ACCOUNTING FOR LABOURLABOUR COSTING Accounting for labour can

ACCOUNTING FOR LABOUR(LABOUR COSTING) Accounting for labour can be classified into 2 categories namely: labour financing information for managers and payroll accounting. Ø Labour financial information for managers is concerned with identifying the amount of labour cost to be charged to individual jobs and overhead accounts. Ø Payroll accounting on the other hand is concerned with the recording of the amount due to employee, the inland revenue or the pension funds etc. Ø In labour financial information for managers, source documents are prepared to provide basic information relating to the time spent on the job or the output produced.

Labour costing cont’d This information is used to calculate the labour cost. Where a manufacturing organization operates a job costing system, such information can be obtained from the following documents; 1. Job card- this is the record of time spent on the job. Where a worker commences a job, the foreman or timekeeper will enter the time at which he starts the job on the card. When the job is completed, the finishing time is entered on this same card, the hourly rate of pay is applied and the labour costs can then be calculated.

Cont’d 2. Clock cards- a clock card is a document on which time is recorded; the starting and finishing time of the employee to ascertain the total actual attendance time. Both types of workers (direct and indirect labour), will be supplied with clock cards on which to record, their arrival time and departure time from the factory. Such reports provide a basis for wages calculation at time rates. 3. Idle time cards- this may be used to record the amount of idle or waiting time if a productive worker is not occupied for a short period say because of; machine break down, or he/she is waiting to start the next job.

Cont’d 4. Time sheets- a timesheet is a record of how a person’s time has been spent. Daily or weekly timesheets on which the employee enters all particulars himself are commonly issued to indirect workers e. g. maintenance staff. The worker enters his clock number, name and cost centre at the head of the sheet and details of the work upon which he is engaged together with starting and finishing times are entered in the appropriate columns of the form.

By contrast to the job cards in the system mentioned above, a timesheet provides a complete record of how an employee has spent a working day or week. On the other hand, a disadvantage of using a timesheet is that they tend to be entered half at the end of the day or week rather than at the time when the job was started or finished. The timesheets are not as accurate as individual job cards which have to be returned to the office immediately the worker has finished the job.

Cont’d 5. Wage sheet/payroll- all employee are listed on the wages sheet alphabetically or in accordance with the serial numbers. The hours worked by each employee are entered on the wages sheet from the clock card and multiplied by the pay rate. It contains Gross pay, overtime pay, bonus and any other allowances and deductions such as NSSF, PAYE, and advances and finally the Net pay.

Sample wages sheet

Cont’d 6. Employee record card- this contains the basic information about the employees. The card is raised when the employee is still engaged and shows the history of the employee during his life time in the organization, hours, date of appointment, title, rate of pay, promotions, transfers and date of departure. 7. Piece work tickets- these are used where the employees are paid on the piece rate basis. They contain details of the number of items produced by each employee and this is multiplied by the rate per item to give the total weekly wage.

Labour remuneration methods There are 2 basic approaches to remuneration. Time related or output related. People are either paid according to the length of time spent working or according to how efficiently they have worked i. e. time rates and piece rates. 1. Time rates, this means that employees are paid a basic pay rate per hour, day, week irrespective of the production achieved. Basic time rates provide no incentive to improve productivity and close supervision is necessary. So bonuses or commissions are often paid to encourage efficient working.

Methods cont’d 2. Piece work- piece work is where a fixed amount is paid per unit of output achieved irrespective of time spent. Rigid inspection procedures are required to ensure work is of an adequate standard. variation on the basic theme is the differential piece rate. This is almost incremental system, a low piece rate for the 1 st units of production and a higher piece rate for the subsequent units of production.

INCENTIVE SCHEMES Modern managers recognize the need to motivate the workers to do the job, others coerce them. They do this by using incentive schemes among which are premium bonus schemes or plans. ØPremium bonus plans pay a basic time rate plus a portion of the time saved as compared to some agreed allowed time. Examples of premium bonus schemes include: Halsey scheme, Halsey Weir and Rowan scheme.

Schemes cont’d • Halsey plan (scheme). The employee receives 50% of the time saved as • Halsey weir plan (scheme). The employee receives 33% of the time saved i. e.

