Labour Incentive

Paper 3A: Cost Accounting Chapter 3

CA. B.N. Pattabhi, M.Com, FCA

SOLUTATIONS

DEDICATED TO MY NOBLE,

EVER LOVING, EVER INSPIRING

PARENTS

LALITAMMA & NANJAPPA

Learning Objectives

To understand the need for Labour Cost Control Understand the attendance & Payroll Procedure Treatment of Idle Time & Over Time Concept of Labour Turn Over & Methods of calculating Understand the various methods of Wage & Incentive

Payments Efficiency Rating Procedures

Labor Cost Control This is one factor of production which can make or mar the performance of an organisation.

Labour Cost Control

Labour is the second largest element of cost after materials.

Labour is the most dynamic factor of production

In the present day service economy labour or human capital is the greatest asset of an organisation

Quality of Labour force determines the performance of an organisation

What is Labour cost control?

Labour cost control is an effort to optimise the labour cost and minimise the labour cost per unit of output

Labour cost control does not mean low wages for the employees

Lowly paid workforce means, low morale, low motivation, low out put and hence a costly proposition

Meaning continued

Labour cost control implies achieving a balance between the wage rate and motivation levels.

Wage payment system should ensure that the employees are motivated to perform better and the performance is properly rewarded

It is optimisation of labour cost per unit of output

Process of Labour Cost Control

The process of Labour Cost Control starts at the project initiation stage.

Like bill of materials is prepared before starting a production process, the type of labour, number of employees or workers and the labour mix is decided at the project initiation or planning level itself.

Various departments are involved in Labour Cost Control

Departments Involved in LCC

Planning Department

or Management

Personnel or HR

Department

Engineering & Work Study Department

Time Keeping Department

Payroll Department

Cost Accounting Department

Factors for LCC

Assessment of

manpower requirement

Control over time

keeping & time

booking

Time & Motion Study

Control over Idle time & Over time

Control over Labour

Turnover Wage

System Incentive System

Factors of LCC Continued

Systems of Wage

Payment and

Incentives

Control over Casual,

Contract & Other

workers

Job Evaluation & Merit Rating

Labour Productivity

Collection and Analysis of Labour Cost

Cost Accounting Department is entrusted with the job of Collecting, Analysing and Distributing labour costs.

Based on such analysis the total labour cost would be

segregated as Direct Labour cost which would form part of

the cost of the products produced or service rendered.

Collection and Analysis of Labour Cost Contd

Abnormal Idle time cost or cost of labour which is unutilised due to executive or managerial failure is kept out of the

purview of cost and treated as loss

Indirect Labour cost which would again form part of the cost of product produced or services rendered though indirectly through standing order rates or overhead recovery rates

Collection and Analysis of Labour Cost Contd

The same procedure is followed even in Non-integrated accounts, wherein the total labour cost is first debited to Labour

Cost Control Account and then transferred to respective accounts like WIP Control A/c or Overhead Control A/c

Students should remember that at the first stage total labour cost is collected and analysed.

Attendance and Payroll Procedure

Attendance and Payroll Procedure

The first and the most important task in labour cost control

is recording of the time, it is called as

“Time Booking”.

Time keeping refers to accurate recording

of employees attendance and time spent by them at the

work premises.

In simple words it’s akin to an

attendance register.

Attendance and Payroll Procedure Contnd

Recording the accurate time spent by an employee on a specific job or jobs is called as Time booking.

It is allocating of employee’s time and cost thereon to the specific job or jobs is referred to as Time Booking.

Time booking also forms the basis for Overhead recovery.

Time Keeping It is one of the basic requirements of labour cost control

Methods of Time Keeping

Mechanical Methods

Time Recording Clocks Dial Time Records

Manual Methods

Attendance Register Method Metal Disc Method

Methods of time keeping can broadly be classified into two categories Viz

Methods of Time Keeping Contnd

Due to technological advancement and rapid reduction in cost of the electronic equipments the above methods of time keeping has become obsolete and has been replaced by smart cards which record the entry and exit time of the employees.

