3

Labour

Learning Objectives

When you have finished studying this chapter, you should be able to:
• Understand the need of labour cost control,
• Understand the attendance and the payroll procedure
• Describe the meaning and accounting treatment of idle time and overtime
• Understand the concept of labour turnover and the various methods of computing the
same
• Understand various types of systems of wage payment and incentives
• Describe the efficiency rating procedures.

3.1 Introduction
Labour cost after material cost is another significant element of cost not only because the
wage bill in a modern organisation is generally substantial but also because it has certain
peculiar characteristics which other elements of cost do not have. A good cost accountant
must understand the special features of labour cost, the most important of which is that there
is almost no limit to the increase of output of this most important and wonderful factor of
production.

3.2 Classification of Labour Cost

Labour cost may be broadly classified as direct labour cost and indirect labour cost.
3.2.1 Direct Labour Cost: Labour cost that is expended in production of a product and easily
identified and allocated to a cost unit i.e. a specific job, contract, work order or any other unit
of cost.
3.2.2 Indirect Labour Cost: Labour cost that is expended on the wages of workmen who are
not directly engaged in the production process and can be easily identified with a cost unit.

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 Labour 3.2

Distinction between Direct and Indirect Labour Cost:

Direct labour cost Indirect labour cost
1. It is the cost incurred in payment of labour 2. Cost incurred for payment of labour who
who are directly engaged in the production are not directly engaged in the production
process process.
2. Direct labour cost can be easily identified 2. Indirect labour cost is apportioned on some
and allocated to cost unit.. appropriate basis.
3. Direct labour cost varies with the volume 3. Indirect labour cost may not vary with the
of production and has positive relationship volume of production.
with the volume.

3.3 Labour Cost Control

Labour costs are associated with human beings. To control labour costs one has to
understand human behavior. Labour cost control means control over the cost incurred on
labour. Control over labour costs does not imply control over the size of the wage bill; it also
does not imply that wages of each worker should be kept as low as possible.
The aim should be to keep the wages cost per unit of output as low as possible. This can only
be brought about by giving workers optimum wages and then harnessing their energies to
optimise output.
A well motivated team of workers can bring about wonders. Each concern should, therefore,
constantly strive to raise the productivity of labour. The efforts for the control of labour costs
should begin from the very beginning. There has to be a concerted effort by all the concerned
departments. In a large organisation, generally the following departments are involved in the
control of labour costs :
Department Functions
1. Personal Department i) On receipt of labour requisition from the various
departments it searches for the required skills
and qualification.
ii) It ensures that the persons recruited posses the
requisite qualification and skills required for the
job.
iii) Arranges proper training for the newly recruited
workers and workshops for existing workers.
iv) Maintains all personal and job related records
of the employees.

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 3.3 Cost Accounting

v) Evaluation of performance from time to time

2. Engineering and Work i) Prepares plans and specifications for each job
Study Department ii) Providing training and guidance to the
employees
iii) Supervises production activities
iv) Conducts time and motion studies
v) Undertakes job analysis.
vi) Conducts job evaluation.
3. Time-keeping Department This Department is primarily concerned with the
maintenance of attendance records of the em-
ployees and the time spent by them on various jobs,
etc.
4. Payroll Department i) The preparation of payroll of the employees.
ii) It disburses salary and wage payments.
5. Cost Accounting This department is responsible for the accumulation
Department and classification etc. of all type of costs.
All such data pertaining to labour costs are also
collected, analysed and allocated to various jobs,
processes, departments, etc., by this department.

3.3.1 Important Factors for the Control of Labour Cost: To exercise an effective
control over the labour costs, the essential requisite is efficient utilisation of labour and allied
factors. The main points which need consideration for controlling labour costs are the
following:
(i) Assessment of manpower requirements.
(ii) Control over time-keeping and time-booking.
(iii) Time & Motion Study.
(iv) Control over idle time and overtime.
(v) Control over labour turnover.
(vi) Wage systems.
(vii) Incentive systems.
(viii) Systems of wage payment and incentives.
(ix) Control over casual, contract and other workers.
(x) Job Evaluation and Merit Rating.
(xi) Labour productivity.

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 Labour 3.4

3.3.2 Collection of Labour Costs: The task of collecting labour costs is performed by the
Cost Accounting Department which record separately wages paid to direct and indirect labour.
It is the duty of this department to ascertain the effective wages per hour in each department
and to analyse the total payment of wages of each department into:
(i) the amount included in the direct cost of goods produced or jobs completed;
(ii) the amount treated as indirect labour and thus included in overheads ; and
(iii) the amount treated as the cost of idle time and hence loss.
(iv) the amount treated as abnormal loss/ gain and to be transferred to profit and loss
account.
Through this process costs of various jobs are ascertained. Naturally, in this the proper
recording of time spent by the workers is essential. Labour cost per hour may be collected
through the use of the form given below:
A.B.C. Co. Ltd.
Department Labour Cost Report Week ended
Productive Time Wages Paid
Name of Section Day O/Time Total Paid Total Time O/Time Bonus Total Cost per
the Work Hours Hours Idle Time Hrs. Premium Production
employee Hrs. Time Hrs. Hours
Hrs.
(`) (`) (`) (`) (`)

3.4 Attendance & Payroll Procedures

3.4.1 Attendance Procedure / Time-keeping: It refers to correct recording of the
employees’ attendance time. Students may note the difference between “time keeping” and
“time booking”. The latter refers to break up of time on various jobs while the former implies a
record of total time spent by the workers in a factory.
Objectives of Time-keeping : Correct recording of employees’ attendance time is of utmost
importance where payment is made on the basis of time worked.
Where payment is made by results viz; straight piece work, it would still be necessary to
correctly record attendance for the purpose of ensuring that proper discipline and adequate
rate of production are maintained. In fact the various objectives of time-keeping are as follows:
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining and controlling labour cost.
(iv) For ascertaining idle time.

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(v) For disciplinary purposes.

(vi) For overhead distribution.
Methods of Time-keeping: There are two methods of time-keeping. They are the manual
methods and the mechanical methods. The choice of a particular method depends upon the
requirements and policy of a firm. But whichever method is followed, it should make a correct
record of the time incurring the minimum possible expenditure and should minimise the risk of
fraudulent payments of wages.
Methods Descriptions
Manual
(a) Attendance Register It is the oldest method of recording time. Under this
Method method, an attendance register is kept in the time office
adjacent to the factory gate or in each department for
workers employed therein.
The time of a arrival and departure, may be noted down
by an employee know as time-keeper.
This method is simple and inexpensive and can be used
in small firms where the number of workers is not large.
This method may lead to dishonest practice of recording
wrong time because there is possibility of collusion
between some of the workers and the time-keeper.
However, for recording the time of workers who work at
customers’ premises and places which are situated at a
distance from the factory, this may be the only suitable
method.
(b) Metal Disc Method Under this method, each worker is allotted a metal disc
or a token with a hole bearing his identification number.
As the workers enter the factory gate, they remove their
respective discs or tokens and place them in a box or
tray kept near the board. Immediately after the scheduled
time for entering the factory, the box is removed and the
late comers will have to give their tokens to the time-
keeper personally so that the exact time of their arrival
could be recorded.
It has certain disadvantages as given below:
1. There are chances that a worker may try to remove
his companion’s token from the board in order to
get his presence marked when he is absent.
2. There are chances of disputes regarding the exact
time of arrival of a worker because the time-keeper

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 Labour 3.6

marking the attendance can commit mistakes

deliberately or through carelessness. There is no
authentic proof of the presence or absence of the
workers.
3. There are chances of inclusion of dummy or ghost
workers by the time-keeper.
Mechanical
(a) Time Recording The time recording clock is a mechanical device which
Clocks automatically records the time of the workers. Under this
method, each worker is given a Time Card and are serially
arranged in a tray near the factory gate and as the worker
enters the gate, he picks up his card from the tray, puts it in
the time recording clock which prints the exact time of
arrival in the proper space against the particular day. This
process is repeated for recording time of departure for
lunch, return from lunch and time of leaving the factory in
the evening. Late arrivals, early leavings and overtime are
printed in red to attract the attention of the management.
Advantages:
i There are no chances of disputes arising in
connection with recording of time of workers
because time is recorded by the time recording
clock and not by the time-keeper.
ii There is no scope for partiality or carelessness of
the time-keeper as it is in case of manual
methods.
Disadvantages:
i There are chances that a worker may try to get his
friend’s time card from the tray in order to get him
marked present in time when he is actually late or
get his presence marked when he is absent. This
drawback can be removed if the time-keeper does
not show carelessness.
ii Sometimes, the time recording clock goes out of
order and the work of recording of time is
dislocated.
(b) Dial Time Records. The dial time recorder is a machine which has a dial
around the clock. This dial has a number of holes
(usually about 150) and each hole bears a number
corresponding to the identification number of the worker
concerned. There is one radial arm at the centre of the

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dial. As a worker enters the factory gate, he is to press

the radial arm after placing it at the hole of his number
and his time will automatically be recorded on roll of a
paper inside the dial time recorder against the number.
The sheet on which the time is recorded provides a
running account of the worker’s time.
Advantages:
1. This machine allows greater accuracy and can itself
transcribe the number of hours to the wages sheets.
2. This machine can also calculate the wages of the
workers and thus avoids much loss of time.
Disadvantages:
The high installation cost of the dial time recorder and its
use for only a limited of workers are the drawbacks of
this method.
(c) Punch Card One of the most popular time clock attendance systems
attendance system is punch card attendance system. A punch card is a flat
and stiff paper with notches cut in it and contains digital
information. In punch card attendance system,
employees use this punch or proximity card for in and/or
out. To use a punch card, employees just need to wave
the card near a reader, which then ensures whether the
correct person is logging in and/or out.
Advantages:
1. Punch card attendance system prevents the proxy
attendance and records the accurate in and/or out
time of each employee.
2. Employees just need to punch their cards and their
attendance along with the time gets recorded so in
short manual intervention is not there which avoids
any kind of misconception.
3. There is no scope of editing and manipulation in
records so it keeps utmost transparency in the
organization.
Disadvantages:
Like all good things come along with bad things, punch
card attendance system also has a few disadvantages, it
has a complex software and hardware and needs
expensive machines to install.
(d) Bio Metric Attendance Biometrics has unique recognizing features which are
based on physical or behavioral traits of an individual.

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system Recognizing an individual on the basis of physical traits

include identification based on his fingerprint, face, DNA,
eyes, iris, palm, etc while behavioral traits identification
refers to voice or rhythm recognition. Based on this
technology different recognition systems have been
designed depending on different traits.
Fingerprint recognition system - An automated method
of verifying a match between human fingerprints. As
fingerprint of every person is unique, it offers a very
secure and reliable attendance monitoring. No buddy
punching/ proxy attendance is possible.
Face recognition- Based on automatic identification and
verification of face by digital image or video frame and
matching it with facial database present in it software.
Mainly used in security systems.
Time and attendance Tracking technology – Time and
attendance technology helps the companies to keep a
track on the attendance and working hours of the
employee in order to make their payment. This
technology has proved to be a real time and money
saver for all types of business. This technology has
replaced all the paper sheets and other manual systems
at rapid speed. It has two types of systems. One is web-
based and the other is PC-based. It depends on the type
of business whether which system suits it.

Requisites of a Good Time-keeping System: A good time-keeping system should have

following requisites:
1. System of time-keeping should be such which should not allow proxy for another worker
under any circumstances.
2. There should also be a provision of recording of time of piece workers so that regular
attendance and discipline may be maintained. This is necessary to maintain uniformity of
flow of production.
3. Time of arrival as well as time of departure of workers should be recorded so that total
time of workers may be recorded and wages may be calculated accordingly.
4. As far as possible, method of recording of time should be mechanical so that chances of
disputes regarding time may not arise between workers and the time-keeper.
5. Late-comers should record late arrivals. Any relaxation by the time-keeper in this regard
will encourage indiscipline.
6. The system should be simple, smooth and quick. Unnecessary queuing at the factory
gate should be avoided. Sufficient clocks should be installed keeping in view the number

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of workers so that workers may not have to wait for a long period for recording their time
of arrivals and departures.
7. A responsible officer should pay frequent visits at the factory gate to see that proper
method of recording of time is being followed.
Time-Booking - The clock card is required, essentially, for the correct determination of the
amount of wages due to a worker on the basis of time he has put in the factory.
It merely records day by day and period by period the total time spent by each individual worker in
the factory. But it does not show how that time was put to use in the factory—how an individual
worker utilised his time in completing jobs entrusted to him and how long he was kept waiting for
one reason or another due to lack of work, lack of material and supplies, lack of instructions,
machine breakdowns, power failures and the like. These are all vital pieces of information
necessary for the proper collection of cost data and for effective controlling of costs. For the
collection of all such information, a separate record, generally known as Time (or Job) card, is kept.
The time (or job) card can be of two types—
• One containing analysis of time with reference to each job : A separate job card is
employed in respect of a job undertaken; where a job involves several operations, a
separate entry is made in respect of each operation.
Thus the job card would record the total time spent on a particular job or operation. If a
number of people are engaged on the same job or operation, the time of all those
workers would be booked on the same card.
One advantage of this method is that it provides complete data on the labour content of
job or operation collectively so that the computation of labour cost is greatly facilitated.
But this method has drawbacks as well. Since a worker’s job timing is scattered over a
number of job cards the time spent on all these jobs and idle time must be abstracted
periodically for finding each worker’s total time spent on different jobs and the time for which
he remained idle during the period. The total of these two times (job and idle) must obviously
equal his total attendance time, as shown by his clock card or attendance register.
Thus, it would be seen that if the job cards are made out according to job or operation a
separate summary has to be prepared for reconciling each worker’s job and idle time with
his gate time. It would be quite obvious that such a reconciliation is of great importance
from the point of view of labour costs.
• The other with reference to each worker: In this case, it would greatly facilitate
reconciliation of the worker’s job time with his gate time.
Under this system, a card would be issued to each worker for each day or for each week
and the time which he spends on different jobs (and also any idle time) would be
recorded in the same card so that the card would have a complete history on it as to how
his time had been spent during the period. Since all the details would be on one card the
total time accounted for in the job card would be readily tallied with the total time put in

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the Gate Card or attendance register. In this case however, a Labour Abstract for
different jobs would have to be prepared from the card of individual worker so that total
hours (and/or their value) put in by different workers on different jobs during the period
could be ascertained and aggregated. It would thus be seen that according to either of
the method a process of abstraction and reconciliation is necessary
Specimens of two types of job cards are given below:
JOB CARD (1st type)
Description of ................................. Job No. ........................................
Department ..................................... Date.............................................

Worker’s Start Stop Elapsed Actual time Rate Amount

No. time taken

Supervisor’s initial

JOB (OR TIME) CARD (2nd type)

No..................... Date.................................
Name of the worker ................................. Ticket No...............................
Department...........................................
Operation...............................
Job Start Stop Time Time Rate Amount
No. Elapsed
Supervisor’s initial
Reconciliation of gate and job cards - An advantage of the introduction of job card is that:-
i It enables a reconciliation to be made of the time spent by the worker in each
department with the time paid for as per the attendance record.
ii Reconciliation not only helps in locating wastage of time, but also in preventing dummy
workers being put on the payroll of workers paid for time not worked by them.
The two sets of records serve separate purposes.
Where payment to labour is on the time rate basis, the Gate Card is a record of the hours of
work that should be paid for. Since the Gate Card merely records the hours during which the
worker has been within the premises of the factory and it does not contain any details as to

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how those hours have been put to use by the worker in his department, a job card must be
prepared to provide the necessary information. As we have already seen, the job card may be
prepared either worker-wise or job-wise.
Objectives of Time-Booking - Objectives of time-booking are as follows:
1. To ensure that time paid for, according to time keeping, has been properly utilised on
different jobs or work orders.
2. To ascertain the cost of each job or work order.
3. To provide a basis for the apportionment of overhead expenses over various jobs/work
orders when the method for the allocation of overhead depends upon time spent on
different jobs.
4. To calculate the amount of wages and bonus payable under the wage incentive system.
5. To ascertain the labour hours spent on each job and the idle labour hours.
3.4.2 Payroll procedure: Steps included in this process are as under:

Time -keeping Personnel/ HR

Department Department
1. Time and Attendance

2. Employee Details

Payroll Department

3. Wage and Salary sheet

5. Deposit of deductions and

Cost/ Accounting contributions
Department
4. Payment after deductions and
contributions

Statutory Bodies
Employees

Diagram: Payroll Procedures

1. Attendance and Time details: A detailed sheet of number of days or hours worked
by each employee (in case of time based payment) and units or percentage of work

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(in case of piece rate) as reflected by the time keeping methods are sent to the
payroll department by the time keeping department. Further, payroll department
with the help of time booking records calculate any further incentives such as
overtime payment, bonus to be paid to the employees.
2. List of employees and other details: A list of employees on roll and the rate at
which they will be paid is sent by the personnel/ HR department. Payroll
department should ensure that no unauthorised person can paid.
3. Computation of wages and other incentives: Payroll department based on the
details provided by the time keeping department and personnel department
calculate wages/ salary to be paid to the employees. Payroll department prepares
pay slip for all employees authorized by the personnel department and forward the
same to the cost/ accounting department for further deductions and payment.
4. Payment to the employees: Cost/ accounting department deduct all statutory
deduction such as employee’s contribution to provident fund and employee state
insurance (ESI) scheme, TDS on salary etc. After all deductions wages/ salary is
paid to the employees.
5. Deposit of all statutory liabilities: All statutory deduction made from the employees
alongwith employer’s contributions such as provident fund and employee state
insurance scheme are paid to the respective statutory bodies.
6. Investigation: Should a clock card (attendance sheet) for an employee not listed on
the payroll sheet be found, investigation of its propriety is required. Likewise, there
should be an explanation for any missing clock cards deductions: After the gross
earnings (that is, the total amount earned by an employee before any deductions
are taken into consideration) have been calculated for every employee, deductions
are entered on the payroll sheet, and the net pay of each employee is determined.
The followings are generally deducted from the payroll

Type of deductions Description

Statutory Deductions
1. Provident fund Employee’s contribution to the Provident fund is deducted
from the salary/ wages of the concerned employee.
Employee’s contribution to the fund shall be equal to
contribution payable by the employer.
2. Employee State Insurance Employee’s contribution to the ESI is deducted from the
Scheme (ESI) salary/ wages. Currently, the employee’s contribution rate
(w.e.f. 1.1.97) is 1.75% of the wages
3. Tax Deduction at Source Employer is obliged to deduct tax at source if it will be paying

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(TDS) to the employee net salary exceeding maximum exemption

limit in equal installments.
4. Professional Tax In India, the professional tax is imposed at the state level.
Business owners, working individuals, merchants and people
carrying out various occupations comes under the purview of this
tax. Professional tax is deducted based on predetermined slabs.
Other Deductions
1. Voluntary contribution to If any employee so desires may contribute over and above the
Provident fund contribution payable by the employer.
2. Contribution to any An employee may contribute to any benevolent fund
benevolent fund. voluntarily by a putting a request to the payroll department.
3. Loan deductions Installments of any loan taken by the employee.
4. Other advances and dues Other advances like festival advance and unadjusted
advances taken.

