LABOUR COSTING

Points to remember
• Production is the quantity or volume of output produced. Productivity
is a measure of the efficiency with which output has been produced. An
increase in production without an increase in productivity will not
reduce unit costs.
• Standard hour of production means the number of hours required by
one worker to produce one unit of finished good, working in the
standard way.
• Budgeted hours is the expected total time required to produce
budgeted output of product
• 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
• The overtime premium is the extra rate per hour which is paid, not the
whole of the payment for the overtime hours.
Points to remember
• If employees work unsocial hours, for instance overnight, they may be entitled
to a shift premium. The extra amount paid per hour, above the basic hourly
rate, is the shift premium.
• Piecework remuneration system means labour is paid on the basis of output
produced by him.
• Bonus schemes were introduced to compensate workers paid under a time-
based system for their inability to increase earnings by working more efficiently.
• A profit sharing scheme is a scheme in which employees receive a certain
proportion of their company's year-end profits.
• A share option scheme is a scheme which gives its members the right to buy
shares in the company for which they work at a set date in the future and at a
price usually determined when the scheme is set up.
• An employee share ownership plan is a scheme which acquires shares on
behalf of a number of employees, and it must distribute these shares within a
certain number of years of acquisition.
 Points to remember (w.r.t
•overtime)
Janitorial wages are usually classified as overhead because they
represent an indirect cost, as do payroll costs for supervisors,
security personnel, and maintenance workers.
• Appropriate classification of idle time and overtime premiums
of production workers is less obvious. For example, if three
hours of a production worker’s time are idle (i.e., not spent on
production activities) and each hour costs $20, then $60 of idle
time cost is usually charged to overhead if management feels
that the cost is a general cost of all production.
• However, if a specific job results in idle time, such as waiting for
materials because of a product design change demanded by
the customer, then the idle time could be charged to the direct
labour costs of that job.
Points to remember (w.r.t overtime)
• Whether the customer will pay for the charge of overtime depends on
the prevailing market conditions (e.g., degree of competition) or the
details of the contract with the customer.
• Overtime premiums represent the extra hourly wage rate paid to
production workers who must work above their normal time
requirements. For example, a worker might be paid time and a half for
five overtime hours. Thus, if $20 is the base rate, the five hours will have
an overtime premium of $10 per hour × 5 hours, or $50.
• Classification of the overtime as direct labour or overhead depends on
the cause of the overtime. A job-specific reason (e.g., a rush order)
dictates a direct job cost, whereas a normal overtime cost resulting from
general conditions, such as peak production needs, dictates an overhead
(indirect) charge to all jobs completed during that peak period.
Points to remember
• Under time saving allowance, direct labour cost is referred as the
labour cost on standard hours.
• Any payment made on the spoiled units will be treated as indirect
cost except for the spoilage considered as a normal loss. (will be
discussed in process costing)
• All allowances are treated as indirect cost except overtime allowance
incurred at the special request of the customer.
• In a piecework scheme, wages are calculated by output produced by
worker for example £6 per unit
• Incremental piecework schemes offer an incentive to employees to
increase their output by paying higher rates for increased levels of
production.
• Bonus schemes were introduced to compensate workers paid under
a time-based system in order to increase earnings by working more
efficiently.
• (a) Employees are paid more for their efficiency.
• (b) The profits arising from productivity improvements are shared
between employer and employee.
• (c) Morale of employees is likely to improve since they are seen to
receive extra reward for extra effort.
A bonus scheme must satisfy certain
conditions to operate successfully
• (a) Its objectives should be clearly stated and attainable by the
employees.
• (b) The rules and conditions of the scheme should be easy to
understand.
• (c) It must win the full acceptance of everyone concerned.
• (d) It should be seen to be fair to employees and employers.
• (e) The bonus should ideally be paid soon after the extra effort has been
made by the employees.
• (f) Allowances should be made for external factors outside the
employees' control which reduce their productivity (machine
breakdowns, material shortages).
• (g) Only those employees who make the extra effort should be rewarded.
• (h) The scheme must be properly communicated to employees
• 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.
Labour turnover

• Labour turnover is the rate at which employees leave a company and

this rate should be kept as low as possible. The cost of labour
turnover can be divided into preventative and replacement costs.