In case of white collar jobs the working time of the employees is tracked through the login & log off of the terminal

Requisites of Good Time Keeping System

It should avoid Proxy

It should record the attendance of Piece workers as well

Accurate recording of time of arrival and departure

Should be mechanical as far as possible

Time Keeper should be objective and record the accurate time

Requisites Contnd

It should be simple smooth and quick It should avoid queuing

There should be a surprise check / visit to

ensure proper functioning and adherence to the established method of

time keeping

Time Booking IT is the process of analysing the time kept and allocating such time to various jobs

Time Booking

Time Booking is the process of allocating the time spent by an

employee to the various jobs he has handled/executed

It is done by using Job Cards which records the time spent by different

workers on a particular job or

Employee time cards which records the

time spent by each employee on various

jobs

Time Booking Contnd

Each of the above method of time booking ie Job

Cards and Employee Time Sheets have respective uses, advantages and

disadvantages.

The type of record to be maintained for time

booking depends mainly on the nature of the

industry and its specific requirements

Time Booking Contnd

Reconciliation of attendance record and time sheets / job cards helps in evaluating the labour utilisation and ascertaining the difference between the time paid and time uitilised ie the idle time.

It helps in detecting and deleting dummy / ghost workers.

It is advisable to maintain both the records as they are complementary to each other

Objectives of Time Booking

To ensure proper utilisation of time paid for

To ascertain the cost of each job/ work order

Serves as a base for apportionment of OH

Helps on calculating wage & bonus payments under incentive schemes

To ascertain the labour hours spent on job/ jobs & the idle time and the reasons therefor

Payroll Procedure

Preparing the list of

employees

Ascertaining the no of

hours worked

Computing the wages

payable based on the

hourly rate

Investigation or probe of

dummy / ghost

employees, if any

Effecting deductions tax and non

tax

Payment of wages

Over Time & Idle Time

Over Time & Idle Time

In the Indian scenario, under the Factories Act 1948, every worker is required to work 9 hours a day or 48 hours a week. If an employee works for more than 9

hours a day then excess time worked over and above the statutory requirement of 48 hours is to be paid at a higher rate, normally at double the regular

rates.

This additional payment is called as Over Time Premium

Over Time & Idle Time Contnd

Idle time is that time for which a worker is paid but not engaged on any job.

Idle time may be Normal or Abnormal

Normal Idle time is that idle time which can’t be avoided / reduced by executive action

The causes for Normal Idle time are

Time lost in reaching the workplace from the factory gate, interval between jobs, machine setup time and normal fatigue.

Over Time & Idle Time Contnd

Causes for abnormal idle time are Lack of

Coordination Non Availability of

Raw materials Breakdown of

Machinery / Power Failure

Faulty planning, Industrial unrest etc

Abnormal idle time is that idle time which could have been avoided / reduced by executive action.

Treatment of Cost of Idle Time

Cost of Normal idle time is absorbed into the

product cost by building it into the labour

recovery rate

Cost of abnormal idle time is not included in the cost but directly

transferred into costing profit & loss account

Treatment of cost of Over Time

As a General production programme If overtime is resorted to, to cope with the demand in the market or to meet an urgent order then the over time

premium is treated as the overhead cost of the respective department or cost centre which works overtime

At the request of the Customer If the overtime worked is at the behest of the customer, then the overtime premium is charged to that

customer

The overtime may be due to various reasons and treatment of overtime premium depends on the reasons for OT

Treatment of cost of Over Time

Due to uncontrollable factors

Over time premium in this case will be charged to the costing profit & loss account

Due to fault of another department if overtime is warranted due to the fault of another department, then the overtime

premium will be treated as the cost of the department which has committed the fault