3.5 Idle Time

It is a time during which no production is carried out because the worker remains idle even
though they are paid. Idle time can be normal idle or abnormal idle time.
Normal idle time : It is the time which can not be avoided or reduced in the normal course of
business.
Causes Treatment

1. The time lost between factory gate It is treated as a part of the cost of
and the place of work production. Thus, in the case of direct
workers an allowance for normal idle time
2. The interval between one job and
is built into the labour cost rates.
another
In the case of indirect workers, normal idle
3. The setting up time for the machine
time is spread over all the products or jobs
4. Normal fatigue etc. through the process of absorption of
factory overheads

Abnormal idle time : Apart from normal idle time, there may be factors which give rise to
abnormal idle time.
Causes Treatment
1. Idle time may also arise due to Abnormal idle time cost is not included as
abnormal factors like lack of a part of production cost and is shown as
coordination a separate item in the Costing Profit and

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2. Power failure, Breakdown of machines Loss Account.

3. Non-availability of raw materials, The cost of abnormal idle time should be
strikes, lockouts, poor supervision, fire, further categorised into controllable and
flood etc. uncontrollable. For each category, the
break-up of cost due to various factors
4. The causes for abnormal idle time
should be separately shown. This would
should be further analysed into
help the management in fixing responsibility
controllable and uncontrollable. for controlling idle time.
i) Controllable abnormal idle time Management should aim at eliminating
refers to that time which could controllable idle time and on a long-term
have been put to productive basis reducing even the normal idle time.
use had the management been This would require a detailed analysis of the
more alert and efficient. All causes leading to such idle time.
such time which could have
been avoided is controllable
idle time.
ii) Uncontrollable abnormal idle
time refers to time lost due to
abnormal causes, over which
management does not have
any control e.g., breakdown of
machines, flood etc. may be
characterised as uncontrollable
idle time.

Illustration 1: (calculation of effective hourly cost)

‘X’ an employee of ABC Co. gets the following emoluments and benefits:
(a) Basic pay ` 1,000 p.m.
(b) Dearness allowance ` 200 p.m.
(c) Bonus 20% of salary and D.A.
(d) Other allowances ` 250 p.m.
(e) Employee’s contribution to P.F. 10% of salary and D.A.
‘X’ works for 2,400 hours per annum, out of which 400 hours are non-productive and treated
as normal idle time. You are required to find out the effective hourly cost of employee ‘X’.
Solution
Statement showing computation of effective hourly cost of employee ‘X’
(i) Earning of Employee ‘X’:
Per month Per annum

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 3.15 Cost Accounting

(`) (`)
Basic pay 1,000 12,000
Dearness Allowance 200 2,400
Bonus 240 2,880
Employer’s contribution to provident fund 120 1,440
Other allowance 250 3,000
1,810 21,720
(ii) Effective working hours :
Annual working hours 2,400
Less : Normal idle time 400
Effective working hours 2,000
Effective hourly cost of ‘X’ : ` 21,720/2,000 10.86

3.6 Overtime
Overtime premium: Work done beyond normal working hours is known as ‘overtime work’.
Overtime payment is the amount of wages paid for working beyond normal working hours. The
rate for overtime work is higher than the normal time rate; usually it is at double the normal
rates. The extra amount so paid over the normal rate is called overtime premium.
As per the Factories Act 1948 “ Where a worker works in a factory for more than nine
hours in any day or for more than fortyeight hours in any week, he shall, in respect of
overtime work, be entitled to wages at the rate of twice his ordinary rate of wages.”
Where any workers in a factory are paid on a piece-rate basis, the time rate shall be
deemed to be equivalent to the daily average of their full-time earnings for the days on
which they actually worked on the same or identical job during the month immediately
preceding the calendar month during which the overtime work was done, and such time
rates shall be deemed to be the ordinary rates of wages of those workers
Ordinary rate of wages means the basic wages plus such allowances, including the cash
equivalent of the advantage accruing through the concessional sale to workers of food
grains and other articles, as the worker is for the time being entitled to, but does not
include a bonus and wages for overtime work.

Occasional overtime is a healthy sign since it indicates that the firm has the optimum capacity
and that the capacity is being fully utilised. But persistent overtime is rather a bad sign
because it may indicate either (a) that the firm needs larger capacity in men and machines, or
(b) that men have got into the habit of postponing their ordinary work towards the evening so
that they can earn extra money in the form of overtime wages.

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Causes overtime and treatment of overtime premium in cost accounting

Causes Treatment
(1) The customer may agree to bear the (1) If overtime is resorted to at the desire
entire charge of overtime because of of the customer, then overtime
urgency of work. premium may be charged to the job
directly.
(2) Overtime may be called for to make (2) If overtime is required to cope with
up any shortfall in production due to general production programmes or for
some unexpected development. meeting urgent orders, the overtime
premium should be treated as
overhead cost of the particular
department or cost centre which works
overtime.
(3) Overtime work may be necessary to (3) If overtime is worked in a department
make up a shortfall in production due due to the fault of another department,
to some fault of management. the overtime premium should be
charged to the latter department.
(4) Overtime work may be resorted to, to (4) Overtime worked on account of
secure an out-turn in excess of the abnormal conditions such as flood,
normal output to take advantage of an earthquake etc., should not be
expanding market or of rising demand charged to cost, but to Costing Profit
and Loss Account.

Effect of overtime payment on productivity: Overtime work should be resorted to only when
it is extremely essential because it involves extra cost. The overtime payment increases the
cost of production in the following ways:
1. The overtime premium paid is an extra payment in addition to the normal rate.
2. The efficiency of operators during overtime work may fall and thus output may be less
than normal output.
3. In order to earn more the workers may not concentrate on work during normal time and
thus the output during normal hours may also fall.
4. Reduced output and increased premium of overtime will bring about an increase in costs
of production.
5. Gives rise to associated costs. (wear and tear of machinery, power etc.)
Steps for controlling overtime: To keep overtime to its minimum, it is necessary to exercise
proper control over the overtime work. The suitable procedure which may be adopted for
controlling overtime comprises the following steps:

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1. Watch on the output during normal hours should be maintained to ensure that overtime is
not granted when normal output is not obtained during the normal hours, without any
special reasons.
2. Statement concerning overtime work be prepared along with justifications, at appropriate
places for putting up before the competent authority.
3. Prior sanction about overtime should be obtained from competent authority.
4. Actual rate of output produced during the overtime period should be compared with
normal rate of output.
5. Periodical reports on overtime wages should be sent to top management for taking
corrective action.
6. If possible an upper limit may be fixed for each category of workers in respect of
overtime.
Illustration 2: (Calculation of earnings)
Calculate the earnings of A and B from the following particulars for a month and allocate the
labour cost to each job X, Y and Z:
A B
(i) Basic Wages ` 100 160
(ii) Dearness Allowance 50% 50%
(iii) Contribution to provident Fund (on basic wages) 8% 8%
(iv) Contribution to Employee’s State Insurance (on basic wages) 2% 2%
(v) Overtime Hours 10
The normal working hours for the month are 200. Overtime is paid at double the total of
normal wages and dearness allowance. Employer’s contribution to state Insurance and
Provident Fund are at equal rates with employees contributions. The two workers were
employed on jobs X, Y and Z in the following proportions:
Jobs
X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%

Overtime was done on job Y.

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 Labour 3.18

Answer
Statement showing Earnings of Workers A and B
Workers A B
(`) (`)
Basic Wages 100 160
Dearness Allowance (50% of Basic Wages) 50 80
Overtime Wages (Refer to Working Note 1) 15 --
Gross Wages earned 165 240
Less: Provident Fund – 8% of Basic Wages
– ESI – 2% of Basic Wages = Total 10% of basic Wages 10 16
Net Wages paid 155 224
Statement of Labour Cost
Gross Wages (excluding overtime) `150 240
Employers contribution to P.F. and E.S. I. 10 16
160 256
Ordinary wages Labour Rate per hour 0.80 1.28
(` 160/200) (` 256/200)
Statement Showing Allocation of Wages to Jobs
Total Wages: Jobs
(`) X Y Z
(`) (`) (`)
Worker A
Ordinary Wages (4:3:3) 160 64 48 48
Overtime 15 -- 15 --
Worker B
Ordinary Wages(5:2:3) 256 128 51.20 76.8

431 192 114.2 124.8

Working Notes
1. Normal Wages are considered as basic wages
2 × ( Basic wage + DA ) × 10 hours
Over time =
200

⎛ `150 ⎞
= 2×⎜ ⎟ × 10 hours = 1.50 × 10 hours = ` 15
⎝ 200 ⎠

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 3.19 Cost Accounting

Illustration 3: (Calculation of rate per day)

It is seen from the job card for repair of the customer’s equipment that a total of 154 labour
hours have been put in as detailed below :
Worker ‘A’ paid at Worker ‘B’ paid at Supervisory
` 2 per day of ` 1 per day worker ‘C’
8 hours of 8 hours paid of ` 3
per day of 8 hours
Monday 10.5 hours 8 hours 10.5 hrs.
Tuesday 8 ” 8 ” 8”
Wednesday 10.5 “ 8 ” 10.5”
Thursday 9.5 ” 8 ” 9.5 ”
Friday 10.5 ” 8 ” 10.5 ”
Saturday − 8 ” 8”
Total 49 hours 48 hours 57 hours
In terms of an award in a labour conciliation, the workers are to be paid dearness allowance
on the basis of cost of living index figures relating to each month which works out @ ` 96 for
the relevant month. The dearness allowance is payable to all workers irrespective of wage rate
if they are present or are on leave with wages on all working days.
Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 4 hours
on Saturdays; the workers are however paid full wages for Saturday (8 hours for 4 hours worked).
Workers are paid overtime according to the Factories Act for hours worked in excess of
normal working hours on each day. Excluding holidays (including 4 hours work to be put in on
Saturday) the total number of hours work out to 192 in the relevant month. The company’s
contribution to Provident Fund and Employees State Insurance Premium are absorbed into
overheads.
Work out the wages payable to each worker.
Solution
(1) Calculation of hours to be paid for worker A :
Normal Extra Overtime Equivalent Total
hours hours hours normal normal
overtime hours
Monday 8 1 1½ 3 12
Tuesday 8 - - - 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10

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 Labour 3.20

Friday 8 1 1½ 3 12
Saturday - - - - -
40 4 5 10 54
Calculation of hours to be paid for worker B :
Normal Extra Overtime Equivalent Total
hours hours hours normal normal
overtime hours
Monday 8 - - - 8
Tuesday 8 - - - 8
Wednesday 8 - - - 8
Thursday 8 - - - 8
Friday 8 - - - 8
Saturday 4 4 - - -
44 4 - - 48
Calculation of hours to be paid for worker C :
Normal Extra Overtime Equivalent Total
hours hours hours normal normal
overtime hours
Monday 8 1 1½ 3 12
Tuesday 8 - - - 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday 4 4 - - -
44 8 5 10 62
(a) Wages payable:
A B C
Basic wages per hour (`)* 0.250 0.125 0.375
Dearness allowance per hour (`)** 0.500 0.500 0.500
Hourly rate (`) 0.750 0.625 0.875
Normal hours 44 48 52
Overtime hours 5 - 5
Normal wages (`) 33.00 30 45.50
Overtime wages (`) 7.50 - 8.75
Total wages payable : (`) 40.50 30.00 54.25
* Rate per day/ 8 hours
** `96/ 192 hours

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 3.21 Cost Accounting

Illustration 4: (Calculation of labour cost chargeable to a job)

In a factory, the basic wage rate is ` 10 per hour and overtime rates are as follows :
Before and after normal working hours : 175% of basic wage rate
Sundays and holidays : 225% of basic wage rate
During the previous year, the following hours were worked :
Normal time : 1,00,000 hours
Overtime before and after working hours : 20,000 hours

Overtime on Sundays and holidays : 5,000 hours

Total : 1,25,000 hours
The following hours have been worked on job ‘Z’ :
Normal : 1000 hours.
Overtime before and after working hrs. : 100 hours.
Sundays and holidays : 25 hours.
Total : 1125 hours.
You are required to calculate the labour cost chargeable to job ‘Z’ and overhead in each of the
following instances:
(a) Where overtime is worked regularly throughout the year as a policy due to the labour
shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
Solution
Workings
Computation of average inflated wage rate (including overtime premium) :
Basic wage rate : ` 10 per hour
Overtime wage rate before and after working hours : ` 10 × 175% = ` 17.50 per hour
Overtime wage rate for Sundays and holidays : ` 10 × 225% = ` 22.50 per hour
Annual wages for the previous year for normal time : 1,00,000 hrs. × ` 10 = ` 10,00,000
Wages for overtime before and after working hours : 20,000 hrs. × ` 17.50=` 3,50,000
Wages for overtime on Sundays and holidays : 5,000 hrs. × ` 22.50 = ` 1,12,500
Total wages for 1,25,000 hrs. = ` 14,62,500
`14,62,500
Average inflated wage rate : = 1,25,000 hrs.
`11.70 per hour

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 Labour 3.22

(a) Where overtime is worked regularly as a policy due to labour shortage, the overtime
premium is treated as a part of labour cost and job is charged at an inflated wage rate.
Hence,
Labour cost chargeable to job Z = Total hours × Inflated wage rate
= 1,125 hrs. × ` 11.70 = ` 13,162.50
(b) Where overtime is worked irregularly to meet the requirements of production, basic
wage rate is charged to the job and overtime premium is charged to factory overheads as
under :
Labour cost chargeable to
Job Z : 1,125 hours @ ` 10 per hour = ` 11,250.00
Factory overhead : 100 hrs. × ` (17.50 – 10) = ` 750.00
25 hrs. × ` (22.50 – 10) = ` 312.50
Total factory overhead ` 1,062.50
(c) Where overtime is worked at the request of the customer, overtime premium is also
charged to the job as under :
`
Job Z labour cost 1,125 hrs. @ ` 10 = 11,250.00
Overtime premium 100 hrs. @ ` (17.50 – 10) = 750.00
25 hrs. @ ` (22.50 – 10) = 312.50
Total 12,312.50

3.7 Labour Turnover

Labour turnover in an organisation is the rate of change in the composition of labour
force during a specified period measured against a suitable index.
The standard of usual labour turnover in the industry or locality or the labour turnover rate for
a past period may be taken as the index or norm against which actual turnover rate is
compared.
There are three methods of calculating labour turnover which are given below :
(i) Replacement method : This method takes into consideration actual replacement of
labour irrespective of number of persons leaving
Number of employees replaced
= × 100
Average number of employees on roll
New labour appointed on account of expansion not to be included in number of
replacements
(ii) Separation method: In this method labour turnover is measured by dividing the total
number of separations during the period by the average total number of workers on

