CAF-03 Labor costing
Lecture # 1 Lecture # 106 (Over all)
Classwork
1. Discussed computation of labour cost and solved following question.
Question-1 (Autumn 2012, Q-2)
Jadeed Limited (JL) operates a multiple piece rate plan at its factory as follows:
(i) Basic piece rate of Rs. 3 per piece is paid up to 80% efficiency;
(ii) 120% basic piece rate where efficiency is more than 80% but less than or equal to 100%;
(iii) 130% basic piece rate for above 100% efficiency.
The workers are eligible for a “Guaranteed Day Rate “which is equal to 70% efficiency.
Required:
Compute the labour cost per piece at 10% intervals between 60% and 130% efficiency, assumingthat at 100%
efficiency 80 pieces are produced per day. (10)
Question-2 (Spring 2003, Q-2)
Following is the labour data of a company for a given week:
Days Units Hours
Monday 270 8
Tuesday 210 8
Wednesday 300 8
Thursday 240 8
Friday 260 8
Required:
You are required to prepare a schedule showing weekly earnings, hourly rate, and the labour cost per unit assuming
a 100% bonus plan with a base wage of Rs. 6 per hour and a standard production rate of 30 units per hour. (06)
Homework
Question-3 (Spring 2008, Q-5)
Ishaq Limited manufactures plastic bottles for pharmaceutical companies. It has recently introduced a 100%
weekly group bonus plan with a guaranteed wage of Rs. 150 per hour. Standard production per hour is 50
bottles. Each worker is supposed to work 8 hours a day from Monday to Friday and 5 hours on Saturday.
Presently, there are 20 workers who are entitled for this plan. Production for the first week under the 100%
bonus plan was:
Days Mon Tue Wed Thu Fri Sat
No. of bottles 8,700 7,350 9,750 7,500 8,950 4,550
Most of the workers have raised objection on the company’s bonus plan. They are of the view that bonus
calculation should be based on daily production instead of weekly production. The management of the
company has asked you to determine the impact of such a change.
Required:
Prepare statements showing labour cost per unit under each of the two options. Give reasons for the
differences, if any. (10)
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CAF-03 Labor costing
Lecture # 2 Lecture # 107 (Over all)
Classwork
Question-4 (Spring 2009, Q-2)
The Following information pertains to a weeks work for three employees of a company:
Employees L M N
Total hours worked (Actual hous) 60 65 70
Hours of indirect work (included in total hours) 20 10 5
Basic hourly wage rate (Rs.) 60 80 50
Output in units 192 175 150
Time allowed per unit (hours) 0.25 0.4 0.60
Bonus is paid @ 60% of basic wage rate for all time saved. The normal working week is 45 hours. The first
five hours of overtime ae paid at basic rate plus 40% and the rest at basic rate plus 60%.
Required: You are required to calculate the following for each employee.
a) Basic wages including overtime.
b) Amount of bonus earned and gross wages.
c) Direct wages per unit, when overtime is worked:
• Due to labor shortage.
• Specially, the customer’s request, to expedite delivery. (15)
Homework
Question-5 (Autumn 2006, Q-5)
Mid-way Services Limited received an urgent order for installation of 4 machines in a textile mill.
Immediately after receiving the order, the company deputed four engineers on the job. Each engineer was
responsible for installation of one machine. The standardtime to complete this job was 50 hours.
It is the policy of the company to pay its engineers on job to job basis. The minimum amount
the company pays is based on standard hours. The payment is made at the rate of Rs. 100 per
hour.
In order to speed up the installation work, the company offered the engineers ‘Time Saving
Bonus’ (TSB) under which they would be entitled for the following incentives:
Percentages of time saved TSB
to time allowed
0% t o 10% 10% of time saved x hourly rate
11% to 20% 20% of time saved x hourly rate
20% to 30% 30% of time saved x hourly rate
In addition to the agreed amount, the customer has agreed to pay the company Rs. 150 for
every hour saved on installation of each machine.
The jobs were completed successfully and the time spent by each engineer is as follows:
Engineers A B C D
Hours spent 41 36 46 50
Required:
(i) Calculate the total earning of each engineer and their earning per hour. (08)
(ii) Compute the net additional revenue earned by the company. (03)
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CAF-03 Labor costing
Question-6 (Spring 2014, Q-3)
(a) The following information relates to a week’s work for three employees:
Employee
A B C
Output (units) 160 276 68
Time allowed (hours per unit) 0.5 0.25 0.75
Basic hourly wage rate (Rupees) 80 100 70
Hours worked as direct labour 48 54 30
Hours worked as indirect labour - - 12
The normal working week is 42 hours. For the first six hours, overtime is paid at 50% above the
normal rate. Any further overtime is paid at double the normal rate. Bonus is paid at three-fifth of
the normal rate for the hours saved.
Required:
Using the information given above, calculate the total wages earned by each employee. (08)
Question-7 (Autumn 2011, Q-2 [b])
Mr. Lark works as a machinist on a machine running 54 hours a week. Following information pertains to his
last week’s work on the machine:
Total hours worked 51 hours
Overtime (included in total hous worked) idle 4 hours
Idle time due to machine break down 3 hours
Basic hourly wage rate Rs.25
The overtime is paid at basic rate plus 45%.
