Cost Accounting

An Introduction
Introduction
Cost is a measurement, in monetary terms, of
the amount of resources used for the purpose of
production of goods or rendering services.
Cost is the amount of actual or notional
expenditure relating to a product, job, service,
process or activity.
Cost is often used as a generic term to describe
various types of costs.
Costing is the technique and process of
ascertaining costs.
Introduction
Cost Accounting is the process of accounting from the
point at which expenditure is incurred or committed to
the establishment of its ultimate relationship with cost
centers and cost units. It includes:
Collecting, classifying, recording, allocating and analyzing costs
Preparation of periodical statements and reports for ascertaining
and controlling costs
Application of cost control methods
Ascertainment of profitability of activities carried out or planned.
Cost Accounting is the processing and evaluation of
monetary and non-monetary data to provide information
for internal planning, control of business operations,
managerial decisions and special analysis.
Introduction
Cost Accountancy is the application of costing and cost
accounting principles, methods and techniques to the
science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation
of information derived there from for the purpose of
managerial decision making.
Objectives of Cost Accounting
To ascertain cost
To control cost
To provide information for decision making
To determine selling price
To ascertain costing profit
Advantages of Cost Accounting
Helps in ascertainment of cost
Helps in control of cost
Helps in decision making (make or buy, retain or replace, continue
or shut down, accept or reject orders, etc)
Helps in fixing selling prices
Helps in inventory control
Helps in cost reduction
Helps in measurement of efficiency
Helps in preparation of budgets
Helps in identifying unprofitable activities
Helps in identifying material losses
Helps in identifying idle time, idle capacity
Helps in improving productivity
Helps in cost comparison
Essentials of a Good System
Suitability to the nature of business
Tailor made system to meet requirements of the business
Simplicity easy to understand and simple to operate
Economical to install and operate
Flexibility to adapt to the changing business needs
Accuracy must provide accurate information
Promptness of information
Support of staff must have staff co-operation and participation
Cost control must ensure cost control in various fields
Clearly defined Cost Centers least ambiguity
Detail give relevant details but avoid unnecessary detail
Cost Concepts
Cost Unit Is a unit of product, service or time in terms of which
costs are ascertained or expressed. It is a unit of measurement.
Responsibility Centers is the unit or function of an organization
under the control of a manager who has direct responsibility for its
performance. E.g. Cost Center, Revenue Center, Profit Center,
Contribution Center, Investment Center.
Cost Center Is a location, person or item of equipment for which
costs may be ascertained and used for the purposes of cost control.
Types of Cost Centers:
Personal Cost Center person or group of persons
Impersonal Cost Center location or equipment
Production Cost Center where actual production takes place
Service Cost Center departments which render service to other cost
centers
Cost Object any product, service, process or activity for which a
separate measurement of cost is required.
Financial & Cost Accounting
No. Basis Financial Accounting Cost Accounting
1. Objective
Financial performance and
position
Ascertain cost and cost control
2. Costs and profits
Shows overall costs and profit /
loss
Shows details for each product,
process, job, contract, etc
3. Control / Report Emphasis on reporting
Emphasis on control and
reporting
4. Decision making Limited use Designed for decision making
5. Responsibility Does not fix responsibility Can effectively fix responsibility
6. Time frame Focus on historical data Focus on present and future
7. Type of reports
General reports like P&L
Account, Balance Sheet, Cash
Flow Statement
Can generate special reports
and analysis
8. Legal need Statutory requirement
Voluntary, except for some
cases
9. Transactions Records external transactions
Records internal and external
transactions
10. Reader Everybody Internal management
11. Formats Standard, as per law Tailor made
12. Access Everybody, except for some Very limited access
13. Unit of value Monetary Monetary and physical

Methods of Costing
No. Costing Method Meaning Application
1. Job Costing
A job, product, batch, contract,
service or any specific order is
treated as a cost unit.
Engineering, Construction, Ship
Building, Pharmaceuticals, etc
Contract Costing
For specific orders, contract or
service.
Construction, Engineering, etc
Batch Costing Production is done in batches.
Garments, Pharmaceuticals,
Components, Toys, Tyres,
Tubes, etc
2. Process Costing
Products subject to a process;
output of one process becomes
input for the next process.
Paper, Chemicals, Textiles,
Sugar, etc

Operation
Costing
Type of operations performed is
monitored.
Engineering, Textiles, etc
Unit Costing
Single product, process
involved or where product is
uniform, continuous and
identical.
Cement, Steel, etc
Service Costing For service operations
Transport, Railways, Hotels,
Hospitals, etc.