• Average number of employees is

• (opening employees + closing employees)/2
Causes of labour turnover

• Some employees will leave their job and go to work for another
company or organisation. Sometimes the reasons are unavoidable.
• Illness or accidents
• A family move away from the locality
• Marriage, pregnancy or difficulties with child care provision
• Retirement or death
• Other causes of labour turnover are to some extent controllable.
• Paying a lower wage rate than is available elsewhere
• Requiring employees to work in unsafe or highly stressful conditions
• Requiring employees to work uncongenial hours
• Poor relationships between management and staff
• Lack of opportunity for career enhancement
• Requiring employees to work in inaccessible places (eg no public transport)
• Discharging employees for misconduct, bad timekeeping or unsuitability
The costs of labour turnover

• Replacement costs
• These are the costs incurred as a result of hiring new employees; they
include the following.
• Cost of selection and placement
• Inefficiency of new labour; productivity will be lower
• Costs of training
• Loss of output due to delay in new labour becoming available
• Increased wastage and spoilage due to lack of expertise among new staff
• The possibility of more frequent accidents at work
• Cost of tool and machine breakages
• Preventative costs
• These are costs incurred in order to prevent employees leaving; they include
the following.
• Cost of personnel administration incurred in maintaining good relationships
• Cost of medical services including check-ups, nursing staff and so on
• Cost of welfare services, including sports facilities and canteen meals
• Pension schemes providing security for employees
The prevention of high labour turnover

• Labour turnover will be reduced by the following actions.

• Paying satisfactory wages
• Offering satisfactory hours and conditions of work
• Creating a good informal relationship between members of the
workforce
• Offering good training schemes and a well-understood career or
promotion ladder
• Improving the content of jobs to create job satisfaction
• Proper planning so as to avoid redundancies
• Investigating the cause of an apparently high labour turnover
Incremental Piecework

A company is using following scheme as labour remuneration method

1-100 $2 per unit
101-200 $2.5 per unit
201-above $3 per unit
If production is 250 units, then payment will be made as follows:
First band 100 * 2 = $200
Second band 100 *2.5 = $250
Last band 50 * 3 = $150
Total pay $600
Direct cost = 250 * 2 = $500
Indirect cost = 600 – 500 = $100
Incremental Piecework
• An employee is paid on a piecework basis. The basis of the piecework
scheme is as follows:
• 1 to 100 units – $0.20 per unit
• 101 to 200 units – $0.30 per unit
• 201 to 299 units – $0.40 per unit
• With only the additional units qualifying for the higher rates.
Rejected units do not qualify for payment.
• During a particular day the employee produced 210 units of which 17
were rejected as faulty.
• What did the employee earn for their day's work? ($47.9)
• What is the average labour cost per unit? ($0.248 per unit)
 Incremental Piecework
• A company employs several part time labour to manufacture product ‘X’. These staff is
paid on an incremental piecework basis. The details of the piecework scheme are as
follows
• Output Wage rate
• 1-3000 £0.60 per unit
• 3001-3500 £0.75 per unit
• 3501-4000 £0.90 per unit
• Company does not pay for output which is rejected by quality control department
• The figures below refer to the output achieved by three of the employees during a recent
week:
• Employee A B C
• Total output of X (including rejection) 2500 3200 3900
• Rejected output 50 150 100
• Required:-
• Calculate separately the amount payable to each of employees A, B and C based on the
output achieved above.
• (1470, 1837.5, 2445)
Minimum Guaranteed Pay (MGP)
• A manufacturing company pays its labour minimum guaranteed pay
of £30 per day.
• Wage rate of labour A is £2 per unit and he manufactured
• 20 units on Monday
• 25 units on Tuesday
• 15 units on Wednesday
• 12 units on Thursday
• 14 units on Friday
• Required:-
• Calculate his earning of the week and calculate extra amount which
will be classified as indirect cost ($180, $8)
Minimum Guaranteed Pay (MGP)
• A manufacturing company pays its labour minimum guaranteed pay of
£600 per week.
• Wage rate of labour A is £3 per unit and he manufactured
• 25 units on Monday
• 30 units on Tuesday
• 28 units on Wednesday
• 45 units on Thursday
• 40 units on Friday
• Required:-
• Calculate his earning of the week ($600)
• Classify what amount should be charged to production overheads. ($66)
 Bonus

• Labour require 30 minutes to produce an output. Wage rate of labour is

$10 pre hour. labour works 40 hours in a week. Actual production during
week # 13 was 88 units.
• Bonus is paid at 75% of wage rate.
• Required:
• Calculate total pay of labour ($430)
• What will be benefit to employer for introducing bonus scheme ($10)
 Bonus
Worker A Worker B Worker C Worker D

