Labour Costing

Labour Cost:
Any amount paid or payable in cash or in Kind with respect to the labour.
Determination of labour cost:

. Amount

Total Labour hours:

Total number of hours spend by the worker inside the factory.

Effective Idle
Labour Time
Total
Labour
Hours

Idle Time:
It represents the time for which wages are paid but no output is given by the workers.

Normal Abnormal
Idle Time Idle Time

Idle
Time

Normal Idle Time: It is inherent (or inbuilt) in any job situation and thus it cannot be avoided or eliminated or
reduced.

✓ Treatment of Normal Idle Time: It shall be reduced from the Total Labour Hours in order to determine Effective
Labour Hours.

✓ Reasons for Normal Idle Time:

i. Time taken by workers to travel the distance between main gate of factory and the place of their work.
ii. Time lost between the finishing of one job and starting of next job.
iii. Time spent on overcoming fatigue.
Abnormal Idle Time: It arises on account of Abnormal causes or reasons i.e. situations which do not arise in normal
course of business.

✓ Treatment of Abnormal Idle Time: Abnormal Idle Tie shall be charged to Costing Profit and Loss A/c.

✓ Reasons For Abnormal Idle Time:

i. Machine Breakdown
ii. Power Failure
iii. Non-Availability of Raw Material
iv. Defective Planning
Effective Labour cost:
Effective labour hours can be calculated by deducting the idle time from total labour hours.
Total labour cost
Effective labour hours

Question 1
Mr.X an employee of ABC company Ltd. gets the following emoluments and benefits:
a. Basic pay 1000 p.m
b. DA 200 p.m
c. Bonus 20% of Salary & DA
d. Other allowances 250 p.m
e. Employer’s contribution to PF 10% of salary and DA
X works for 2400 hours p.a 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.
Question 2
From the following particulars calculate the labour cost per man day of 8 hours:
a. Basic salary Rs.2 per day
b. DA 25 paise for every point over 100 cost of living index.(Current living index: 700 points)
c. Leave salary 10 of (a) and (b)
d. Employer’s contribution to PF 8% of (a) (b) & (c)
e. Employer’s contribution to State insurance 2.5% of (a) (b) & (c)
f. Expenditure on amenities to labour Rs.20 per head per month
g. No of working days in a month is 25 days of 8 hours each.
Question 3
A worker is paid Rs.100 per month and DA of Rs.200 p.m. There is a PF 8 1/3 % and the employer also contributes the
same amount as the employee. The Employee state insurance corporation premium is 12 % of wages of which 2% is
paid by the employee. It is the firm’s practice to pay 2 months as bonus each year. The number of working days in a
year are 300 of 8 hours each. Out of these the workers are entitled to 15 days leave on full pay. Calculate the wage rate
per hour for costing purposes.
Question 4
Following data have been extracted from the books of M/s. ABC Pvt Ltd:
I. Salary (each employee ,per month) Rs.30,000
II. Bonus 25% of salary
III. Employer’s contribution to PF,ESI etc. 15% of salary
IV. Total cost at employee’s welfare activites Rs.6,61,500 p.a
V. Total leave permitted during the year. 30 Days
 VI. No of employees 175
VII. Normal idle time 70 hours p.a
VIII. Abnormal Idle time – due to failure of power supply 50 hours
IX. Working days p.a 310 days of 8 hours each
Your are required to calculate:
• Annual cost of each employee
• Employee cost per year
• Cost of abnormal idle time per employee

Overtime:
➢ Overtime is the time worked over and above the normal working hours as specified in Factories Act, 1948 or by
a mutual agreement between worker union and management
➢ According to Factories Act, 1948, a worker is entitled for overtime at double the rate of his wages if he works
beyond 9 hours in a day or 48 hours in a week whichever is higher.
➢ In cases other than those covered by Factories Act, 1948, the overtime wat should be paid in accordance with
the agreement entered between Employer and Employee.