Multiple or
Composite
Costing
Application of two or more
costing methods. Involves
manufacturing and assembly
operations.
Vehicles, Consumer Goods, etc

Costing Techniques
No. Costing Technique Description
1. Marginal Costing
Charging variable costs to operations, processes or products
and writing off all fixed costs against profits in the period in
which they arise.
2. Direct Costing
Charging all direct costs to operations, processes or products
and writing off all indirect costs against profits in the period in
which they arise.
3. Absorption Costing
Charging all variable costs and fixed production overheads to
operations, processes or products and writing off selling,
distribution and administration overheads against profits in the
period in which they arise.
4. Uniform Costing
Using the same costing principles and / or practices by a
number of firms in the same industry. Helps in inter-firm
comparison, price fixation, cost control / reduction and seeking
government tax relief / protection.
5. Standard Costing
System which involves fixation of cost standards, ascertain
variances of actual cost with standard cost, variance analysis
and presentation for corrective action and decision making.
6. Budgetary Control
System which involves establishment of budgets, comparison
of actual with budget, variance analysis and corrective action.
7. Historical Costing Actual cost ascertained after it has been incurred.

Cost Treatment
Cost Ascertainment is the process of determining actual
costs after they have been incurred.
Cost Estimation is the process of determining future
costs in advance before production starts, on the basis
of actual past cost adjusted for anticipated future
changes.
Cost Allocation is the process of charging the full amount
of an individual item or cost directly to the cost center for
which the item of cost was incurred.
Cost Apportionment is the process of charging the
proportion of common items of cost to two or more cost
centers on some equitable basis.
Cost Absorption is charging cost from cost centers to
products or services by means of a pre-determined
absorption rate.
Cost Classification
Classification Meaning Example
By Nature or Element
Direct Material Cost
Which can be directly allocated to a
product, job or process
Basic raw material,
primary packing material
Indirect Material Cost
Which cannot be directly allocated to a
product, job or process
Stores, consumables,
some low value items
Direct Labour Cost
Labour directly engaged for a specific
job, contract or work order.
Shop floor labour
Indirect Labour Cost
Labour not directly engaged for a
specific job, contract or work order.
Staff departments
Direct Expenses
All direct costs other than materials
and labour costs.
Processing charges,
machine hire charges,
excise duty, etc
Indirect Expenses
All indirect costs other than indirect
materials and indirect labour costs.
Rent, repairs, telephones,
electricity, utility costs,
insurance, depreciation
Factory Overheads
Sum of indirect material, indirect labour
and indirect expenses for the factory.

Administration
Overheads
Sum of indirect material, indirect labour
and indirect expenses for the office.

Selling Overheads
Sum of indirect material, indirect labour
and indirect expenses for selling.

Distribution
Overheads
Sum of indirect material, indirect labour
and indirect expenses for distribution.


Cost Classification
By Function
Production Cost
Sum of direct material, direct labour,
direct expenses and factory overheads.

Administrative Cost
Cost of the Admin Department for the
management of the organization.

Selling Cost
Cost for seeking to create and
stimulate demand and secure orders.

Distribution Cost
Costs for making the packed product
ready for dispatch to recovery of
material for recycling, if any.

Research Cost
Costs for developing new or improved
product / application.

Pre-Production Cost Cost of trial run or production.
By Relation to Cost Center
Direct Cost
Sum of direct material, direct labour
and direct expenses of the Cost
Center.

Indirect Cost
Sum of indirect material, indirect labour
and indirect expenses of the Cost
Center. Also called as Overhead Cost.
This cost is apportioned
to the Cost Center.

