ACCOUNTING FOR LABOUR

4.0 MEANING AND COMPONENTS OF LABOUR COST

Labour cost is the second element of cost after material. It represents the remunerations for employees’ efforts
in the production process. It consists of the following:
 Recruitment cost
 Training and staff development
 Wages and salaries
 Employees’ bonus
 Overtime premium
 Allowances
 Group incentives
4.1 LABOUR COST COMPUTATION
There are three main methods of remunerating labour namely:

4.1.1 TIME WORK/ DAY RATE METHOD OF REMUNERATION:

Under this arrangement the workers are paid on the basis of hours engaged. It is calculated as:
Time/ hours worked x Rate/hour
Advantages:
i. It is easy to operate and easy to understand
ii. The quality of work produced tends to be higher since workers are not in a rush to complete a job or
maximise their pay
iii. They do not lead to very complex negotiation when they are being revised
Disadvantages:
i. Work may be slow in order to increase time worked
ii. There is need for extra supervision cost to avoid (i) i.e. to avoid idle time
iii. The method tends to be unfair as both efficient and inefficient workers are paid the same rate
iv. Target may not be met
v. There is no special incentive for employees to work hard
Illustration 4.1
Labourer A worked for 500 hours at a rate of ₦2,000 per hour. Calculate his gross wage.
SUGGESTED SOLUTION:
Gross wage for Labourer A = 500 X ₦2,000 = ₦1,000,000

OVERTIME PREMIUM
What is Time? Time is the basic rate. That is, the normal working hours a Job e.g., if the normal rate of pay is
₦200 and hour, then the time is ₦200. But if an employee works for more hours than the basic daily requirement,
he may be entitled to an overtime payment. In other words, OVERTIME is the time worked above the normal
hours. Hours of overtime are usually paid at a premium rate.
Premium: This is the rate paid above the basic rate to workers who worked overtime.
Illustration 4.2
The basic day rate is ₦4/hour and overtime is paid at time and a quarter. Ade worked eight hours of overtime.
What is his gross wage?
SUGGESTED SOLUTION:
N
Basic wage (8 hours x N4) 32
Overtime premium (8 hours x N1) 8
Total pay (8 hours x N5) 40