Steps for checking Overtime

Ensure normal output during normal hours

OT statement should contain justifications

Prior Sanction from competent authority should be obtained before working OT

Compare out put during normal time & OT

To send periodical statements to management to take corrective action

To set an upper limit on OT

Labour Trunover

Labour Turnover

Labour Turnover means rate of change in the composition of

the labour force during a specific period

Labour turnover has a significant impact on the profitability of the organisation since it has both explicit and implicit costs involved

An organisation should aim at minimising the

labour turnover

Costs associated with L T-O

Cost of Recruitment

Cost of Training

Cost of Replacement

Loss of profit during induction

Loss of profit during Training

• Personal • Avoidable and Unavoidable

Causes of L T-O

Methods of Calculating L T-O

Replacement method

Separation method

Flux method combination of the Replacement and Separation methods

L T-O is normally calculated based on the average number of employees

The Number of workers joining including replacements are called as accesssions

Causes of LT-O

Personal Causes For Better Prospects

Premature Retirement due to ill health

Domestic / Family problems or

Responsibilities

Discontent over the Job and working

Environment

Causes of LT-O Contnd

Unavoidable Causes

• Seasonal Nature of the Business • Shortage of Raw materials,

Power or Lack of Demand • Change in the Plant Location • Disability of the workers • Disciplinary Measures

Causes of LT-O Contnd

Avoidable Causes

• Dissatisfaction with the Job, Remuneration • Timings, conditions, environment etc • Inter personal problems with Management,

Supervisors & co workers. • Lack of scope for learning & Development • Lack of other Fringe Benefits like Medical

& recreation facilities • Low wages and allowances

Effects of LT-O

Production flow is disturbed

Loss of productivity during the initial period

Higher cost of Training & Induction

Increased breakage of Tools & Wastages

Higher cost of recruitment & Training

Preventive Costs are costs incurred to minimise labour turn over

Replacement costs are costs incurred to replace the workers who have left the job

Steps to Minimise L T-O

Conducting Exit Interview to gain insights

Critical Job Analysis & Evaluation

Scientific Recruitment, Placement & Promotion

Change in the Management’s attitude towards the workers and their needs

Forming of Joint Committees of Management & Workers to resolve issues

Incentive Systems

Incentive Systems

Incentive means a reward or a tool of motivation to encourage employees to

improve their performance by increasing their

efficiency and effectiveness

Incentive may be Monetary or Non Monetary, Individual

or Collective

The ultimate aim of an incentives is to increase the output by promoting healthy

competition amongst employees to increase their Efficiency & Effectiveness

Incentive Systems

1 • The guiding principle behind any incentive systems

is sharing of profits or benefits derived out of increased efficiency and effectiveness of the workers between the management and the workers.

2 • In simple terms it is a win-win situation for both the

Management and the workers

Prerequisites of Incentive Systems

Well defined Quality Control System

Need to increase production

Precision in measuring quality & quantity

Role of Management

Efforts of the Workers

Standards of Performance

Non Discrimination

Features of Sound Incentive Systems

Just & Fair

Clear definition of the Scheme

Expectation of workers & Stability

Penalties in the scheme

Quality of work

Availability of Adequate Resources

Cost effectiveness & Reasonableness Minimum base wages and Uniformity

Characteristics of Good Incentive System

Just to both Employer and Employee

Reward should be commensurate with risk

Unrestricted

Simple and Reasonable

Flexible & cohesive with other controls

Should facilitate supervision & Team Work

Support & reception by Employees

Classification of Labour

Classification of Labour

Direct Labour All those labour costs that are specifically

incurred or readily Chargeable or identifiable

with a specific job or contract or work order

or any other unit of cost is called as Direct

Labour Cost.

