LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING

ICAN CAP II

Labour Cost: Cost incurred for hiring of human resource of employees.

Just like materials labour is also two types:

Direct Labour: Any Labour Cost that is specifically incurred for or can be readily charged to or
identified with a specific job, contract, work order or any other unit of cost. Examples: Weavers in
weaving unit, Baker in baking unit, labour employed in construction contract, carpenter in furniture
unit.

Indirect Labour: Is that labour which cannot be readily identified with a specific job, contract or
work order. Example: Labour employed in personnel dept, cost accounting dept, stores, power
house, security dept, repair and maintenance dept.

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Time Keeping/ Time Booking:

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Time keeping is a system of recording the arrival and departure time of each workers. Some of the

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methods of time keeping are: Attendance register, Token/Disk method, swipe card, biometric
devices.
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Time Booking is a system of recording the time spent by each workers on various jobs, orders or
processes. Methods are : Daily time sheet, weekly time sheet, job cards (or job ticket).
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Is the reconciliation between time card and job card necessary??

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Distinguish between Job Evaluation and Merit Rating

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Answer
As

Job Evaluation: It can be defined as the process of analysis and assessment of jobs to ascertain
reliably their relative worth and to provide management with a reasonably sound basis for
determining the basic internal wage and salary structure for the various job positions. In other
A

words, job evaluation provides a rationale for differential wages and salaries for different groups of
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employees and ensures that these differentials are consistent and equitable.

Merit Rating: It is a systematic evaluation of the personality and performance of each employee by
his supervisor or some other qualified persons. Thus the main points of distinction between job
evaluation and merit rating are as follows:

1. Job evaluation is the assessment of the relative worth of jobs within a company and merit rating
is the assessment of the relative worth of the man behind a job. In other words job evaluation rate
the jobs while merit rating rate employees on their jobs.

2. Job evaluation and its accomplishment are means to set up a rational wage and salary structure
whereas merit rating provides scientific basis for determining fair wages for each worker based on
his ability and performance.

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
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3. Job evaluation simplifies wage administration by bringing uniformity in wage rates. On the other
hand merit rating is used to determine fair rate of pay for different workers on the basis of their
performance.

Time and motions study: It is the study of time taken and motions (movements) performed by
workers while performing their jobs at the place of their work. Time and motion study has played a
significant role in controlling and reducing labour cost. Time Study is concerned with the
determination of standard time required by a person of average ability to perform a job. Motion
study, on the other hand, is concerned with determining the proper method of performing a job so
that there are no wasteful movements, hiring the worker unnecessarily. However, both the studies
are conducted simultaneously. Since materials, tools, equipment and general arrangement of work,

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all have vital bearing on the method and time required for its completion. Therefore, their study
would be incomplete and would not yield its full benefit without a proper consideration of these
factors.

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Time and motion study is important to management because of the following features:

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1. Improved methods, layout, and design of work ensures effective use of men, material and
resources.
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2. Unnecessary and wasteful methods are pin-pointed with a view to either improving them or
eliminating them altogether. This leads to reduction in the work content of an operation, economy
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in human efforts and reduction of fatigue.

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3. Highest possible level of efficiency is achieved in all respect.

4. Provides information for setting labour standards - a step towards labour cost control and cost
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reduction.
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5. Useful for fixing wage rates and introducing effective incentive scheme.

It should be management’s endeavor to increase inventory turnover but to reduce labour

turnover. Expand and illustrate the idea contained in this statement.
A

Answer : Inventory turnover: It is a ratio of the value of materials consumed during a period to the
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average value of inventory held during the period. A high inventory turnover indicates fast
movement of stock.

LABOUR TURNOVER

It is defined as an index denoting change in the labour force for an organization during a specified
period. Labour turnover in excess of normal rate is termed as high and below it as low turnover.

Definitions of labour turnover are as follows:

 Labour Turnover according to Separation method

 Labour Turnover according to Flux Method

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
ICAN CAP II

 Labour Turnover according to Replacement Method

Effects of high inventory turnover and low labour turnover: High inventory turnover reduces
the investment of funds in inventory and thus accounts for the effective use of the concern’s
financial resources. It also accounts for the increase of profitability of a business concern. As against
high labour turnover the low labour turnover is preferred because high labour turnover causes-
decrease in production targets; increase in the chances of break-down of machines at the shop floor
level; increase in the number of accidents; loss of customers and their brand loyalty due to either
non-supply of the finished goods or due to sub-standard production of finished goods; increase in
the cost of selection, recruitment and training; increase in the material wastage and tools breakage

All the above listed effects of high labour turnover accounts for the increase in the cost of

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production/process/service. This increase in the cost finally accounts for the reduction of concern’s
profitability. Thus, it is necessary to keep the labour turnover at a low level.

As such, it is correct that management should endeavour to increase inventory turnover and

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reduce labour turnover for optimum and best utilization of available resources and reduce the cost

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of production and thus increase the profitability of the organization.