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 3.23 Cost Accounting

payroll during the same period

Number of employees separated during the year
= × 100
Average number of employees on roll during the period
(iii) Flux method: This method takes into account both the number of replacements as
well as the number of separations during the period
Number of employees separated + Number of employees replaced
= × 100
Average number of employees on roll during the period
Labour turnover due to new recruitment:: Workers joining a business concern on account
of its expansion do not account for labour turnover. But these newly recruited workers are
certainly responsible for a change in the composition of labour force, due to this feature, some
cost accountants measure workers to the extent of new (excluding replacements) joining the
labour force as follows :
No. of new workers joining in a period (excluding replacements)
Ö × 100
Average number of workers on the roll in a period
The total number of workers joining, including replacements, is called accessions. The
labour turnover rate, in such a case, may also be computed in respect of total number of
workers joining (accessions) the business concern, during a given period both on account of
replacements and because of expansion is as under:
No.of accessions in a period
Ö × 100
Average number of wor ker s in a period
When number of accessions are considered for measuring labour turnover, the labour turnover
rate by flux method may be computed by using any one of the following expressions:
Labour turnover rate (flux method) =
No. of separations + No. of replacements + No. of new recruitments
× 100
Average number of wor ker s
OR
No. of separations + No. of accessions
× 100
Average number of workers
The above rate of labour turnover indicates the total effect of number of workers
separated, number of workers replaced and number of new workers recruited and
joined the concern on account of its expansion, etc.
If in the above computations, the data given is for a period other than a year, the labour
turnover rate so computed may be converted into equivalent annual labour turnover rate by
the following formula:

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 Labour 3.24

Turnover rate for the period

Equivalent annual labour turnover rate = × 365
Number of days in the period
Causes of Labour Turnover : The main causes of labour turnover in an organization/ industry
can be broadly classified under the following three heads :
(a) Personal Causes;
(b) Unavoidable Causes; and
(c) Avoidable Causes.
Personal causes are those which induce or compel workers to leave their jobs; such causes
include the following :
(i) Change of jobs for betterment.
(ii) Premature retirement due to ill health or old age.
(iii) Domestic problems and family responsibilities.
(iv) Discontent over the jobs and working environment.
In all the above cases the employee leaves the organisation at his will and, therefore, it is
difficult to suggest any possible remedy in the first three cases.
But the last one can be overcome by creating conditions leading to a healthy working
environment. For this, officers should play a positive role and make sure that their
subordinates work under healthy working conditions.
Unavoidable causes are those under which it becomes obligatory on the part of management
to ask one or more of their employees to leave the organisation; such causes are summed up
as listed below:
(i) Seasonal nature of the business;
(ii) Shortage of raw material, power, slack market for the product etc.;
(iii) Change in the plant location;
(iv) Disability, making a worker unfit for work;
(v) Disciplinary measures;
(vi) Marriage (generally in the case of women).
Avoidable causes are those which require the attention of management on a continuous basis
so as to keep the labour turnover ratio as low as possible. The main causes under this case
are indicated below :
(1) Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,
(2) Strained relationship with management, supervisors or fellow workers;
(3) Lack of training facilities and promotional avenues;

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 3.25 Cost Accounting

(4) Lack of recreational and medical facilities;

(5) Low wages and allowances.
Proper and timely management action can reduce the labour turnover appreciably so far as
avoidable causes are concerned.
Effects of Labour Turnover: High labour turnover increases the cost of production in the
following ways:
(i) Even flow of production is disturbed;
(ii) Efficiency of new workers is low; productivity of new but experienced workers is low in
the beginning;
(iii) There is increased cost of training and induction;
(iv) New workers cause increased breakage of tools, wastage of materials, etc.
In some companies, the labour turnover rates are as high as 100%; it means that on the
average, all the work is being done by new and inexperienced workers. This is bound to
reduce efficiency and production and increases the cost of production.
(v) Cost of recruitment and training increases.
Two types of costs which are associated with labour turnover are :
(a) Preventive costs: These include costs incurred to keep the labour turnover at a low
level, i.e. cost of medical services, welfare schemes and pension schemes. If a company
incurs high preventive costs, the rate of labour turnover is usually low.
(b) Replacement costs: These are the costs which arise due to high labour turnover. If
men leave soon after they acquire the necessary training and experience of good work,
additional costs will have to be incurred on new workers, i.e., cost of employment, training and
induction, abnormal breakage and scrap and extra wages and overheads due to the
inefficiency of new workers.
It is obvious that a company will incur very high replacement costs if the rate of labour
turnover is high. Similarly, only adequate preventive costs can keep labour turnover at a low
level. Each company must, therefore, work out the optimum level of labour turnover keeping in
view its personnel policies and the behaviour of replacement cost and preventive costs at
various levels of labour turnover rates.
Remedial Steps To Minimise Labour Turnover - The following steps are useful for
minimising labour turnover.
1. Exit interview : An interview be arranged with each outgoing employee to ascertain the
reasons of his leaving the organisation.
2. Job analysis and evaluation : Before recruiting workers, job analysis and evaluation
may be carried out to ascertain the requirements of each job.

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 Labour 3.26

3. Scientific system of recruitment, placement and promotion: The organisation should

make use of a scientific system of recruitment, selection, placement and promotion for
employees.
4. Enlightened attitude of management: The management should introduce the following
steps for creating a healthy working atmosphere :
(i) Service rules should be framed, discussed and approved among management and
workers, before their implementation.
(ii) Provide facilities for education and training of workers.
(iii) Introduce a procedure for settling worker’s grievances.
5. Use of committee: Issues like control over workers, handling their grievances etc., may
be dealt by a committee, comprising of members from management and workers.
Illustration 5: (calculation of cost of labour turnover)
The management of Bina and Rina Ltd. are worried about their increasing labour turnover in
the factory and before analyzing the causes and taking remedial steps, they want to have an
idea of the profit foregone as a result of labour turnover in the last year.
Last year sales amounted to ` 83,03,300 and P/V ratio was 20 per cent. The total number of
actual hours worked by the Direct Labour force was 4.45 Lakhs. As a result of the delays by
the Personnel Department in filling vacancies due to labour turnover, 1,00,000 potentially
productive hours were lost. The actual direct labour hours included 30,000 hours attributable
to training new recruits, out of which half of the hours were unproductive.
The costs incurred consequent on labour turnover revealed, on analysis, the following:
Settlement cost due to leaving ` 43,820
Recruitment costs ` 26,740
Selection costs ` 12,750
Training costs ` 30,490
Assuming that the potential production lost as a consequence of labour turnover could have
been sold at prevailing prices, find the profit foregone last year on account of labour turnover.
Solution
Determination of contribution foregone
Actual hours worked (given) 4,45,000
Less : Unproductive training hours 15,000
Actual productive hours 4,30,000
The potentially productive hours lost are 1,00,000

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 3.27 Cost Accounting

`83,03,300
Sales lost for 1,00,000 hours = × 1,00,000 hrs = ` 19,31,000
4,30,000 hrs
Contribution lost for 1,00,000 hrs.
`19,31,000
= × 20 = ` 3,86,200
100
Statement showing profit foregone last year on account of
labour turnover of Bina and Rina Ltd.
(`)
Contribution foregone ( as calculated above) 3,86,200
Settlement cost due to leaving 43,820
Recruitment cost 26,740
Selection cost 12,750
Training costs 30,490
Profit foregone 5,00,000
Illustration 6: (Calculation of workers recruited, joined and discharged)
The Cost Accountant of Y Ltd. has computed labour turnover rates for the quarter ended 31st
March, 2011 as 10%, 5% and 3% respectively under ‘Flux method’, ‘Replacement method’ and
‘Separation method’ respectively. If the number of workers replaced during that quarter is 30,
find out the number of:
(1) workers recruited and joined and (2) workers left and discharged.
Solution
Working Note:
Average number of workers on roll:
No. of replacements
Labour turnover rate under replacement method = × 100
Average number of workers on roll
5 30
Or, =
100 Average number of workers on roll
30× 100
Or Average number of workers on roll = = 600
5
(1) Number of workers recruited and joined :
No. of separations * (S) + No. of accessions(A)
Labour turnover rate (Flux method) = × 100
Average number of workers on roll
10 18 * + A
Or =
100 600

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 Labour 3.28

⎡ 6000 ⎤
Or A = ⎢ 100 −18⎥ = 42
⎣ ⎦
No. of workers recruited and joined 42.
(2) Number of workers left and discharged :
No. of separations(S)
Labour turnover rate (Separation method) = × 100
Average number of workers on roll
3 S
=
100 600
Or S* = 18
Hence, number of workers left and discharged comes to 18.

3.8 Incentive System

3.8.1 Important factors necessary for introducing of an incentive system: An
incentive can be defined as the stimulation for effort and effectiveness by offering monetary
inducement or enhanced facilities. It may be provided individually or collectively.
It may be monetary in the form of a bonus where the employee gets a reward for his efforts
directly or non-monetary tending to improve living and working conditions where a group of
employees or individuals share the reward arising out of their combined effort in equitable
production.
The main factors that should be taken into account before introducing a scheme of incentives
are stated below:
(i) System of Quality Control: The need for producing goods of high quality or those
having very good workmanship or finish and the manner this can be ensured. Only if a
system of quality control can be relied upon to maintain the quality of goods of the
standard required, an incentive scheme should be introduced; otherwise, workers should
be paid on time basis.
(ii) Maximise production: The need to maximise production—thus required incentives to be
given to workers. But sometimes workmanship is more important than quantity of output;
in such cases, incentive schemes of wage payment are not suitable.
(iii) Precision in measuring quantity of Work: Where the quantity of work done cannot be
measured precisely, incentive schemes cannot be offered.
(iv) Role of Management in Incentive Schemes: The role of management and workers in
achieving greater efficiency, if it is unnecessary for the management to constantly plan
work, for example, when the work is repetitive, workers should be offered good incentives
to achieve high efficiency; but in case management is constantly required to plan the
work, as in the case of job work, the management should share the fruits of extra
efficiency achieved. This factor determines the choice of a particular incentive scheme.

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 3.29 Cost Accounting

(v) Effort of Workers: Whether the quantity of output is within the control of the worker and
if so, to what extent. Sometimes, as in the case of chain assembly work the output is not
dependent on the effort put in by workers; incentive schemes in such cases are not suit-
able.
(vi) Standards of Performance: The exactitude with which standards of performance can be
laid down. Fixation of standard is necessary for the introduction of a scheme of
incentives. When this requires heavy expenditure, incentive schemes may be rather
costly.
(vii) No Discrimination: The effect of an incentive scheme for one set of workers on other
workers. If for instance, an incentive scheme makes it possible for unskilled workers to
earn high wages, the wage rates for skilled workers must also be raised (if they are paid
on time basis) to avoid dissatisfaction among them. In that event, the incentive scheme
may raise labour cost instead of lowering it.
(viii) Comparative Study: The system of wage payment prevailing in other areas and
industries or similar occupations. If possible, there should be uniformity.
(ix) Attitude of Workers: The attitude of labour and trade unions towards incentive
schemes. Workers usually like to have a certain guaranteed time-basis wage but also like
to earn extra through an incentive scheme.
On the whole, the system of wage payment should be such as would increase production
without lowering quality. This will increase the surplus and will enable the employer to pay
higher wages which, in turn, will lead to higher output.
3.8.2 Main principles for a sound system of wage incentive: The objective of wage
incentives is to improve productivity and increase production so as to bring down the unit cost
of production.
In order to make the incentive scheme effective and useful, the following general principles
have to be considered while designing a sound system of wage incentives.
(i) Just and Fair: The reward for a job should be linked with the effort involved in that job
and the scheme should be just and fair to both employees and employers. This involves
the following:
(a) The standard required of the workers should be carefully set, if possible through
proper time and motion studies.
(b) If the work is of repetitive type, the entire benefit of the time saved should be
available to the worker but, in the case of non-standardised work or where precise
standards cannot be set, the benefit of the time saved, if any, should be shared by
the employer, the supervisor and the worker.
(ii) Well defined scheme: The scheme should be clearly defined and be capable of being
understood by the employees easily. The standards set should be such that they can be

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 Labour 3.30

achieved even by average employees. While standards are being set, the workers
concerned should be consulted.
(iii) Worker’s Expectations: As far as possible, no limit should be placed on the amount of
additional earnings; otherwise it will dampen the initiative of the workers. In this regard,
what is important is not what actually prevails but what the workers think—if they think,
even wrongly, that the employer will stop wages from rising beyond a certain limit, the
incentive scheme may not be really effective.
(iv) Stability: The scheme should be reasonable and stable, and should not be changed or
modified too often without consulting the employees.
(v) Charge on employees: The scheme should take care that the employees are not
penalised for reasons beyond their control.
(vi) Incentive based on quality: The scheme should provide for inspection of output so that
only good pieces qualify for incentives. It would even be better not to introduce any
incentive scheme if workmanship is of vital importance in sales.
(vii) Adequate Resources: The management should ensure that there is no cause for
complaint by the workers that they are sitting idle, say for want of tools or materials.
Management has to see that there is, as far as practicable, no interruption of production.
(viii) Limited Costs: The operation of the scheme should not entail heavy clerical costs. In fact the
scheme should facilitate the introduction of budgetary control and standard costing.
(ix) Morale booster : It should be capable of improving the morale of the employees and it
should be in conformity with the local trade union agreements and other government
regulations.
(x) Guaranteed wages : There should be a guaranteed wage on time basis which generally
works as a good psychological boost to incentive scheme.
(xi) Equality in payment: the effect of incentive scheme on those who cannot be covered should
be gauged and taken note of. Sometimes, highly skilled workers have perforce to be paid on
time basis whereas semiskilled or unskilled workers may be put on incentive scheme. If the
latter earn more than former, the incentive schemes on the whole prove harmful.
Essential characteristics of a good incentive system: to recapitulate
(i) It should be just both to the employer and to the employee. It should be positive and not
unnecessarily punitive and so operated as to promote confidence.
(ii) It should be strong both ways i.e. it should have a standard task and a generous return.
The latter should be in direct proportion to employee’s efforts. It should reflect the
employer’s contribution to the success of the company.
(iii) It should be unrestricted as to the amount of the earning.
(iv) It should be reasonable, apart from being simple, for employee to figure out his incentive
in relation to his individual performance, as far as practicable.

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 3.31 Cost Accounting

(v) It should be flexible and intimately related to other management controls.

(vi) It should automatically assist supervision and, when necessary, aid team work.
(vii) It should have employee’s support and in no way should it be paternalistic.
(viii) It should have managerial support in so far as production material, quality control,
maintenance and non-financial incentives are concerned.
(ix) It should not be used temporarily and dropped in recession times as means of wage
reduction.
(x) There should be correct measurement of the effort made for incentive purpose.
Measurement of effort is made by time and motion study and based on job evaluation;
the rates of wages are fixed for different operations.

3.9 Labour Utilisation

For identifying utilisation of labour a statement is prepared (generally weekly) for each
department / cost centre. This statement should show the actual time paid for, the standard
time (including normal idle time) allowed for production and the abnormal idle time analysed
for causes thereof.
3.9.1 Identification of utilisation of labour with cost centres : For the identification of
utilisation of labour with the cost centre a wage analysis sheet is prepared.
Wage analysis sheet is a columnar statement in which total wages paid are analysed
according to cost centre, jobs, work orders etc. The data for analysis is provided by wage
sheet, time card, piece work cards and job cards.
The preparation of such sheet serves the following purposes:
(i) It analyse the labour time into direct and indirect labour by cost centres, jobs, work
orders.
(ii) It provides details of direct labour cost comprises of wages, overtime to be charged as
production cost of cost centre, jobs or work orders.
(iii) It provides information for treatment of indirect labour cost as overhead expenses.
Wage Analysis Sheet
No. week- Department/ Total Work in Factory Administration Selling &
ending cost centre progress Overhead Overhead control Distribution
control A/c A/c overhead
control
Account

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 Labour 3.32

3.9.2 Identification of labour hours with work order or batches or capital job: For
identification of labour hours with work order or batches or capital jobs or overhead work
orders the following points are to be noted :
(i) The direct labour hours can be identified with the particular work order or batches or
capital job or overhead work orders on the basis of details recorded on source document
such as time sheet or job cards.
(ii) The indirect labour hours cannot be directly identified with the particular work order or
batches or capital jobs or overhead work orders. Therefore, they are traced to cost centre
and then assigned to work order or batches or capital jobs or overhead work orders by
using overhead absorption rate.

3.10 Systems of Wage Payment and Incentives

There exist several systems of employee wage payment and incentives, which can be
classified under the following heads:
The formulas for different wage payment and incentive systems are given below:
SYSTEMS OF WAGE PAYMENT & INCENTIVES

Time Rate Systems Payment by Results

Time of High Measured Differential Piece Combin Premium Group System

Rate Wage Day Work Time Rate Work ation of Bonus system Incentive
time Methods of wage
System Plan Schemes
and payment for
Piece Indirect
Work Workers

Straight Differential
Piece Piece Work Halsey Rowan Barth
Work
and Halsey System System
Weir
Tylor Merrick Systems
System System

Gantt Emerson’s Points Accelerated

Task and efficiency Scheme Premium system
Bonus System
System

Beadaux Haynes
Syst. Syst.