Classification Meaning Example

Cost Classification
By Variability / Behaviour
Fixed Cost
Costs that do not vary with the volume
of production.
Rent, insurance, salary
Variable Cost
Costs that vary directly with the volume
of production.
All direct costs, variable
overheads
Semi-Variable / Semi-
Fixed Cost
Costs where one part remains fixed in
a given range and the other part varies
with volume of production.
Telephones, electricity
By Controllability
Controllable Cost
Costs that can be influenced by a
decision maker at a particular level.
Direct costs
Uncontrollable Cost
Costs that cannot be influenced by a
decision maker at that particular level.
All costs can ultimately be
controlled at the top.
By Normality
Normal Cost
Cost that is normally incurred at a level
of operation.
Cost as per standard
Abnormal Cost
Cost that is not normal at the level of
operation.
Abnormal loss, abnormal
idle time

Classification Meaning Example

Cost Classification
By Inventory
Product Cost Cost that is absorbed to value of stock Manufacturing costs
Period Cost Cost that are expensed out. Fixed costs
Expired Cost
Costs incurred for generating revenue.
Expensed cost.
COGS, admin expenses
Deferred Cost
Unexpired cost, capitalized cost,
deferred revenue expenditure would
provide benefits in future periods.
Fixed assets, prepaid
expenses, R&D expenses
By Time
Historical Cost
Actual cost ascertained after it has
been incurred.

Pre-determined Cost
Future cost ascertained in advance
could be standard or estimated cost

Standard Cost
What the cost should be - based on
engineering specifications and efficient
operating conditions
Standard material and
labour costs
Estimated Cost
What the cost will be - estimated on the
basis of past experience adjusted for
anticipated changes.
Projection for actual
material cost for next year

Classification Meaning Example

Cost Classification
By Decision Making
Relevant Costs
Cost that is relevant for making the
underlying decision.

Irrelevant Costs
Cost that is not relevant for making the
underlying decision.

Sunk Costs
Historical or past cost already incurred
and cannot be changed.

Shut-Down Costs
Fixed costs to be incurred even when
the plant is shut down.

Out of Pocket Costs Costs that involve cash outlay.
Opportunity Costs
The value of sacrifice made in
accepting an alternate course of action.

Imputed Costs
Notional costs that do not have a cash
outlay, are similar to opportunity cost.
Rent of own premises,
interest on own capital
Differential Costs
Increase or decrease in cost due to
change in activity level. Also called
incremental cost.

Marginal Cost
Total variable cost attributable to one
unit of product. Incremental cost of
making one unit of product.

Replacement Cost Current cost of an identical asset.
Conversion Cost
Cost of converting raw material into a
finished product.

Committed Costs
Costs that are committed and have to
be incurred.

Discretionary Costs Costs that can be avoided.

Classification Meaning Example

Cost Audit
Cost Audit is the verification of cost accounts and a check on the
adherence to the Cost Accounting plan. It comprises of verification
of the cost records and ensuring that they adhere to the principles of
cost accounting.
Purpose of Cost Audit are protective (examine undue wastage /
losses to reflect realistic cost of production) and constructive
(provide information for management decision making).
Items excluded from Cost Accounts items of financial nature like
Other Income, Finance Costs, Financial Accounting adjustments
and appropriations. These include profit on sale of fixed assets /
investments, interest income / expense, dividend / rent income,
preliminary expenses written off, tax, cash discount, provision for
doubtful debts, etc.
Cost Components
No. Cost Component Description
1. Prime Cost
Direct Material Cost + Direct Labour Cost + Direct Expenses
(Direct Material Cost = Opg. Stock of RM + Net Purchase Cost
Clg. Stock of RM)
2.
Works or Factory
Cost
Prime Cost + Factory Overheads + Opg. Stock of WIP Clg.
Stock of WIP
3.
Cost of Production
or Cost of Goods
Produced
Factory Cost + Admin Overheads
4. Cost of Goods Sold Cost of Production + Opg. Stock of FG Clg. Stock of FG
5. Cost of Sales Cost of Goods Sold + Selling & Distribution Overheads