Required:
Calculate the total wages paid to Mr. Lark allocating it between direct and indirect labour.Also give reasons
for such allocation. (05)
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CAF-03 Labor costing
Lecture # 2 Lecture # 108 (Over all)
Classwork
Question-8 (Autumn 2009, Q-6)
Toy Limited is engaged in the production of a single product. On the basis of past history, the management
has estimated the cost of production per unit, as follows:
Rupees
Raw material - 5 kg @ Rs. 40 per kg 200
Labour - 10 hours @ Rs. 25 per hour 250
Variable overheads - 60% of direct labour 150
Total 600
The annual production requirement is 100,000 units.
The management has been deeply concerned with the performance of its labour as it has been witnessing
various inefficiencies. The industrial relations department has recently carried out a study under the guidance
of a consultant. It has put forward a plan whereby the company’s wage policy is to be revised as under:
■ Rate of wages would be increased by 12%.
■ Workers who perform their tasks in less than the estimated time of 10 hours per unit would be given
a premium of Rs. 18 per hour saved.
The consultant is of the view that the following efficiencies can be brought about by introducing the above
change:
(i) Raw material input per unit includes wastage of 7%. It would reduce to 3% .
(ii) 70% of the workers would work more efficiently and improve their efficiency by 20%.
(iii) Overheads will be reduced to 55% of the revised cost of direct labour (including premium).
(iv) The quality of production will improve and the rate of rejection will be reduced from 4% to 3%.
Rejected units are sold for Rs. 150 each.
Required:
Determine whether it would be beneficial for the company to adopt the wage plan recommended by the
industrial relations department. (14)
Homework
Question-9 (Spring 2022, Q-3)
Argentina Limited (AL) is involved in the production of a single product 'Zinc' which requires highly skilled labour.
AL’s budgeted production for the year is 120,000 units. The break-up ofexisting variable cost per unit of Zinc is
as follows:
Rupees
Raw material (4 kg @ Rs. 100 per kg) 400
Skilled labour (1.5 hours @ Rs. 200 per hour) 300
Variable overheads 125
825
Presently, there is a shortage of skilled labour in the market and consequently the management of AL
foresees a high labour turnover. In case of high labour turnover, AL would be required to hire substitute
labour at the existing wage rate which would cause the following inefficiencies:
(i) Increase of raw material wastage from 4% to 5%.
(ii) Increase of finished goods rejection rate from 3% to 4%. Rejected units are sold as scrapfor Rs. 300 per unit.
In order to avoid the situation, the management is considering to revise the wage plan as follows:
(i) Increase wages by 7%.
(ii) Pay a premium of Rs. 70 per hour saved to skilled labour who manufactures the product in less than 1.5 hours.
The management believes that introduction of above wage plan would increase the efficiency of its
existing skilled labour by 6%.
Required:
Determine whether AL should implement the proposed wage plan or hire substitute labour. (08)
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CAF-03 Labor costing
Question-10 (Autumn 2022, Q-1)
Centaurus Limited (CL) is engaged in the business of manufacture and supply of leather jackets.
Presently CL manufactures 30,000 jackets per month. Following information is available for the
month of August 2022:
Number of skilled workers 350
Standard monthly hours per worker 200
Standard hours per unit 3
Normal wage rate per hour Rs. 150
Overtime wage rate per hour Rs. 250
Variable overhead rate per hour Rs. 120
In order to reduce the conversion cost, CL’s management is evaluating the following two wage
incentive plans:
Option 1: Introduce a piece wage system at the rate of Rs. 500 per unit. This is expected tomake
workers 15% more efficient.
Option 2: Introduce a bonus of Rs. 50 per unit if a unit is completed within 90% of the standard
time. It is expected that after introduction of bonus, 70% units will be completed within 90% of the
standard time.
Required:
Evaluate the above options and advise the most beneficial option. (08)
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CAF-03 Labor costing
Lecture # 4 Lecture # 109 (Over all)
Classwork
Question-11 (Spring 2011, Q-3)
Zircon Ltd (ZL) manufactures and supplies footballs for both domestic and international markets. Following
information is available from the company's records:
Number of skilled workers 250
Standard working hours per month 200
Actual hours per unit of product 1.5
Standard labour rate per hour (Rs.) 42
Variable overhead rate per labour hour (Rs. 75
The company manufactures 40,000 footballs per month. Overtime is paid to the workers @ 75% over and
above the standard wage rate.
In order to increase the production efficiency and reduce the cost of conversion, the management is currently
evaluating various wage incentive plans. The production manager has suggested the following options to the
management.
Option 1: Introduce a piece wage system at the rate of Rs.72 per unit. It is expected to improve the current
production efficiency from 65% to 78%.
Option 2: Introduce a monthly group bonus plan with a guaranteed wage of Rs.48 per hour based on a
standard 1.4 hours per unit of product. This plan is expected to reduce the overtime by 60%.
Required:
Evaluate the above options in contrast with the existing scheme and advise the management about the most
economical option. (15)
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