The overtime premium is the extra pay/hour (i.e. ¼ of a time in the above case) which is paid, and not the whole
of the payment for the overtime hours.
Note: If employees work unsocial hours, e.g. overnight, they may be entitled to a shift premium. The extra
pay/hour above the basic hourly rate is the shift premium.
4.1.2 PIECE WORK/ PIECE RATE METHOD OF REMUNERATION (OUTPUT BASED)
This is one of the two categories of payment by results or incentive scheme. Under this method, the amount of
labour cost is based on units produced. It is calculated by multiplying the quantity of good units produced by
the fixed rate per unit. It includes the following:
i. Straight Piece Rate: Labour wages is calculated as: No of units produced x Rate/unit
Illustration 4.3
1000 units of product Z was produced at a rate of N160/unit. What is the gross wage?
SUGGESTED SOLUTION:
Gross wage = 1,000 X ₦160 = ₦160,000
Illustration 4.4
A worker is paid ₦1,600 per hour and he is expected to produce 10 units per hour. During an eight hours day,
Ade completed 90 units and Olu 60 units. Calculate the earnings of each employee.
SUGGESTED SOLUTION:
Since 10 units are the expected units to be produced per hour at a rate of ₦1,600, piece rate per unit is:
₦1,600/10 = ₦160/units
Ade = 90 units X ₦160 = ₦14,400
Olu = 60 units X ₦160 = ₦9,600
Illustration 4.5
Class work: The following details relate to a worker:
Hourly rate = ₦4
Agreed rate of production / hour = 100 units
Actual hours worked = 6 hours
Units produced = 750 units
Calculate the gross wage using (a) time rate method (b) piece rate method
SUGGESTED SOLUTION:
(a) Time rate: Gross wage = ₦4 X 6 hours = ₦24
Since 100 units are the expected units to be produced per hour at a rate of ₦4, piece rate per unit is:
₦4/100 = ₦0.04/units
(b) Piece rate: Gross wage = ₦0.04 X 750 units = ₦300
Advantages
i. Effort is rewarded therefore, employees are given incentives to produce more
ii. Less supervision in terms of quantity is needed because workers will only be paid for work done
iii. Employers benefit from a reduction in the overhead cost/unit
Disadvantages
i. The quality of product may be jeopardized
ii. High cost of supervision in order to guide against inferior quality
iii. It takes time to set standard time
iv. Workers may not come to work if they have earned target income thereby creating idle time
ii. Piece Rate with Guaranteed Day Rate:
This guaranteed the minimum rate an employee can earn in a day. Under this method, the worker receives the
higher of:
a. His pay given by his total output x piece rate or b. The guaranteed day rate.
The guaranteed minimum wage is offered to piece workers so that they do not suffer loss of earnings
when production is low due to no fault of their own e.g. shortage of raw materials, power failure and so on.
Illustration 4.6
Ayomide is paid 50 kobo for each towel she weaves, but she is guaranteed a minimum wage of ₦60 for a 40
hour week. In a series of four weeks, she makes 100, 120, 140 and 160 towels.
Required: Calculate her pay each week and the conversion cost per towel if production overhead is added at
the rate of ₦2.50 per direct labour hour.
SUGGESTED SOLUTION
Ayomide pay for each week:
Week 1: 100 units X ₦0.50 = ₦50 but will receive a minimum wage of ₦60
Week 2: 120 units X ₦0.50 = ₦60
Week 3: 140 units X ₦0.50 = ₦70
Week 4: 160 units X ₦0.50 = ₦80
Conversion Cost per towel:
Total towels produced = 100 + 120 + 140 + 160 = 520 towels
Conversion cost = direct labour cost + production overhead
Direct labour costs = ₦60 + ₦60 + ₦70 + ₦80 = ₦270
Direct labour hour = 40 hours/week X 4 weeks = 160 hours
Production overhead = ₦2.50 X 160 hours = ₦400
Total conversion costs = ₦270 + ₦400 = ₦670
Conversion cost per towel = ₦670/520 = ₦1.29
iii. Differential Piece Rate:
Under this method, the piece work rate changes at different levels of efficiency or production. It is introduced
to push labour to work harder and the same rewarded. It offers an incentive to employees to increase their output
by paying higher rate for increased levels of production. For example:
Up to 80 units per week, rate of pay per unit = ₦1
80 to 90 units per week, rate of pay per unit = ₦1.20
Above 90 units per week, rate of pay per unit = ₦1.30
Employers should obviously be careful to make it clear whether they intend to pay the increased rate on all units
produced or on the extra output only.
Advantages
i.They drive employees to work
ii.Efficient workers are rewarded
Disadvantages
i.Inspection of output is necessary to ensure that quality doesn’t fall as production increases
ii.Labour may over work themselves to earn higher wages
4.3 PREMIUM BONUS SCHEME METHOD OF REMUNERATION
This is the second method of payment by result or incentive scheme. The premium bonus scheme is a
compromise between day rate and the straight piece rate in that it relates earnings to the time work and the
output achieved. Under the day rate method, all the units produced above the units that should have been
produced within the given time are not paid for as the employer takes all the benefits of the worker’s efficiency
(Illustration 4.5). Under the straight piece rate, all units produced above the standard units are paid for and all
the benefits accrued to the worker (Illustration 4.5). However, under the premium bonus scheme, the benefits
of such extra units are shared between the employer and the employee depending on the formula adopted. In a
typical bonus scheme, a worker’s pay is made up of two components:
i. Day rate amount, based on the hours worked and
ii. A bonus based on the time saved in achieving the particular level of output
4.4 TYPES OF PREMIUM BONUS SCHEME
i. Halsey Bonus Scheme: Time saved is to be shared equally between the employer and the employee
therefore, bonus to be paid = ½ x time saved x day rate.
Note that time saved = time allowed – time taken.
ii. Halsey-Weir Bonus Scheme: Time saved is shared in the ratio 2:1 in favour of the employer therefore,
bonus paid = ⅓ x time saved x day rate
iii. Rowan Bonus Scheme: this is designed to ensure that bonus paid is smaller than the day rate. Bonus
paid = Time taken x time saved x day rate
Time allowed
Illustration 4.7 using same information in 4.5
Class work: The following details relate to a worker:
Hourly rate = ₦4
Agreed rate of production / hour = 100 units
Actual hours worked = 6 hours
Units produced = 750 units
Calculate his bonus premium under the three schemes