Types of cost associated with labour turnover

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Two types of costs which are associated with labour turnover are:
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(i) Preventive costs: This includes costs incurred to keep the labour turnover at a low level i.e.,
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cost of medical schemes. If a company incurs high preventive costs, the rate of labour
turnover is usually low.
(ii) Replacement costs: These are the costs which arise due to high labour turnover. If men
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leave soon after they acquire the necessary training and experience of work, additional
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costs will have to be incurred on new workers, i.e., cost of advertising, recruitment,
selection, training and induction, extra cost also incurred due to abnormal breakage of
tools and machines, defectives, low output, accidents etc., caused due to the inefficiency
and inexperienced new workers.
A

It is obvious that a company will incur very high replacement costs if the rate of labour
turnover is high. Similarly, only adequate preventive costs can keep labour turnover at a
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low level. Each company must, therefore, workout the optimum level of labour turnover
keeping in view its personnel policies and the behaviour of replacement costs and
preventive costs at various levels of labour turnover rates.

Question No.1 From the following information, calculate Labour turnover rate and Labour flux
rate:

No. of workers as on 01.01.2000 = 7,600

No. of workers as on 31.12.2000 = 8,400

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ICAN CAP II

During the year, 80 workers left while 320 workers were discharged 1,500 workers were recruited
during the year of these, 300 workers were recruited because of exits and the rest were recruited in
accordance with expansion plans

(Ans: Separation Method: 5%, Replacement Method: 3.75%, New recruitment: 15%, Flux: 23.
75%)

Question No.2 The management of a company are worried about their increasing labour turnover
in factory and before analyzing the causes and taking remedial steps, they want to have idea of the
profit foregone as –a result of labour turnover in the last year.

Last year sales amounted to Rs. 83,03,300 and the profit-volume ratio was 20 per cent. Total

AN
number of actual hours worked by the Direct Labour Force was 4.45 lakhs. As a result of the delays
by the Personnel Department in filling vacancies due to labour turnover, 1,00,000 potentially
productive hours were lost. The actual direct labour hours includes 30,000 hours attributable to
training new recruits, out of which half of the hours were unproductive.

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The costs incurred consequent on labour turnover revealed on analysis the following:
-I (Rs.)
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Settlement costs due to leaving 43,820
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Recruitment costs 26,740

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Selection costs 12,750

Training costs 30,490

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Assuming that the potential production lost as a consequence of labour turnover could have been
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sold at prevailing prices, find the profit foregone last year on account of labour turnover.

(Ans: Rs.500,000)
A

Question No.3 The following information is collected from the personnel department of ST limited
for the year ending 31st March, 2008:
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Number of workers at the beginning of the year 8,000

Number of workers at the end of the year 9,600

Number of workers left the company during the year 500

Number of workers discharged during the year 100

Number of workers replaced due to left and discharges 700

Additional workers employed for expansion during the year 1,500

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
ICAN CAP II

You are required to calculate labour turnover rate by using separation method, replacement
method and flux method.

(Ans. Separation: 6.82%, Replacement: 7.95% and Flux: 31.81%)

Question No.4 Accountant of your company had computed labour turnover rates for the quarter
ended 30th September, 2012 as 14%, 8% and 6% under Flux method, Replacement method and
Separation method respectively. If the number of workers replaced during 2nd quarter of the
financial year 2012-13 is 36, find the following:

(i) The number of workers recruited and joined; and (Ans:36)

(ii) The number of workers left and discharged. (Ans: 27)

AN
Question No. 5 The rate of change of labour force in a company during the year ending 31st March,
2013 was calculated as 13%,8% and 5% respectively under 'Flux Method', 'Replacement method'
and 'Separation method'. The number of workers separated during the year is 40. You are required

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to calculate:

(i)
(ii)
Average number of workers on roll. (Ans. 800) -I
Number of workers replaced during the year. (Ans.64)
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(iii) Number of new accessions i.e. new recruitment. (Ans.64)
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(iv) Number of workers at the beginning of the year. (Ans.788)

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RTP May 2015 ICAI Corrs Consultancy Ltd. is engaged in BPO industry. One of its trainee
executives in the Personnel department has calculated labour turnover rate 24.92% for the last
year using Flux method. Following is the some data provided by the Personnel department for the
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last year:
As

Employees At the beginning Joined Left At the end

Data Processors 540 1,080 60 1,560
Payroll Processors ? 20 60 40
Supervisors ? 60 --- ?
A

Voice Agents ? 20 20 ?
Assistant Managers ? 20 --- 30
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Senior Voice Agents 4 --- --- 12

Senior Data Processors 8 --- --- 34
Team Leaders ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Voice Agents --- 8 --- ---
Senior Data Processors --- 26 --- ---
Employees transferred to the Subsidiary Company
Team Leaders --- --- 60 ---
Assistant Managers --- --- 10 ---
At the beginning of the year there were total 772 employees on the payroll of the company. The
opening strength of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 : 3 :

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
ICAN CAP II

2. The company has decided to abandon the post of Team Leaders and consequently all the Team
Leaders were transferred to the subsidiary company. The company and its subsidiary are
maintaining separate set of books of account and separate Personnel Department. You are required
to calculate:
(a) Labour Turnover rate using Replacement method and Separation method.
(b) Verify the Labour turnover rate calculated under Flux method by the trainee executive of the
Corrs Consultancy Ltd.

