Management Information MA 1 Ibrahim Hameem CIMA exam
Management Information MA 1 Ibrahim Hameem (CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)
ACCA – Management Information The economic order quantity • The economic order quantity (EOQ) is the order quantity which minimized stockholding costs. There are two sets of costs relevant; The holding cost. • This is made up of costs such as financing the inventory, storing it, and the risks of the stock being damaged, deteriorating or becoming out-of-date. The reorder cost. This is the administration cost of raising requisitions and orders, receiving the stock and processing the invoices
ACCA – Management Information Example • Annual demand for inventory 20, 000 units • Order quantity is 1, 000 units per order • Ordering costs = $50/order • Holding cost = $5 per unit per year
ACCA – Management Information • Holding costs: the maximum inventory is assumed to be 1, 000 units i. e the reorder quantity. That is then used up steadily and just as the last unit is used, another 1, 000 units will be received.
ACCA – Management Information Accounting for labor costs • This chapter looks at how remuneration is calculated and accounted for, and also how certain labor-related ratios can be calculated.
ACCA – Management Information Remuneration methods Labor costs can arise from: • Basic wage or salary • Overtime premiums • Bonuses • Holiday pay • Sick Pay • Payroll taxes Many countries pay wages and salaries under a ‘pay as you earn scheme’ which means that the employer deducts the employees’ income tax form the gross wage and pays that over directly to the tax authority. Only the net amount after tax is then paid to the employee.
ACCA – Management Information Employee remuneration can be based on the following approaches • A constant weekly or monthly amount • An amount based on hours worked plus overtime • An amount based on units produced • An amount based on productivity • An initial amount plus a bonus
ACCA – Management Information Question 01 • Employees are paid $6/hour for a standard 40 hour week. Overtime is paid at time and one third. The employee is expected to make at least 80 units in a week, and to encourage productivity, each unit in excess of 80 will be generate an additional payment of $5 less any overtime premium that would relate to the time the additional unit would normally take. What is an employee’s wages in a week in which 90 units are made and the employee works 44 hours? • $306 (40*6+5*10+(8 -2)*4 -2*4) = 306
ACCA – Management Information The effect of changes in remuneration methods and changes in productivity on unit labor costs • To increase competitiveness, employers will try to reduce unit costs and will often attempt to do this by offering employees productivity payments. Employers need to look at the before and after costs. • Illustration Current scheme: $7/hour, 40 hour week. Overtime premium = time and a half. Usually 400 units are produced in 50 hours Weekly wages = 50 x $7 + 10 x $3. 5 = $385 Cost per unit = $385/400 = 0. 9625 Proposed scheme: rates as above, but in addition the overtime premium is paid on any hours saved. Assume that 50 units are now made in 44 hours
ACCA – Management Information Gross and net earnings • Gross pay: the total amount earned by the employee • Net pay: the amount paid to the employee after the employer makes deduction for income tax and certain statutory amounts. • Total labor cost to employer: employees’ gross pay plus any additional payroll taxes (and perhaps pension costs) that the employer has to bear.
ACCA – Management Information Illustration • Will productivity related pay always result in better motivation and profitability for employees? • No, not necessarily
ACCA – Management Information Example An employee is paid at the rate of $10/hour. Tax and other deductions amount to 25% for weekly income in excess of $100 Employer payroll taxes = 10% gross wages • If an employee works 38 hours in a week, what are the employee’s gross pay, net pay and the total amounts that have to be paid by the employer to the tax authorities?
ACCA – Management Information Example • Gross wages 38 x $10 = $380 • Tax and other deductions 25% x (380 – 100) = $70) • Net pay $310 • Payroll taxes $380 x 10% $38 • Total payments by employer to tax authorities = $70 + $38 = $108
ACCA – Management Information Accounting for labor costs • In addition to being paid whilst working (basic, overtime premiums, productivity bonuses, employees are often also paid when: • on holidays • ill • idle (because, say of machine breakdown) The labor costs are classified as direct or indirect depending on what caused those costs: Direct labor costs: all hours worked x normal hourly rate Indirect labor costs: overtime premium, idle time, sick pay, holiday pay.
ACCA – Management Information Question 02 • Under most systems of tax, what do employers pay to employees? A Gross wages B Gross wages less employees’ deductions less employers’ payroll tax C Gross wages less employees’ deductions D Gross wages less employers’ payroll tax
Management Information MA 1 Ibrahim Hameem (CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)
- Slides: 16