Chapter 2 Labour Costing

PART-A
1. Arif Limited
The general ledger of the Arif Limited showed following balances at the end of January 2016:
Direct Labour Rs. 250,000
Indirect Labour Rs. 60,000
Sales Salaries Rs. 100,000
Office Salaries Rs. 50,000
Provident Fund of 6% shall be deducted on gross wages and average 3% shall be deducted as
Income Tax. Management provided benefits to its employees by contributing similar amount of
contribution towards Provident Fund and 2% as Medical Insurance.
Required:
1. Calculate net wages payable to employees for the month of January 2016.
2. Calculate the labour cost to employer for the month of January 2016.
3. Pass Journal entries for above transactions.

2. Khawar Jamal Limited

Khawar Jamal Limited had paid following salaries to its employees for the month of March 2016:
Employee Department Rs.
Amjad Production 25,000
Behram Sales 18,000
Cefam Supervisor 35,000
Dong Production 16,000
Ejaz Office 22,000
All production employees including supervisor is entitled to 20% bonus; whereas sales person is
entitled to earn commission on sales 2%. Total sales made by Behram during the said month
were Rs. 200,000. Provident fund of 10% shall be deducted from basic wage of each employee
and similar amount is contributed by employers. Income tax of 10% shall be held from the
salaries of employees whose gross earnings were Rs. 24,000 or more.
Required:
1. Prepare payroll sheet showing gross and net pay for the month.
2. Calculate total cost of payroll to the company.
3. Pass necessary journal entries.

3. Rashid Enterprises
An employee of the Fabricating Department of Rashid Enterprises is paid Rs. 28 per hour for a
regular week of 40 hours. During the week ended November 12, the employee worked 50 hours
and earned time and a half for overtime hours.
Required:
1. Entry to distribute the labour cost if the overtime premium is charged to the jobs worked on
during the overtime hours.
2. Entry to distribute the labour cost if the overtime premium is not charged to specific jobs.

4. Arjuna Company
Arjuna Company has just installed a pension plan for its employees. The company operates, on
the average, 50 weeks out of the year for 40 hours each week. After an average of 25 years,
 each of the approximately 100 workers is to receive a pension averaging Rs. 500,000 per year
for an average of 10 years. For March, the number of direct labour hours was 32,000. The
pension cost is recorded monthly on the basis of direct labour hours.
Required:
1. Pension cost per direct labour hour for March, assuming that earnings from pension fund
investments will provide 50% of the required fund.
2. Total pension cost for March.

5. Junaid Limited
The following information were taken from daily time tickets of a producing department of
Junaid Limited, summarizes time and piecework for the week ended 30 Arpil.
Employee Number Job No. Hours Pieces Hourly Piece
worke produced rate Rs. rate
d
Bashir 90 641 40 960 - 0.90
Naseeb 91 - 46 - 21.00 -
Saqib 92 638 40 - 17.40 -
Irfan 93 - 40 - 21.60 -
Junaid Limited operates on a 40-hour week and pays time and a half for overtime. Addition
information is stated below:
a. 5% deduction of provident fund should be made for each employee on gross pay.
b. An advance of Rs. 100 was made to Bashir on April 26.
c. 2% deduction is to be made from each employee’s wages for Social Security Contribution.
d. Naseeb works in the storeroom issuing materials; Saqib is the supervisor; the others work
directly on special orders as noted.
e. Use 4% in computing income tax withheld.
f. Employer’s contribution towards provident fund should be 5%; 3% towards social security
contribution and 1% on pension fund.
Required:
1. Each employee’s gross pay, deductions and net pay.
2. Journal entries to set up the accrued payroll and other liabilities; pay the payroll; and
distribute the payroll and record the employer’s contributions.

6. Lahore Industries
Lahore Industries is small engineering workshop producing specialty products by employing 5
workers. In order to increase the productivity, Management is considering introduce the
incentive scheme, and it has two options, first Hasley premium plan and second Rowan Plan.
Management thinks that due to implementation of incentive plan, the productivity shall
increase by 20% to 25%. Following data is relevant for first month:
Hourly rate of wages (Guaranteed) Rs. 20
Average time allowed to produce 1 unit 2 hours
Number of working days in a month 25
Number of working hours in a day 8
Actual production during the month 625 pieces
Required:
1. Calculate effective rate of earning per hour under both proposed plans.
2. State with help of working whether productivity has increased or not as mentioned above.
 3. Advise Lahore Industries Management whether incentive wage plan should be implemented
or not. If yes, then which plan is better?

