F2-06 Accounting For Labour PDF

Session 6
Accounting for Labour
FOCUS
This session covers the following content from the ACCA Study Guide.
B. Cost Accounting Techniques

1. Accounting for material, labour and overheads
b) Accounting for labour
i) Calculate direct and indirect costs of labour.
ii) Explain the methods used to relate input labour costs to work done.
iii) Prepare the journal and ledger entries to record labour cost inputs
and outputs.
iv) Describe different remuneration methods: time-based systems,
piecework systems and individual and group incentive schemes.
v) Calculate the level, and analyse the costs and causes of
labour turnover.
vi) Explain and calculate labour efficiency, capacity and production
volume ratios.
vii) Interpret the entries in the labour account.
Session 6 Guidance
Understand the difference between direct and indirect labour (s.1.1).

Be aware of the various items that may be deducted from the wages of employees (ss.2.1–2.3).
Understand the accounting entries for labour costs (s.2.4). Attempt Example 1.
(continued on next page)

F2 Management Accounting Becker Professional Education | ACCA Study System
Sadia sadia Afzal - [email protected]

VISUAL OVERVIEW
Objective: To describe the principles and practice of costing labour to a business.
LABOUR
• Direct v Indirect
• Accounting Categories
PAYROLL ACCOUNTING LABOUR COST

ACCOUNTING
• Payroll
• Employees' Deductions • Source Documents
• Payslips • Job Costing System
• Accounting Entries • Journal and Ledger
Entries
• Source Documents
• Payroll Analysis
LABOUR TIME AND REMUNERATION LABOUR

WAGE ROUTINES METHODS MEASURES
• Clock Cards • Fixed Salaries • Labour
• Time Sheets • Time Rate Turnover
• Job Cards • Piecework Rate • Labour
Efficiency
• Premium Bonus
Ratios
• Overtime
• Idle Time
Session 6 Guidance
Understand how the labour costs are accounted for in product or job costs (ss.3.2–3.3).
Be aware of different remuneration methods (ss.5.1–5.5).
Calculate labour turnover and labour efficiency ratios (ss.6.1–6.2) and attempt Example 4.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 6-1

Session 6 • Accounting for Labour F2 Management Accounting
1 Labour
1.1 Direct v Indirect Labour Cost

Direct Labour Cost Indirect Labour Cost
Can be specifically traced to Not charged directly to a
or identified with a particular product. Examples include:
product/service. Examples < Instruction and supervision.
include:
< Idle time.
< Wages of operatives
assembling parts into
finished products.
< Machine operatives engaged
in production process.
1.2 Accounting Categories

1.2.1 Payroll Accounting
Records amounts owed to employees, taxing authorities (e.g. HM
Revenue & Customs in the UK), etc.
1.2.2 Labour Cost Accounting

Identifies amounts to be charged to individual jobs and overhead
accounts.
2 Payroll Accounting
2.1 Payroll
< This record, which is usually computerised, shows for each
employee:
 gross wages/salaries;
 employees' deductions; The associated
 net salary (i.e. what the employee actually receives). This employment costs
are the expense of
is equal to the employee's gross salary less the employee's
the employer, not the
deductions. employee, and so are
< It may also include details of the employer's associated not deducted from
employment costs (e.g. employer's social benefit and pension the employee's gross
contributions). salary. The total
 These are additional payments made by the employer. ("gross") cost to the
employer is therefore
 They are often based on the amount of salary and may
the employees' gross
therefore be expressed as a percentage of gross salary. plus the employer's
contributions.
6-2 © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

F2 Management Accounting Session 6 • Accounting for Labour
2.2 Employees' Deductions

In most jurisdictions, employment and tax laws specify that
employees must pay certain taxes and other contributions. The
employer must deduct these from the employee's gross salary,
and pay them over to the tax authorities. The employer is
effectively acting as a collection agent for the government.
The most common employees' deductions are:
< Personal income tax: Employees are liable for personal
income tax on their employment income ("salary"). Employers
deduct this tax from their employees' salaries or wages. At
the end of the year, when an employee completes his personal
income tax return, any difference between his final tax liability
for the year and the personal income tax advances paid by the
employer must be settled (e.g. with a payment to or refund
from the tax authority). Such deductions are often called
personal income tax advances, or "pay as you earn" schemes. Social insurance—a
< Benefit contributions: Employees may be legally required to national (government)
insurance program
make contributions towards social insurance programs (e.g.
which provides benefits
for healthcare or unemployment). (e.g. against sickness,
< Pension contributions: These may be to state pension unemployment).
funds and/or private pension funds (e.g. company pension Employees'
schemes). participation is usually
compulsory. It may
2.3 Payslips be called "social
security" or "national
Employees usually receive a "payslip" or a "pay cheque" showing insurance".
their gross salary minus the deductions.
Illustration 1 Payslip
Period: March 20XX

