Chapter 3 - Labour Costs Flashcards

1
Q

Factors that affect labour costs

A

Wage rates paid by other local businesses

Comparisons with national average wage rates

The national minimum and living wage rates set by government

Any government incentives to take on additional employees

Housing and transport costs in the locality

The impact of interest rate changes on business confidence

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2
Q

Labour payment methods

A

Time rate - The employee is paid on the basis of time spent at work.

Piecework rate - The employee is paid an agreed amount for each task carried out

Bonus System - The employee is paid a time rate and then receives a bonus if output is better than expected when comparing the time allowed with the time taken. The bonus is calculated as a percentage of the time saved multiplied by the time rate.

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3
Q

Methods to calculate gross wages

A

Time sheets - Employees record the hours they have worked

Clock cards - Employees clock in and clock out

Piecework tickets - Completed by employees who work on a batch of output

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4
Q

Methods to calculate gross wages

A

Time sheets - Employees record the hours they have worked

Clock cards - Employees clock in and clock out

Piecework tickets - Completed by employees who work on a batch of output

Job cards - Each employee records the amount of time spent on each job

Route cards - Used to follow a product through the production process which employees record the amount of time spent on working on the product

Computer cards - Swipe cards which link direct into the computerised payroll

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5
Q

Overtime

A

Overtime payments - For normal cost accounting purposes any overtime worked the overtime premium is charged to indirect labour and the workers normal rate is charged to direct labour.

E.g an employee works on the production line and works 35 hours. The employee works 40 hours at a rate of £12 and is paid at a time and a half. Direct wages cost is 40 x £12 = 480 and the 5 additional hours x £6 is charged to indirect labour.

However, where a customer requests overtime to be worked to get a rush job completed then the full overtime rate is charged as direct labour and passed on as a cost to the customer.

Other additional payments made to employees such as bonuses will be treated in a similar way to overtime premium and will be treated as an indirect labour cost.

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6
Q

Idle time

A

Idle time is when production is stopped through no fault of the production line employees. Employees paid under a piecework or a bonus system will receive time rate for the period. These wage costs are normally charged to overheads as indirect labour.

Also time spent by direct workers on non productive work would also usually be treated as an overhead.

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7
Q

Equivalent units

A

When production employees are paid on the basis of output a calculation of equivalent units may need to be made. This happens when the part of the production at the end of the accounting period is work in progress for the labour content.

E.g 10,000 units have been completed. 2,000 units are work in progress and are 50 percent done. The equivalent units completed for the month will be:

10,000 + (2,000 x 50%) = 11,000 equivalent units.

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8
Q

Using a time sheet

A

In order to calculate gross wages a time sheet is used. A time sheet records:

Hours worked each day, split between production and indirect work

Amount of basic pay each day

Amount of overtime premium each day

Total pay each day

Total hours worked for the week

Total basic pay, overtime premium and pay for the week

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9
Q

Bookkeeping for labour costs

A

A wages control account - which can also includes salaries and links to the payroll accounting system. It is used to charge labour costs to the various cost profit or investment centres of a business or organisation. In this way:

Direct labour costs are charged to production

Indirect labour costs are charged to production overheads

Administration labour costs are charged to non production overheads

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10
Q

Payroll systems

A

Payroll software can be used to ensure compliance with tax rules and real time information reporting for HMRC.

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