SUGGESTED SOLUTION
Time taken = 6 hours
Basic pay = 6 hours X ₦4 = ₦24
Time allowed on 750 units = 750/100 = 7.5 hours
Time saved = time allowed – time taken = 7.5 hours – 6 hours = 1.5 hours
i. Halsey scheme = ½ X 1.5 X ₦4 = ₦3 Gross pay = ₦24 + ₦3 = ₦27
ii. Halsey-Weir = 1/3 X 1.5 X ₦4 = ₦2 Gross pay = ₦24 + ₦2 = ₦26
ii. Rowan = 6/7.5 X 1.5 X ₦4 = ₦4.8 Gross pay = ₦24 + ₦4.8 = ₦28.8
Illustration 4.8
Jobs are issued to Operator X to make 189 units and to Operator Y to make 204 units for which a time allowance
of 20 standard minutes and 15 standard minutes per unit respectively is credited. For every hour saved bonus is
paid at 33⅓ of the base rate which is ₦1 per hour for both employees. The basic working week is 42 hours.
Hours worked in excess are paid at time and a half. X completes his units in 46 hours and Y completes his in
40 hours (but work a full week). Due to defective materials, 6 of X’s units and 4 of Y’s units are subsequently
scrapped although all units produced are paid for.
Required: Calculate for each of X and Y
a. the amount of bonus payable b. the total gross wage payable c. the wages cost per good units made
SUGGESTED SOLUTION:
Operator X Operator Y
Time allowed: 189 x 20/60 = 63 hrs 204 x 15/60 = 51 hrs
Less: Time taken 46 hrs 40 hrs
Time saved 17 hrs 11 hrs

Bonus payable 1/3 x 17 x ₦1 = ₦5.67 1/3 x 11 x ₦1 = ₦3.67

Day rate pay 46 hrs x ₦1 = ₦46 40 hrs x ₦1 = ₦40
Overtime premium (46 hrs - 42 hrs) x ₦0.5 = ₦2 Nil
Idle time Nil (42 hrs – 40 hrs) x ₦1 = ₦2

Gross wages: X = ₦46 + ₦5.67 + ₦2 = ₦53.67 Y = ₦40 + ₦3.67 + ₦2 = ₦45.67

Units produced: X = 189 units – scrap of 6 units = 183 units

Y = 204 units – scrap of 4 units = 200 units
Wages cost per unit X = ₦53.67/183 = ₦0.29
Y = ₦43.67*/200 = ₦0.22
* Idle time payment of ₦2 does not form part of direct labour cost of producing the 200 units of Y. it is regarded
as part of overhead cost.
4.5 DIRECT AND INDIRECT COST OF LABOUR
i. Direct Labour Cost
This is the cost incurred on employees who are engaged in directly transforming the raw materials into finished
goods. It should be noted that:
i. It is only the basic wages paid to direct workers (i.e. basic wage of normal time and basic wage of
overtime payment) that constitute direct labour cost.
ii. All payment made to indirect labour either basic wages of normal time and overtime or overtime
premium are indirect cost except payment made as a result of customer request
ii. Indirect Labour Cost
All other costs that are not direct labour cost make up the indirect labour costs. They include:
i. Overtime premium i.e. general overtime. You should note that specific overtime is treated as direct
labour cost.
ii. Shift premium
iii. Idle time
iv. Bonuses
v. Sick pay
vi. Insurance premium etc

Illustration 4.12
Mary Kay employs two types of labour: skilled workers considered being direct workers, and semi-skilled
workers considered to be indirect workers. Skilled workers are paid N10 per hour and semi-skilled N5 per hour.
The skilled workers have worked 20 hours overtime this week, 12 hours on specific orders and 8 hours on
general overtime. Overtime is paid at a rate of time and a quarter. The semi-skilled workers have worked 30
hours overtime, 20 hours for a specific order at a customer’s request and the rest for general purposes. Overtime
again is paid at time and a quarter.
What would be the total overtime pay considered to be a direct cost for the week?
SUGGESTED SOLUTION:
Overtime Hours: Skilled worker = 20 hours (12 hours direct and 8 hours indirect)
Semi-skilled worker = 30 hours (20 hours direct and 10 hours indirect)
Direct costs: Skilled worker Overtime = 12 x 1.25 x ₦10 = ₦150
Semi-skilled Overtime = 20 x 1.25 x ₦5 = ₦125
Total overtime pay considered as direct cost = ₦150 + ₦125 = ₦275
4.6 LABOUR TURNOVER
Labour turnover is the rate at which employees leave a company and this rate should be kept as low as possible.
The cost of labour turnover can be divided into preventive and replacement cost.
Reasons for Labour Turnover:
Unavoidable Reasons:
 Illness or accident
 A family move away from the locality
 Marriage, pregnancy or difficulties with child care provision
 Retirement or death
Controllable Reasons:
 Paying a lower wage rate than is available elsewhere
 Requiring employees to work in unsafe or highly stressful conditions
 Discharging employees for misconduct, bad timekeeping or unsuitability
 Lack of opportunity for career enhancement
 Poor relationship between management and staff
 Requiring employees to work uncongenial hours