Standard 3 hours per 9 min per unit 1 hour and 15 4 units per hour
manufacturing time unit min per unit

Actual hours worked 40 hours 42 hours 40 hours 36 hours

Actual production 15 units 290 units 34 units 162 units

Wage rate of labour $10 per hour $7 per hour $8 per hour $12 per hour

Bonus rate 50% of wage 50% of wage 50% of wage 50% of wage
rate rate rate rate
Answer $425 $299.25 $330 $459

• Calculate total pay of all workers

Bonus

• A labour manufactures 10 units of product Z in one hour. In a

particular week he manufactured 400 units. Basic working hours
allowed per week is 38. Wage rate of labour is £10 per hour and
bonus is paid at the rate of 50%of wage rate.
• Required:-
• Calculate total pay of labour (£390)
 Bonus
• Labour require 12 minutes to produce an output. Wage rate of labour is
$10 pre hour. labour works 8 hours per day and 5 days in a week. Actual
production during week # 13 was 215 units.
• Management wants to share benefit of time saved equally with
employee.
• Required:
• Calculate total pay of labour ($415)
• What will be benefit to employer for introducing bonus scheme. ($15)
Bonus (option B)
Overtime
• Overtime hours include all the hours exceeding the normal
hours.
• All overtime hours are paid at a higher rate than the normal
hours.
• The additional amount paid during overtime hours, over and
above the normal hours is known as Overtime allowance or
premium.
E.g.:
Normal Wage Rate $8 per hour
Overtime Wage Rate $12 per hour
Overtime premium $4 per hour
 Overtime
• Basic working week is of 42 hours. Labour actually worked 46 hours.
Wage rate of labour is £12 per hour and overtime premium is paid
@50% of wage rate

•
Overtime

• There are 8 direct employees and 2 indirect employees in a

manufacturing company. Each employee is allowed to work for 35
hours in a week. Company pays overtime premium at the rate of
tome and quarter when actual hours worked exceed total hours
allowed per week. Basic wage rate of direct employees is £5 per hour
and indirect employees is £3 per hour. In a particular week, each
employee worked 38 hours
• Required:-
• a) Calculate total pay of direct labour and indirect labour (DL pay:
£1,550, IDL pay: £232.5)
• b) Assuming that labour worked overtime to meet normal
production, classify what amount should be charged to direct cost
and production overheads (DL cost: £1,520, IDL cost: £262.5)
Overtime

• Q15. Following are details related to workers of a company

• Direct Workers: 2,000 basic hours plus 250 hours of overtime
• Indirect Workers: 1,100 hours including 120 hours of overtime
• Out of total hours, 30 hours of direct workers were recorded as IDLE.
• Overtime is paid at time and a quarter. Wage rate of direct labour is
£10 per hour and indirect labour is £6 per hour.
• Required: -
• Classify labour cost as DIRECT or INDIRECT (DL cost: £22,200, IDL
cost: £7,705)
Overtime

• There are 20 direct employees and 10 indirect employees in a

manufacturing company. Each employee is allowed to work for 30
hours in a week. Company pays overtime premium at the rate of 50%
of wage rate if actual hours worked exceed total hours allowed per
week. Basic wage rate of direct employees is £7 per hour and indirect
employees is £5 per hour. In a particular week, direct labour worked
630 hours and indirect labour worked 315 hours.
• Required:-
• Calculate total pay of direct labour and indirect labour (DL Pay:
£4,515, IDL Pay: £1,612.5)
Change in labour cost per unit

• An employee is paid on a piecework basis. The scheme is as follows:

• 1 – 100 units per day standard wage rate
• 101 – 200 units per day standard wage rate + 0.1 per unit
• > 200 units per day standard wage rate + 0.2 per unit
• An employee usually manufactures 210 units in a day. Standard
wage rate is £0.9 per unit
• If this remuneration method changes to £8 per hour and labour is
allowed to work for 35 hours per week (with same output), what will
be its effect on labour cost per unit?____________
• (increase in labour cost by $0.38 per unit)
Change in labour cost per unit
• Employees in a factory are paid at £6 per hour for 40 hours week.
Overtime rate is £9 per hour (including £3 premium). Standard
production time is 2 hours per unit. On average employees work 4
hours of overtime.
• Now management is considering introduction of some machinery
which will reduce production time by 0.5 hours per unit. Overtime
will not be needed then.
• Calculate change in labour cost per unit (decrease by £3.66 per unit)
Labour Ratios

• Production volume ratio = actual production / budgeted production

• Or
• Production volume ratio = standard hours allowed / budgeted hours

• Efficiency ratio = standard hours allowed / actual hours taken

• Capacity ratio = actual hours worked / budgeted hours

Labour ratios

• Calculate production volume ratio, capacity ratio and efficiency ratio.