SYSTEM OF WAGE PAYMENT

There are two principal wage payment system: i) payment on the basis of time spent in the factory

AN
irrespective of the amount of work done known as time wage system ii) Payment on the basis of the
work done irrespective of the time taken by the worker known as piece rate system. Other methods
are called premium plans or bonus and profit sharing system are used with either of the two

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principal methods of wage payment.

Time wage system:

Wage = Actual time devoted * Time Rate

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Piece Rate wage system (payment by results)
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• Taylor’s differential piece rate system

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• Merrick system

•
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Barth System
As

Premium and Bonus Plan

• Halsey Premium Plan

• Rowan System
A

• Emersion system
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• Bedeaux point premium plan

Group Bonus Scheme

• Priestman’s Production Bonus

• Scanlon Plan

• Towne Plan

Co-partnership and Profit Sharing Scheme

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
ICAN CAP II

Question No. 1 Calculate the earnings of worker A and B under straight piece rate system and
Taylor’s differential piece rate system from the following particulars:
Normal rate per hour = Rs. 1.80
Standard time per unit = 20 seconds
Differentials to be provided:
80% of piece rate below standard
120% of piece rate above standard

AN
Worker A produces 1,300 units per day and worker B produces 1500 units per day. Assume a day
of 8 hours work.
(Ans: A: Straight piece: 13 Taylor 10.40 B: straight piece: 15 Taylor: 18)

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Question No. 2 Calculate the earnings of worker A, B and C under piece rate system and Merrick’s

Normal rate per hour Rs.1.80

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multiple piece rate system from the following particulars:
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Standard Time per unit 1 minute
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Output per day is as follows:

Worker A- 384 units; Worker B- 450 units and worker C – 552 units
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Working hours per day are 8.

(Ans: Straight piece rate: A-11.52 B-13.50 C-16.56 Merrick- A- 11.52 B-14.85 C-19.87)
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As

Question No. 3 Standard output 100 units, daily wage rate Rs.100, X produced 60 units, Y
produced 100 units and Z produced 110 units. Calculate the earning under Emerson’s efficiency
plan.
(Ans: X -100 Y-120% and Z- 130)
A

Question No.4 Standard time allowed to produce 40 units- 8 hours, standard wage rate Rs.20 per
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hour. X, Y and Z completed the task in 10 hours, 8 hours and 6 hours respectively. Calculate the
earning under Gantt Task and Bonus system.
(Ans: X-200 Y-192 Z-192)
Question No.5 Calculate the earnings of worker from the follow information:
• Rowan Plan B) Halsay Plan
Standard time 30 hours
Time Taken 20 hours
Hourly rate of wage is Rs.1 per hour plus a dearness allowance @ 50 paisa per hour worked.
(Ans: Rowan Plan- 36.67 and Halsay Plan- 35)
Question No.6 The standard time allowed for the job is 30 hours. The hourly rate of guaranteed
wage is Rs.1.50. Because of the saving in time, a worker X gets an hourly wage of Rs.1.80 under
Rowan premium plan. For the same saving of time, calculate the hourly rate of wages a worker will

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
ICAN CAP II

get under Halsay premium Bonus System.

(Ans: effective hourly rate = 1.69)

QUESTIONS IMPORTANT FOR AN EXAMINATION:

Question No.1 ZED Limited is working by employing 50 skilled workers. It is considered the
introduction of incentive scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of
wage payment for increasing the labour productivity to cope up the increasing demand for the
product by 40%. It is believed that proposed incentive scheme could bring about an average 20%
increase over the present earnings of the workers; it could act as sufficient incentive for them to
produce more.

AN
Because of assurance, the increase in productivity has been observed as revealed by the figures for
the month of April, 2004.

Hourly rate of wages (guaranteed) Rs. 30

C
Average time for producing one unit by one worker at the previous performance (This may be
taken as time allowed) -I
1.975 hours

Number of working days in the month 24

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Number of working hours per day of each worker 8

Actual production during the month 6,120 units

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Required:
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• Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme. (
Ans. 33.89 and 36.17 Per hour)
As

• Calculate the savings to the ZED Limited in terms of direct labour cost per piece. (Ans.Rs.6.
10 and 2.51 per piece)
A

• Advise ZED Limited about the selection of the scheme to fulfill their assurance. (Ans.
C

Rowan Plan)

Question No. 2 The existing Incentive system of Alpha Limited is as under:

Normal working week 5 days of 8 hours each plus 3 late shifts of 3 hours each

Rate of Payment Day work: Rs. 160 per hour

Late shift: Rs. 225 per hour

Average output per operator for 49-hours week i.e. including 3 late shifts 120 articles In order to
increase output and eliminate overtime, it was decided to switch on to a system of payment by
results. The following Information is obtained:

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Time-rate (as usual) : Rs. 160 per hour

Basic time allowed for 15 articles : 5 hours

Piece-work rate : Add 20% to basic piece-rate

Premium Bonus : Add 50% to time.

