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1. Remuneration methods

2. Labour cost behavior

3. Recording labour costs

4. Cost accounting for labour cost

5. Labour turnover

Cost Accounting ABMC2513

Lecture 04 Chan Sai Meng

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Methods of remuneration

The correct choice of labour remuneration in abusiness is very important for 2 main reasons:

1.The remuneration method may have a

major impact on the cost of finished

products or services.

2.The morale and efficiency of

employees can be affected by the

remuneration methods in operation.



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Time based systems

These are based on the principle that anemployee is paid for the hours attended

Wages payable = Hours worked X

Rate of pay per hour



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The idea is that it is the managements

duty to ensure that work is carried out by

employee during these periods of

attendance at the workplace. The wages

earned are then computed by multiplying

the number of hours by the agreed hourly

wage rate.



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It is common for this system to besupplemented by the payment of a higher rateper hour for working hours in excess of thenormal working week. This is known as

overtime and it is commonly paid at apremium of between 25% and 100% abovethe normal hourly rate.



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A time based method of remuneration is often usedwhere:

a) the output is difficult to measure, such

as in administrative functions

b) activities vary considerably, such as

repairing machinery

c) quality of output is extremely

important and to use other systems

might encourage employees to give

priority to the speed of output.

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Piecework systems

These are based on the principal that anemployee requires encouragement to work andconsequently is paid by reference to the units ofoutput produced. In these system it is necessary torecord the amount of work done by each employeebut the amount of attendance time is less significant.

A piecework system is used when quantity ofoutput is important and the quality control can be

satisfactorily maintained by other managementtechniques.

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Piecework systems

These are based on the principal that anemployee requires encouragement to work andconsequently is paid by reference to the units ofoutput produced. In these system it is necessary torecord the amount of work done by each employeebut the amount of attendance time is less significant.

A piecework system is used when quantity ofoutput is important and the quality control can be

satisfactorily maintained by other managementtechniques.

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Bonus schemes

Bonus schemes were introduced largely to

compensate the workers paid under a time

based system for their ability to increase

earning by working more efficiently.

Whereas piecework earning could

increase their earnings by becoming more

efficient unless some form of bonus

systems exists.Cost Accounting ABMC2513


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All bonus schemes are similar. They rely

on the setting of a target and the

comparison of actual performance with

that target. The savings which result from

the employees greater efficiency are then

shared between the employees and the

employer.



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OTHER METHODS OF REMUNERATION

SYSTEMS

Guaranteed minimum wage

A guaranteed minimum wage applies topiecework based remuneration systems. It protectsemployees by guaranteed minimum weekly wagebased on an hourly rate multiplied by theemployees number of attendance hours.

This is only applied if the level of piecework

earning is below this guaranteed minimum level

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Differential piecework rate

Using this system, a target of units is set and

different rates per unit are paid depending upon

the total number of units achieved. Usually a

daily target is used.

Example:

Units produced in a day RM

1-100 units 0.45 each

101- 129 units 0.50 each

130- 149 units 0.55 each

150 units and above 0.60 each

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Labour cost behaviour

When employees are paid on a piecework

basis, their pay is a variable cost.

When employees are paid a basic day-rate

wage, their pay per week is fixed

regardless of the volume of the output.

Because of the productivity bonuses,

overtime premium, commission and so on,

labour costs are often mixed costs .

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Recording labour costs

Clock cards

A clock card is a document on which are

recorded the starting and finishing times

of an employee.

This may be done manually or by insertion

into a time recording device.

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Piecework/ Bonus Tickets

The piecework method ofremuneration and the operation of bonusschemes require an analysis of the activityof each employee during a particular payperiod in order to determine the amount ofgross wages payable.

Piecework/bonus tickets are used inorder to determine the amount of

piecework earning or the amount of bonusearning payable to an employee.

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Time sheets

A time sheet is used to analyze theattendance time of an employee over thetasks which have been completed. Thisanalysis should also include idle time andother non-productive periods. This may bedone on a daily or weekly basis.

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Accounting for the cost of labour

Overtime earning

This overtime premium may be caused by thespecific request of a customer who requires a

job to be completed early or at a specific time,or may have resulted because of the

organizations need to complete a work whichwould be finished without working overtime.

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In the situation caused by the customer, thecustomer should be advised that the overtimewould be required to be charged to them asthey can be directly attributable to the job andclearly identified. They are considered as

direct cost.

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In general circumstances, the cost of theovertime premium is regarded asindirect cost, even though the premium ispaid to the direct workers, because it cannotbe identified with a specific cost unit.

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Bonus earning

The earning ofbonus, if paid on anindividual task basis, can be clearlyattributable to a particular task and so wouldbe direct labourof this task.

If the bonus system accumulates the totalallowable time and hours worked for aparticular pay period and then calculates the

bonus based on these totals, then any bonuswill be treated as indirect cost.

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Idle time

Idle time payments are made when anemployee is available for work and is beingpaid, but is not carrying out any productivework.Idle time can arise of various reasonsincluding machine breakdown, lack of ordersor insufficient materials.Idle time are treatedas indirect cost in the analysis of wages.

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Labour turnover - Reasons

a) Better pay

b) Illness or accidents

c) A family move from the locality

d) Marriage, pregnancy or child care

e) Retirement or death

f) Employees are working in unsafe or

stressful conditions

g) Long hours of work

h) Lack of opportunity for career

enhancement

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Cost of Labour turnover

a) Preventive Costs

b) Replacement Costs

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Preventive Costs

These are costs incurred in trying to

keep employees in their jobs.

a) Cost of personnel administration

incurred in maintaining good

relationship

b) Cost of medical services

c) Cost of welfare services

d) Pension scheme providing financial

security to the employees

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Replacement Costs

These are costs incurred as a result of

hiring new employees.

a)Cost of selection and placement

b)Inefficiency of new labours,

productivity may be low

c)Cost of training

d)Increase in wastage and spoilage due

to lack of expertise.

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Prevention of High Labour Turnover

a) Paying satisfactory wages

b) Offering satisfactory hours and conditionof work

c) Creating good informal relation

d) Offering good training scheme

e) Proper planning as to reduce redundancies

f) Provide benefits such as company car,

staff discount and so on.

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Labour turnover is a measure of the numberof leavers relative to the size of the workforce.

Number of leavers X 100%

Average workforce

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CLOCK CARD

SUNDAY

SATURD

AY

FRIDAY

THURSD

AY

WEDNES

DAY

TUESDA

Y

MONDAY

TOTALHOURS

OUTINOUTINDAY

NO: NAME:

CLOCK CARD

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Weekly Time Sheet

Gross wagesSupervisors signature

Amount$

HoursCodeJobFinishStartDay

For office useTo be completed by employee

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From the following information, calculate for each employee

his earnings using:

-50-92Output in units - Z

270-7672Output in units - Y

12012042Output in units - X

8546Hourly rate - RM34403638Actual hours worked

DCBAEmployees

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Each minute earned is valued atRM0.10 for piecework calculation.

X - 6 minutes, Y - 9 minutes,Z - 15 minutes.

Standard time allowed (per unit)

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Question

. From the following information, calculate for each employee hisearnings using:

a) guaranteed hourly rates only (basic pay).

b) piecework, but with earnings guaranteed at 75% of basic pay

where the employee fails to earn this amount,

c) premium bonus in which the employee receives two thirds of timesaved in addition to hourly pay.

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ANSWERS

a) RM228, RM144, RM200, RM272

b) RM228 RM140.40 RM150 RM315

c) RM228 RM144 RM200 RM370.67

Documents

Lec02Labour HO (1)