Practice Questios
Q1.

• Standard production time for the manufacturing of product ‘Mark’ is

0.5 hours per unit. Labour normal working time is 8 hours per day. In
a particular day labour produced 20 units. Wage rate of labour is £6
per hour and company pays bonus at the rate of £4 per hour saved.
• Required:- Calculate total pay of labour (£56)
Q2.

• A labour manufactures one unit of product ‘X’ in 2 hours. In a

particular week he manufactured 22 units. Basic working hours
allowed per week is 36. Wage rate of labour is £10 per hour and
bonus is paid at the rate of 50%of wage rate for each hour saved by
labour.
• Required:-
• Calculate total pay of labour (£480)
Q3.

• Following are some details given about a particular company.

• There are 5 working days in a week and there are 8 working hours
per day. Standard production time to produce one unit is 30 minutes.
In a particular week labour produced 86 units. Wage rate of labour is
£12 per hour and bonus is paid at the rate of 60% of wage rate.
• Required:-
• Calculate total pay of labour for the week. (£501.6)
Q4.

• Steve is a direct labour and is allowed to work for 8 hours per day. His
wage rate is £4 per hour. Overtime premium is paid at 60% of wage
rate. In a particular day he worked 10 hours.
• Required:-
• Calculate total earnings of the employees (£44.8)
• Classify what amount should be charged to direct cost and
production overheads assuming that overtime is a regular feature of
company (DC: £40, IDC:£4.8)
Q5.

• A labour is allowed to work for 8 hours per day. His wage rate is £4
per hour. Overtime premium is paid at £2 per hour. In a particular day
he worked 11 hours out of which 2 hours were recorded as idle.
• Required:-
• Calculate total earnings of the employees (£50 for the day)
• Classify what amount should be charged to direct cost and
production overheads assuming that overtime is a regular feature of
company (DC: £36, IDC: £14)
Q6.

• There are 8 direct employees and 2 indirect employees in a

manufacturing company. Each employee is allowed to work for 35
hours in a week. Company pays overtime premium at the rate of
tome and quarter when actual hours worked exceed total hours
allowed per week. Basic wage rate of direct employees is £5 per hour
and indirect employees is £3 per hour. In a particular week, each
employee worked 38 hours
• Required:-
• a) Calculate total pay of direct labour and indirect labour (DL pay:
£1,550, IDL pay: £232.5)
• b) Assuming that labour worked overtime to meet normal
production, classify what amount should be charged to direct cost
and production overheads (DL cost: £1,520, IDL cost: £262.5)
Q7.

• Following are details related to workers of a company

• Direct Workers: 1,600 basic hours plus 120 hours of overtime
• Indirect Workers: 850 hours including 70 hours of overtime
• Overtime is paid at time and a half. Wage rate of direct labour is £8
per hour and indirect labour is £5 per hour.
• Required: -
• Calculate total pay of direct and indirect labour (DL Pay: 14,240, IDL
cost: £4,425)
Q8.

• A company operates a differential piece-rate system and the

following weekly rates have been set:
• 1 – 400 units £1∙20 per unit in this band
• 401 – 550 units £1∙25 per unit in this band
• 551 units and above £1∙55 per unit in this band
• There is a guaranteed minimum wage of £625 per week paid to all
employees. An employee manufactured 800 units. The amount
payable (to the nearest £) to the employee will be _____£1,055_____
Q9.

• An employee is paid on a piecework basis. The scheme is as follows:

• 1 – 100 units per day standard wage rate
• 101 – 200 units per day standard wage rate + 0.1 per unit
• > 200 units per day standard wage rate + 0.2 per unit
• An employee usually manufactures 210 units in a day. Standard
wage rate is £0.9 per unit
• If this remuneration method changes to £8 per hour and labour is
allowed to work for 35 hours per week, what will be its effect on
labour cost per unit?____________
• Increase by £0.38 per unit
Q10.