Required: Prepare a Statement showing hours worked, weekly earnings, number of articles
produced and labour cost per article for one operator under the following systems:

(a) Existing time-rate (Ans.70.21)

AN
(b) Straight piece-work (Ans.64.00)

(c) Rowan system (Ans. 66.72)

C
(d) Halsey premium system (Ans.63.70)

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Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan
Premium system, and Halsey premium system above and worker earns half the time saved under
Halsey premium system.
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Question No.3 Using Taylor’s differential piece rate system, find the earning of A from the
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following particulars:
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Standard time per piece 12 minutes

Normal rate per hour (in a 8 hours day) Rs. 20

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A produced 37 Units
As

(Ans. Earnings: Rs.122.84)

Question No. 4 Standard output in 10 hours is 240 units; actual output in 10 hours is 264 units.
A

Wages rate is Rs.10 per hour. Calculate the amount of bonus and total wages under Emerson Plan.
C

(Ans. Bonus 30 and Total Wages 130)

Question No. 5 Two workmen, A and B, produce the same product using the same material. A is
paid bonus according to Halsey plan, while B is paid bonus according to Rowan plan. The time
allowed to Labour manufacture the product is 100 hours. A has taken 60 hours and B has taken 80
hours to complete the product. The normal hourly rate of wages of workman A is Rs. 24 per hour.
The total earnings of both the workers are same. Calculate normal hourly rate of wages of workman
B.

(Ans. Hourly Rate = 20)

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LABOUR CONTROL COST AND MANAGEMENT ACCOUNTING
ICAN CAP II

Question No. 6 Standard Time for a job is 90 hours. The hourly rate of guaranteed wages is Rs. 50.
Because of the saving in time a worker a gets an effective hourly rate of wages of Rs. 60 under
Rowan premium bonus system. For the same saving in time, calculate the hourly rate of wages a
worker B will get under Halsey premium bonus system assuring 40% to worker.

(Ans. Hourly Rate. Rs.55 per hour)

Question No. 7 You are given the following information of a worker:

• Name of worker : ‘X’

• Ticket No. : 002

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• Work started: 1-4-11 at 8 a.m.

• Work finished : 5-4-11 at 12 noon

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• Work allotted : Production of 2,160 units

•
•
Work done and approved : 2000 units

Time and units allowed : 40 units per hour

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• Wage rate : Rs. 25 per hour
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• Bonus : 40% of time saved

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• Worker X worked 9 hours a day.

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You are required to calculate the remuneration of the worker on the following basis:
As

(i) Halsey plan and (ii) Rowan plan (Ans. Rowan. Rs.1200 and Halsay.Rs
.1,100)
A

Question No.8 X executes a piece of work in 120 hours as against 150 hours allowed to him. His
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hourly rate is Rs.10 and he gets a dearness allowance @ Rs.30 per day of 8 hours worked in
addition to his wages. You are required to calculate total wages received by X under the following
incentive schemes:

• Rowan Premium Plan, and (Ans.Rs.1,890)

• Emerson's Efficiency Plan (Ans. Rs.2,190)

Question No. 9 The management of a company wants to formulate an incentive plan for the
workers with a view to increase productivity. The following particulars have been extracted from
the books of company:

Piece Wage rate Rs. 10

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Weekly working hours 40

Hourly wages rate Rs. 40 (guaranteed)

Standard/normal time per unit 15 minutes.

Actual output for a week:

Worker A 176 pieces Worker B 140 pieces

Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate when
output above normal.

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Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved.

Calculate: (i) Earning of workers under Halsey’s and Rowan’s premium scheme. (ii) Earning of
workers under Taylor’s differential piece rate system and Emerson’s efficiency plan.

C
(Ans .Halsay: A: 1745 B: 1600, Taylor A: 2,080 B:1,920)
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Question No. 10A Companyis undecided as to what kind of wage scheme should be introduced.
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The following particulars have been complied in respect of three systems, which are under
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consideration of the management.

Workers A B C
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Actual Hours worked in a week 38 40 34

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Hourly rate of wages Rs.6 Rs.5 Rs.7.20

As

Production in units

Products P 21 – 60
A

Products Q 36 – 135
C

Product R 46 25 –

Standard time allowed per unit of each product is:

P Q R

Minutes 12 18 30

For the purpose of piece rate, each minute is valued at Rs. 0.10.

You are required to calculate the wages of each worker under:

• Guaranteed hourly rate basis

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• Piece work earning basis, but guaranteed at 75% of basic pay (guaranteed hourly rate) if his
earnings are less than 50% of basic pay.

• Premium bonus basis where the worker receives bonus based on Rowan scheme.

Question No. 11 A Company’s basic wages rate is Rs.0.45 per hour and its overtime rates are:

Evenings- time and one third, week ends- double time

During the previous year the following hours were worked:

Normal time 440,000 clock hours

AN
Time plus one third 40,000 clock hours

Double time 20,000 clock hours

C
The following times have been worked on the stated jobs:

Job X

Clock hours
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Clock hours
Job Z

Clock hours
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Normal time 6,000 10,000 8,000
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Evening overtime 600 1,200 2,100

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Week end overtime 200 100 600

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You are required to calculate the labour cost chargable to each job in each of the following
circumstances:
As

• Where over time is worked regularly throughout the year as company policy due to labour
shortage

•
A

Where overtime is worked irregularly to meet spasmodic production requirements

•
C

Where overtime is worked specifically at the customer’s request to expedite delivery

State briefly the reason for each method chosen.

