CHPATER 4 ACCOUNTING FOR LABOUR Flashcards
What is the payroll department as a remuneration method
The payroll department is involved in carrying out functions that relate input labour costs to the work done.
Preparation of the payroll involves calculating gross wages from time and activity records.
The payroll department also calculates net wages after deductions from payroll.
The payroll department also carries out an analysis of direct wages, indirect wages, and cash required for payment.
There are two basic approaches to remuneration – time-related or output-related.
what are time-related systems as a method of remuneration
The most common remuneration method is to calculate pay or wages based on the number of hours an employee works.
Employees are paid a basic rate per hour, day, week or month.
Time-based systems do not on the whole provide any incentive for employees to improve productivity and close supervision is often necessary.
Overtime can be paid at a premium if any extra hours are worked. Overtime is looked at in more detail in section 3.
The formula for a time-based system is as follows.
total wages = (total hours worked x basic rate of pay ph) + (overtime hours x overtime premium)
A guaranteed minimum wage is often required due to minimum wage requirements.
Methods for recording the length of time an employee spends working can include:
time sheets
time cards
job sheets.
How are time records used by organisations to relate labour costs to work done?
It is essential that organisations employ relevant methods in both manufacturing and service industries to relate the labour costs incurred to the work done. One of the ways in which this can be done is to make records of the time spent by employees doing jobs.
Time recording is required both for payment purposes and also for determining the costs to be charged to specific jobs.
In many manufacturing industries employees will be supplied with an attendance record on which to record their time of arrival and departure from the factory. Such records are known as time cards (gate or clockcards) and are used to calculate wages and rates of pay.
Plastic ‘swipe’ cards directly linked to a central computer can also be used.
Activity time records
Another method of relating work done to costs incurred is by the use of activity time records. Activity time records may be either period related or task related.
Period-related timesheets are commonly used in service industries, for example in accountancy firms where time spent working for different clients is analysed, often to the nearest 15 minutes.
Period-related timesheets are records that may cover days, weeks or sometimes longer periods.
Task-related activity time records are known as job sheets, operations charts or piecework tickets. They are generally more accurate and reliable than time-related activity time records, and are essential when incentive schemes are in use.
what are output related systems as a remuneration method
A piecework system pays a fixed amount per unit produced. The formula for a piecework system is as follows.
Total wages = (units produced × rate of pay per unit)
A guaranteed minimum wage is often required due to minimum wage requirements.
Piecework is often combined with a time-based system to provide an added incentive to employees.
what types of piecework systems are there (relating to output related remuneration systems)
There are two main piecework systems that you need to know about:
Straight piecework systems – the same rate per unit is paid no matter how many units are produced. These systems are almost extinct today as employees are more likely to be paid a guaranteed minimum wage within a straight piecework system.
Differential piecework systems – these systems are the most widely used piecework systems and involve different piece rates for different levels of production.
what are incentive schemes
Incentive schemes can be aimed at individuals and/or groups.
Many different systems exist in practice for calculating bonus schemes. General rules are as follows:
They should be closely related to the effort expended by employees.
They should be agreed by employers/employees before being implemented.
They should be easy to understand and simple to operate.
They must be beneficial to all of those employees taking part in the scheme.
what are premium bonus plans?
Most bonus schemes pay a basic time rate, plus a portion of the time saved as compared to some agreed allowed time. These bonus schemes are known as premium bonus plans. For example:
The employee receives 50% of the time saved.
bonus = (time allowed - time taken)/2 x time rate
The proportion paid to the employee is based on the ratio of time taken to time allowed.
bonus = (time taken/time allowed) x time rate x time saved
what are measured days work as an incentive scheme
Measured day work – the concept of this approach is to pay a high time rate, but this rate is based on an analysis of past performance. Initially, work measurement is used to calculate the allowed time per unit. This allowed time is compared to the time actually taken in the past by the employee, and if this is better than the allowed time an incentive is agreed, e.g. suppose the allowed time is 1 hour per unit and that the average time taken by an employee over the last three months is 50 minutes. If the normal rate is $12/hour, then an agreed incentive rate of $14/hour could be used.
what is share of production as an incentive scheme?
Share of production – share of production plans are based on acceptance by both management and labour representatives of a constant share of value added for payroll. Thus, any gains in value added – whether by improved production performance or cost savings – are shared by employees in this ratio.
what is the distinction between direct and indirect labour
One of the most important distinctions of labour is between direct and indirect costs.
Direct labour costs make up part of the prime cost of a product and include the basic pay of direct workers.
Direct workers are those employees who are directly involved in producing the output of the business.
Indirect labour costs make up part of the overheads (indirect costs) and include the basic pay of indirect workers.
Indirect workers are those employees who are not directly involved in producing the output of the business, (for example, maintenance staff, factory supervisors and canteen staff).
Indirect labour costs also include the following:
Bonus payments.
Benefit contributions.
Idle time (when workers are paid but are not making any products, for example when a machine breaks down).
Sick pay.
Time spent by direct workers doing ‘indirect jobs’ for example, cleaning or repairing machines.
what are overtime premiums
If employees are entitled to extra pay when hours in excess of contracted hours are worked then they will be paid for overtime. When employees work overtime, they receive an overtime payment which includes a basic pay element and an overtime premium.
how are overtime payments classified into direct/indirect labour costs
It is important that the overtime payment is analysed correctly into direct and indirect labour costs.
Basic pay (whether it relates to overtime or normal working hours) is always classified as a direct labour cost for direct labour workers.
Overtime premiums are usually classified as an indirect labour cost but if the extra hours are at the specific request of a customer because they want a job to be finished as soon as possible they can be classified as direct labour.
Employees who work night shifts, or other anti-social hours may be entitled to a shift allowance or shift premium. Shift premiums are similar to overtime premiums where the extra amount paid above the basic rate is treated as an indirect labour cost.
how are labour costs accounted for
Labour costs are recorded in an organisation’s statement of profit and loss. Accounting transactions relating to labour are recorded in the labour account.
The labour account is debited with the labour costs incurred by an organisation. The total labour costs are then analysed into direct and indirect labour costs.
Direct labour costs are credited from the labour account and debited in the work-in-progress (WIP) account. Remember, direct labour is directly involved in production and are therefore transferred to WIP before being transferred to finished goods and then cost of sales.
Indirect labour costs are credited from the labour account and debited to the production overheads account. It is important that total labour costs are analysed into their direct and indirect elements.
what is labour turnover and its formula
Labour turnover is a measure of the proportion of people leaving relative to the average number of people employed.
Management might wish to monitor labour turnover, so that control measures might be considered if the rate of turnover seems too high.
Labour turnover is calculated for any given period of time using the following formula:
number of leavers who require replacement/average number of employees x 100
what are the causes of labour turnover
Causes
It is important to try to identify why people leave an organisation and to distinguish between avoidable and unavoidable causes of labour turnover.
Causes of labour turnover – avoidable:
poor remuneration
poor working conditions
lack of training opportunities
lack of promotion prospects
bullying in the workplace.
Causes of labour turnover – unavoidable:
retirement
illness/death
family reasons (e.g. pregnancy)
relocation.
Efficient managers will investigate high levels of labour turnover and aim to keep that turnover rate at a minimum.