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 3.33 Cost Accounting

1 Time Rate System

Earnings = Hours worked × Rate per hour
2 Straight Piece Rate System
Earnings = Number of units × Piece rate per unit
3 Differential piece Rate System
3.1 F.W. Taylor’s System
Efficiency Payment
Less than 100% 83% of the normal piece rate or 80% of piece rate
when below standard
Either 100% or 125% of the normal piece rate or 120% of piece rate
more than 100% when at or above standard
3.2 Merrick Differential Piece Rate System
Efficiency Payment
Up to 83 % Ordinary piece rate
83% to 100% 110% of ordinary piece rate (10% above the ordinary
piece rate)
Above 100% 120% or 130% of ordinary piece rate (20% to 30% of
ordinary piece rate)
4 Combination of Time and Piece Rate
4.1 Gantt Task and Bonus System
Output Payment
Output below standard Guaranteed time rate
Output at standard 120% of time rate
Output above standard 120% of piece rate
4.2 Emerson Efficiency System
Earning is calculated as follows :
Efficiency Payment
Below 66-2/3% No bonus, only guaranteed time rate is paid.
66-2/3% to 100% Worker is paid by hourly rate for the time he actually
worked plus in increase in bonus according to degree of
efficiency on the basis of step bonus rates. Bonus rate
can be up to 20%.
Above 100% 120% of time wage rate plus additional bonus of 1% for
each 1% increase in efficiency.
4.3 Bedaux Point System
Earnings = Hours worked × Rate per hour +

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 Labour 3.34

⎛ 75 Bedaux pointssaved ⎞
⎜ × × Rate per hour ⎟
⎝ 100 60 ⎠
4.4 Haynes Manit Systems
This system is similar to Bedaux Point system. Instead of Bedaux points
saved, ‘MANIT’ (Man-minutes) saved are measured for payment of bonus.
Bonus is distributed as follows :
50% bonus to the workers
10% bonus to the supervisors
40% bonus to the employer
4.5 Accelerated Premium System
In this system individual employer makes his own formula. The following
formula may be used for a general idea of the scheme:
Y= 0.8 × x2
Where
y= wages
x= efficiency
5 Premium Bonus Plan
5.1 Halsey Premium Plan
⎛ 50 ⎞
Earnings = Hours worked × Rate per hour + ⎜ × Time saved × Rate per hour) ⎟
⎝ 100 ⎠
5.2 Halsey-Weir Premium Plan
⎛ 30 ⎞
Earnings = Hours worked × Rate per hour + ⎜ × Time saved × Rate per hour) ⎟
⎝ 100 ⎠
5.3 Rowan System
Earnings = Hours worked × Rate per hour +
⎛ Time saved ⎞
⎜ × Hours worked × Rate per hour) ⎟
⎝ Time allowed ⎠
5.4 Barth Sharing Plan
Earnings = Rate per hour × Standard hours × Hours worked

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 3.35 Cost Accounting

5.5 Scanlon Plan

Average Annual Salaries and Wages
Bonus Percentage =
Average Annual Sales Revenue

One should remember that Provident Fund, Employees State Insurance Scheme Premium and
bonus are payable on the basic wages, dearness allowance and value of food concession.
3.10.1 Time Rate System
Meaning Suitability
Under this system, the worker is paid by the (1) Persons whose services cannot be
hour, day, week, or month. The amount of directly or tangibly measured, e.g.,
wages due to a worker are arrived at by general helpers, supervisory and
multiplying the time worked (as shown by the clerical staff etc.
gate card) by the appropriate time rate. (2) Workers engaged on highly skilled jobs
or rendering skilled services, e.g., tool
making, inspection and testing.
(3) Where the pace of output is
independent of the operator, e.g.,
automatic chemical plants.

Merits Demerits
(i) Simple to understand and to calculate (i) No monetary incentive to raise the
wages. level of production.
(ii) Reduces temptation on the part of (ii) No distinction between the slow and
workers to increase the output at the the efficient worker.
cost of quality. (iii) The tendency is for the fall in output;
(iii) Unity in labour, no distinction between this raises the cost per unit (because
efficient and inefficient labour due to both labour and fixed expenses will be
quality of production. spread over a smaller number of units).
(iv) Stability in wages (iv) A firm cannot be sure of labour costs
per unit under this method and, hence,
may suffer a loss on quotations if
already submitted.

3.10.1 (i) High wage plan: This plan was first introduced by Ford Motor Company (in USA)
in order to induce workers to exercise extra effort in their work.
Under this plan a worker is paid a wage rate which is substantially higher than the rate
prevailing in the area or in the industry. In return, he is expected to maintain a very high level

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 Labour 3.36

of performance, both quantitative and qualitative. As a result, high rate men are not as costly
or expensive as they might appear at first sight.
High wage plan is suitable where high quality of work and also increased productivity are required.
The advantage which may accrue from the implementation of this plan are :
(1) It is simple and inexpensive to operate.
(2) It helps in attracting highly skilled and efficient workers by providing suitable incentive.
(3) It reduces the extent of supervision.
(4) Increased productivity may result in reduction of unit labour cost.
3.10.1.(ii) Measured day work : According to this method the hourly rate of the time worker
consists of two parts viz, fixed and variable. The fixed element is based on the nature of the job i.e.
the rate for this part is fixed on the basis of job requirements. The variable portion varies for each
worker depending upon his merit rating and the cost of living index. The aggregate of fixed and
variable part for a day is termed as Measured day’s work rate of a worker.
As the rate is based on two different elements, there are separate time rates not only for each
worker but also for each job. This method does not find much favour with workers due to the
following :
1. The rates fixed are not easily understood by the workers.
2. Merit rating tends to be arbitrary and unless changed at rapid intervals, the ratings will
not reflect the correct ranking of the qualities of a worker.
3.10.1.(iii) Differential time rate : According to this method, different hourly rates are fixed
for different levels of efficiency. Up to a certain level of efficiency the normal time or day rate is
paid. Based on efficiency level the hourly rate increases gradually. The following table shows
different differential rates :
Up to, say 75% efficiency Normal (say ` N per hr.)
From 76% to 80% efficiency 1.10 × N
From 81% to 90% efficiency 1.20 × N
From 91% to 100% efficiency 1.30 × N
From 101% to 120% efficiency 1.40 × N
As this method is linked with the output and efficiency of workers, therefore, it cannot be
strictly called as a time rate method of wage payment. This method in fact is similar to
differential piece work system.
3.10.2 Payment by result: Under this system the payment made has a direct relationship
with the output given by a worker. The attendance of the worker or the time taken by him for
doing a job has no bearing on the payment. The system of payment by results may be
classified into the following four categories :
(a) Systems in which the payment of wages is directly proportionate to the output given by workers.

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 3.37 Cost Accounting

(b) Systems in which the proportion of the wage payment to the worker increases
progressively with increase in production.
(c) Systems in which payment rate decreases with the increase in output.
(d) Systems with earnings varying in proportions which differ at different levels of production.
3.10.2.(i) Straight piece work system
Under this system of wage payment, each operation, job or unit of production is termed a
piece. A rate of payment, known as the piece rate or piece work rate is fixed for each piece.
The wages of the worker depend upon his output and rate of each unit of output; it is in fact
independent of the time taken by him. The wages paid to a worker are calculated as :
Wages = Number of units produced × Piece rate per unit.
Considerable care and judgment are called for fixing the piece rate. If the rate fixed is too high
or too low, it would operate to the disadvantage of either the employer or the employee. Any
attempt on the part of the management to revise a piece rate, erroneously set too high, is
likely to lead to friction and conflict with labour. If on the other hand, it is too low, it would fail
in its objective. The only way all this may be avoided is by employing scientific methods of job
evaluation and time and motion study for the purpose of setting the rates.

Advantages Disadvantages
1. The system is simple to operate and 1. The quality of output usually suffers.
also easy to understand.
2. The incentive provided is quite 2. Maintenance of detailed statistics as regards
effective as the workers get the full production of individual workers is necessary.
benefit of any increase in production
and the employer also gains by
saving on overhead costs.
3. Labour cost per unit being constant,
these can be calculated in advance 3. Maintenance of satisfactory discipline in the
and quotations can be confidently matter of arrival and departure of workers
submitted. becomes somewhat difficult.

4. In the anxiety to produce as large a quantity

as possible, workers may damage the
machines and may also increase wastage of
materials.
5. Skilled workers and supervisors (who are
often paid on time basis) may resent higher
wages to unskilled workers paid on the piece
basis.

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 Labour 3.38

3.10.2 (ii) Differential piece work system : This system provide for higher rewards to
more efficient workers. The main feature of all differential piece-work systems is that several
piece rates on a slab scale are fixed for a job or operation which is put on piece-work. For
different levels of output below and above the standard, different piece rates are applicable.
Taylor Differential Piece Work System and Merrick Differential Piece Rate System are two
important differential piece work systems discussed briefly as below:
(a) Taylor’s differential piece work system - The Taylor’s Differential Piece Rate System
aims at rewarding efficient workers by providing increased piece rate beyond certain level of
output.
Under this system two widely differing piece-rates are prescribed for each job. The lower rate
is 83% of the normal piece rate and the higher rate is 125% of the normal piece rate. In other
words the higher rate is 150% of the lower rate. The lower rate is given to a worker when his
efficiency level is less than 100%. The higher rate is offered at efficiency level of either 100%
or more. Due to the existence of the two piece rates, the system is known as differential piece
rate system.
Note: Some authors also use 80% and 120% of the piece rates as lower and higher rates
respectively at the efficiency levels, as indicated in the above paragraph.

Advantages Disadvantages
1. It is simple to understand and operate. This system is quite harsh to workers, as a
2. The incentive is very good and slight reduction in output may result in a
attractive for efficient workers. large reduction in the wages earned by
3. It has a beneficial effect where them. This system is no longer in use in its
overheads are high as increased original form, though the main idea behind
production has the effect of reducing it is used in many wage schemes.
their incidence per unit of production.

Illustration 7: (Calculation of earnings under Taylor’s differential piece rate system)

Using Taylor’s differential piece rate system, find the earnings of the Amar, Akbar and Ali from
the following particulars:
Standard time per piece : 20 minutes
Normal rate per hour (in an 8 hours day) : ` 9.00
Amar produced : 23 units
Akbar produced : 24 units
Ali produced : 30 units

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 3.39 Cost Accounting

Solution
Earnings under Differential piece rate system
Workers Amar Akbar Ali
Standard output per day (units) 24 24 24
(8 hours x 60 minutes)/ 20 minutes
Actual output per day (units) 23 24 30
Efficiency (%) 95.83% 100% 125%
⎡ Actual output ⎤ ⎡ 23 unit ⎤ ⎡ 24 unit ⎤ ⎡ 30 unit ⎤
⎢ Standarad output ×100⎥ ⎢⎣ 24 unit × 100⎥⎦ ⎢⎣ 24 unit × 100⎥⎦ ⎢⎣ 24 unit × 100⎥⎦
⎣ ⎦
* Earning rate per unit 83% of 125% of 125% of
the piece the piece the piece
rate rate rate
Earning rate per unit (`) 2.49 3.75 3.75
(Refer to working note) (83% of `3) (125% of `3) (125% of `3)
Earnings (`) 57.27 90.00 112.50
(23 units × ` 2.49) ( 24 units × ` 3.75) (30 units × ` 3.75)
* Under Taylor’s Differential price rate system, two widely differing price rates are prescribed
for each job. The lower rate is 83% of the normal piece rate and is applicable if efficiency of
the worker is below 100%. The higher piece rate is 125% of the normal piece rate and is
applicable if work completed is at efficiency level of 100% and above.
Working Note:
Normal rate per hour = ` 9.00
` 9.00 ` 9.00
Normal rate per unit = = = `3
S tandard production per hour 3 units
(b) Merrick differential piece rate system - Under this system three piece rates for a job
are fixed. None of the fixed rates is below the normal. These three piece rates are as below:
Efficiency Piece rate applicable
Upto 83% Normal rate,
Above 83% and upto 100% 10% above normal rate.
Above 100% 20% or 30% above normal rate.
This system is an improvement over Taylor’s Differential Piece Rate System.
Illustration 8 (Calculation of earnings under Merrick differential piece rate system)
Refer to the statement of previous Illustration and compute the earnings of workers under
Merrick Differential Piece Rate System

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 Labour 3.40

Solution
Workers Amar Akbar Ali
* Earning rate per unit 10% above 10% above 20% above
(Refer to previous illustration) the normal the normal the normal
rate rate rate
or
30% above
the normal
Earning rate per unit (`) 3.30 3.30 3.60 or 3.90
Earnings (`) 75.90 79.20 108 or 117
(23 units × ` 3.30) (24 units × ` 3.30) (30 units × ` 3.60)
or
(30 units × ` 3.90)
Illustration 9: (Calculation of earnings under Taylor’s differential piece rate system)
Using Taylor’s differential piece rate system, find the earning of A from the following
particulars :
Standard time per piece 12 minutes
Normal rate per hour (in a 8 hours day) `20
A produced 37 units
Solution:
Actual output = 37 units
8 hrs. × 60 minutes
Standard output = = 40 units
12 minutes per piece
37 units
Efficiency = × 100 = 92.5%
40 units
Under Taylor’s differential piece rate system, a worker is paid lower piece rate of 83%, since
his efficiency is less than 100%.
Standard production per hour = 60 minutes/12 minutes = 5 units
Normal Rate per hour = `20
Normal piece rate per unit = `20/5 units = `4
Lower piece rate per unit = `4 × 83/100 = `3.32
Total earnings = 37 units × `3.32 = `122.84

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 3.41 Cost Accounting

Illustration 10: (Calculation of earnings under Merrick differential piece rate system)
Calculate the earnings of workers A, B and C under Straight Piece Rate System and Merrick’s
Piece Rate System from the following particulars:
Normal Rate per Hour ` 5.40
Standard Time per Unit 1 Minute
Output per day is as follows:
Worker A – 390 Units
Worker B – 450 Units
Worker C – 600 Units
Working hours per day are 8.
Solution:
Earnings of Workers under Straight Piece Rate System:
Worker A = 390 units × ` 0.09 = ` 35.10
Worker B = 450 units × ` 0.09 = ` 40.50
Worker C = 600 units × ` 0.09 = ` 54.00

Earnings of Workers under Merrick’s Multiple Piece Rate System

Particulars A B C
Efficiency level 81.25% 93.75% 125%
(Refer to working note ii)
Applicable wage rate per unit 0.09 0.099 0.108*
Earnings (`) 35.10 44.55 64.80
(390 units × 0.09) (450 units × 0.099) (600 units × 0.108)
Note : *Some author suggests an increase of 30% over normal piece rate at an efficiency
level of 120% or more. In such a case the rate per unit would be ` 0.117 and total earnings
would come to `70.20.
Working Notes :
(i) Normal wage rate per unit = Normal Rate per Hour/Standard output per hour
= ` 5.40/60 = 9 Paise
(ii) Efficiency level
Workers A B C
Actual output per day (units) 390 450 600
Standard output per day (units) 480 480 480

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 Labour 3.42

Efficiency level achieved

Actual output units 390 450 600
= × 100 × 100 × 100 × 100
Standard output units 480 480 480
= 81.25% = 93.75% = 125%
3.10.3 Gantt task and bonus system: This system is a combination of time and piece
work system. According to this system a high standard or task is set and payment is made at
time rate to a worker for production below the set standard.
If the standards are achieved or exceeded, the payment to the concerned worker is made at a
higher piece rate. The piece rate fixed under this system also includes an element of bonus
the extent of 20%. The figure of bonus to such workers is calculated over the time rate of the
workers.
Thus in its essence, the system consists of paying a worker on time basis if he does not attain
the standard and on piece basis if he does. Wages payable to workers under this plan are
calculated as under :
Output Payment
(i) Output below standard Guaranteed time rate.
(ii) Output at standard Time rate plus bonus of 20% (usually) of time rate.
(iii) Output above standard High piece rate on worker’s whole output.
It is so fixed, so as to include a bonus of 20% of the timerate.
Advantages Disadvantages
1. It provides good incentive for efficient The guaranteed time rate may have the
workers and at the same time protects effect of weakening the urge of slower
the less efficient by guaranteeing the worker to increase his output.
time rate.
2. It is simple to understand and operate.
3. It encourages better supervision and
planning.

Illustration 11: (Calculation of wages under the Gantt system)

In a factory the standard time allowed for completing a given task (50 units), is 8 hours. The
guaranteed time wages are ` 20 per hour. If a task is completed in less than the standard
time, the high rate of ` 4 per unit is payable. Calculate the wages of a worker, under the Gantt
system, if he completes the task in
(i) 10 hours; (ii) 8 hours, and (iii) in 6 hours. Also ascertain the comparative rate of earnings
per hour under the three situations.