Treatment of Overtime Wages in Costing:

1. If the overtime occurs due to the desire or at the request of the customer then the entire amount of overtime wages
should be charged to the particular job directly.
2. If the overtime occurs due to a general pressure of work on account of shortage of skilled labour and is worked
regularly throughout the year as a normal feature, the overtime wages will be charged evenly to all customers.

Average wage rate = Normal wages + Overtime wages

Normal Time + Overtime

3. If the overtime occurs due to mismanagement or due to occurrence of some abnormal event, the overtime wages
should be charged to Costing Profit & Loss A/c.
Question 5:
The normal working week in a factory is 44 hours. A worker is paid 0.50 per hour, overtime at 1.5 times the hourly rate
and a bonus of 0.25 for every 100 articles produced in excess of 500 per week. Calculate his wages for the week from
the following particulars taken from this time and job card.
In Out In Out
Day (AM) (AM) (PM) (PM) Output
Friday 08:00 12:00 01:00 05:30 950
Saturday 08:00 11:30 - - 545
Sunday - - - - 0
Monday 08:30 12:30 01:00 08:00 1106
Tuesday 08:00 12:00 01:00 06:00 1052
Wednesday 08:00 12:00 01:00 06:30 1002
Thursday 08:00 12:00 01:00 07:00 1112

Question 6:
Following are the particulars of two workers A and B:
Particulars A B
Basic wages 10000 16000
DA 50% 50%
Contribution to PF(on basic wages) 8% 8%
Contribution to ESI(on basic wages) 2% 2%
OT 10 -

The normal working hours for the month are 200. OT is paid at double the time of normal wages and DA. Employer’s
contribution to ESI and PF are at equal rates with employee’s contribution. 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

Calculate:
a. Ordinary wage rate per hour
b. Allocate employee cost to each job X,Y and Z
Question 7:

Systems of wage payment & Incentives

Time based schemes:
STRAIGHT TIME RATE SYSTEM:
Under this system, wages are paid according to the number of hours worked including the idle time by
the workers.

Wages = Time worked * Rate for the time

Output STRAIGHT PIECE RATE SYSTEM:
based Under this system, wages are paid on the basis of number of unites produced by the
schemes : workers
Wages = No of units produced * Rate per unit

Premium Bonus Plans:

Under Premium bonus plans, Standard time is set for all the jobs. Then the time saved for each job is calculated by
comparing standard time with Actual time taken for the job.

Halsey plan:
Wages = Time taken * Time rate + 50% * (Time saved * Time rate)

Rowan plan:
Wages = Time taken * Time rate + Time saved * Time taken * Time rate
Time Allowed

Question 8:

A worker takes 9 hours to complete a job on daily basis and actual time taken is 6 hours. His day rate is 75 paise an
hour. The material cost for the product is Rs.4/- and the overheads are recovered at 150% of the Direct wages.
Calculate the factory cost of the product as per rowan and Halsey plan.
Question 9:
A workman’s wages for a guaranteed 44 Hours week is Rs.0.75 per hour. The estimated time to produce one article is
30 Minutes and under the incentive plan time allowed is increased by 20%. During a week a worker produced 100
articles. Calculate the wages under each of the following methods:

• Time rate
• Rowan system
• Halsey system
Question 10:
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 Halsey’s plan. 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 OH rate is
Rs.5 per man hour actually worked. The factory cost for the product for A is Rs.3490 and for B it is Rs.3600.
Required:

• Compute the normal rate of wages

• Compute the cost of materials cost
• Prepare a statement comparing the factory cost of the products as made by the two workmen.
Question 11:
A skilled worker in XYZ Ltd. Is paid a guaranteed wage rate of Rs.30 per hour. The standard time per unit for a
particular product is 4 hours. Mr. A. a machine man has been paid wages under the Rowan incentive plan and had
earned an effective hourly rate of Rs.37.50 on the manufacture of that particular product.

What could have been his total earnings and effective hourly rate , had he been put on Halsey incentive plan?