Question No. 12Calculate the earnings of a worker under i) Halsay Plan and ii) Rowan Plan from
the following particulars:

1. Hourly rate of wages guaranteed 0.50 paisa per hour

2. Standard time for producing one dozen articles- 3 hours

3. Actual time taken by workers to produce 10 dozen articles – 48 hours

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Question No. 13Calculate the earning of workers A, B, C under straight piece rate system and
Merrick’s multiple piece rate system from the following particulars:

Normal Rate per hour Rs.5.40

Standard time per unit : 1 Minute

Output per day is as follows:

Worker A – 390 units

Worker B- 450 Units

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Worker C- 600 units

Working hours per day are 8.

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TREATMENT OF IDLE TIME AND OVERTIME:
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Idle time refers to the labour time paid for but not utilized on production. It, in fact, represents the
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time for which wages are paid, but during which no output is given out by the workers. This is the
period during which workers remain idle.
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Reasons for idle time: According to reasons, idle time can be classified into normal idle time and
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abnormal idle time. Normal idle time is the time which cannot be avoided or reduced in the normal
course of business.
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The main reasons for the occurrence of normal idle time are as follows:
As

1. Time taken by workers to travel the distance between the main gate of factory and the place of
their work.

2. Time lost between the finish of one job and starting of next job.
A

3. Time spent to overcome fatigue.

C

4. Time spent to meet their personal needs like taking lunch, tea etc.

The main reasons for the occurrence of abnormal idle time are:

1. Due to machine break downs, power failure, non-availability of raw materials, tools or waiting for
jobs due to defective planning.

2. Due to conscious management policy decision to stop work for some time.

3. In the case of seasonal goods producing units, it may not be possible for them to produce evenly
throughout the year. Such a factor too results in the generation of abnormal idle time.

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Treatment in Cost Accounting: Idle time may be normal or abnormal.

Normal idle time: It is inherent in any job situation and thus it cannot be eliminated or reduced.
For example:- time gap between the finishing of one job and the starting of another; time lost due to
fatigue etc.

The cost of normal idle time should be charged to the cost of production. This may be done by inflating
the labour rate. It may be transferred to factory overheads for absorption, by adopting a factory
overhead absorption rate.

Abnormal idle time: It is defined as the idle time which arises on account of abnormal causes; e.g.
strikes; lockouts; floods; major breakdown of machinery; fire etc. Such an idle time is

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uncontrollable. The cost of abnormal idle time due to any reason should be charged to Costing
Profit & Loss Account.

Overtime: Payment to workers, when a worker works beyond the normal working hours. Usually

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overtime has to be paid at double the rate of normal hours.

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Overtime Premium: It’s the amount of extra payment paid to a worker under overtime

Under Cost Accounting, the overtime premium is treated as follows:

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• If overtime is resorted to at the desire of the customer, then the overtime premium may be
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charged to the job directly.

•
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If overtime is required to cope with general production programme or for meeting urgent
orders, the overtime premium should be treated as overhead cost of particular department
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or cost center which works overtime.

•
As

Overtime worked on account of abnormal conditions should be charged to costing Profit &
Loss Account.

• If overtime is worked in a department due to the fault of another department the overtime
A

premium should be charged to the latter department.

C

Effect of overtime payment on productivity:

Overtime work should be resorted to only when it is extremely essential because it involves extra
cost. The overtime payment increases the cost of production in the following ways:

1. The overtime premium paid is an extra payment in addition to the normal rate.

2. The efficiency of operators during overtime work may fall and thus output may be less than
normal output.

3. In order to earn more the workers may not concentrate on work during normal time and thus
the output during normal hours may also fall.

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4. Reduced output and increased premium of overtime will bring about an increase cost of
production.

Treatment of Idle Capacity Cost

(a) If idle capacity is due to unavoidable reasons such as repairs & maintenance, change over of job
etc., a supplementary overhead rate may be used to recover the idle capacity cost. In this case, the
costs are charged to production capacity utilized.

(b) If idle capacity cost is due to avoidable reasons such as faulty planning, power failure etc, the
cost should be charged to P/L A/c.

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(c) If idle capacity is due to seasonal factors, then the cost should be charged to cost of production
by inflating overhead rates.

Question No.14. X’ an employee of ABC Co. gets the following emoluments and benefits:

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(a) Basic pay Rs. 1,000 p.m.

(b) Dearness allowance Rs. 200 p.m. -I

(c) Bonus 20% of salary and D.A.
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(d) Other allowances Rs. 250 p.m.

(e) Employee’s contribution to P.F. 10% of salary and D.A.

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‘X’ works for 2,400 hours per annum, out of which 400 hours are non-productive and treated as
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normal idle time. You are required to find out the effective hourly cost of employee ‘X’.