Costing P&L Account
No. Particulars Amount Per Unit
A
Direct Material Cost
= Opening Stock of Materials
+ Purchases
+ Expenses on Purchases
- Purchase Returns
- Closing Stock of Materials
- Value of Normal Scrap of Direct Materials
(on number of units produced)
B
Direct Labour Cost
= Direct Labour Cost Paid
+ Outstanding / Payable
- Prepaid
(on number of units produced)
C Direct Expenses (on number of units produced)
D Prime Cost = (A + B + C) (on number of units produced)
E
Works / Factory Overheads
= Factory Overheads Paid
- Value of Normal Scrap of Indirect Materials
+ Opening Stock of WIP
- Closing Stock of WIP
(on number of units produced)
F Works or Factory Cost = (D + E) (on number of units produced)
Costing P&L Account
No. Particulars Amount Per Unit
G Office and Admin Expenses (on number of units produced)
H Cost of Goods Produced = (F + G) (on number of units produced)
I
FG Stock Adjustment
+ Opening Stock of FG
- Closing Stock of FG
J Cost of Goods Sold = (H + I) (on number of units sold)
K Selling & Distribution Expenses (on number of units sold)
L Cost of Sales = (J + K) (on number of units sold)
M Profit (on number of units sold)
N Sales = (L + M) (on number of units sold)
Material Cost
Fundamentals
Material Cost
Material Cost can be Direct and Indirect
Direct Materials are those which can be
identified with and directly allocated to the
product, job or process.
Includes basic material and primary packing
material
Indirect Materials are those which cannot be
easily identified with and directly allocated to the
product, job or process.
Includes stores, consumables, small value
materials
Direct Material Cost
The total direct material cost includes:
Purchase price
Customs Duty, Excise Duty, VAT, CST, Octroi
Inward freight
Insurance
Directly attributable expenses like packing expenses,
inspection, storage, delivery, etc
(Less) Volume or Trade Discounts
Rebates, Duty Drawback, MODVAT, Subsidies, etc
(Less) Cost of containers recovered on return
Objectives of Material Control
Avoid under stocking or shortages
Avoid over stocking and obsolescence
Ensure proper quality from reliable sources
Explore alternate sources and reduce cost
Reduce total cost of materials, including
ordering and carrying costs
Avoid wastages and losses in storage and use
Maintain proper inventory records
Provide information for decision making
Requirements for Material Control
Proper co-ordination
Proper purchase system
Proper storage system
Proper issue system
Perpetual inventory system
Continuous stock taking system
Budgetary control system
Proper documentation
Proper accounting system
Proper reporting system
Documents for Materials
Purchase of Materials
Bill of Materials (BoM)
Purchase Requisition
Supplier Selection
Purchase Order
Goods Received Note
Inspection Note
Return of Rejected Material
Bill Passing
Making Payment to Supplier
Issue of Materials
Bin Card
Stores Ledger
Material Requisition
Material Return Note
Material Transfer Note
Material Losses
Waste portion of raw material lost during processing or storage, having no
recovery value
Arises due to shrinkage, evaporation, chemical reaction, etc
Scrap incidental residue manufacturing operations usually of small
amount and low value recoverable without further processing
Arises due to processing of material, defective or broken parts and
obsolescence / abortion of development projects
Defective Work work that has some imperfections which can be rectified
by additional material or processing
Arises due to improper product design, bad raw material, poor
workmanship, inadequate supervision, improper material handling, defective
machinery or improper training
Spoiled Work work that cannot be reconditioned or brought to standard
and must be sold as scrap or seconds
Arises due to improper product design, improper machinery or process
used, improper material quality or untrained operators
Normal Loss is charged to the particular job or as production overheads
Abnormal Loss is charged to Costing Profit & Loss Account
Controlling Material Loss
Proper product design
Proper selection of manufacturing process
Proper selection of machinery & equipment
Proper process control
Proper storage and material handling
Trained manpower
Proper record keeping
Proper control system having scientific standards
Proper reporting system
Defined accountability
Corrective action
Materials Issue Pricing
Cost Price Methods
FIFO (First In First Out)
LIFO (Last In First Out)
HIFO (Highest In First Out)
Base Stock Price
Average Price Methods
Simple Average
Weighted Average
Periodic Simple / Weighted Average
Moving Simple / Weighted Average
Notional Price Methods
Standard Price
Inflated Price
Replacement or Market Price
Weighted Average and FIFO Methods are used in Accounting
Inventory Control
Inventory is tangible property or assets held
for sale in the ordinary course of business or
in the process of production for sale or
for consumption in the production of goods or services for sale including
maintenance supplies and consumables other than machinery spares
Inventory comprises of raw materials, stores & spares, work-in-process and