Employee number: 12345 Employee name: Roberta Smith
$
Gross salary 2,000
Deductions:
Personal income tax 500
Employees' benefit contributions 200
Contributions to company pension scheme 100
Net salary 1,100
The net salary of $1,100 will be paid by bank transfer on
26 March to bank account number 098765.

2.4 Accounting Entries

Monthly (or weekly) ledger entries:
Dr Gross salary expense (income statement) x
Cr Personal income tax payable x
Cr Benefits contributions payable x
Cr Pension contributions payable x
Cr Cash/bank (to employee) x
Periodically (e.g. monthly/quarterly) the employer pays the

balance on the accounts payable to the relevant bodies:
Dr Personal income tax payable x

Dr Benefits contributions x
Dr Pension contributions x
Cr Cash/bank x
Example 1 Accounting Entries
Peter is the management accountant for Big Burger Co. He

receives a monthly gross salary of $5,000. Before paying his
salary, the company makes the following deductions:
(i) Personal income tax advance at the rate of 19% of salary;
(ii) Employees' benefits contributions at 10%;
(iii) Contributions to a private pension scheme of 5%.
In the country where Big Burger Co is located, companies have to
pay 25% employers' benefits contributions.
All deductions made by Big Burger plus all employers' benefit
contributions must be paid to the relevant authorities on the 10th day
of the month following the month in which the employee was paid.
Required:
(a) Calculate Peter's monthly net salary.
(b) Prepare the journal entries to reflect the payroll
calculations for Peter.
(c) Prepare the journal entries that are made on the 10th
day of the following month.
Solution
(a) Calculation of Peter's net salary
(b) Journal entries on paying Peter
(c) Journal entries on paying over-contributions

2.5 Source Documents

< When employees are salaried there may be no specific
document to initiate their inclusion on the monthly payroll
(e.g. for management staff).
< However, for a large workforce on the payroll some
authorisation for inclusion on the payroll generally will be
required. This usually will take the form of attendance
records (e.g. clock cards) or non-attendance records (e.g.
absenteeism reports).
2.6 Payroll Analysis

Gross wages may be analysed for management purposes:
< per department or operation;
< per labour classification;
< by product; or
< by chargeable and non-chargeable (e.g. in an accounting or
legal practice).
3 Labour Cost Accounting
3.1 Source Documents

< Clock cards or other labour records
< Time sheets
< Job cards
< Idle time records
3.2 Job Costing System
DIRECT INDIRECT
*Essentially the
JOB CARDS
same approach is
used in process
costing (see Session
10). Direct labour
costs are separately
TIME SHEETS identified as inputs to
the process account,
with indirect costs
being included in
overheads.
IDLE TIME RECORDS The treatment of
overheads depends
on whether output is
costed at marginal or
total absorption cost
(see Session 8).
JOB APPORTIONED TO JOBS FACTORY Job costing is
ACCOUNTS OVERHEAD further developed
in Session 9.*

3.3 Journal and Ledger Entries

The total cost of labour including wages (e.g. of factory workers),
salaries (e.g. of foremen), overtime, etc is debited to a labour
cost ("control") account:*
Labour a/c
$ $
Wages x Direct labour
Salaries x (to production process) x
Indirect labour (transfer to
production overhead) x
Total cost must be allocated and/or apportioned into direct and

indirect components between work-in-progress ("WIP") and *There cannot be a
production overhead accounts:* balance in the labour
account as it is not
treated equivalently
Production process (WIP) a/c
to an account such
$ $ as inventory.
Direct materials issues x
Direct labour x Transfer to finished goods x
Manufacturing overheads x
Production overhead a/c

$ $ *The further
Rent, electricity, accounting entries
from the production
depreciation, etc x overhead a/c are
Indirect materials x explained in Session 9.
Indirect labour x

4 Labour Time and Wage Routines
RECORDING
TIME
EMPLOYEE
EMPLOYEE AT ENGAGED ON
WORK: ACTIVITIES:
USE CLOCK CARDS USE TIME SHEETS
OR JOB CARDS
IDLE TIME
(= DIFFERENCE)
4.1 Clock Cards