Cont’d • Rowan scheme. The proportion paid to the employee is based on the ratio of the time taken to the time allowed.

Illustration • Employees basic rate • Allowed time for job A • Time taken for job A 100 per hour 1 hour 30 minutes Required: calculate the basic pay and the bonus under the Halsey, Halsey-weir and Rowan schemes.

Exercise The following data relates to a company which employs 5 skilled workers to produce a product. v. Hourly rate of wages 3, 000 v. Average time allowed for producing a unit of product by one worker 4 hours v. No. of working days in a month 24 days. v. No. of working hours per day for @ worker 10 hrs v. Actual production during the month 1, 000 units Required: the bonus under the 3 bonus schemes, basic pay and gross pay

IDLE TIME Idle time represents time lost by workers. it actually represents the time for which workers are paid but no production is obtained. For example, the time lost between factory gate and department, time when production is interrupted by machine maintenance, tea breaks, machine break down, power interruption etc. Causes of idle time. 1. Productive causes 2. Administrative causes 3. Economic causes.

Productive causes • Idle time due to machine break downs • Power failures • Waiting for tools and/or raw materials • Waiting for work • Waiting for instructions Idle time due to productive causes is usually controllable by proper planning, strict supervision and maintenance of plant and machinery.

Administrative causes Idle time is sometimes caused by administrative decisions thus, when there is surplus capacity of plant and machinery which the management decides not to use, there may be some idle time due to administrative decision. This usually happens during depressions when some of the machines have got to work below normal capacity and regular workers are paid full amount of wages. This is because the management does not want to get rid of trained workers temporarily.

Economic causes Idle time can be caused by fall in demand of products, say due to severe competition, seasonal nature of certain industries like woolen goods, ice industry etc. where production can’t be evenly distributed throughout the year. In such cases, it is not possible to get rid of workers during slack season.

Measurement of idle time. • Idle time is classified as normal and abnormal. The cost of normal idle time is treated in the following two ways; a) It is charged to factory overheads b) Wage rate may be inflated so as to make allowance for normal loss of labour time. Thus, if worker’s production time is only 7 hours during an 8 hours day and his hourly rate of pay is shs. 300, the inflated wage rate will be; 8/7 * 300 giving 343.

Abnormal idle time • This is that idle time which arises due to reasons not connected in any way with the routine of manufacture and for which the employer must pay. Abnormal idle time is attributable to defective planning, inefficiency or bad luck. • Payment for such idle time is not included in cost and is adjusted through costing profit and loss account.

Control of idle time The following steps may be taken to control idle time. § Production should be properly planned so that imbalances in production are avoided or reduced. § Repairs and maintenance of plant and machinery should be regularly undertaken so as to avoid breakdown. § Raw materials, tools and instructions should reach the worker well in time so that no time is wasted in their waiting. § Supervision should be tightened. NB: Overtime occurs when a worker works beyond normal working hours. There is always an overtime premium.

Labour turnover In all business organizations, it is a common feature that some workers leave the employment and new workers join in the place of those leaving. This change in workforce is known as labour turnover. Labour turnover is therefore the rate of change in the composition of the labour force in the organization. Measurement of labour turnover: To facilitate comparisons between different periods and different undertakings, labour turn over may be expressed in a rate of percentage.

Methods of computing labour turn over rate 1. Separation method- this method takes into account only those workers who have left during a particular period. The formula is; No. of workers left during a period X 100 average no. of employees during period Average number of employee

Cont’d 2. Replacement method. This method takes into account only those new workers who have joined in the place of those that have left. Its formula is; Note: if new workers are engaged for expansion programme or any other such purposes, they are not considered for this computation. 3. Flux method. This shows the total change in composition of labour force due to separations and additions (replacement) of workers.

Cont’d Formula for flux method Example: Oxalis company ltd supplies you the following information. No. of workers on 1 st April 2015 400 No. of workers on 30 th April 2015 500 No. of workers resigned 35 No. of workers discharged 10 No. of replacements (new workers) 40 Required: calculate the LTO rate using the 3 methods.

Activity q Causes of labour turnover, they may be economical, social, political and religious. q Costs of labour turnover in an organization. These may be positive and negative effects of labour turnover in an organization.