7. Jamal Sons Enterprises

Following data is provided by Accountant for the calculation of weekly salaries of an employee
of Jamal Sons Enterprises:
Days Hours Worked
Monday 8
Tuesday 10
Wednesday 9
Thursday 11
Friday 9
Saturday 4
Accountant is confused whether overtime should be made on daily based calculation or on
weekly based calculation. Further data is relevant:
Normal working days 8 hours except Saturday (4 hours)
Normal rate of pay Rs. 20 per hour
Overtime is paid at time and 75%
Required:
Advise Accountant about best choice of calculation based on above information.

8. Arslan Limited
Following data is relevant to prepare payroll for the month of January 2016 of Arslan Limited:
a. Standard production per month per worker – 1,000 units
b. Actual production during the month by each worker:
Amjad 850 units
Ali 750 units
Khan 950 units
c. Piece work rate Rs. 10 per unit
d. Addition production bonus is Rs. 100 for each percentage of actual production exceeding
80% over standard.
e. Guaranteed wage per month of each employee is Rs. 8,000
Required:
Calculate total monthly remuneration of each of three employees from the following data:

9. Khaleej Company
Khaleej Company Management has provided you following data to check whether labour
turnover is high or low
No. of employees at the beginning - 1,960
No. of employees at the end - 2,040
Replacements - 160
Preventive cost Rs.
a) Personnel administration 14,000
b) Medical facilities 6,000
c) Welfare expenses 25,000
d) Retirement scheme 55,000
Replacement cost:
 a) Recruitment &training 8,000
b) 40% wages of new entrants not charged to direct labour 6,000
c) Loss of production 6,000
d) Cost of defectives scraps, reworking 2,000
e) Other costs like tool & machine breakage etc. 2,000
Required:
You are required to calculate:
a. Labour turnover
b. Cost per employee
c. Cost per replacement

10. PPT Limited

The employees in a plastic toy-making unit are paid wages at the rate of Rs. 70 per hour for an
eight-hour shift. Each employee produces 5 units per hour. The overhead in this department is
Rs. 100 per direct labour hour. Employees and the management are considering the following
piece rate wage proposal:
Up to 45 units per day of 8 hours Rs. 13 per unit.
From 46 units to 50 units Rs. 16 per unit.
From 51 units to 55 units Rs. 16.50 per unit.
From 56 units to 60 units Rs. 17 per unit.
Above 60 units Rs. 17.50 per unit.
The working hours are restricted to 8 hours per day. Overhead rate does not change with
increased production.
Required:
Prepare a statement indicating advantages to the employees as well as the management at
production levels of 40, 45, 55 and 60 units.

11. JSS (Private) Limited

JSS (Private) Limited is currently producing a product “JSS”, which is produced by group of 5
workers and one supervisor. Currently each worker earns wages of Rs. 30 per hour; whereas
supervisor Rs. 50 per hour. Average production was 5,000 units in a month of 25 days and 8
hours per day.
In order to enhance the productivity and efficiency, management is considering to introduce
group bonus scheme. For this scheme, standard production per hour for group is set at 28 units
per hour. Total amount of bonus shall be calculated at 60% of efficiency level exceeding 100%,
and multiplying Rs. 50 per hour. The amount of bonus shall be distributed equally among each
employee after paying 20% of the bonus amount to supervisor.
The plan was implemented and results were derived as: Month of January 6,000 units and
February 6,500 units.
Required:
1. Calculate total wages earned by one of the work and supervisor. Also calculate per hour
earnings.
2. Calculate labour cost per month and per unit labour cost for each of the month stated
above.