(Ans:effective hourly rate: 10.86)

As

Question No.15 In a factory, the basic wage rate is Rs. 10 per hour and overtime rates are as
follows:
A

Before and after normal working hours : 175% of basic wage rate
C

Sundays and holidays : 225% of basic wage rate

During the previous year, the following hours were worked :

Normal time : 1,00,000 hours

Overtime before and after working hours : 20,000 hours

Overtime on Sundays and holidays : 5,000 hours

Total : 1,25,000 hours

The following hours have been worked on job ‘Z’ :

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Normal : 1000 hours.

Overtime before and after working hrs. : 100 hours.

Sundays and holidays : 25 hours.

Total : 1125 hours.

You are required to calculate the labour cost chargeable to job ‘Z’ and overhead in each of the
following instances:

(a) Where overtime is worked regularly throughout the year as a policy due to the labour shortage.

AN
(b) Where overtime is worked irregularly to meet the requirements of production.

c) Where overtime is worked at the request of the customer to expedite the job.

C
Question No.16 Calculate the earnings of A and B from the following particulars for a month and
allocate the labour cost to each job X, Y and Z:
-I A B
s
(i) Basic Wages Rs. 100 160
nt

(ii) Dearness Allowance 50% 50%

ra

(iii) Contribution to provident Fund (on basic wages) 8% 8%

(iv) Contribution to Employee’s State Insurance (on basic wages) 2% 2%

pi

(v) Overtime Hours 10

As

The normal working hours for the month are 200. Overtime is paid at double the total of normal
wages and dearness allowance. Employer’s contribution to state Insurance and Provident Fund are
at equal rates with employees contributions. The two workers were employed on jobs X, Y and Z in
A

the following proportions:

C

Jobs

X Y Z

Worker A 40% 30% 30%

Worker B 50% 20% 30%

Overtime was done on job Y

Question No.17 The management of a company wants to formulate an incentive plan for the
workers with a view to increase productivity. The following particulars have been extracted from
the books of company:

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Piece Wage rate Rs. 10

Weekly working hours 40

Hourly wages rate Rs. 40 (guaranteed)

Standard/normal time per unit 15 minutes.

Actual output for a week:

Worker A 176 pieces

Worker B 140 pieces

AN
Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate when
output above normal.

C
Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved.

Calculate:

•
-I
Earning of workers under Halsey’s and Rowan’s premium scheme.
s
• Earning of workers under Taylor’s differential piece rate system and Emerson’s efficiency
nt

plan.
ra

(Ans: Halsay: A-1,680 B: 1,600 Rowan: A-1745 B-1600 Taylor: A-2112 B-1120 Emersion: A-2
,080 B-1920)
pi

Question No. 18 Management of a manufacturing unit is considering extensive modernization of

the factory through progressive mechanization which would result in improved productivity and
As

reduced strength. Through negotiation with the union it was agreed that for every 1% increase in
productivity, workers would be paid 0.5% incentive wages. It was also agreed that through
voluntary retirement the staff strength would be reduced to 300 from the present level of 400. The
A

following further comparative data are available before and after the proposed mechanization:
C

Before Mechanization After Mechanization

No. of articles produced per month 50,000 48,000

Fringe Benefits 50% of wages

Wages paid per month Rs.400,000

Sales per month (value) Rs.2,400,000

P/V ratio 25%

Based on the above data, you are required to work out the annual financial implication of the
proposal.

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(Ans: Increase in contribution: 1,008,000)

Question No.19 Find out the labour cost per hour if a worker is paid Rs.200 per month in addition
to DA (Dearness Allowance) of Rs.50 per month. He is entitled to bonus @ 10% on wages.
Employer’s contribution is 8 1/3 of wages towards contributory provident fund and 1% towards
ESI scheme. The employee’s contribution towards ESI scheme is ½ %. The worker is entitled to
leave on full pay for 1/20 of days worked. The employer maintains a canteen where subsidized tea
and lunch are provided to workers and a monthly subsidy of Rs.1000 is provided to the canteen.
The total number of the employees who take advantage of this canteen is 200. Normal idle time

AN
amounts to 20%. The average working days in a month are 25 of 8 hours each. (Ans:1.
93 per hour)

C
Question No. 20In a manufacturing concern producing a single product the following actual figures
are available:

Sales
-I
2,399,040
Costs:
s
nt

Direct Labour 514,080

Materials 599,760
ra

Variable overheads 526,320

Fixed Overheads 530,000
pi

Actual hours worked by Direct Labourers 206,000 hours

As

As a consequence of labour turnover 6,000 productive hours are lost due to delays in recruitment, 4
,000 relating to training replacements are included in actual hours worked which may be reckoned
A

as 2000 hours of full productive hours.

C

Find the profit foregone as a result of labour turnover, assuming that all products due to increased
production can be sold at the prevailing price. (Ans:Profit foregone 29,760)

Question No. 21During the Audit of Accounts of Ambe Steels, your assistant found errors in the
calculation of the wages of factory workers and he wants you to verify his work.