Example: Salary of Assembly lane worker

Classification of Labour Contnd

Indirect Labour

• All those labour cost which are not identifiable with a particular job, contract or work order or any other unit of cost is treated as Indirect Labour

Example:

• Salary of the Factory Manager • Security Guard, • Cleaners etc

Labour Utilisation

• is tracked by preparing a Wage Analysis Sheet

Systems of Wage & Incentive Payment

Systems of Wage & Incentive Payment - Broadly two systems

Time Rate System

• Based on the total time spent by the employee on the job and

Payment by Results

• Based on the output achieved by the employee in the given time

Time Rate Systems

Time Rate Systems

Simple Time Rate System

• All the workers are paid on the basis of the total time spent by them on the job.

High Wage Plan

• Introduced by Henry Ford of Ford Motor • Company USA to attract above average workers by offering

them a wage rate which is higher than the prevailing industry average but setting a higher performance standard

Time Rate Systems

Measured Days Work

• Consists of two components fixed & variable • Fixed pay based on the job evaluation and • variable pay based on merit rating and cost • of living index

Differential time Rate

• Indirectly linked to efficiency, different wage rates for different levels of efficieny

Payment by Results

Payment by results is broadly classified into Piece Work System Combination of Time & Piece

work Premium Bonus Method Group System of Wage Payment

This system aims at linking the wages to workers to the output / efficiency

Payment by results means rewarding a worker based on the output achieved.

Piece Work Systems

Piece Work Systems

Straight Piece Work

• Under this method the piece rate per unit is fixed and the workers are paid based on the output achieved by the worker.

• Under this method there is no added incentive to the worker to achieve a greater output or efficiency

Differential Piece Rate Systems

Differential Piece Rate

• Under this method standard output is fixed and a worker is paid based on his efficiency

F W Taylor’s Differential Piece

Rate

• Upto 100% 83% or 80% of Piece Rate • 100 % or More 125% or 120% of Piece

Rate Efficiency Payment

• Under this scheme, the difference in wages will be 50% even for a short fall of 1%

The payment for a worker varied very

widely

Differential Piece Rate Contnd.

Merrick’s Differential Piece Rate System

• Payment Efficiency

• Ordinary Piece Rate Upto 83%

• 110% of Ordinary Piece Rate 83% - 100%

• 120% or 130% of Ordinary Piece Rate Above 100%

Time & Piece Rate Systems

Combination of Time & Piece Rate Systems

I. Gantt task & bonus system: It’s a combination of time and piecework system.

Output Payment/Incentive • Guaranteed Time Rate Below standard

• Time rate +20% bonus At standard

• High piece rate on entire output of the worker the Above standard

• As to include the 20% bonus. Piece rate is so fixed

Emerson’s efficiency system

Min time wages are guaranteed. Bonus depends on level of efficiency.

• Payment Output

• only time wages Upto 66 2/3%

• Time wages + Bonus between 0.01% to 20% 66 2/3% to

100% • Time wages + Bonus 20% +1% bonus

for every 1% Increase in output above the standard

Above 100%

Points scheme or Bedeaux System

The work is expressed in terms of Bedeaux points or B’s. Each B represents one minute. If the task is

completed within the standard time the workers are paid bonus at the rate of 75% of the time rate for the time saved. Otherwise the workers are paid at the

time rate.

Hayne’s system

If the work is of non-repetitive nature the time saved is shared between worker employer and foreman in the ratio of 4:1:1.

The wages for the time saved in case of repetitive type of work is shared between the worker and foreman in the ratio of 4:1.

The workers are paid according to the time rate.

Work is expressed in terms of “MANIT” which stands for Man Minutes.

Accelerated premium system

The earnings increase progressively with the output i.e the proportion of increase in earnings will be greater than the increase in the output

Premium Bonus Plans

Halsey and Halsey Weir system

Standard time for the job is set.

If the time taken is equal to or more than the standard time then only day rate wages is

paid.

If the time taken is less than the standard time then the benefit of time

saved is shared between the employer

& employee.

The bonus payable on time saved under

Halsey system is 50% and under Halsey Weir

system is 30%.