12. JAM Limited

 JAM Limited has installed new plant and recently provided special training to staff. It is
estimated that labour time to produce first unit shall be 20 hours. Further analysis revealed that
learning rate of 80% shall be achieved by employees and it shall continue till 300 units. During
the first week JAM Limited has produced 220 units and second week 260 units. Labour rate per
hour is Rs. 50.
Required:
You are required to calculate:
1. Labour cost for first 8 units
2. Labour cost from unit 9 to 18
3. Labour cost for 18th unit
4. Labour cost for first week
5. Labour cost for second week

PART-B
13. Emerson Efficiency Plan (ICAP Autumn 2001 Q30)
Emerson efficiency plan establishes a scale of bonus ratio between low task and high task
starting with zero bonus at a certain efficiency level increasing by small increments to
successively large increments cumulating to a determined bonus at 100% efficiency. Above
100% efficiency, additional bonus is allowed. Khashhkaily Enterprises adopted the Emerson
efficiency plan for their cigarette packing plant which employs four (4) workers. Bonus is paid to
workers in addition to basic pay which is fixed by the labour authorities. Brief synopsis of the
scheme is as follows:
Efficiency rates Rate of bonus
Upto 75% Efficiency 0 Bonus
76% to 85% Efficiency 2.5% bonus
86% to 98% Efficiency 7.5% bonus
99% and above efficiency 15% bonus
Standard time 3 minutes per carton
Minimum basic pay is Rs. 3,375
Information specific for the month of August 2001 is as follows:
Actual packing for the month
Worker A 3,750 cartons
Worker B 4,625 cartons
Worker C 4,250 cartons
Worker D 3,350 cartons
August 2001 consisted of 25 working days of 9 hours each and there were no absentees during
the month. For the purpose of calculating standard per unit labour rate minimum efficiency is
considered as normal packing.
Required:
Calculate the employee wise payroll cost for the month of August 2001 separately showing the
basic pay and bonus payable to each employee. (15-Marks)

14. Incentive Plan (ICAP Spring2003 Q2-a)

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 earning, hourly rate, and the labor 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-Marks)

15. Efficiency Plans (ICAP Autumn 2003 Q4)

Following data pertains to a worker of a manufacturing industry.
Actual production 400 units
Working hours in a week 48 hrs
Guaranteed rate per hour Rs. 10
Estimated time to produce on unit 8 minutes
As an incentive the management has agreed to 20%
increase the time allowed per unit by

Required:
Calculate the gross wages of the worker according to:
a. Piece work with a guaranteed weekly wages
b. Under Rowan premium bonus
c. Under Hasley premium bonus 50% to worker. (09-Marks)

16. ABC Company (ICAP Autumn 2004 Q2)

ABC Company has been manufacturing 7,280 units per month of a product and selling the same
at a price of Rs. 154 per unit. With the increase in competition, the customers are now asking for
new contracts at a rate of Rs. 140 per unit. The company has started cost/benefit analysis of
various options like extra shift working, buying new technologies etc. However, as an immediate
step they are going to implement 100% bonus wages plan for improvement in production
capacity. Mixed expectations of the outcome of this plan are:

Owners 7,800 units per month

Production manager 8,190 units per month
Labour contractor 9,100 units per month

Other data is as under:

Fixed overheads Rs. 264,368 per month
Variable overhead Rs. 73 per machine per hour
Daily wages (8 hours shift) Rs. 200 per person
Number of machines 10
Number of labour required 2 per machine
Standard capacity 28 units per machine
 Direct material Rs. 75 per unit
Working days in a month 26

Required:
Prepare a table showing per unit cost at present and various expected levels of production. (16-
Marks)

17. Group Incentive Scheme (ICAP Autumn 2005 Q3)

A factory manufactures three components A, B and C.
During a week, the following was recorded:
Individual
Labour Number of Rate per
hours
grade employees hour (Rs.)
worked
I 6 40 40
II 18 32 42
III 4 28 40
IV 1 16 44

Actual output and standard times are given below:

Standard minutes
Components Output
per components
A 444 30
B 900 54
C 480 66

The normal working week is of 38 hours. Overtime is paid at a premium of 50% of the normal
hourly rate.
A group incentive scheme is in operation and a bonus is paid based on the time saved. The rate
of bonus payment is 75% of normal hourly rate. The time saved is allocated to each labour grade
in proportion to the number of hours worked by each group.
Required:
Calculate the total payroll showing the basic pay, overtime premium and bonus pay for each
grade of labour. (12-Marks)

18. Mid-way Services Limited (ICAP Autumn 2006 Q5)

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 standard time 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 TSB
saved to time allowed
 0% to 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-Marks)
(ii) Compute the net additional revenue earned by the company. (03-Marks)