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 3.43 Cost Accounting

Solution
(i) When the worker performs the task in 10 hours, his earnings will be at the time wage rate
i.e. 10 hours × ` 20 per hour = ` 200.
(ii) When the worker performs the task is standard time i.e. in 8 hours, his earning will be:
8 hours × ` 20 = ` 160
Bonus @ 20% of time wages = ` 32
Total earnings ` 192
(iii) When the worker performs the task in less than the standard time his earning will be at
piece rate i.e.
50 units × ` 4 per unit = ` 200
The comparative rate of earnings per hour under the above three situations is:
(i) ` 200/10 hrs. = ` 20 per hour
(ii) ` 192/8 hrs. = ` 24 per hour
(iii) ` 200/6 hrs. = ` 33.33 per hour
3.10.4 Emerson’s efficiency system: Under this system minimum time wages are
guaranteed. But beyond a certain efficiency level, bonus in addition to minimum day wages is given.
A worker who is able to attain efficiency, measured by his output equal to 2/3rd of the
standard efficiency, or above, is deemed to be an efficient worker deserving encouragement.
The scheme thus provides for payment of bonus at a rising scale at various levels of
efficiency, ranging from 66.67% to 150%.
The levels are as mentioned below:
(i) For a performance below 66.67% only time rate wages without any bonus are paid.
(ii) Above 66⅔ % to 100% efficiency, bonus varies between 0.01% and 20%.
(iii) Above 100% efficiency bonus of 20% of basic wages plus 1% for each 1% increase in
efficiency is admissible.
This system is superior to one to the differential piece rate in so far as it encourages the slow
worker to do a little better than before. Also it does not pre-suppose a high degree of average
performance. Wages on time basis are guaranteed.
Illustration 12: (Earnings under Emerson Efficiency System)
From the following information you are required to calculate the bonus and earnings under
Emerson Efficiency System. The relevant information is as under:
Standard working hours : 8 hours a day
Standard output per hour in units : 5

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 Labour 3.44

Daily wage rate : ` 50

Actual output in units
Worker A 25 units
Worker B 40 units
Worker C 45 units
Solution
Statement showing bonus and earnings under Emerson Efficiency System
Workers A B C
Actual output in units 25 40 45
Standard output in units 40 40 40
Efficiency level (%) 62.5% 100% 112.50%
⎡ Actual output ⎤
⎢ Standarad output × 100⎥
⎣ ⎦
Rate of bonus No bonus 20% 32.50%
(20% + 12.5%)
Time wages (`) 50 50 50
Bonus (`) Nil 10 16.25
(20% of ` 50) (32.5% of ` 50)
Total earnings (`) 50 60 66.25
3.10.5 Points scheme or Bedeaux system: Under this scheme, firstly the quantum of
work that a worker can perform is expressed in Bedeaux points or B’s. These points represent
the standard time in terms of minutes required to perform the job. The standard numbers of
points in terms of minutes are ascertained after a careful and detailed analysis of each
operation or job. Each such minute consists of the time required to complete a fraction of the
operation or the job, and also an allowance for rest due to fatigue.
Workers who are not able to complete tasks allotted to them within the standard time are paid
at the normal daily rate.
Those who are able to improve upon the efficiency rate are paid a bonus, equal to the wages
for time saved as indicated by excess of B’s earned (standard minutes for work done) over
actual time. Workers are paid 75% of the time saved.
Illustration 13: (Calculation of earnings under Bedeaux system)
Calculate the earnings of worker from the following information under Bedeaux system :
Standard time for a product A-30 seconds plus relaxation allowance of 50%.
Standard time for a product B-20 second plus relaxation allowance of 50%.

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 3.45 Cost Accounting

During 8 hour day for

Actual output of product for A 500 units.
Actual output of product B 300 units
Wage rate ` 10 per hour
Solution
Bedeaux point per unit of product A :
30 seconds + 15 seconds 45
= = 0.75 B’s
60 60
Bedeaux point per unit of product B:
20 seconds +10 seconds 30
= = 0.50 B’s
60 60
Total production in terms of B’s:
500 × 0.75 + 300 × 0.50 = 525 B’s
Standard B’s (8 hours × 60) = 480 B’s
No. of B’s saved (525 B’s – 480 B’s) = 45 B’s
45
Earnings = Hrs. worked × rate per hour + 75/100 × × ` 10
60
45
= 8 hours ×`10 + 75/100 × × ` 10
60
= ` 80 + ` 5.63 = ` 85.63
3.10.6 Hayne’s system: Under this system also the standard is set in minutes. The standard
time for the job is expressed in terms of the standard man-minutes called as “MANIT”. Manit
stands for man-minute. In the case of repetitive work the time saved is shared between the worker
and the foreman in the ratio 5 : 1. If the work is of non-repetitive nature, the worker, the employer
and the foreman share the value of time saved in the ratio of 5 : 4 : 1. Each worker is paid
according to hourly rate for the time spent by him on the job.
3.10.7 Accelerated premium system: Under this system earnings increase with output;
the rate of increase of earnings itself increases progressively with output; in fact the earnings
increase in greater proportion than the increase in production. This system acts as a strong
incentive for skilled workers to earn high wages by increasing output and for production
beyond standard.
3.10.8 Premium bonus methods :Under these methods, standard time is established for
performing a job. The worker is guaranteed his daily wages (except in Barth System), if his output
is below and upto standard. In case the task is completed in less than the standard time, the saved

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 Labour 3.46

time is shared between the employee and the employer.

There are two types of time-sharing plans in use viz., constant sharing plans and variable sharing
plans.
3.10.9 Halsey and Halsey Weir systems :
Under Halsey system a standard time is fixed for each job or process.
If there is no saving on this standard time allowance, the worker is paid only his day rate.
He gets his time rate even if he exceeds the standard time limit, since his day rate is guaranteed.
If, however, he does the job in less than the standard time, he gets a bonus equal to 50 percent of
the wages of time saved; the employer benefits by the other 50 percent. The scheme also is
sometimes referred to as the Halsey fifty percent plan.
Formula for calculating wages under Halsey system
= Time taken × Time rate + 50% of time saved × Time rate.
The Halsey Weir System is the same as the Halsey System except that the bonus paid to
workers is 30% of the time saved i.e.
= Time taken × Time rate + 30% of time saved × Time rate.

Advantages Disadvantages
1. Time rate is guaranteed while there 1. Incentive is not so strong as with piece
is opportunity for increasing earnings rate system. In fact the harder the
by increasing production. worker works, the lesser he gets per
2. The system is equitable in as much piece.
as the employer gets a direct return 2. The sharing principle may not be liked
for his efforts in improving production by employees.
methods and providing better
equipment.

Illustration 14: (Calculation of earning under Halsey System)

Calculate the earning of a worker under Halsey System. The relevant data is as below :
Time Rate (p.h.) `6
Time allowed 8 hours
Time taken 6 hours
Time saved 2 hours

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 3.47 Cost Accounting

Solution
Calculation of total earnings :
6 hrs. × `6 + 1/2 × (2 hrs. × ` 6) or ` 36 + `6 = ` 42
Of his total earnings, ` 36 is on account of the time worked and `6 is on account of his share
of the premium bonus.
3.10.10 Rowan system: According to this system a standard time allowance is fixed for the
performance of a job and bonus is paid if time is saved.
Under Rowan System the bonus is that proportion of the time wages as time saved bears to
the standard time.
Formula for calculating wages under Rowan system
Time Saved
= Time taken × Rate per hour + × Time taken × Rate per hour
Time allowed

Advantages Disadvantages
1. It is claimed to be a fool-proof system 1. The system is a bit complicated.
in as much as a worker can never
double his earnings even if there is
bad rate setting.
2. It is admirably suitable for 2. The incentive is weak at a high
encouraging moderately efficient production level where the time saved
workers as it provides a better return is more than 50% of the time allowed.
for moderate efficiency than under the
Halsey Plan.
3. The sharing principle appeals to the 3. The sharing principle is not generally
employer as being equitable. welcomed by employees.

Illustration 15: (Calculation of earnings under Rowan System)

Calculate the earnings of a worker under Rowan System. The relevant data is given as below:
Time rate (per Hour) `6
Time allowed 8 hours.
Time taken 6 hours.
Time saved 2 hours.

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 Labour 3.48

Solution
Calculation of total earnings:
Time Saved
= Time taken × Rate per hour + × Time taken × Rate per hour
Time allowed
2 hours
= 6 hours × `6 + × 6 hours × `6 = ` 36 + `9 = ` 45
8 hours
Illustration 16: (Calculation of earnings and effective hourly rate under Halsey scheme)
A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of ` 30 per hour. The standard
time per unit for a particular product is 4 hours. P, a machineman, has been paid wages under
the Rowan Incentive Plan and he had earned an effective hourly rate of ` 37.50 on the
manufacture of that particular product.
Required: What could have been his total earnings and effective hourly rate, had he been put
on Halsey Incentive Scheme (50%)?
Solution:
Total earnings (under 50% Halsey Scheme) = Hours worked × Rate per hour + ½ × time
saved × Rate per hour
= 3 hours × ` 30 + ½ × 1 hour × `30 = ` 105
Total earnings ` 105
Effective hourly rate = = = ` 35
Hours taken 3 hours
Working Note :
Let T hours be the total time worked in hours by the skilled workers (machine man P), ` 30 is the
rate per hour; standard time is 4 hours per unit and effective hourly earning rate is ` 37.50 then
Time saved
Earning (under Rowan plan) = Hours worked × Rate per hr + ×
Time allowed
Time taken × Rate per hr
(4 − T)
` 37.5 T = T × `30 + × T × ` 30
4
` 37.5 = ` 30 + (4 – T) × ` 7.5
or, ` 7.5 T = ` 22.5
or, T = 3 hours.
Illustration 17: (Comparison of earnings between Halsey plan and Rowan plan)
(a) Bonus paid under the Halsey Plan with bonus at 50% for the time saved equals the
bonus paid under the Rowan System. When will this statement hold good? (Your answer
should contain the proof).

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 3.49 Cost Accounting

(b) The time allowed for a job is 8 hours. The hourly rate is `8. Prepare a statement showing :
i. The bonus earned
ii. The total earnings of labour and
iii. Hourly earnings.
Under the Halsey System with 50% bonus for time saved and Rowan System for each
hour saved progressively.
Solution:
50
(a) Bonus under Halsey Plan = × (SH × AH) × R (i)
100
AH
Bonus under Rowan Plan : = × (SH × AH) × R (ii)
SH
Bonus under Halsey Plan will be equal to the bonus under Rowan Plan when the
following condition holds good :
50 AH
× (SH × AH) × R = × (SH × AH) × R
100 SH
50 AH
=
100 SH
Hence, when the actual time taken (AH) is 50% of the time allowed (SH), the bonus under
Halsey and Rowan Plans is equal.
(b) Statement of Bonus, total earnings of labour and hourly earnings under Halsey and
Rowan Systems.
SH AH Time Basic Bonus under Bonus under Total Total Hourly Hourly
saved wages (AH Halsey Rowan system Earnings Earnings Earnings Earnings
× `8) (B System ⎡B ⎤ under under under under
× C × 8⎥
× `8) ⎡ 50 ⎤ ⎢⎣ A ⎦ Halsey Rowan Halsey Rowan
⎢ 100 × C × 8⎥ System System System System H/B
⎣ ⎦
D+E D+F G/B

A B hours C = (A-B) D E F G H I J
hours hours ` ` ` ` ` ` `
8 8 - 64 - - 64 64 8.00 8.00
8 7 1 56 4 7 60 63 8.57 9.00
8 6 2 48 8 12 56 60 9.33 10.00
8 5 3 40 12 15 52 55 10.40 11.00
8 4 4 32 16 16 48 48 12.00 12.00
8 3 5 24 20 15 44 39 14.67 13.00
8 2 6 16 24 12 40 28 20.00 14.00
8 1 7 8 28 7 36 15 36.00 15.00

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 Labour 3.50

Illustration 18: (Preparation of Comparison statement of earnings)

Two workmen, ‘A’ and ‘B’, produce the same product using the same material. Their normal wage
rate is also the same. ‘A’ is paid bonus according to the Rowan system, while ‘B’ is paid bonus
according to the Halsey system. The time allowed to make the product is 50 hours. ‘A’ takes 30
hours while ‘B’ takes 40 hours to complete the product. The factory overhead rate is ` 5 per man-
hour actually worked. The factory cost for the product for ‘A’ is ` 3,490 and for ‘B’ it is ` 3,600.
Required :
(a) Compute the normal rate of wages;
(b) Compute the cost of materials cost;
(c) Prepare a statement comparing the factory cost of the products as made by the two workmen.
Solution:
Step 1 : Let X be the cost of material and Y be the normal rate of wages per hour.
Step 2 : Factory Cost of Workman ‘A’
(`)
A. Material Cost X
B. Wages 30 Y
AH 12 Y
C. Bonus = × (SH - AH) × R
SH
30
Bonus = × (50 - 30) × Y
50
D. Overheads (30 × `5) 150
E. Factory Cost X + 30Y + 12 Y + `150
or, X + 42 Y = `3,490 (Given) – `150 = `3,340 …
Equation (I)
Step 3 : Factory Cost of Workman ‘B’
(`)
A. Material Cost X
B. Wages 40 Y
C. Bonus = 50% of (SH - AH) × R 5Y
= 50% of (50 - 40) × R
D. Overheads (40 × `5) 200
E. Factory Cost X + 40Y + 5 Y + `200
or, X + 45 Y = `3,600 (Given) – `200 = `3,400 …
Equation (II)
Step 4 : Subtracting Eq. (I) from Eq. (II)
3Y = `60

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 3.51 Cost Accounting

Y = ` 60/3 = ` 20 per hour.

(a) The normal rate of wages : ` 20 per hour
(b) The cost of material : X + 45 × ` 20 = ` 3,400
X = ` 3,400 – ` 900 = ` 2,500
(c) Comparative Statement of the Factory Cost of the product made by the two workmen.
‘A’ ‘B’
(`) (`)
Material cost 2,500 2,500
Direct Wages (30 × ` 20) 600 (40 × ` 20) 800
Bonus (12 × ` 20) 240 (5 × ` 20) 100
Factory Overhead 150 200
Factory Cost 3,490 3,600

Illustration 19: (Appropriate incentive scheme)

A factory having the latest sophisticated machines wants to introduce an incentive scheme for
its workers, keeping in view the following:
(i) The entire gains of improved production should not go to the workers.
(ii) In the name of speed, quality should not suffer.
(iii) The rate setting department being newly established are liable to commit mistakes.
You are required to devise a suitable incentive scheme and demonstrate by an illustrative
numerical example how your scheme answers to all the requirements of the management.
Solution
Rowan Scheme of premium bonus (variable sharing plan) is a suitable incentive scheme for
the workers of the factory. If this scheme is adopted, the entire gains due to time saved by a
worker will not pass to him.
Another feature of this scheme is that a worker cannot increase his earnings or bonus by
merely increasing its work speed. The reason for this is that the bonus under Rowan Scheme
is maximum when the time taken by a worker on a job is half of the time allowed. As this fact
is known to the workers, therefore, they work at such a speed which helps them to maintain
the quality of output too.
Lastly, Rowan System provides a safeguard in the case of any loose fixation of the standards
by the rate-setting department. It may be observed from the following illustration that in the
Rowan Scheme the bonus paid will be low due to any loose fixation of standards. Workers
cannot take undue advantage of such a situation. The above three features of Rowan Plan
can be discussed with the help of the following illustration:
(i) Time allowed = 4 hours

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 Labour 3.52

Time taken = 3 hours

Time saved = 1 hour
Rate = ` 5 per hour
Time taken
Bonus = × Time saved × Rate
Time allowed
3 hours
= × 1 hour × ` 5 = ` 3.75
4 hours
In the above illustration time saved is 1 hour and, therefore, total gain is ` 5. Out of ` 5
according to Rowan Plan only ` 3.75 is given to the worker in the form of bonus and
the remaining ` 1.25 remains with the management. In other words a worker is entitled
for 75 percent of the time saved in the form of bonus.
(ii) The figures of bonus in the above illustration when the time taken is 2 hours and 1 hour
respectively are as below:
Time taken
Bonus = × Time saved × Rate
Time allowed
2 hours
= × 2 hours × ` 5 = ` 5
4 hours
1 hours
= × 3 hours × ` 5 = ` 3.75
4 hours
The above figures of bonus clearly show that when time taken is half of the time
allowed, the bonus is maximum. When the time taken is reduced from 2 to 1 hour, the
bonus figure fell by ` 1.25. Hence, it is quite apparent to workers that it is of no use to
increase speed of work. This feature of Rowan Plan thus protects the quality of output.
(iii) If the rate-setting department erroneously sets the time allowed as 10 hours instead of
4 hours, in the above illustration; then the bonus paid will be as follows:
3 hours
Bonus = × 7 hours × ` 5 = ` 10.50
10 hours
The bonus paid for saving 7 hours thus is ` 10.50 which is approximately equal to the wages
of 2 hours. In other words the bonus paid to the workers is low. Hence workers cannot take
undue advantage of any mistake committed by the time setting department of the concern.