finished goods
Inventory control includes planning, organizing and controlling purchase and
storage to ensure availability in terms of quantity, quality, timeliness at least
cost
Monitoring level of inventory with respect to production and sales
Releasing material in a systematic manner to ensure quality at least cost
and reduce wastage / obsolescence
Analyze inventory levels and suggest optimal and alternate uses of material
including value engineering
Ensure physical stock taking to avoid pilferage
Provide information for inventory valuation
Techniques of Inventory Control
ABC Analysis
Economic Order Quantity (EOQ)
Stock Levels minimum, maximum, reorder level,
reorder quantity
Inventory Turnover Ratio
Slow and Non-Moving Items
Purchase, Storage and Issue Procedure
Two Bin System
Perpetual Inventory Records and Continuous Stock
Verification
Budgetary System
ABC Analysis
A: 70% value, 10% items
B: 20% value, 20% items
C: 10% value, 70% items
Ensures control on high value items
Saves time and cost of monitoring
Reduces total investment in inventory
Facilitates faster decision making
Better utilization of resources
Better physical control of stock
Economic Order Quantity (EOQ)
Level at which the ordering and carrying costs are
minimum. At EOQ, the ordering and carrying costs are
equal.
Ordering Cost includes costs for placing an order,
transportation, receiving goods and inspecting goods
Ordering Cost reduces with order size
Carrying Cost includes costs for storage space, handling
materials, insurance, obsolescence and personnel.
Carrying Cost increases with order size
Dependent on periodicity and annual material
consumption
EOQ determines quantity to be ordered at a given time
EOQ Technique
Assumes prior knowledge of annual usage, constant usage rate,
constant ordering cost, constant carrying cost and zero lead /
delivery time
EOQ can be determined by graphical, tabular or formula method
Find the level at which total of ordering and carrying cost is least or
ordering cost equals carrying cost
EOQ = (2AO / C) where A = Annual Consumption, O = Ordering
Cost per order and C = Carrying Cost per order
EOQ = (2AO/IP) where I = Inventory or Stock Holding Cost (as %
of average stock value) and P = Price per unit
Economic Order Frequency (in days) = 365 / (Number of orders per
year)
Total annual ordering and carrying cost at EOQ = (2AOC)
Stock Levels
Maximum Stock Level is the maximum stock
level that can be held in store.
It avoids cost of over-stocking such as costs for
storage, investment, insurance and risk of
obsolescence
Dependent on reorder level, reorder quantity,
rate of consumption, reorder period, availability
of funds and storage space, cost of storage,
insurance, obsolescence, price fluctuation, etc
Formula: Maximum Level = Reorder Level +
Reorder Quantity (Minimum Consumption x
Minimum Reorder Period)
Stock Levels
Minimum Stock Level is the level below which the stock
should not be allowed to fall
Dependent on reorder level, rate of consumption and
reorder period
Formula: Minimum Level = Reorder Level (Normal
Consumption x Reorder Period)
Reorder Level is the level of stock at which fresh
replenishment order should be placed
Dependent on consumption rate, reorder period and
minimum level
Formula: Reorder Level = Maximum Consumption x
Maximum Reorder Period OR Minimum Level + (Normal
Consumption x Reorder Period)
Stock Levels
Average Stock Level = Minimum Level + Reorder
Quantity OR (Minimum Level + Maximum Level) / 2
Danger Level is the level at which only emergency
material issue is done (normal material issue is stopped)
It is a level at which urgent ordering action is required
If Danger Level is below Minimum Level, urgent
corrective action is required
If Danger Level is above Minimum Level, it calls for
preventive action
Dependent on rate of consumption and reorder period
Formula: Normal Consumption Rate x Maximum
Reorder Period for emergency purchases
Inventory Turnover Ratio
Indicates the speed with which inventory is consumed
A high ratio indicates fast moving stock, low ratio
indicates slow moving stock
Inventory Turnover Ratio = Materials Consumed /
Average Stock Held expressed in times
Materials Consumed = Opening Stock + Purchases
Closing Stock
Average Stock = (Opening Stock + Closing Stock)
Days of Inventory = 365 / Inventory Turnover Ratio
Can be computed for stock categories to determine fast
moving, slow moving, dormant or obsolete stock
Ideal level is determined with reference to level of other
firms or the industry average
Other Techniques
Two Bin System Bin has two parts, the smaller one for
reorder stock level and the other for the remaining
material
Issues are made from the larger bin, fresh order placed
when it become empty, material used from smaller bin till
replacement received and filled
Periodic Inventory System Physical stock taking done
periodically, requiring shut down
Records then physically reconciled
Perpetual Inventory System Records updated at every
receipt and issue
Done using bin cards and stores ledger
Continuous stock taking done by random checks of the
bin cards and stores ledger