He has extracted the following information:

• The contract provides that the minimum wage for a worker is his base rate. It is also
paid for down times i.e. the machine is under repair or the worker is without work. The

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standard work week is 40 hours. For overtime production, workers are paid 150
percent of base rates.

• Straight piece work: The worker is paid at the rate of 20 paisa per piece.

• Percentage bonus plan- Standard quantities of production per hour are established by
the engineering department. The worker’s average hourly production, determined from
his total hours worked and his production, is divided by the standard quantity of
production to determine his efficiency ratio. The efficiency ratio is then applied to his
base rate to determine his hourly earnings for the period.

AN
• Emersion Efficiency plan: A minimum wage is paid for the production upto 66-2/3 of
standard output or efficiency. When the workers production exceeds 66-2/3 of the

C
standard output, he is paid bonus as per the following table:

Efficiency Level Bonus

-I
s
Up to 66-2/3 % Nil
nt

Above 66-2/3 to 79% 10%

ra

80% - 99% 20%

pi

100% - 125% 45%

As

Your assistant has produced the following schedule pertaining to certain workers of a
weakly payroll:
A

Workers Wage Total Down Units Standard Base Gross

incentive Hours Time Produced unit Rate Wage as
C

plan Hours per book

Rajesh Straight Piece 40 5 400 - 1.80 85
rate
Mohan* Straight Piece 46 - 455 - 1.80 95
rate
John Straight Piece 44 - 425 - 1.80 85
rate
Harish Percentage 40 4 250 200 2.20 120
Bonus Plan
Mahesh Emerson 40 - 240 300 2.10 93
Anil Emerson 40 - 600 500 2.00 126
*Total hours of Mohan include 6 overtime hours.

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Prepare a schedule showing whether the above computations of worker’s wage are correct or not.
Give details

Question No. 22If the activity ratio and capacity ratio of a company is 104% and 96% respectively.
Find out it’s efficiency ratio. (Ans.108.33%)

Question No. 23 An article passess through five hand operations as follows:

Operation No. Time per article Grade of worker Wage Rate per Hour

1 15 min A 0.65

AN
2 25 min B 0.50
3 10 min C 0.40
4 30 min D 0.35

C
5 20 min E 0.30
-I
The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a
s
statement showing for each operation and in total the number of operations required, the labour
nt

cost per dozen and the total labour cost per week to produce the total targeted output.
ra

Group Bonus Plan: The plans described above are all individual bonus plans. Many times output of
pi

individuals cannot be measured. Similarly, the output of individual is dependent on the

performance of the group. In such cases, rather than implementing individual bonus systems, group
As

bonus system is implemented. The total amount of bonus, which is determined according to
productivity, can then be shared equally or in agreed proportion between the group members. The
main objects of group bonus system are as follows.
A

Creation of team spirit. Elimination of excessive waste of materials and time. Recognition
C

of group efforts. Improving productivity.

Question No. 24XYZ Ltd. has introduced a Scanlon plan of incentive bonus for its employees from
the year 2006-07. The relevant information for three previous years is as follows.

Year Sales Revenue Rs. Total Salaries and Wages Rs

2003-04 2, 40, 000 72, 000

2004-05 2, 50, 000 70, 000

2005-06 2, 70, 000 86, 400

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For the year 2006-07, the sales revenue has been Rs.3, 25, 000 and the total salaries and wages paid
Rs.90, 000. What is the amount due to employees under Scanlon Plan? If 50% is set-aside in the
bonus equalization reserve fund, how much money is to be paid out for 2006-07 as Scanlon Bonus?

(Ans: Bonus available for disbursement = Rs.3, 832)

Question No. 25In a unit 10 men work as a group. When the production for the group exceeds the
standard output of 200 pieces per hour, each man is paid an incentive for the excess production in
addition to his wages at hourly rates. The incentive is at half the percentage, the excess production
over the standard bears to the standard production. Each man is paid an incentive at the rate of this
percentage of a wages rate of Rs.2 per hour. There is no relation between the individual workman’s
hourly rate and the bonus rate.

AN
In the week, the hours worked are 500 hours and the total production is 120,000 pieces.

a) Compute the total amount of the bonus for the week.

C
b) Calculate the total earnings of the two workers A and B of the Group
A worked 44 hours and his basic rate per hour was Rs. 2.20.
-I
B worked 48 hours and his basic rate per hour was Rs. 1.90

(Ans: Total Bonus Rs.100 Total Earning A: Rs.105.60 B: 100.80)

s
nt

Question No. 26Both Direct and Indirect labour of a factory are entitled to production bonus in
accordance with the Group Incentive scheme, the outlines are as follows:
ra

a. For any production in excess of the standard rate fixed at 10,000 tonnes per month (of 25
days) a general incentive of Rs. 10 per tonne is paid in aggregate. The total amount payable
pi

to each separate group is determined on the basis of an assumed percentage of such excess
production being contributed by it, namely @ 70% by direct labour, @ 10% by inspection
As

staff, @12 % by maintenance staff and @ 8% by supervisory staff.