< "Gate timekeeping" records are needed to record time at work
(for payment purposes).
< Modern time-recording systems may not use physical cards
(e.g. computers logging users in/out).
4.2 Time Sheets

< Made out for each employee.
< A common method of relating time to activities.
< Two kinds:
 Weekly, which has the risk of being forgotten and/or
manipulated.
 Daily, which has the disadvantage of requiring a large
volume of paperwork.
4.3 Job Cards

Made out for each job. There are two kinds:
1. One per complete job.
Advantage—card stays with job (can be accurately costed
on completion).
Disadvantage—cost is not known until completion.
2. One per operation.
Disadvantage—each job has a card for every operation
(generates paperwork).

5 Remuneration Methods
Remuneration methods are the different ways of paying for labour.
5.1 Fixed Salaries

Paid for a calendar period (week, month or year).
< Will be fixed for any production level, so cost per unit will
decrease as production increases.
< Management will be paid on this basis, as may most of the
permanent workforce.
5.1.1 Advantages 5.1.2 Disadvantages
Easier to calculate the monthly Less motivation for salaried
payroll and prepare budgets. employees to work more
No requirement to pay for efficiently or outside normal
overtime. working hours.
Salaried staff may be better Calculating labour cost per unit
motivated and have more becomes more complicated and
loyalty/commitment to the firm is subjective as assumptions will
because they will generally have to be made. The cost of
have greater job security. salaried employees is most likely
to be treated as an overhead
(see Session 7).
5.2 Time Rate (Also Called "Day Work")

< A fixed amount or "flat rate" per unit of attendance time (e.g.
hour or day).
< The method used when payment based on quantities
produced would be unsuitable (e.g. temporary secretaries and
maintenance workers).
< If the production rate is fairly standard, the labour cost will be
approximately constant per unit. If not, it could vary widely
from unit to unit.
(Potential Problems)
Easy to administer.
Simple to negotiate. Employees are not motivated to
increase productivity (i.e. output
per hour).
Constant supervision may be
required.
Encourages laziness.
5.3 Piecework Rate
< A fixed amount per unit of output achieved (results in a
constant cost per unit).
< Often operated based on standard time per unit (e.g.
bricklaying) (although a higher rate may be paid for higher
levels of output).

Illustration 2 Piecework Rate
Sarah Kowalski carves wooden animals for a small company supplying

the tourist market. In week 26 her production was as follows:
Standard time
allowed/unit
6 Deer 2 hours
5 Mink 1.5 hours
12 Owls 1 hour
6 Eagles 2 hours
She is paid $6 per standard hour of production (irrespective of
actual time worked).
Required:
Calculate Sarah's earnings for week 26.
Solution
Sarah's week 26 earnings are:
$
Deer 6 × 2 × $6 72
Mink 5 × 1.5 × $6 45
Owls 12 × 1 × $6 72
Eagles 6 × 2 × $6 72
261

Constant labour cost per unit Lack of income security (may be
(i.e. standard time). demotivating).
Encourages efficient work (if standard Quality may fall or inspection costs
is fair). increase (e.g. if no guaranteed
minimum payment).
Labourers may suffer financially
due to factors they cannot control
(e.g. faulty materials). Therefore,
if production is low, the piecework
rate method of payment may be
accompanied by a guaranteed
minimum payment (weekly or daily).
Illustration 3 Guaranteed
Minimum Payment
Standard rate per hour = $4
Guaranteed minimum per week = 35 hours
Actual production in week 6: 10 units @ 3 hours per unit
Piecework rate:
Standard hours = 10 × 3 = 30 hours
Pay = 30 × $4 = $120
Subject to guaranteed minimum pay = 35 × $4 = $140
Therefore week 6 pay = $140

5.4 Premium Bonus Schemes

Premium bonus is a combination of:
Day Rate: based on hours worked
+
Bonus: related to time saved for output achieved
Bonus schemes may operate on an individual or group basis.
< Under individual schemes, the achievement of each individual
is assessed separately and a bonus is calculated based on the
work of the individual.
< Under group schemes, a group of people share a reward
based on an assessment of their collective performance.
Illustration 4 Premium Bonus