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 3.53 Cost Accounting

3.10.11 Barth system The formula used for calculating the remuneration under this system
is as follows :
Earnings = Hourly rate × Standard hours × Hours worked

The system is particularly suitable for trainees and beginners and also for unskilled workers. The
reason is that for low production efficiency, the earnings are higher than in the piece-work system
but as the efficiency increases, the rate of increase in the earnings falls.
This system is not suitable for workers having more than 100% efficiency as it does not provide
incentive on working at more than 100% efficiency.
Illustration 20: (Selection of appropriate incentive scheme)
Mr. A. is working by employing 10 skilled workers. He is considering the introduction of some
incentive scheme - either Halsey Scheme (with 50% bonus) or Rowan Scheme - of wage
payment for increasing the labour productivity to cope with the increased demand for the

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 Labour 3.54

product by 25%. He feels that if the proposed incentive scheme could bring about an average
20% increase over the present earnings of the workers, it could act as sufficient incentive for
them to produce more and he has accordingly given this assurance to the workers.
As a result of the assurance, the increase in productivity has been observed as revealed by
the following figures for the current month :
Hourly rate of wages (guaranteed) ` 2.00
Average time for producing 1 piece
by one worker at the previous performance 2 hours
(This may be taken as time allowed)
No. of working days in the month 25
No. of working hours per day for each worker 8
Actual production during the month 1,250 units
Required :
1. Calculate effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
2. Calculate the savings to Mr. A in terms of direct labour cost per piece under the schemes.
3. Advise Mr. A about the selection of the scheme to fulfill his assurance.
Solution
Working Notes:
1. Total time wages of 10 workers per month:
= No. of working days in the month × No. of working hours per day of each worker ×
Hourly rate of wages × No. of workers
= 25 days × 8 hrs. × ` 2 × 10 workers = ` 4,000
2. Time saved per month :
Time allowed per piece by a worker 2 hours
No. of units produced during the month by 10 workers 1,250 pieces
Total time allowed to produce 1,250 pieces (1,250 × 2 hours) 2,500 hours
Actual time taken to produce 1,250 pieces 2,000 hours
Time saved (2,500 hours – 2,000 hours) 500 hours
3. Bonus under Halsey scheme to be paid to 10 workers :
Bonus = (50% of time saved) × hourly rate of wages
= 50/100 × 500 hours × ` 2 = ` 500
Total wages to be paid to 10 workers are (` 4,000 + ` 500) ` 4,500, if Mr. A considers

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 3.55 Cost Accounting

the introduction of Halsey Incentive Scheme to increase the labour productivity.

4. Bonus under Rowan Scheme to be paid to 10 workers :
Time taken
Bonus = × Time saved × hourly rate
Time allowed
2,000hours
= × 500 hours × ` 2 = ` 800
2,500hours
Total wages to be paid to 10 workers are (` 4,000 + ` 800) ` 4,800, if Mr. A considers
the introduction of Rowan Incentive Scheme to increase the labour productivity.
1. (i) Effective hourly rate of earnings under Halsey scheme :
(Refer to Working Notes 1, 2 and 3)
Total time wages of 10 workers+Total bonus under Halsey scheme
=
Total hours worked
= R` 4,000 + ` 500 = ` 2.25
2,000 hours
(ii) Effective hourly rate of earnings under Rowan scheme :
(Refer to Working Notes 1, 2 and 4)
Total time wages of 10 workers+Total bonus under Rowan scheme
=
Total hours worked
R` 4,000+R`800
= = ` 2.40
2,000 hours
2. (i) Saving in terms of direct labour cost per piece under Halsey scheme :
(Refer to Working Note 3)
Labour cost per piece (under time wage scheme) = 2 hours × ` 2 = ` 4.
Labour cost per piece (under Halsey scheme)
Total wages paid under the scheme ` 4,500
= = = ` 3.60
Total number of units produced 1,250
Saving per piece : (` 4 – ` 3.60) = ` 0.40.
(ii) Saving in terms of direct labour cost per piece under Rowan Scheme :
(Refer to Working Note 4)
Labour cost per piece under Rowan scheme = ` 4,800/1,250 units = ` 3.84
Saving per piece = ` 4 – ` 3.84 = ` 0.16.

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 Labour 3.56

3. From the labour cost per piece under Halsey scheme (` 3.60) and Rowan scheme
(` 3.84), it is quite clear that Halsey scheme brings about more saving than Rowan scheme
to the concern. But Halsey scheme does not fulfill the assurance given to the workers about
20% increase in their earnings as it secures only 12.5% [500/4,000 × 100] increase.
On the other hand, Rowan scheme secures 20% [800/4,000 × 100] increase in the earnings
and it fulfills the assurance. Therefore, Rowan scheme may be adopted.
Illustration 21: (Calculation of earnings under different schemes)
Wage negotiations are going on with the recognised Labour Union and the Management wants
you as the Cost Accountant of the Company to formulate an incentive scheme with a view to
increase productivity.
The case of three typical workers Achyuta, Ananta and Govida who produce respectively 180, 120
and 100 units of the company’s product in a normal day of 8 hours is taken up for study.
Assuming that day wages would be guaranteed at 75 paise per hour and the piece rate would be
based on a standard hourly output of 10 units, calculate the earnings of each of the three workers
and the labour cost per 100 pieces under (i) Day wages, (ii) Piece rate, (iii) Halsey scheme, and
(iv) The Rowan scheme.
Also calculate under the above schemes the average cost of labour for the company to produce
100 pieces.
Solution
Calculation of earnings of each of the three workers and the labour cost per 100 pieces under
different wage schemes.
(i) Day wages
Name of workers Day Actual Labour
wages output cost per
(units) 100 pieces
(`) (`)
Achyuta 6.00 180 3.33
Ananta 6.00 120 5.00
Govinda 6.00 100 6.00
Total 18.00 400
Average cost of labour for the company to produce 100 pieces :
Total wages paid `18
× 100 = × 100 = ` 4.50
Total output 400

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 3.57 Cost Accounting

(ii) Piece rate

Name of workers Actual Piece Wages Labour
output rate earned cost per
(units) (`) (`) 100 pieces
(`)
Achyuta 180 0.075 13.50 7.50
Ananta 120 0.075 9.00 7.50
Govinda 100 0.075 7.50 7.50
Total 400 30.00
` 30
Average cost of labour for the company to produce 100 pieces : = × 100 = ` 7.50
400
(iii) Halsey Scheme
Name of Acutal Std. time Actual Time Bonus Total Labour
workers output for time saved Hrs. wages cost per
(units) actual for Hrs. (50% including 100
output actual of time Bonus* pieces
Hrs. output saved
Hrs. Hrs.) (`) (`)
Achyuta 180 18 8 10 5 9.75 5.42
Ananta 120 12 8 4 2 7.50 6.25
Govinda 100 10 8 2 1 6.75 6.75
24.00
` 24
Average cost of labour for the company to produce 100 pieces = ×100= `6.00
400
*Total wages = (Actual hours worked + bonus hours) × Rate per hour
Hence total wages of Achyuta are: (8 + 5) × ` 0.75 = ` 9.75
Similarly, the total wages of Ananta and Govinda are ` 7.50 and ` 6.75 respectively.

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 Labour 3.58

(iv) Rowan Scheme:

Name of Actual Std. time Actual Time Bonus* Wages for Bonus Total Labour
workers output for time saved hrs. actual @ 75 P earnings cost
(units) actual taken (hours) hrs. per per
output hours @ 75 P Bonus 100
(hrs.) per hr. hour pieces
(`) (`) (`) (`)
(1) (2) (3) (4) (5) (6) (7) (8) (7)+(8)=(9) (10)
Achyuta 180 18 8 10 4.44 6.00 3.33 9.33 5.18
Ananta 120 12 8 4 2.67 6.00 2.00 8.00 6.67
Govinda 100 10 8 2 1.6 6.00 1.20 7.20 7.20
24.53
` 24.53
Average cos t of labour to the company for 100 pieces = × 100 = ` 6.13
400

*Bonus hours = Time taken × Time saved

Time allowed
8 hours × 10 hours
Bonus hours of Achyuta = = 4.44
18 hours
Similarly, bonus hours of Ananta and Govinda are `2.67 hours and `1.6 hours
respectively.
3.10.12 Group System of wage payment : Certain jobs or operations are required to be
performed collectively by a number of workers. Under such cases each man’s work depends
on the work performed by one or more of his colleagues and as such it is not possible to
measure separately the output of each worker.
The workers constituting a group or a team here are considered as a composite unit and the
combined output of such a unit is measured for the purpose of wage calculation. The methods
usually used for distributing wages to each worker are the following :
1. Equally, if all the workers of the group are of the same grade and skill, same rate of pay
and has worked for same duration.
2. Pro-rata to the time-rate of each worker where the time spent by the individual worker is
the same.
3. On the basis of the time rates and attendance of each worker.
4. On a specified percentage basis; the percentage applicable to a worker is pre-
determined on the basis of the skill, rate of pay etc.
5. In a group of unskilled and skilled workers, a method of distribution is to pay the unskilled
workers at their time rates. The balance amount remaining out of the total earnings after

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 3.59 Cost Accounting

payment to the unskilled workers is distributed among the skilled workers by any of the
methods discussed above.
Group Bonus - Group Bonus refers to the bonus paid for the collective efforts made by a
group of workers. The amount of bonus is distributed among the individual members of the
group on some agreed basis.
Group Bonus Schemes - Under a group bonus scheme, bonus is paid to a team/group of
employees working together.
Such a scheme is introduced generally where individual efficiency cannot be established for
the payment of bonus.
For example, in the construction work, it is the team work of masons and labourers which
produces results. If any incentive is to be offered, it should be offered to the team as a whole
and not to an individual. Group bonus is based on the combined output of the team as a
whole. The quantum of bonus is determined on the basis of the productivity of the team and
the bonus is shared by individual workers in specified proportions, often in the proportion of
wages on time basis.
Objectives of Group Bonus Schemes: The objectives of a group bonus scheme are the
following :-
(i) To create collective interest and team spirit among workers.
(ii) To create interest among supervisors to improve performance.
(iii) To reduce wastage in materials and idle time.
(iv) To achieve optimum output at minimum cost.
(v) To encourage individual members of the group, team where only the output of the team
as a whole can be measured.
Advantages of Group Bonus Schemes :
1. They create a sense of team spirit since all the workers in a group realise that their
personal incentives are dependent upon group effort.
2. A spirit of healthy competition amongst various groups doing identical jobs is also
created. This results is the elimination of excessive waste of materials.
3. The operators and supervisors also feel interested in raising the production to higher levels.
4. The scheme is usually easier to understand and entails less costing and accounting
work. It is easier to set up group activity targets, since the performance unit is large.
Schemes of group bonus - There are five schemes of group bonus as discussed below :
(1) Priestman’s Production Bonus: This method was adopted by Priestman Bros. Ltd., in 1917.
According to this method when the actual production in units or points exceeds the
standard fixed, a bonus is paid to the workers as additional wages equivalent to the
percentage of actual output over the standard output.

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 Labour 3.60

(2) Cost Efficiency Bonus: Under this scheme, the amount of bonus is calculated when the
cost is reduced below the normal established targets. Targets of cost, for example,
material cost, labour cost and overhead cost etc., per unit are fixed. If the measurement
of actual performance shows a saving in the total labour and material cost or a reduction
in the total cost per unit, a fair percentage of the saving is distributed among the staff.
Three popular schemes usually used for calculating the amount to be distributed to
workers as Bonus are as below :
(i) Nunn-Bush Plan: According to this plan a norm of direct labour cost is fixed and
expressed as a percentage of the sales value.
The amount calculated at this percentage is credited to a fund. The actual labour
cost is debited to this fund and the balance remaining to the credit of this fund is
distributed as bonus to all the workers and employees.
(ii) Scanlon Plan: Here also a fund is created for the normal cost of wages and
salaries. This fund is debited with the actual labour costs. Two-thirds to three-
fourths of the credit balance, if any, is distributed as bonus, the balance is kept as
reserve for future set-backs.
(iii) Rucker Plan: This plan is quite similar to Nunn-Bush Plan except that the
percentage for crediting the fund is based on the total value added by manufacturer
(i.e. the total cost less the value of the material) and not on total sales value.
(3) Town Gain Sharing Plan: Under this plan bonus is dependent upon a saving in the
labour cost as compared to standard. The bonus is calculated at 50% of the saving
achieved.
(4) Budgeted Expense Bonus: Bonus is determined in advance and paid as a percentage
of savings effected in the actual total expenses as compared to the budgeted expense. It
is payable to indirect workers also.
(5) Waste Reduction Bonus: Bonus becomes payable under this scheme if the team of
workers brings about a reduction in the percentage of material wastages as compared to
the standard set. It is applicable to industries where the material cost assumes a greater
proportion of the total cost.
Many times group bonus schemes do not enjoy the approval of workers. Some workers tend to
feel that their personal incentives are low merely because some members of the group are
lazy or inefficient. Such workers believe that it is better to provide incentives on individual
basis, if it is possible.
3.10.13 System of Incentive schemes for Indirect Workers: Since the setting of
work standards and measurement of output in the case of indirect workers is not an easy task
in respect of maintenance, internal transport, inspection, packing and cleaning, therefore the
introduction of a system of payment by results for indirect workers is difficult.
In spite of the aforesaid difficulty, it has been felt necessary to provide for incentives to

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indirect workers, due to the following reasons:

1. Dissatisfaction: Payment of incentive bonus to direct workers and time rate to indirect workers
leads to dissatisfaction and labour unrest.
2. Entitlement: Indirect workers are as much entitled to bonus as direct workers.
3. Team Spirit: Bonus payment to indirect workers creates team spirit.
4. Increase in efficiency: An incentive system for indirect workers assists in maintaining the
efficiency of services such as plant repairs, stores maintenance, material handling etc.
5. Dependence on indirect labour: The efficiency of direct workers is reduced where their work is
dependent upon the service rendered by the indirect workers.
A few examples of incentive schemes to indirect workers are as below :
(i) Incentive to supervisors and foremen: Supervisors and foremen are an important link
between the management and the workers. Incentive payment to these persons would assist
in maintaining all round efficiency. Incentive to supervisors and foremen may be provided in
the form of non-financial benefits.
Incentive can also be provided to these workers in the form of Bonus. The extent of bonus
which will be distributed as incentive will depend on the savings effected over the standards.
(ii) Incentive to maintenance and repairs staff: Under mass production work, repair and
maintenance duties can be considered as routine and repetitive for which percentage of
efficiency can be evaluated. In case such an evaluation is not possible or practicable, a group
bonus system may be established, on the basis of reduction in breakdown or on the number
of complaints.
Illustration 22: (Calculation of earnings of each worker under group task)
A, B and C were engaged on a group task for which a payment of ` 725 was to be made. A’s time
basis wages are ` 8 per day, B’s ` 6 per day and C’s ` 5 per day. A worked for 25 days; B worked
for 30 days; and C for 40 days. Distribute the amount of ` 725 among the three workers.
Solution
Total wages on time basis : (`)
A 25 @ ` 8 200
B 30 @ ` 6 180
C 40 @ ` 5 200
580
Payment for the task
Bonus : (` 725 – ` 580) 145
or, 25% of the time-basis wages. 725

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 Labour 3.62

Earnings of each worker

Worker Wages on time basis Group task Bonus 25% Total
(`) (`) (`)
A 200 50 250
B 180 45 225
C 200 50 250
580 145 725
Illustration 23: (Calculation of bonus earned by direct and indirect labour)
Both direct and indirect labours of a department in a factory are entitled to production bonus in
accordance with a group incentive scheme, the outline of which is as follows:
(a) For any production in excess of the standard rate fixed at 16,800 tonnes per month (of 28
days) a general incentive of ` 15 per tonne is paid in aggregate. The total amount
payable to each separate group is determined on the basis of an assumed percentage of
such excess production being contributed by it, namely @ 65% by direct labour, @ 15%
by inspection staff, @ 12% by maintenance staff and @ 8% by supervisory staff.
(b) Moreover, if the excess production is more than 20% above the standard, direct labour
also get a special bonus @ ` 5 per tonne for all production in excess of 120% of
standard.
(c) Inspection staff are penalized @ ` 20 per tonne for rejection by customer in excess of
2% of production.
(d) Maintenance staff are also penalized @ ` 20 per hour for breakdown.
From the following particulars for a month, work out production bonus earned by each group :
(a) Actual working days : 25
(b) Production : 21,000 tonnes
(c) Rejection by customer : 500 tonnes
(d) Machine breakdown : 40 hours
Solution
Standard output per month
1. Standard output per day =
Budgeted number of days in a month