Premium Bonus Plans Contnd

Rowan system

• Bonus is paid in proportion to the time saved as compared with the standard time

• Wages = Time taken X Rate per Hr + (Time Saved/Time allowed) X Time taken X Rate per Hr

Halsey V/s Rowan Scheme

Rowan system is more scientific and balanced since the bonus payable to a worker never exceeds 100% whereas under Halsey scheme a worker can get a bonus which is more than his wages

Barth & Scalon Plans

Barth Sharing Plan Earnings = Rate per Hour X √Standard Hours X Hours

worked Scanlon Plan Bonus Percentage = Av Annual Sal & Wages Av Annual Sales Revenue

Group Systems of Wage Payment

Group Systems of Wage Payment

Certain jobs are to be executed by a group of workers and the performance

of one worker depends on the performance of his co workers.

In these kinds of jobs it is difficult / impossible to measure performance of

any one worker, in such cases the group is treated as composite unit and

the group is rewarded as a whole

Group Systems of Wage Payment Contnd

The wages are distributed on the basis of

• Pro rata to the time spent by each worker

Equally

Time rates and Attendance

• In a group consisting of both skilled and unskilled workers, unskilled workers are paid by time rate, balance is distributed to skilled workers on any of the above bases

Specified Percentage basis

Objectives of Group Bonus Scheme

Create Collective interest & Team Spirit

Create Interest among Supervisors

Reduce wastage and idle time

Achieve optimum output at Minimum cost

To encourage individual members of a group where only performance of the group as a whole can only be measured

Group Bonus Schemes

• Bonus percentage is equal to the difference between the actual output & standard output

Priestman’s Production

Bonus

• The standard cost is set and a very fair portion of the savings in cost is paid to the workers as bonus.

Cost Efficiency Bonus

Cost Efficiency Bonus Plans

Systems of Cost Efficiency Bonus Plans

Nunn Bush Plan

• Total Labour cost is fixed as a percentage of sales and credited to a separate fund. Actual Wages is debited to the fund, the balance if any is distributed as a bonus

Scanlon Plan

• Two thirds to Three fourths of the savings in wages as above is distributed as bonus balance is retained as a reserve

Systems of Cost Efficiency Bonus Plans

• It is similar to the Nunn Bush plan except • that the total wages are expressed as a

% of • total value added by a manufacturer

Rucker Plan

• 50% of the savings in the labour cost as • compared to the standard set is

distributed as • bonus

Town Gain Sharing Plan

Systems of Cost Efficiency Bonus Plans

Budgeted Expense Bonus

• Bonus % is determined in advance and is paid as a % of savings achieved

Waste Reduction

Bonus

• Bonus is payable if the % of wastage is reduced as compared to the standard set

Other Systems

System of Incentive to Indirect Workers

Establishing a standard of performance for indirect workers is

very difficult. Nevertheless the indirect workers have to be given some incentives so that they are

motivated to achieve greater results.

The Scheme varies from industry to industry and type of indirect workers

Profit Sharing & Co Partnership Schemes

It is one of the latest developments in the field of management and is termed as employee participation in management.

The sun rise industries like IT & ITES have been able to attract and retain the talent with the help of well defined Profit Sharing Schemes

Absorption of Wages

Absorption means applying the costs to a particular product or article.

As a thumb rule the labour absorption rate is always higher than the wage rate because the labour cost also includes cost of non monetary benefits extended to the workers and also the cost of normal idle time during which no production is achieved

Principles of Remuneration

Geographical Area Based

Performance/job Based

Minimum Wages

Maintain Standard of Living

Separate Wage Rates for Different classes of employees

Incentives as per output

Efficiency Rating

The process involves Determining the

standards of performance Measuring the Actual

performance Efficiency Rating

It is process of ascertaining the efficiency of the worker vis-à-vis the standard set

Lesson Summary

Labour Cost is the cost incurred on Human resources in an organisation

Thank You