Labour Cost
Fundamentals
Meaning
Essential factor of production
A human resource that participates in the
process of production
Two Categories Direct & Indirect Labour
Labour Cost controlled by:
Personnel Department
Engineering / Work Study Department
Time Keeping Department
Payroll Department
Cost Accounting Department
Labour Cost Control
Manpower requirement assessment
Time and Motion Study
Job Evaluation and Merit Rating
Labour Productivity
Wage Systems
Incentive Systems
Time Keeping and Time Booking
Labour Turnover
Casual and contract workers
Time Keeping
Statutory attendance record
Maintain discipline and punctuality
Payroll preparation
Ascertain Overtime
Ascertain Idle Time
Ascertain Labour Cost
Provide basis for apportionment
Control Labour Cost
Maintained using Attendance Register / Muster,
Token / Disc Method and Time Clocks / Clock
Card
Time Booking
Records time spent by each worker on various
jobs / orders / processes
Methods:
Daily Time Sheet
Weekly Time Sheet
Job Card or Job Ticket
Time and Job Card
Labour Cost Card / Circulating Job Card
Piece Work Card
Labour Turnover
Rate of change in the composition of labour force due to
retirement, resignation or retrenchment
Defined as the number of workers left or replaced or
both in relation to the average number of workers
Turnover due to personal, avoidable and unavoidable
causes
Cost of Labour Turnover consists of Preventive Cost and
Replacement Cost
Preventive Cost personnel administration, medical &
health care, welfare measures, wage & retirement
benefits
Replacement Cost personnel department expenses,
training of new workers, initial inefficiency, initial
breakages and defectives, time lag in recruitment,
Labour Turnover Measurement
Measurement by Separation Rate Method, Replacement
Rate Method, Flux Method
Separation Rate Method: Number of Separations /
Average Number of Workers x 100
Replacement Rate Method: Number of Replacements
(not normal additions) / Average Number of Workers x
100
Flux Method: (Number of Separations + Replacements)
/ Average Number of Workers x 100
OR
(Number of Separations + Accessions i.e. all
Recruitments) / Average Number of Workers x 100
Types of Labour Cost
Overtime Cost:
Customer requested, charged to specific job
For increased production, charged to total production
Abnormal overtime, charged to Costing P&L Account
Idle Time:
Normal Idle Time, charged to the product
Abnormal Idle Time, charged to Costing P&L Account
Casual Workers, charged to specific job or as production
overhead based on work done
Out-Workers (who do the work in their premises)
normally supply based on piece rate
Outside Workers (outdoor duty) should be monitored to
ensure adequate time booking
Types of Labour Cost
Attendance Bonus are part of wages and treated
accordingly
Shift Premium, charged same as Overtime Cost
Fringe Benefits are part of wages and treated
accordingly
Apprentice Wages, charged as production overhead
Holiday / Vacation Pay, charged as overhead or
accounted in an inflated rate
Leave with pay, accounted in an inflated rate
Employers contribution to employee insurance, charged
as production overhead
Incentive Wage Plans
Premium Bonus Plan - Halsey Plan, Halsey Weir Plan,
Rowan Plan, Barth Plan
Differential Piece Work - Taylor System, Merrick System
Combination of Time and Piece Work - Emersons
Efficiency Plan, Gantt Task and Bonus Plan, Points
Scheme (Bedeaux Plan, Haynes Plan), Accelerated
Premium Plan
Group Incentive Plans Priestmans Production Bonus,
Rucker Plan, Scalon Plan, Towne Gain Sharing Plan,
Budgeted Expenses Bonus
Incentives for Indirect Workers
Profit Sharing
Co-Partnership
Premium Bonus Plans