• Basic working week of an employee is 35 hours. Company pays

overtime if labour works more than basic working hours. In a
particular week, an employee worked 42 hours including 2 idle hours.
Wage rate of labour is £8 per hour and overtime premium is paid at
the rate of 25% of wage rate.
• What amount will be charged to production overheads?
__£30_____________.
Q11.

• Basic working hours of Direct labour are 35. In a particular week, 44

hours of labour were recorded. Out of total overtime recorded, 5
hours were due to machine breakdown and remaining hours were
due to customer’s specific order. Wage rate of labour is £12 per hour
and overtime is paid at time and half.
• Classify labour cost as DIRECT and INDIRECT (DL cost: £492, IDL cost:
£90)
Q12.

• A labour is currently getting £2 per unit for first 200 units, £3 per unit
for the next 200 units and then £4 per unit for any output produced
thereafter. Production is expected to be 500 units in a week
• Management is considering to change remuneration scheme to
hourly rate of £14 per hour. Labour will be allowed to work 40 basic
hours however it is expected that labour will also need 4 hours of
overtime which will be paid at time and half. Production is expected
to decrease by 10%.
• Calculate change in labour cost per unit (decrease by £1.37 per unit)
 Q13.

Following data is related to total labour cost of making 1,000 units in a one week period.
Number of employees Hours per employee Wage rate (£) Total cost (£)
Basic wage 24 35 7.00 5880
Overtime 24 5 10.00 1200
Total cost 7080
Management is thinking to change remuneration scheme to piecework system where employees will be paid £6 per unit for
the first 30 units and then £7.00 per unit for any output over and above. It is expected that employees will manufacture 50
units under this system.
Calculate change in labour cost per unit (decrease by £0.68 per unit)
Q14.

• Labour manufactures 2 units of product A per hour. Budgeted

production was 2,600 units however actual production was 3,000
units. Labour actually worked 1600 hours.
• Calculate all labour ratios

• PV = 115%, Capacity ratio = 123%, Efficiency ratio = 93.75%)

Q15.

• Standard manufacturing time of product ALPHA is 10 units per hour.

Budgeted production was 20,000 units however labour actually
produced 24,000 units. Actual hours taken were 2,300
• Calculate all labour ratios

• (PV = 120%, Capacity ratio = 115%, Efficiency ratio = 104%)

Q16.

• An organisation 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. Three
minutes is the standard time allowed per unit of output. 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’s gross pay (total pay) for that day?
• ___________.

• (gross pay = $180)

Q17.

• The following data is given for the labour cost of direct workers in a
department of a factory for a week:
• Production hours 450
• Training hours 20
• Idle time hours 32
• Total hours 502
• There are 12 direct labours in the department and basic working week
is of 38 hours. Overtime is worked to meet general requirement of
production, and idle time and training time are regarded as normal.
Basic wage rate is of £8 per hour and overtime is paid at time and half
• What amount will be charged to indirect labour?
• ______________. ($600)
Q19.

• A company employs 100 direct workers in the factory, who are paid a
basic rate of $5 per hour for a 35 hour week. In addition to working
their normal hours last month, each worker was asked to work
additional 5 hours overtime per week to meet general production
requirements. All overtime hours are paid at time and a half. As a
result of some faulty material, 150 hours of direct labour time were
registered as idle. What is the indirect labour cost for last month,
assuming a 4 week period?
• A $750 B $2,000
• C $5,750 D $15,750
 Q20.
• The following details relate to the labour in a production cost centre for a period:
• Direct personnel Indirect personnel
• Hourly rates of pay:
• Basic $10·00 $7·00
• Overtime $13·00 $9·10
• Payroll hours:
• Productive 310 118
• Idle 18 4
• Total 328 122
• Additional information:
• 1. The basic rates of pay apply to a normal working week of 38 hours
• 2. There are eight direct personnel and three indirect personnel in the cost centre
• 3. Overtime and idle time is considered as normal
• Calculate the total amounts:
• (i) paid to the direct personnel and the indirect personnel respectively; (6 marks)
• ANSWER: Direct labour pay: $3,352, indirect labour pay: $870·80
• (ii) charged as direct cost and indirect cost (overheads) respectively (6 marks)
• ANSWER: charged as direct cost: $3,100, charged as indirect cost: $1,122·80