Labor Costing and Control
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Learning Objectives
⚫ After studying this topic you will
understand:
⚫ The term Labor and its classification.
⚫ Costing for Labor
⚫ Fixation of production time
⚫ Methods of Wage Computation
⚫ Understand Incentive plan
⚫ Analyze different methods of incentive
plans
Introduction
Labor represents cost of services of human
resources-the most valuable asset of an
organization. Effective utilization of all the
resources of an organization depends on
the quality of its manpower.
Labor as economist call it, is a highly
perishable commodity. Any labor time not
effectively utilized is labor loss. This fact
makes it necessary to have a vigilant control
over the labor cost.
Classification of labor
Labor classification
Direct Labor Indirect Labor
Conveniently Not conveniently
identifiable with the identifiable to the unit
unit of Output of Output
Elements of Labor Cost
⚫ Direct or indirect labor cost
⚫ Basic Components:
● Basic wage
● Overtime Premium
● Idle Time
● Labor Turnover
Accounting for Labor
Accounting for Labor consists of:
⚫ Time Keeping
⚫ Computation of Payroll
⚫ Allocation of Payroll costs
Time Keeping
This involve two main activities:
1. accumulates the total number of hours
worked by each worker so as to calculate his
earnings.
2. determines how the labor - hours were
spent so that proper distribution can be
made in the cost records.
Source Documents:
⚫ Time or Clock Card
⚫ Labor Job ticket
Allocation of Payroll Costs
On the basis of the time cards and job tickets, the cost
accounting departments allocate the total payroll costs to
individual jobs/departments/products.
Recording of Payroll
Work-in-process Inventory (direct labor) Dr.
Factory Overhead Control (indirect labor) Dr.
T
o Payroll Payable Cr.
To record deductions and payment of payroll (wages):
Payroll Payable
Dr.
To Employee Deductions Payable
Cr.
To Cash (to employees)
Methods of Wage Payment
System of Wage
Payment
•Time Wage Rate System
•Piece Wage Rate System
•Incentive Wage rate system
Time Wage Rate System
⚫ In this system the workers are paid on the
basis of time spent in the factory
irrespective of the amount of work done.
Earnings are calculated as:
Total Earnings = Hours worked X Rate Per
Hour
Check:
A worker is paid Rs. 15 per hour and he
spent 400 hours during a particular month
in a factory. What is his total earning of
that particular month.
Required: Total earning under time wage
rate system
Check:
Total wages = total hours worked X wage
rate per hour
= 400 hours X Rs. 15 per hour
= Rs. 6000
Piece Wage Rate System
Workers are paid on the basis of work
done irrespective of time taken by the
worker.
Total Earnings are calculated as:
Total Earnings = No. of Units X Rate per
unit
Check:
A worker is paid Rs. 20 per unit and he
produced 50 units in 8 Hours. What is his
total earning.
Required: Total wages under piece rate
system
Check:
Total Wages = Total Output X wage rate
per unit of output
= 50 units X Rs. 20 per unit
=Rs. 1000
Incentive Wage rate System
Each worker gets not only wages at normal
rate but also receives bonus or premium for
his efficiency. There are various premium
plans. Mostly used are:
⚫ Halsey premium plan
⚫ Halsey Weir Plan
⚫ Rowan premium plan
Halsey Premium plan
The Worker is paid 50% of the time saved
over the standard rate per piece. Standard
time is fixed for each job/operation. If labor
completes at standard time or more he is
given the standard price.
If time is saved then wages are given for
actual hours saved as a bonus.
Total Earnings = (hours worked X Rate Per
Hour) + 50% (time saved X Rate Per hour)
Check:
Rate per hour = $ 1.50 per hour
Time allowed for job = 20 hours
Time taken = 15 hours
Required: calculate the total earnings of the
workers under the Halsey plan.
Check:
Total Earnings = (hours worked X Rate Per
Hour) + 50% (time saved X Rate Per
hour)
=(15hours X $ 1.50) +
50% (5 hours X $1.50)
=$22.5 + 50%($7.5)
=$22.5 + $3.75
=$26.25
Halsey Weir Plan
It is calculated as Halsey Premium plan, the
only difference is that the rate of premium
of bonus is only 30% in place of 50%.
Total Earnings = (hours worked X Rate Per
Hour) + 30% (time saved X Rate Per hour)
Check:
Rate per hour = $ 1.50 per hour
Time allowed for job = 20 hours
Time taken = 15 hours
Required: calculate the total earnings of the
workers under the Halsey weir plan.
Check:
Total Earnings = (hours worked X Rate Per
Hour) + 50% (time saved X Rate Per
hour)
=(15hours X $ 1.50) +
30% (5 hours X $1.50)
=$24.75
Rowan Premium plan
In Rowan premium plan wages are paid on
time basis. If worker takes standard time or
more time he is paid for the actual time
taken. If worker takes less than the
standard time, he is paid a bonus.
Total Earning = Hours worked X Rate per
hour) + {(time saved/Time allowed) X
(Hour Worked X Rate per hour)}
Check:
a worker takes 12 hours for completing
our works but our standard time is 16
hours. Rate per hour is $ 2.
Required: Calculate wages of a worker
under Rowan premium plan.
The End