16,800 tonnes
= = 600 tonnes
28 days
2. Standard output for 25 days = 600 tonnes × 25 days = 15,000 tonnes
(a) General Incentive
(i) Standard output : 15,000 tonnes

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 3.63 Cost Accounting

(ii) Actual output : 21,000 tonnes

(iii) Excess output over standard : 21,000 – 15,000 = 6,000 tonnes
(iv) Percentage of excess : 40%
6,000 tonnes
production to standard output : × 100
15,000 tonnes
(v) Aggregate general incentive : = Excess output × ` 15
: = 6,000 tonnes × `15 = ` 90,000
(vi) Allocation of general incentive
Direct labour : 65% of ` 90,000 ` 58,500
Inspection staff : 15% of ` 90,000 ` 13,500
Maintenance staff : 12% of ` 90,000 ` 10,800
Supervisory staff : 8% of ` 90,000 ` 7,200
Total ` 90,000
(b) Special bonus to direct workers
(i) 20% is the excess output over 120% of standard output
or 3,000 tonnes (15,000 tonnes × 20%)
(ii) Special incentive = 3,000 tonnes × ` 5 = ` 15,000
(c) Penalty imposed on inspection staff
(i) Normal rejection = 2% of production = 2% of 21,000 tonnes
= 420 tonnes
(ii) Actual rejection = 500 tonnes
(iii) Excess rejection over normal rejection = 500 – 420 = 80 tonnes
(iv) Penalty = 80 tonnes × ` 20 per tonne = ` 1,600
(d) Penalty imposed on maintenance staff
(i) Breakdown hours = 40 hours
(ii) Penalty = 40 hours × ` 20 per hour = ` 800
Statement of production bonus earned by each group
Particulars Direct Inspection Maintenance Supervisory Total
labour staff staff staff
(`) (`) (`) (`) (`)
1 2 3 4 5
Aggregate
general incentive 58,500 13,500 10,800 7,200 90,000

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 Labour 3.64

Special bonus 15,000 - - - 15,000

Penalty - (1,600) (800) - (2,400)
Production bonus 73,500 11,900 10,000 7,200 1,02,600
3.10.14 Profit-sharing and Co-partnership schemes: A profit-sharing scheme implies
that the net profit of business would be shared between the workers and the shareholders or
the partners in a pre-determined ratio.
Co-partnership, on the other hand, implies that the workers shall own the business jointly with the
shareholders. In this case, usually the workers share of profits is given in the form of shares.
Some employers in our country originally introduced profit-sharing schemes with a view of
stimulating interest among workers for increasing production. But the schemes have not been
successful on account of unwillingness on the part of the management to consult workers.
Even a demand for copies of final accounts of the business to be shown to them has been
considered by some employers to be an unwarranted interference. The question of bonus has
thus been one of the major causes of industrial disputes in recent years. (Payment of
compulsory bonus is now governed by the payment of Bonus Act.)
Though profit sharing has become a normal feature of the industrial life in this country, co-
partnership is comparatively unknown. Nevertheless it must be pointed out that in England
and other Western countries, a number of successful concerns have been allotting shares to
their workers in proportion to their shares of bonus. Some of them have advanced loans to
them to purchase shares. Both these forms of benefit have been quite popular with labour.
Advantages Disadvantages
(i) Employees are made to feel that they (i) Profit may fluctuate from year to year;
too have a stake in the well-being of there is thus an element of uncertainty
the undertaking and have a in such schemes.
contribution to make in earning of (ii) Profit depends upon many factors of
profits by improving production, which labour efficiency is only one.
efficiency and operations. Insufficiency of bonus may lead to
(ii) Labour turnover may be reduced, dissatisfaction instead of promoting
particularly if a minimum period of good relations, if the good work done
service is laid down as a condition for by labour is nullified by other factors.
participating in such schemes. (iii) The reward may be too remote to
(iii) Better team work and better co- sustain continued interest in and zeal
operation. for work.
(iv) There may be doubt and suspicion
about the profit disclosed.
(v) Since all are entitled to participate in
such schemes, there is no recognition of
individual merit.
(vi) The individual share of profit may be

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 3.65 Cost Accounting

too meagre to be appealing.

(vii) Since in practice bonus has to be
fought in India, so it has become an
important cause of labour disputes.

Workers share in the net profits of the firm can be calculated by any of the following
ways:
(i) A fixed percentage may be allowed to the worker as bonus at the end of the financial year.
(ii) The profit earned, can be department wise and hence a fixed percentage of the department’s
profit can be allowed as profit sharing.
(iii) Profits may be computed per unit of output and a part of profit may be allowed to workers
on this basis.
Treatment in Costing: In foreign countries bonus is an ex-gratia payment and hence it is
regarded as an appropriation of profit not to be included in costs. In fact trade unions there do
not look upon bonus with favour.
In India however, payment of bonus is compulsory under the Payment of Bonus Act under
which 8.33% of wages earned or ` 100 whichever is higher, is the minimum bonus payable,
the maximum being 20%. Hence bonus must be treated as part of costs in India.
There can be two methods of dealing with bonus:
(i) It may be treated as part of overheads; in any case, this must be so for bonus paid to
indirect workers.
(ii) In the case of direct workers the bonus payable may be estimated beforehand and wage
rates for costing purposes suitably inflated by including the bonus that would be paid.
Example: A worker gets ` 800 p.m. as wages and it is expected that he will be paid two
months’ wages as bonus. His total earning will be ` 11,200 (` 9,600 + ` 1,600). If the worker
works for 2,400 hours in a year the wage rate for costing purposes will be : ` 4.67, i.e., `
11,200/2,400 hours.
Illustration 24: (Calculation and verification of wages paid to the worker)
During audit of account of G Company, your assistant found errors in the calculation of the
wages of factory workers and he wants you to verify his work.
He has extracted the following information :
(i) The contract provides that the minimum wage for a worker is his base rate. It is also paid
for downtimes i.e., the machine is under repair or the worker is without work. The
standard work week is 40 hours. For overtime production, workers are paid 150 percent
of base rates.
(ii) Straight Piece Work – The worker is paid at the rate of 20 paise per piece.

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 Labour 3.66

(iii) Percentage Bonus Plan – Standard quantities of production per hour are established by
the engineering department. The workers’ average hourly production, determined from
his total hours worked and his production, is divided by the standard quantity of
production to determine his efficiency ratio. The efficiency ratio is then applied to his
base rate to determine his hourly earnings for the period.
(iv) Emerson Efficiency Plan – A minimum wages is paid for production upto 66-2/3% of
standard output or efficiency. When the workers production exceeds 66-2/3% of the
standard output, he is paid bonus as per the following table :
Efficiency Level Bonus
2
Upto 66 % Nil
3
2
Above 66 % to 79 % 10%
3
80% – 99% 20%
100% – 125% 45%
Your assistant has produced the following schedule pertaining to certain workers of a
weekly pay roll :
Workers Wage Incentive Total Down Units Standard Base Gross

Plan Hours Time Produced Units Rate Wages

Hours as per
Book
` `
Rajesh Straight piece work 40 5 400 — 1.80 85

Mohan* Straight piece work 46 — 455 — 1.80 95

John Straight piece work 44 — 425 — 1.80 85

Harish Percentage bonus plan 40 4 250 200 2.20 120

Mahesh Emerson 40 — 240 300 2.10 93

Anil Emerson 40 — 600 500 2.00 126

(40 hours production)

* Total hours of Mohan include 6 overtime hours.
Prepare a schedule showing whether the above computation of workers’ wages are
correct or not. Give details.

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 3.67 Cost Accounting

Solution
Schedule showing the correct figure of
minimum wages, gross wages and wages to be paid
Workers Wage Minimum Gross wages Gross wage Wages to be paid
incentive wages computed as per as per book are Maximum of :
plan Incentive plan minimum and
gross computed
wages
(`) (`) (`) (`)
Rajesh Straight piece work 72.00 80.00 85 80.00
(Refer to W. Note 1)
Mohan Straight piece work 88.20 91.00 95 91.00
(Refer to W. Note 2)
John Straight piece work 82.80 85.00 85 85.00
(Refer to W. Note 3)
Harish Percentage bonus plan 88.00 110.00 120 110.00
(Refer to W. Note 4)
Mahesh Emerson 84.00 100.80 93 100.80
(Refer to W. Note 5)
Anil Emerson 80.00 116.00 126 116.00
(Refer to W. Note 6)
Working notes :
1. Minimum wages = Total normal hours × rate per hour
= 40 hours × ` 1.80 = ` 72
Gross wages (computed) = No. of units × rate per unit
as per incentive plan = 400 units × ` 0.20 = ` 80
2. Minimum wages = Total normal hours × Rate per hour + Overtime
hours × Overtime rate per hour
= 40 hours × ` 1.80 + 6 hours × ` 2.70
= ` 72 + ` 16.20 = ` 88.20
Gross wages (computed)
as per incentive plan = 455 units × ` 0.20 = ` 91.00
3. Minimum wages = 40 hours × ` 1.80 + 4 hours × ` 2.70
= ` 72 + ` 10.80 = ` 82.80
Gross wages (computed) = 425 units × ` 0.20 = ` 85
as per incentive plan

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 Labour 3.68

4. Minimum wages = 40 hours × ` 2.20 = ` 88

Actual production per hour
Efficiency of worker = × 100
Standard production per hour

= (250 units/40 hours) × 100 = 125%

(200 units/40 hours)
Hourly rate = Rate per hour × Efficiency of worker
= ` 2.20 × 125% = ` 2.75
Gross wages (computed)
as percentage of bonus plan = 40 hours × ` 2.75 = ` 110/-
5. Minimum wages = 40 hours × ` 2.10 = ` 84
Efficiency of worker = (240 units/40 hours) × 100 = 80%
(300 units/40 hours)
Bonus (as per Emerson’s plan) = Total minimum wages × Bonus percentage
= ` 84 × 20% = ` 16.80
Gross wages (computed) as per
Emerson’s Efficiency plan = Minimum wages + Bonus
= ` 84 + ` 16.80 = ` 100.80
6. Minimum wages = 40 hours × ` 2 = ` 80
600
Efficiency of worker = × 100 = 120%
500
Bonus (as per Emerson’s plan) = ` 80 × 45% = ` 36
Gross wages (computed) as per
Emerson’s Efficiency plan = ` 80 + ` 36 = ` 116
Illustration 25: (Evaluation of proposal)
The present output details of a manufacturing department are as follows :
Average output per week 48,000 units from 160 employees
Saleable value of output ` 6,00,000
Contribution made by output
towards fixed expenses and profit ` 2,40,000
The Board of Directors plans to introduce more mechanisation into the department at a capital
cost of ` 1,60,000. The effect of this will be to reduce the number of employees to 120, and
increasing the output per individual employee by 60%. To provide the necessary incentive to

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 3.69 Cost Accounting

achieve the increased output, the Board intends to offer a 1% increase on the piece work rate
of ` 1 per unit for every 2% increase in average individual output achieved.
To sell the increased output, it will be necessary to decrease the selling price by 4%.
Calculate the extra weekly contribution resulting from the proposed change and evaluate for
the Board’s information, the desirability of introducing the change.
Solution
1. Present average output per employee and total future expected output per week
Total present output
Present average output per employees per week =
Total number of present employees
48,000 units
= = 300 units
160 employees
Total Future expected output per week = Total number of future employees
(present output + 60% of present
output per employee)
= 120 employees (300 units + 60% ×
300 units)
= 57,600 units
2. Present and proposed piece work rate
Present piece work rate = ` 1.00 per unit
Proposed piece work rate = Present piece work rate + 30% × ` 1
= ` 1.00 + 0.30 P
= ` 1.30 per unit
3. Present and proposed sale price per unit
Present sales price per unit = ` 12.50
(` 6,00,000/48,000 units)
Proposed sale price per unit = ` 12
(` 12.50 – 4% × ` 12.50)
4. Present marginal cost (excluding wages) per unit :
Present sales value − Fixed expenses & profit − Contribution towards present wages
=
Present output (units)

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 Labour 3.70

` 6,00,000 − ` 2,40,000 − ` 48,000

= = ` 6.50 per unit
48,000 units
Statement of extra weekly contribution
(Information resulting from the proposed change
of mechanisation meant for Board’s evaluation)
Expected sales units 57,600
(Refer to Working note 1)
(`) (`)
Sales value : (A) (57,600 units × ` 12) 6,91,200
(Refer to Working note 3)
Marginal costs (excluding wages) : (B) (57,600 units × ` 6.50) 3,74,400
(Refer to Working note 4)
Wages : (C) (57,600 units × ` 1.30) 74,880
(Refer to Working note 2)
Total marginal cost : (D) = {(B) – (C)} 4,49,280
Marginal contribution : {(A) – (D)} 2,41,920
Less : Present contribution 2,40,000
Increase in contribution (per week) 1,920
Evaluation: Since the mechanisation has resulted in the increase of contribution to the extent
of ` 1,920 per week, therefore the proposed change should be accepted.
We have examined the advantages and disadvantages of various methods of remunerating
labour, so we can summarise below that the best method of remuneration can be adjudged
through the following points:
1. A minimum wage should be guaranteed to all workers.
2. Efficient workers are given incentives in the form of bonus so that they can work harder
and produce more.
A share in profits of the firm is given to workers in addition to the minimum wages and bonus

3.11 Absorption of Wages

3.11.1 Elements of wages: In common parlance, the term ‘wages’ represents monetary
payment which an employee receives at regular intervals for the services rendered. Strictly
speaking, however, from the point of view of the employer and the cost to the industry, wages
should be taken to include also non-monetary benefits which an employee receives by virtue
of employment. Such non-monetary benefits may include:
(i) Medical facilities;
(ii) Educational and training facilities;

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 3.71 Cost Accounting

(iii) Recreational and sports facilities;

(iv) Housing and social welfare; and
(v) Cost of subsidised canteen and co-operative societies.
Such benefits are generally given in an industrial establishment. In some cases the provision
of benefits is compulsory. Therefore, while computing the wage cost per worker, the monetary
value of such non-monetary benefits should also be taken into account.
The monetary part of a worker’s remuneration includes the basic wages, dearness allowance,
overtime wages, other special allowance, if any, production bonus, employer’s contribution to
the provident fund, Employees State Insurance scheme premium, contribution to pension fund,
leave pay, etc.
The basic wage is the payment for work done, measured in terms of hours attended or the
units produced, as the case may be. The basic wage rate is not normally altered unless there
is a fundamental change in the working conditions or methods of manufacture.
Dearness allowance is an allowance provided to cover the increase in cost of living from one
period to another. This allowance is calculated either as percentage of the basic wage or as a
fixed amount for the days worked. In either case, the percentage or the fixed amount is
subject to revision whenever the cost of living index or consumer price Index rises or falls by a
certain figure as agreed to by the employer with the labour union. When permanent rise in the
cost of living index occurs, a part of the dearness allowance is often absorbed in the basic
wage.
Overtime allowance is an allowance paid for the extra hours worked at the rates laid down in
the Factories Acpt. In certain industries, where special allowance for the working conditions,
tool maintenance, etc., are paid they are also considered as part of wages.
Production Bonus is an incentive payment made to workers for efficiency that results in
production above the standard. There are different methods of computing incentives. Under
the Payment of Bonus Act, a worker is entitled to compulsory bonus of 8.33% wages earned in
the relevant year or ` 100 (whichever is greater). The bonus may be upto 20% of wages
depending upon the quantum of profits calculated as per the Act.
3.11.2. Component of wages cost or wages for costing purposes: In addition to
wages (including allowances, such as D.A.) that are paid to workers, a firm may have to spend
on many other items (such as premium to the ESI or provident fund or bonus).
Further, the worker does not spend all the time for which he is paid on productive work.
This is because he is entitled to weekly holiday and various type of leave. There is also a
certain amount of unavoidable idle time. The question is to what extent such additional
payment or cost in respect of labour can be charged directly to unit of cost as part of direct
labour cost? Of course, in the case of indirect labour, all such payments as also the wages
paid to them, must be treated as part of overheads.