Scheme
Hourly rate = $10
Agreed rate of production = 50 units per hour
Bonus = ½ time saved
Hours worked = 8 hours
Production = 600 units
600
Time allowed for 600 units = = 12 hours
50
Time taken = 8 hours
Time saved = 4 hours
Total earnings = (8 hours @ $10) + (½ × 4 hours @ $10) = $100
5.4.1 Advantages of Individual Schemes 5.4.2 Potential Disadvantages of

Individual Schemes
Should motivate individuals to work
more productively, provided that the Setting an appropriate target for each
potential rewards are sufficient. Both individual may be difficult.
the employer and employee benefit, as The individual will focus on what is being
the savings are shared. measured, and may ignore quality and
Bonus schemes are a way of other aspects of performance.
communicating to employees what is If there are many employees doing
expected of them. different jobs, managing many different
bonus schemes may become complex
and time consuming.
5.4.3 Advantages of Group Schemes 5.4.4 Disadvantages of Group Schemes

The advantages relating to individual bonus Setting appropriate targets for the
schemes also apply to group schemes. In group may be challenging.
addition group schemes can:
"Lazy" workers would benefit from
Encourage teamwork to achieve targets their harder-working colleagues
set. (who may become demotivated).
Be easier to administer than individual
schemes.
Be used where an individual worker
cannot increase productivity (e.g. on an
assembly/production line).

5.5 Overtime
< Usually arises from working outside normal hours, including
weekends and national holidays.
< Is usually paid at some rate over the normal (time and a On the exam be sure
half or double time). The excess over the normal rate is an to use the combined
overtime premium. Charging of the overtime premium will rate and not just the
premium (alone).
vary according to the circumstances.
< Overtime costs should be allocated based on the specific
circumstances that led to the overtime:
 Allocate directly to the job—if overtime worked on
customer's specific instructions.
 Allocate to a separate general production overhead a/c—
if arising from general pressure of work.
 Allocate to the department responsible for the delay which
resulted in the overtime.
 Charge directly to costing income statement—if due to
circumstances beyond the control of any department
(e.g. power failure, fire, national strike, etc).
Example 2 Direct Labour Cost
Remont employs 15 workers in a factory at an hourly rate of $3.60. A working day is 9

hours and there are usually 20 working days in a month. The firm budgets 6 hours per unit.
During October there were only 14 working days because of a hurricane. To make up for lost
production, each worker worked 45 hours over weekends for an overtime premium of 50%.
Actual production for October was 430 units, 20 units fewer than budgeted.
Required:
Calculate the direct labour cost for October.
Solution
Direct labour costs $
Example 3 Indirect Labour Cost
A summary of Perky's factory payroll for October showed the following:

Basic hours 7,000
Hours of overtime 1,000
Hours of idle time 500
The idle time, which arose due to a power cut, increased the hours of overtime which are
normally worked due to general pressures of work.
Basic pay is $15 per hour and overtime is paid at a premium
of 33 1⁄3%.
Required:
Calculate the indirect labour cost for October.
Solution
Indirect labour costs $

6 Labour Measures
6.1 Labour Turnover Note that the

measures in section
6.1.1 Meaning 6 are not provided as
exam formulae. You
< This is the rate at which employees who have to be replaced need to take care
leave: with labour turnover—
Leavers replaced the numerator
Labour Turnover = × 100% excludes "leavers"
Average number of employees
who are not replaced
6.1.2 Reasons for Labour Turnover* (e.g. redundancies)
and the denominator
< Low rates of pay (result in higher rates of turnover). is an average.
< Lack of supervision and/or training.
< No job and/or promotion prospects.
< Usually closely linked to:
 remuneration (i.e. lower remuneration results in higher
turnover);
 working conditions; *Although some
 training opportunities;
factors which cause
labour turnover
 promotion prospects. are uncontrollable/
< Other contributory factors include retirement, illness, death unavoidable, labour
and pregnancy. turnover generally can
be manageable.
6.1.3 Labour Turnover Costs*
< Leaving costs—administering documentation (e.g. for taxation
authority and payroll changes) and leaving tasks (e.g.
conducting exit interviews).
< "Cover" costs—the costs of covering a vacancy (e.g. through
employment of "temps" or overtime working) until it is filled. *Many labour turnover
costs are usually
< Recruitment costs and tasks—advertising, selection and measurable in terms
engagement (may include agency fees and costs of of time and/or cost.
relocation). However, some costs
< Learning and/or induction costs—may include retraining costs are difficult, if not
and lower productivity (initially). impossible, to quantity.
< Possible disruption of workflow and missed deadlines.
< Lower productivity and/or customer service—due to low
morale (especially if the person leaving was popular and/
or particularly good at the job and/or remaining staff are
required to absorb that person's workload).
< High incidence of stress-related absenteeism.
< Other staff members expressing a desire to leave.