19. Venus Pharmaceutical Limited (ICAP Spring 2007 Q4)

Venus Pharmaceutical Company Limited faced a very high labour turnover during the last year.
The issue has now been settled after the announcement of an attractive payment plan.
Following data relating to last year has been made available to you:
(i) Sales during the last year was Rs. 726 million and contribution margin was 10% of sales;
(ii) Total number of actual direct labour hours was 510,000;
(iii) As a result of delays by the Personnel Department in filling vacancies, 10,000 potential
productive hours were lost. All these potential lost hours could have been sold at the
prevailing rate;
(iv) The actual direct labour hours included 40,000 hours attributable to training new
recruits, out of which 25% of the hours were unproductive;
(v) The labour turnover resulted in following additional costs:
Rupees
Recruitment costs 284,000
Selection costs 128,500

Required:
Calculate the profit foregone by the company during the last year on account of labour
turnover. (05-Marks)

20. Decimal World (Private) Limited (ICAP Autumn 2007 Q7)

Decimal World (Pvt) Limited is engaged in the manufacturing of standard and scientific
calculators. The company operates a bonus scheme for all its factory workers. A performance
bonus is incorporated into the wages by adding 75% of the efficiency ratio in excess of 100% to
the basic hourly rate. The following information is available for the month of July 2007:
Basic rate of pay per hour (Rs.) 125
Standard production per hour (units) 4
Production during the period (units) 226,176
Actual hours spent 45,600

Required:
(a) Calculate the hourly wage rate inclusive of performance bonus.
 (b) Calculate the total labour cost variance. (10-Marks)

21. Ishaq Limited (ICAP Spring 2008 Q5)

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-Marks)

22. Unity Electronics Limited (ICAP Autumn 2008 Q7)

Unity Electronics Limited manufactures and supplies condenser fans used in the production of
Refrigerators to Sigma Corporation. The company earns a contribution margin of Rs. 600 on
each unit sold before charging the labour cost. Following information is available from the
company’s records.
Number of employees 180
Standard working hours (9 hours/day) 54
Standard hours per unit (at 100% efficiency) 3
Standard labour rate per hour (Rupees) 30

Due to the rise in demand for Refrigerators, Sigma Corporation has increased the size of its
order. However, the management is concerned about the productivity of its labour force. An
analysis of the employee’s performance report has revealed that the company is suffering on
account of the following:
 A tendency to waste time as a result of which approximately 9 working hours are lost
per week per employee.
 A tendency to work inefficiently, as a result of which the production efficiency is only
74%.
In order to meet the increased demand, the management is considering an increase in wages by
Rs. 5 per hour. The increase is likely to motivate the employees and reduce the wastage of time
by 5 hours and will also improve the production efficiency to 88%.
Required:
Advise whether Unity Electronic Limited should revise the wages. Show all necessary supporting
calculations. (09-Marks)

23. Unity Electronics Limited (ICAP Spring 2009 Q2)

The following information pertains to a week’s work for three employees of a company:
 Employees L M N
Total hours worked 60 65 70
Hours of indirect work (included in total hours) 20 10 5
Basic hourly wage rate (Rupees) 60 80 50
Output in units 192 175 150
Time allowed per unit (hours) 0.25 0.40 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 are 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:
(i) due to labour shortage.
(ii) specifically at the customer’s request, to expedite delivery. (15 Marks)

24. Toy Limited (ICAP Autumn 2009 Q6)

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

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 Marks)

25. Pakair Limited (ICAP Autumn 2010 Q7)

Pakair Limited manufactures special tools. Information pertaining to payroll costs for the month of
April 2010 is as under:
Gross Salaries
Income tax
Departments excluding Overtime
deductions
overtime
Rupees in Thousands
Machining 1,000 75 25
Assembly 400 40 15
Tool room 25 5 -
Warehouse 75 15 -

Details of other benefits are as under:

i. 35 paid leaves are allowed per year including annual, casual and sick leaves.
ii. Annual bonus equal to one month salary is paid in June.
iii. The company maintains a contributory Provident Fund in which 8.33% of the monthly salary
is contributed by the employer as well as the employees.
iv. During April 2010, the employees availed leaves that cost Rs. 85,000.
v. Advances paid and recovered during the month amounted to Rs. 17,000 and Rs. 28,000
respectively.
vi. The company follows a policy of accruing bonus and paid leaves on a monthly basis.
Required:
Prepare journal entries to record payroll and its disbursements. (12 marks)