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 Labour 3.72

But in the case of direct workers, two alternatives are possible. The additional charges may be
treated as overheads. Alternatively, the wage rates being charged to job may be computed by
including such payments; automatically then, such payments will be charged to the work done
alongwith wages of the worker. (It should be remembered that such wage rate will be only for
costing purposes and not for payment to workers). The total of wages and additional payment
should be divided by effective hours of work to get such wage rates for costing purposes.
Illustration 26: (Calculation of wage rate per hour)
A worker is paid `1000 per month and a dearness allowance of ` 200 p.m. Worker
contribution to provident fund is @ 10% and employer also contributes the same amount as
the employee. The Employees State Insurance Corporation premium is 6.5% of wages of
which 1.75% is paid by the employees. It is the firm’s practice to pay 2 months’ wages as
bonus each year.
The number of working days in a year are 300 of 8 hours each. Out of these the worker is
entitled to 15 days leave on full pay. Calculate the wage rate per hour for costing purposes.
Solution (`)
Wages paid to worker during the year (` 1,000 +200) x 12 14,400
Add: Employer Contribution to:
Provident Fund @ 10% 1,440
E.S.I. Premium 4.75% (6.5 – 1.75) 684
Bonus at 2 months’ wages (Basic + DA) 2,400
Total 18,924
Effective hours per year: 285 × 8 = 2,280
Wage-rate per hour (for costing purpose): ` 18,924/2,280 hours = `8.30
Illustration 27: (Calculation of earnings and labour cost)
Calculate the earnings of A and B from the following particulars for a month and allocate the
labour cost to each job X, Y and Z:
A B
(i) Basic wages ` 100 160
(ii) Dearness allowance (on basic wages) 50% 50%
(iii) Contribution to provident fund (on basic wages plus DA) 10% 10%
(iv) Contribution to employees’ state insurance (on basic wages plus DA)1.75% 1.75%
(v) Overtime Hours 10 -
The normal working hours for the month are 200. Overtime is paid at double the total of
normal wages and dearness allowance. Employer’s contribution to State Insurance is 4.75%
and Provident Fund are at equal rates of employees’ contributions. The two workers were
employed on jobs X, Y and Z in the following proportions:

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 3.73 Cost Accounting

Jobs
X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%
Overtime was done on job Y.
Solution
Statement showing Earnings of Workers A and B
Workers A B
(`) (`)
Basic wages 100.00 160.00
Dearness allowance (50% of basic wages) 50.00 80.00
Overtime wages (Refer to working note 1) 15.00 -
Gross wages earned 165.00 240.00
Less: - Provident fund-10% 15.00 24.00
- ESI-1.75% 2.63 4.20
Net wages paid 147.37 211.80
Statement of Labour cost
(`) (`)
Gross wages (excluding overtime) 150.00 240.00
Employer’s contribution to P.F@10% 15.00 24.00
and E.S.I.@ 4.75% 7.12 11.40
Ordinary wages 172.12 275.40
Labour rate per hour 0.86 1.38
(`172.12/200) (` 275.40/200)
Statement showing allocation of wages to jobs
Jobs
Total Wages X Y Z
(`) (`) (`) (`)
Worker A :
Ordinary wages: (4:3:3) 172.12 68.85 51.63 51.64
Overtime 15.00 — 15.00 —
Worker B :
Ordinary wages: (5:2:3) 275.40 137.70 55.08 82.62
462.52 206.55 121.71 134.26

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 Labour 3.74

Working Notes-1
Normal wages are considered as basic wages
(Basic + D.A.)
Overtime = 2 × × 10 hours
200
= 2 × (` 150/200) × 10 hours = `15
Illustration 28: (Treatment of abnormal idle time)
In a factory working six days in a week and eight hours each day, a worker is paid at the rate
of ` 100 per day basic plus D.A. @ 120% of basic. He is allowed to take 30 minutes off during
his hours shift for meals-break and a 10 minutes recess for rest. During a week, his card
showed that his time was chargeable to :
Job X 15 hrs.
Job Y 12 hrs.
Job Z 13 hrs.
The time not booked was wasted while waiting for a job. In Cost Accounting, how would you
allocate the wages of the workers for the week?
Solution
Working notes:
(i) Total effective hours in a week :
[(8 hrs. – (30 mts. + 10 mts.)] × 6 days = 44 hours
(ii) Total wages for a week :
(` 100 + 120% of ` 100) × 6 days = ` 1,320
(iii) Wage rate per hour : = ` 30
(iv) Time wasted waiting for
job (Abnormal idle time): = 44 hrs. – (15 hrs. + 12 hrs. + 13 hrs.)
= 4 hrs.
Allocation of wages in Cost Accounting
(`)
Allocated to Job X : 15 hours × ` 30 = 450
Allocated to Job Y : 12 hours × ` 30 = 360
Allocated to Job Z : 13 hours × ` 30 = 390
Charged to Costing Profit & Loss A/c : 4 hours × ` 30 = 120
Total 1,320

3.11.3 Holiday and leave wages: One alternative to account for wages paid on account of
paid holiday and leave can be to include them as departmental overheads. In such a case, it is
necessary to record such wages separately from “worked for wages”. Such a segregation can
be made possible by providing a separate column in the payroll for holiday and leave wages in
the same way as there are columns for dearness allowance, provident fund deductions, etc. If,

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 3.75 Cost Accounting

however, a separate or additional column cannot be provided for this purpose it would be
necessary to analyse the payroll periodically to ascertain how much of the total payment
pertains to “worked for wages” and how much is attributed to leave and holiday wages.
Another way could be to inflate the wage rate for costing purposes to include holiday and
leave wages. This can be done only in the case of direct workers.
Illustration 29: (Calculation of leave wages)
Calculate the labour hour rate of a worker X from the following data :
Basic pay ` 1,000 p.m.
D.A. ` 300 p.m.
Fringe benefits ` 100 p.m.
Number of working days in a year 300. 20 days are availed off as holidays on full pay in a
year. Assume a day of 8 hours.
Solution
(a) (i) Effective working days in a year 300
Less : Leave days on full pay 20
Effective working days 280 days
Total effective working hours (280 days × 8 hours) 2,240
(ii) Total wages paid in a year (`)
Basic pay 12,000
D.A. 3,600
Fringe benefits 1,200
16,800
(iii) Hourly rate : ` 16,800/2,240 hours ` 7.50
3.11.4 Night shift allowance: In some cases, workers get extra payment if they work at
night. Since the extra payment is not for any particular job, therefore such a payment should
be treated as part of overheads.
3.11.5 Principles of remuneration: The term ‘remuneration’ has been defined as the
reward for labour and service. It is the result of the agreement between the employer and the
employee, whereby for a specified work or service rendered by the employee the employer
agrees to pay a specified sum of money. Apart from this an employee by virtue of the fact that
he is an employee becomes entitled to certain non-monetary benefits.
The method of remuneration adopted varies from industry to industry and, in certain cases,
even among different units in the same industry. Whatever be the variation, the method of
fixing remuneration payable to the various categories of employees has to be based on certain

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accepted principles. These are:

(i) Geographical Area Based: Wage-rates in an industry should be fixed in conformity with
the general wage-levels in the geographical area i.e. the rate should be more or less the
same for similar efforts and skill. The wage-level in an area would in turn depend upon
demand for labour, the availability of labour, the cost of living in the area, the wage levels
in neighbouring industrial area, and the capacity of the particular industry to pay.
(ii) Performance\Job Based: Wage-rates should be related to the degree of skill, effort, initiative
and responsibility that the employee is expected to assume in respect of the various jobs he
may be called upon to perform. There should be generally equal pay for equal work.
(iii) Minimum Wages: Wage-rates should guarantee a minimum wage regardless of the
existence of factors listed under (ii) above, particularly when the working conditions are
difficult and dangerous.
(iv) Maintain Standard of living: Wage-rates are considered satisfactory only if they enable
the workers to maintain a reasonable standard of living.
(v) Separate wage rates for different classes of employees: Separate wage rates should
be fixed for different classes of employees since each class expects to maintain a
different standard of living; also the education, physical and mental efforts and
responsibility required for performing different jobs are not the same.
(vi) Incentive as per output: It should be possible for worker to increase his earnings
through extra effort and by increasing output. If he alone is responsible, he should have
the full benefit of the increased productivity. Otherwise, if increased output has resulted
from co-operation between management and workers both should share the benefit.
It is important that these basic principles should be recognised in fixing the wage rate of
workers; otherwise, there will be dissatisfaction among the employees and, consequently,
there will be higher labour turnover. Satisfactory employer-employee relationship is a primary
necessity for industrial development and this has to be ensured to a very great degree, by
satisfactory schemes of remunerating labour.
The aim should be to keep labour cost per unit of output (or service) as low as possible. It is
not the same as keeping wages at low levels.
There is a definite correlation between wages and productivity; high wages often lead to such an
increase in productivity that wages per unit of output fall. However, this rule is also subject to
diminishing returns—a point is reached at which any further increase in wage rates does not bring
about a corresponding increase in efficiency. But generally, higher wages result in lower cost per unit.
Wages affect the national economy through cost of goods produced. If an increase in wages
outpaces the corresponding increase in productivity, goods become costlier and cannot
compete with those of other countries in the world markets.
From the point of view of an expert it is necessary to keep wages in check like other costs.
The safe rule is to link up wages with productivity.

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3.11.6 Absorption rates of labour cost : Labour cost as stated above include monetary
compensation and non-monetary benefits to workers.
Monetary benefits include, basic wages, D.A., overtime pay, incentive or production bonus
contribution to employee provident fund, House Rent Allowance, Holiday and vacation pay etc.
The non-monetary benefits include medical facilities, subsidized canteen services, subsidized
housing, education and training facilities.
Accounting of monetary and non-monetary benefits to indirect workers does not pose any
problems because the total of monetary and non-monetary benefits are treated as overhead
and absorbed on the basis of rate per direct labour hour, if overheads are predominantly
labour oriented.
For direct workers, the ideal method is to charge jobs or units produced by supplying per hour
rate calculated as below :
Total of estimated monetary benefits and cost of non - monetary benefits
Rate per hour =
Budgeted direct labour hours - Normal idle time
Another alternative method is to treat the monetary benefits other than basic wages and
dearness allowance as well as cost of non-monetary benefits as overheads.

3.12 Efficiency Rating Procedures

Efficiency is usually related with performance and may be computed by comparing the time
taken with the standard time allotted to perform the given job/task.
If the time taken by a worker on a job equals or less than the standard time, then he is rated efficient.
In case he takes more time than the standard time he is rated as inefficient.
Time allowed as per std.
Efficiency in % = × 100
Time taken
For efficiency rating of employees the following procedures may be followed:
1. Determining standard time/performance standards: The first step is to determine the
standard time taken by a worker for performing a particular job/task. The standard time can be
determined by using Time & Motion study or Work study techniques. While determining the
standard time for a job/task a heterogeneous group of workers is taken and contingency
allowances are added for determining standard time.
2. Measuring Actual Performance of workers: For computing efficiency rating it is
necessary to develop a procedure for recording the actual performance of workers. The
system developed should record the output of each worker along with the time taken by him.
3. Computation of efficiency rating: The efficiency rating of each worker can be computed
by using the above mentioned Formula.

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 Labour 3.78

3.12.1 Need for efficiency rating

1. As discussed earlier when a firm follows a system of payment by results, the payment
has a direct relationship with the output given by a worker. The firm for making payment
to worker is required to ascertain his efficiency level. For instance, under Taylor's
differential piece work system the lower rate i.e. 83% of piece rate is given to a worker
when his efficiency rating is less than 100% and higher rate viz., 125% of piece rate is
offered at efficiency level of either 100% or more. Similarly under Emersion efficiency
plans bonus is paid at rising scale at various level of efficiency, ranging from 66.67% to
150%.
2. The efficiency rating also helps the management in preparing labour requirement budget
or for preparing manpower requirements. For example, let P Ltd. manufactures two
products by using one grade of labour. The following estimates are available :
Product A Product B
Budgeted production (units) 3,480 4,000
Std. hrs. allowed per product 5 4
It is further worked out that the efficiency rating (efficiency ratio) for productive hours worked
by direct workers in actually manufacturing the production is 80% then the exact standard
labour requirement can be worked out as follows :
Product A Product B Total
Budgeted production (in units) 3,480 4,000
Std. hours allowed for 17,400 16,000 33,400
budgeted production (3,480 units × 5 hours) (4,000 units × 4 hours)
Since efficiency ratio is given as 80% therefore Std. labour hours required for 100%
⎛ 100 ⎞
efficiency level are ⎜ 33,400 hours × ⎟ = 41,750 hours.
⎝ 80 ⎠
Labour productivity : Productivity is generally determined by the input/output ratio. In the
case of labour it is calculated as below :
Standard time for doing actual amount of work
Actual time taken to do work
Labour productivity is an important measure for measuring the efficiency of individual workers.
It is an index of efficiency and a sign of effectiveness in the utilisation of resources-men,
materials, capital, power and all kinds of services and facilities.
It is measured by the output in relation to input. Productivity can be improved by reducing the
input for a certain quantity or value of output or by increasing the output from the same given
quantity or value of input.
Factors for increasing labour productivity: The important factors which must be taken into

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consideration for increasing labour productivity are as follows:

1. Employing only those workers who possess the right type of skill.
2. Placing a right type of man on the right job.
3. Training young and old workers by providing them the right types of opportunities.
4. Taking appropriate measures to avoid the situation of excess or shortage of labour at the
shop floor.
5. Carrying out work study for the fixation of wage rate, and for the simplification and
standardisation of work.

3.13 Summary
• Labour Cost: Cost incurred for hiring of human resource of employees
• Direct Labour: Any Labour Cost that is specifically incurred for or can be readily
charged to or identified with a specific job, contract, work order or any other unit of cost.
• Idle Time: The time for which the employer pays but obtains no direct benefit or for no
productive purpose.
• Normal Idle Time: Time which can not be avoided or reduced in the normal course of
business. The cost of normal idle time should be charged to the cost of production.
• Abnormal Idle Time: It arises on account of abnormal causes and should be charged to
Costing Profit and Loss account.
• Time Keeping: It refers to correct recording of the employees attendance time
• Time Booking: It is basically recording the details of work done and the time spent by
workers on each job or process.
• Overtime: Payment to workers, when a worker works beyond the normal working hours.
Usually overtime has to be paid at double the rate of normal hours.
• Overtime Premium: It’s the amount of extra payment paid to a worker under overtime.
• Labour Turnover: It is the rate of change in labour force during a specified period due to
resignation, retirement and retrenchment. If the labour turnover is high, it’s a sign of
instability and may affect the profitability of the firm.
• Labour turnover can be measured through the following methods:
Number of employees replaced
(i) Replacement Method: × 100
Average number of employees on roll

Number of employees separated during the year

(ii) Separation Method: × 100
Average number of employees on rolls during the period

© The Institute of Chartered Accountants of India

 Labour 3.80

Number of employees separated + number of employees replaced

(iii) Flux Method: × 100
Average number of employees on rolls during the period

(iv) Labour turnover due to new recruitment:

No. of new workers joining in a period (excluding replacements)
Average number of workers on the roll in a period

(v) Labour turnover including accessions:

No. of new workers joining in a period (excluding replacements)
Average number of workers on the roll in a period

OR
No. of separations + No. of accessions
× 100
Average number of workers

• Incentives: It is the simulation for effort and effectiveness by offering monetary

inducement or enhanced facilities.
• Time Rate System: The amount of wages due to a worker are arrived at by multiplying
the time worked by the appropriate time rate.
• Differential Time Rate: Different hourly rates are fixed for different levels of efficiency.
Upto a certain level a fixed rate is paid and based on the efficiency level the hourly rate
increases gradually.
• Straight Piece Work: Payment is made on the basis of a fixed amount per unit of output
irrespective of time taken. It is the number of units produced by the worker multiplied by rate
per unit.
• Differential Piece Rate: For different level of output below and above the standard,
different piece rates are applicable.
(i) Taylor’s Differentials Piece Work system:
Output/ Efficiency Rate
< 100% 83% of normal rate
≥ 100% 125% of normal rate or 150% of lower rate
(ii) Merrick Differential Piece Work System:
Efficiency Piece rate applicable
Upto 83% Normal rate,

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 3.81 Cost Accounting

Above 83% and upto 100% 10% above normal rate.

Above 100% 20% or 30% above normal rate.
• Gantt Task and bonus system
Output Payment
Output below standard guaranteed time rate.
Output at standard Time rate plus bonus of 20% (usually) of time rate.
Output above standard High piece rate on worker’s whole output.
It is so fixed, so as to include a bonus of 20% of the time rate
• Emerson’s Efficiency system:
Efficiency Payment
<66.67% Hourly Rate
• 66.67%-100% Bonus varies from 1% to 20%
≥ 100% Bonus of 20% of basic + 1% of every 1% increase
in efficiency.
• Halsey System: Time taken × Time rate + 50% of time saved × Time rate.
• Halsey Weir Plan: same as Halsey system but bonus is paid at 30%.
Time Saved
• Rowan System: Time taken × Rate per hour + × Time taken × Rate per hour
Time allowed
• Barth System: Earnings = Hourly rate × Standardhours × Hours worked
• Job Analysis: A study of job in all phases for the purpose of laying down job description
and job specifications.
• Labour Productivity: It is the index of labour efficiency and indicates the effectiveness
in utilization of labour.
Standard time for doing actual amount of work
Actual time taken to do work
Time allowed as per std.
• Efficiency Rating: × 100
Time taken
• Rate of Absorption of Wages:
Total of estimated monetary benefits and cost of non - monetary benefits
Budgeted direct labour hours - Normal idle time
• Wage Abstract: A summary giving details of wages to be charged to individual jobs,
work orders or processes for a specific period.

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