6.1.4 Ways to Reduce Labour Turnover

< Offer competitive pay levels (i.e. in line with industry).
< Offer relevant incentives and other staff benefits (e.g.
subsidised staff canteen, recreational/sports facilities, product
discounts, etc).
< Incentivise key staff (e.g. with performance-related pay,
individual or team productivity bonuses, etc).
< Ensure that the working environment is suitably designed (e.g.
acceptable levels of heat, light, noise, etc).
< Improve pay structures to remove inequalities and ensure that
pay system is transparent.
< Provide better promotional opportunities (e.g. by adopting a
"promotions from within" policy).
< Formalise training programmes and career structures within
the organisation.
< Consult regularly with employees (about morale, working
conditions, etc). Provide a system that allows employees
to offer ideas for improvements and to which management
responds.
< Provide staff members with regular feedback on their
performance.
Illustration 5 Labour Turnover
An assembly department employs 30 direct workers and a supervisor

at the beginning of a period. During the period six workers left; only
four were replaced.
Required:
Calculate labour turnover for the period.
Solution
30 + 28
Average number of direct workers = 29
2
4
Labour turnover = × 100% = 13.8%
29
This 13.8% can be compared with past figures, targets, industry
averages, etc.

6.2 Labour Efficiency Ratios
6.2.1 Labour Production Volume Ratio

Also called "volume ratio" or "activity ratio". This is simply the
actual output achieved during a period against the budget.
< It is expressed as a percentage of budgeted output.*
Production Actual output achieved
= × 100
volume ratio Budgeted output *If the production
volume ratio is less
than 100%, it means
Illustration 6 Production that actual output was
Volume Ratio less than budgeted. If
it is more than 100%,
Budgeted output for the month was 30,000 units. Actual output was it means that actual
33,000 units. output was more than
33,000 budgeted.
Production volume ratio is × 100 = 110%.
30,000
< It is common when discussing labour ratios to express

output in terms of "standard hours achieved" rather than
units. In this case, the labour production volume ratio can be
calculated as:
Standard hours of production achieved

x 100
Standard hours budgeted
< A standard hour = output (production units) achievable in

an hour (under normal efficient working
conditions).
< The main advantage of using standard hours rather than units
is that the ratio can then be calculated for a department or
process which has different units of output.

Illustration 7 Production Volume

Ratio (Std. Hrs.)
Under normal operating conditions, a manufacturing process can
produce 6 units of X per hour or 4 units of Y. Budgeted labour hours are
5,000 per month. Last month, output was 24,000 units of X and 3,600
units of Y.
Actual output is equivalent to (24,000 ÷ 6) + (3,600 ÷ 4)
= 4,000 + 900 = 4,900 standard hours.
4,900
The production volume ratio is × 100 = 98%.
5,000
6.2.2 Efficiency Ratio

The efficiency ratio is concerned with the rate of production and
compares actual production with what would be expected, given
the actual number of hours worked.
< For example, if the standard time to produce one unit is 10
minutes then six units of output would be expected per hour.
If actual production is greater than six, then labour has been
more efficient; if it is less, then labour has been less efficient.
< Factors that affect labour efficiency include:
 Motivation of workers: the higher the motivation, the
greater the efficiency;
 Experience of workers: less experienced/skilled labourers
may work more slowly while they are still learning a task;
 Length of shifts: during long shifts, labourers may become
less efficient as they are more tired.
< Again, it is normal to express output in terms of standard
labour hours rather than simply using units. The formula for
efficiency is:*
Standard hours of production achieved

× 100
Actual direct working hours
*If the efficiency
ratio is greater than
6.2.3 Capacity Ratio 100%, then labour is
The capacity ratio compares actual labour hours worked with producing more per
those budgeted. hour than expected.
< There are many reasons why the actual working hours may
differ from those budgeted, such as:
 machine breakdowns, power failure, etc resulting in
"downtime" (i.e. "idle time");
 labour unrest resulting in "work to rule" practices or
"strikes";
 absenteeism (e.g. due to sickness); or
*If the labour capacity
 overtime work. ratio is less than
< The capacity ratio is calculated as:* 100%, this means that
fewer labour hours
Actual direct working hours × 100 were worked than
Budgeted hours budgeted.