26. Zircon Limited (ICAP Spring 2011 Q3)

Zircon Limited (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 (Rupees) 42
Variable overhead rate per labour hour (Rupees) 75

The company manufactures 40,000 footballs per month. Overtime is paid to the workers at the
rate of 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 marks)
27. Lark (ICAP Autumn 2011 Q2-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 hours worked) 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 marks)

28. Magnesium Limited (ICAP Spring 2012 Q3)

Magnesium Limited (ML) produces and markets a single product. The management is concerned
about the increasing rate of labour turnover in their factory and wants to assess the losses suffered
by ML due to high labour turnover.
Following information is available from ML’s records for the year ended 31 December 2011:
Sales price per unit Rs. 200
Direct material per unit 0.5 kg at Rs. 96 per kg
Direct labour hours paid 480,000 hours
Labour rate per hour Rs. 55
Actual hours per unit of product 1.5 hours
Variable overhead rate per labour hour Rs. 20
Fixed overheads Rs. 6,000,000

The direct labour hours include 9,000 hours spent on training and replacement, only 50% of which
were productive. Moreover, 12,000 hours of potential work could not be availed because of delayed
replacement. The cost incurred on appointments amounted to Rs. 200,000. ML has no beginning or
ending inventory.
Required:
Prepare a comparative statement showing net profit for the year and profit foregone as a result of
labour turnover; assuming the potential production loss could have been sold in the market at
prevailing prices. (15 marks)

29. Jadeed Limited (ICAP Autumn 2012 Q2)

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, assuming
that at 100% efficiency 80 pieces are produced per day. (10 marks)

30. Z Limited (ICAP Spring 2013 Q3)

Z Limited (ZL) manufactures various products. Following information relating to product-A has been
extracted from ZL’s business plan for the year ending 30 June 2014:
Direct material per unit 12 kg at Rs. 2 per kg
Average labour rate per worker Rs. 56 per day
Average working hours in a day 8 hours
Average labour efficiency 65%
Standard time required for each unit of product-A 2.6
Variable overheads Rs. 10 per labour hour
Fixed overheads 2% of direct material cost
Actual production 25,000 units

In order to improve the production efficiency and reduce cost of conversion, the management has
sought suggestions from the workers. It has announced a reward equal to three months savings in
labour cost to the worker, whose suggestion would be accepted.
In response to management’s offer, one of the workers has suggested to use electric cutter in the
manufacturing process. The proposal is expected to reduce standard time for making each unit of
product-A by 20%. It would also improve labour efficiency from 65% to 80%.
The cutter can be purchased at a cost of Rs. 15,000 and is estimated to have an effective life of one
year.
Required:
Assuming there is no beginning or ending inventory of product-A:
a. Calculate the amount of reward payable to the worker as announced by ZL. (06 Marks)
b. Prepare a statement showing annual cost of production and net savings (if any) in total cost
of production of product-A. (05 Marks)

31. Maroof Engineering (ICAP Autumn 2013 Q6-a)

Maroof Engineering (ME) produces and markets a single product. In order to keep pace with the
changing technology, ME’s management has decided to install high-tech machines in its production
department which would result not only in improving the productivity but would also reduce the
number of workers from the present level of 500 to 400 workers. Following information is available
from ME’s records for the year ended 31 August 2013:
Sales per month Rs. 12,000,000
Wages paid to workers per month Rs. 2,000,000
Other benefits 35% of wages
Production per month 80,000 units
Profit/volume (P/V) ratio 30%

After the installation of high-tech machines, the company is expected to produce 89,600 units per
month. The management has also decided to pay 1.6% incentive wages to the workers for every 2%
increase in productivity.
Required:
Calculate the annual financial implication of the proposal. (11 Marks)

32. ABC (ICAP Spring 2014 Q3)

(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 Marks)
(b) The following is a summary of payroll of LMN Factory Limited for the month of February 2014:
Rupees
Basic salary 420,000
Allowances 147,000
Gross salary 567,000
Deductions:
(13,000)
Loans to staff
(15,500)
Income tax
(35,000)
Employee’s provident fund contribution
Net salary 503,300

The company is also required to pay the following:

 Company’s contribution to the provident fund which is equal to employees’ contribution
 5% of the basic salary to a government organisation
Required:
Pass journal entries to record the payroll cost for the month of February 2014. (06 Marks)