Halsey Plan: standard time fixed for each work,
guarantees hourly wages for actual time taken, bonus of
50% paid if time saved
Earnings = Time Rate Wages + Bonus
= Actual Time Taken x Time Rate + 50% (Time Saved x
Time Rate)
Halsey Weir Plan: same as Halsey Plan except bonus
is 33% compared to 50% in Halsey Plan
Rowan Plan: same as Halsey Plan except bonus is a
proportion (Time Saved / Time Allowed) x Actual Time
Taken x Time Rate
Barth Plan: Designed for trainees, beginners and slow
workers. Earnings = Time Rate x (Standard Hours x
Time Taken)
Differential Piece Rate System
Lower and higher production rates are defined
Taylors System:
Production < standard output: Earnings are 80% of
normal
Production = or > standard output: Earnings are
120% of normal
Merricks System:
Production < 83% of standard output: Earnings are
100% of normal rate
Production > 83% and < 100% of standard output:
Earnings are 110% of normal rate
Production > 100% of standard output: Earnings are
120% of normal rate
Combination Plans
Emersons Efficiency System:
Up to 66% efficiency, nil bonus
More than 66% and < 100% efficiency, bonus on
step basis (32 bonus steps defined)
More than 100% efficiency, bonus @ 20% of basic
wages + additional bonus @ 1% for each 1%
increase in efficiency
Gantt Task and Bonus System:
Less than standard output, no bonus
At standard output, 120% of time rate
More than standard output, 120% of piece rate
Combination Plans
Bedeaux System or Points Scheme:
Points awarded for each unit of production
Up to standard time, no bonus
If time saved, bonus of time saved is given 75% to worker and
25% to foreman
Haynes System
Job expressed in standard man-minutes
For repetitive work, time saved is shared between worker and
foreman in 5:1 ratio
For non-repetitive work, time saved is shared between worker,
employer and foreman in 5:4:1 ratio
Accelerated Premium System
Bonus rate increases with output
Group Incentive Plans
Priestmans Production Bonus:
Bonus paid in proportion to production in excess of
standard output per week
Rucker Plan
Also known as Cost Saving Sharing Plan
Bonus = fixed proportion of value added (sales
purchased materials & services)
of the monthly bonus is paid out, balance
transferred to reserve fund
Scalon Plan
Similar to Rucker Plan except that bonus is linked to
ratio of direct labour cost to sales value
Group Incentive Plans
Towne Gain Sharing Plan
Bonus calculated as 50% of direct labour
hours saved
Budgeted Expenses Bonus
Bonus determined as a fixed percentage of
savings in actual expenses over the budgeted
expenses
Incentives for Indirect Workers
For expense and service cost centers
Creates goodwill, fosters teamwork and
increases efficiency
Measuring or relating indirect work to production
is difficult
Establish standards for measurable and
repetitive activities
Generally clubbed under group incentive plans
Two Types: Monetary & Non-Monetary
Profit Sharing
Based on overall business prosperity and
is over and above other benefits
Types: Cash Plan, Deferred Credit Plan,
Combined Plan
Minimum bonus for eligible workers
determined under Payment of Bonus Act
Discretionary bonus for all determined by
the management
Paid on a flat percentage or on slab rates
Direct Expenses
Basics
Examples
Cost of designs, drawings, technology, royalty,
patent fees, tools, jigs, fixtures for the job
Special services for layout, machining, testing
related to the job
Fees paid to architect, consultant, surveyor,
insurance, freight, hire charges for special tools
or equipment related to the job, sub-contracting
charges
Generally considered as direct overhead and
then allocated to the job or product