b. Moreover, if the excess production is more than 20% above the standard, direct labour also
gets a special bonus @ Rs.5 per tonne for the all production in excess of 120% standard.
A

c. Inspection staff are penalized @ Rs.20 per tonne for any rejection by customer in excess of
1% of production.
C

d. Maintenance staff are also penalized @ Rs.20 per hour of machine break down.
From the following particulars for a month, work out the gross and net production bonus
earned by each group:
Actual working days 20
Production 11,000 tonnes
Rejection by customer 200 tonnes
Machine Breakdown 40 bours
(Ans: Gross incentive: 37,000 Net: 34,400 DL: 28,000, IS: 1,200 MS: 2,800 SS: 34,400)

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SELF-EXAMINATION QUESTIONS

SE.1A company uses an old method of machining a part manufactured for sale. The estimates of
operating details for the year 2005-06 are given below.

Number of parts to be manufactured and sold: 30, 000

Raw materials required per part: 10 kg @ Rs.2 per kg

Average wage rate per worker: Rs.40 per day of 8 hours

Average labor efficiency: 60%

AN
Standard time required to manufacture one part: 2 hours

Overhead rate: Rs.10 per clock hour

C
Material handling expenses: 2% of the value of raw material.

-I
The company has a suggestion box scheme and an award equivalent to three months saving in labor
cost is passed on to the employee whose suggestion is accepted. In response to this scheme
suggestion has been received from an employee to use a special Jig in the manufacture of the
s
aforesaid part. The cost of the Jig, which has life of one year is Rs.3, 000 and the use of the Jig will
nt

reduce the standard time by 12 minutes.

Required: [a] Compute the amount of award payable to the employee who has given the suggestion
ra

. [b] Prepare a statement showing the annual cost of production before and after the
implementation of the suggestion to use the Jig and indicate the annual saving. [c] State the
pi

assumptions on which your calculations are based.

As

(Ans: Award: Rs.12500 b) Total cost 1. Before suggestion 2112000 After:1,965,000)

SE 2.A company has its factories at two locations. Rowan plan is in use at location A and Halsey plan
at location B. Standard time and basic rate of wages are same for a job which is similar and is
A

carried out on similar machinery. Time allotted is 60 hours. Job at location A is completed in 36
hours while at B, it has taken 48 hours. Conversion costs at respective places are Rs.1224 and Rs.
C

1500. Overheads account for Rs.20 per hour.

Required: I] Tofind out the normal wage rate and, II] To compare the respective conversion cost.

(Ans: Both A and B Rs.10 per hour, Conversion cost: A: 1224 B: 1500)

SE 3.During one week the workman X manufactured 200 articles. He receives wages for a
guaranteed 44 hours week at the rate of Rs.15 per hour. The estimated time to produce one article
is 15 minutes and under incentive scheme the time allowed is increased by 20%.

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Calculate his gross wages under each of the following methods of remuneration. [a] Time rate [b]
Piece rate with a guaranteed weekly wage [c] Rowan premium bonus [d] Halsey premium bonus,
50% to workman.

(Ans: a) Rs.60 b) 900 c) 836 d) 780)

SE 4.In a factory bonus system, bonus hours are credited to the employees in the proportion of time
taken which time saved bears to time allowed. Jobs are carried forward from one week to another.
No overtime worked and payment is made in full for all units worked on, including those
subsequently rejected. From the following information you are required to calculate for each
employee –

AN
[a] The bonus hours and amount of bonus earned.

[b] The total wage costs and

C
[c] The wages cost of each good unit produced.

Particulars

Time Rate per hour

Worker A

Rs.10
-I Worker B

Rs.16
Worker C

Rs.12
s
Units produced for production 2500 2200 3600
nt

Time allowed for 100 units 2 hrs 36 minutes 3 hours 1 hour 30 minutes
ra

Time taken 52 hours 75 hours 48 hours

pi

Rejects 100 units 40 units 400 units

As

(Ans: a) Bonus hours: A. 10.4 hours B: Nil C. 5.33 hrs Total wage: A: 624 B. 1200 C: 640 Wage
cost per unit: A: 0.26 B: 0.56 C: 0.20)

SE.5The following particulars of Soni& Co. relate to the year ending 31st March, 2013 for 30
A

workers:
C

Rs.

Basic wages 50,000

Dearness allowance 25,000

Night shift allowance 9,600

Overtime allowance 7,000

PF deposit 12,000

ESI contribution 2,808

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Recovery towards house rent 10,200

Recoveries against supply of goods 16,000

Expenditure for employees’ amenities 4,730

PF is paid in equal share by the employer and employee. Contribution to ESI is in proportion of 7:5
by the employer and employee respectively. The workers are entitled to 5% of the total days
worked as leave on full pay. The number of days worked in a year is 300. Normal idle time is 5%.
Assuming that all the items are evenly spread over all the days in a year find out total wages, total
cash payment to workers and per hour per labour wages. The daily working hours are 8.

(Ans:Total wages: 103,968 Total Cash Payment:58,230 Cost per man Hour: 1.60)

AN
C
-I
s
nt
ra
pi

End of Chapter 3
As
A
C

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