Measuring Labour Turnover

This is the measure of the number of employees leaving/being recruited in a period of time expressed as a
percentage of the total labour force. Labour turnover rate using replacement rate method is calculated as:
Replacement x 100
Average number of employees in a period

Replacement = employees employed during the period to replace those left (excluding those employed due to
expansion)

Average number of employees = employees at the beginning + employees at the end

2
Illustration 4.13
The details below relate to the month of March:
Employees at the beginning of the month of March 201
Employees who started during the month 3
Employees who left during the month 5
Calculate the labour turnover rate

SUGGESTED SOLUTION:
Labour turnover rate using replacement rate method = Replacement/Average employees X 100
Average employees = (201 + 5)/2 = 103
Labour turnover rate = 3/103 x 100 = 2.91%

Illustration 4.14
Guress had a staff of 2,000 at the beginning of 2009 and owing to a series of redundancies caused by the
recession, 1,000 at the end of the year. Voluntary redundancy was taken by 1,500 staff at the end of June, 500
more than expected and these excess redundancies were immediately replaced by new employees. Calculate the
labour turnover rate.

SUGGESTED SOLUTION:
Labour turnover rate using replacement rate method = Replacement/Average employees X 100
Average employees = (2,000 + 1,000)/2 = 1,500
Replacement = 500 ►Labour turnover rate = 500/1,500 x 100 = 33.33%
The Cost of Labour Turnover
The cost of labour turnover can be large and management should attempt to keep labour turnover as low as
possible so as to minimize these cost. It may be divided into:
Preventive Cost: These are the costs incurred in order to prevent employees leaving the company and
they include the following:
 Cost of personnel administration incurred in maintaining good relationships
 Cost of medical services including check-ups, nursing staff and so on
 Cost of welfare services, including sports facilities and canteen meals
 Pension scheme providing security to employees
Replacement Cost: These are costs incurred as a result of hiring new employees, and they include the
following:
 Cost of selection and replacement
 Inefficiency of new labour i.e. productivity will be lower
 Costs of training
 Loss of output due to delay in new labour becoming available
 Increased wastage and spoilage due to lack of expertise among new staff
 The possibility of more frequent accidents at work
 Cost of tools and machine breakages
The Prevention of High Labour Turnover
Labour turnover will be reduced by the following actions:
 Paying satisfactory wages
 Offering satisfactory hours and conditions of work
 Creating a good informal relationship between members of the work force
 Offering good training scheme and well understood career or promotion ladder
 Proper planning so as to avoid redundancies
 Investigating the cause of an apparently high labour turnover
 Providing a congenial work environment
 Improving the content of jobs to create job satisfaction
 Developing better relationship between management and staff
4.7 PRACTICE QUESTIONS
1. State the different components of labour cost
2. Explain with examples the method of premium bonus scheme remuneration
3. Differentiate between direct and indirect labour costs
4. B whose hourly rate of pay is ₦500 was assigned the following jobs which he completed during a week.
Job No. Time allowed (hrs) Time taken (hrs)
21 24 18
61 40 25
(a) You are required to calculate under Rowan premium scheme
i. B’s remuneration for the week
ii. B’s effective hourly rate for the week
(b) What would B’s remuneration for the week have been if the Halsey premium bonus scheme has
been in operation?
5. David Express Limited employed three types of labour: skilled workers considered being direct workers, and
semi-skilled and unskilled workers considered to be indirect workers. Skilled workers are paid ₦30 per hour
and semi-skilled ₦15 per hour and unskilled ₦5. The skilled workers have worked 25 hours overtime this week,
15 hours on specific orders and 10 hours on general overtime. Overtime is paid at a rate of time and a half. The
semi-skilled workers have worked 20 hours overtime, 10 hours for a specific order at a customer’s request and
the rest for general purposes, while the unskilled workers worked for 18 hours overtime all for general purpose.
What would be the total overtime pay considered to be indirect costs for the week?