus is paid on the basis of Time Saved (TS) i.e.
TA>TT.
Individual schemes
• The three (3) main methods of bonus calculations are:
• Halsey
• Halsey-Weir
• Rowan
Halsey Bonus Scheme
• Under this plan, time rate is guaranteed.
• Standard time and work are also pre-determined.
• The bonus is 50% of the standard time saved.
• Where time saved is time allowed less time taken.
Total wages = Time taken x Hourly rate + 50% (Time saved) x Hourly
rate.
Thus bonus = 50% (time saved) x Hourly rate
Halsey Weir
•  This method is the same as the Halsey. Except that in Halsey- Weir the
Bonus is equal to 30% or % of the Time Saved.

• Total wages = Time taken x Hourly rate +% (Time saved) x Hourly

rate
• Thus bonus = % (Time saved) x Hourly rate
Rowan
• The percentage of bonus to the wages earned is that which the time
saved bears to the standard time.
Total wages = Time taken x Hourly rate + (Time saved / Standard time)
x Time taken x Hourly rate

Thus bonus = (Time saved / Time Allowed) x Time taken x Hourly rate

• See illustration 4.7 for worked exmples

Group Incentive Schemes
• There are certain jobs or operations, which are, required to be done collectively
by a group of workers as in the case of the following:
1. Where production is on continuous production line basis so that extra
production depends upon all employee increasing their speed.
2. Where teamwork is necessary e.g. mines.
3. Where it is not possible to measure the performance of each individual worker.
• The incentive in such circumstances can be made attractive by:
• creating small groups
• forming a group where degree of skill required does not vary widely
• making the group independent of any other group, machines, etc.
Labor Cost Accounting and Control of Labor
• This involves the accounting treatment of the labor cost as generated
by the Payroll.
• There basically three activities involved in when accounting for labor.
• These are:
1. Time keeping
2. Computation of total payroll
3. Allocation of payroll costs.
Labor Control
• Controlling labor or labor control on the other hand is a joint effort
between and among the following departments of an entity:
1. Personnel department
2. Time-office
3. Payroll department
4. Cost department
Labor Cost Accounting
• Labor cost accounting involves:
1. Analysis and Classification of the Remuneration into Direct and
Indirect

2. Journalizing and Posting of Direct and Indirect Cost to the

Accounting Books (Journal and Ledger).
Analysis of labor cost
• Labor is either analyzed into

1. Direct

2. Indirect
Journalizing
• This will require passing entries in the various books of account

• Refer to chapter 4 page and read section on “some remunerations

and their accounting treatments”
Overtime
• An employee is said to have worked overtime when s/he works beyond the normal
working hours.
• The rate at which overtime is paid is always higher than the normal rate- usually
double the normal rate.
• The ff are some causes of overtime:
1. working due to seasonal rush
2. making up time lost due to unavoidable reasons
3. completing a job or order within a specified period as requested by the
customer
4. working due to policy decisions, i.e. when there is general pressure of work and
labor shortage etc.
Idle Time
• When workers are paid on time basis there is usually a difference between the time
for which the workers are paid and the time actually spent by them in production.
• The loss of time for which the employer pays but obtains no direct benefit is termed
as idle time.
• In other words, Idle time cost represents the wages paid for the time lost, i.e., time
during which the worker was idle.

• Causes of idle time

The causes of idle time can be classified into the following groups:
1. According to controllability (normal and abnormal idle item)
2. According to functions (productive, administrative and economic causes)
Accounting Treatment for Idle Time
• Idle time cost arising due to normal and unavoidable causes should be
charged as overheads (treated as part of product cost) and those due
to abnormal causes should be charged to Costing Profit and Loss
Account (treated as period cost).
Try solving questions in the text book and join the
UEW LMS CHAT ROOM for further discussions