6.2.4 Relationship Between Ratios

< Multiplying the efficiency ratio by the capacity ratio gives the
production volume (or "activity") ratio.
< In other words, the reason why a volume (i.e. level of activity)
is more or less than budgeted can be analysed into two
aspects:*
 whether there was more or less capacity than budgeted;
 whether, with the available capacity, labour was more or
less efficient than budgeted. *This analysis forms
the basis of variance
analysis (Session 16).
Illustration 8 Combining Ratios
The following information relates to a production department for a

quarter.
Direct labour Hours
Budgeted 4,800
Actual basic 4,000
Overtime 420
Budgeted output = one unit every 2.7 minutes
Actual output = 100,000 units
Required:
Calculate activity, efficiency and capacity ratios.
Solution
Production Standard hours of production achieved
× 100
volume ratio Standard hours budgeted
100, 000 units × 2.7 minutes

60 minutes × 100
4, 800
4,500
= × 100= 93.75%
4, 800
Efficiency Standard hours of production achieved

= × 100
ratio Actual direct working hours
4, 500
= × 100 = 101.81%
4, 420
Capacity Actual direct working hours

= × 10
00
ratio Budgeted hours
4, 420
= × 100 = 92.08%
4, 800
(Check: 93.75% = 101.81% × 92.08% subject to small rounding

differences)

Example 4 Labour Ratios
Standard time per unit = 2 hours

Actual production = 1,080 units
Actual hours worked = 2,040 hours
Budgeted hours = 2,400 hours
Required:
Calculate the efficiency, capacity and volume ratios.
Solution
Efficiency ratio =
Capacity ratio =
Volume ratio =
Check:
6.3 Idle ("Waiting") Time

< Non-productive hours that are nevertheless paid for
("downtime") should obviously be prevented as far as possible.
< It is important to analyse causes of idle time so that necessary
corrective action can be taken. Three types of causes are:
1. productive causes (e.g. machine breakdown, power failure
or time spent waiting for tools, materials, etc);
2. administrative causes (e.g. surplus capacity, unforeseen
drop in demand);
3. economic causes (e.g. seasonal fluctuations in demand).

Summary
< Labour expense can be categorised as direct or indirect. Direct labour can be idenitified with
a particular product or service; indirect labour cannot.
< Payroll accounting involves calculating gross wages of each employee, and all deductions
(e.g. personal income tax and employee's social contributions). Gross wage is debited as a
cost. Credit is cash paid (net salary) and taxes and social insurance payable.
< In cost accounting, labour costs are debited to relevant accounts as labour is used. (Direct
costs to product costs and indirect costs to overhead expense.)
< To reflect the use of direct labour in the production process:
Dr WIP a/c (or production a/c)
Cr Labour a/c
(For indirect labour, the debit is to Overheads)
< The main methods of remunerating employees are fixed salaries, time rate and piece rate.
< Individual and group incentive schemes pay a combination of the employee's day rate (based
on hours worked) + a bonus (related to time saved for output achieved).
< The accounting treatment of overtime premiums paid depends on the cause of the overtime.
For example, if due to general high work load it is an overhead expense rather than a product
cost.
Leavers replaced
< Calculated labour turnover is: × 100%
Average number of employees
< Labour turnover is often caused by either low pay, lack of supervision and/or training, or no
job and/or promotion prospects.
< Labour turnover costs include leaving costs, cover costs, recruitment costs, learning and/
or induction costs, workflow disruption, lower productivity and/or customer service, stress-
related absenteeism, and other staff leaving.
< The three labour efficiency ratios are:
Production Standard hours of production achieved
= × 100
volume ratio Standard hours budgeted
Efficiency Standard hours of production achieved

= × 100
ratio Actual direct working hours
Capacity Actual direct working hours

= × 100
ratio Budgeted hours

Session 6
Session 6 Quiz
Estimated time: 15 minutes
1. Give TWO examples of indirect labour costs. (1.1)
2. State the purpose of labour cost accounting. (1.2.2)
3. Name FOUR source documents for labour cost accounting. (3.1)
4. Give an advantage and a disadvantage of keeping a job card for each job. (4.3)
5. State THREE potential problems of remuneration for day work. (5.2)
6. State THREE potential problems of remuneration for piecework. (5.3)
7. Give THREE reasons for high labour turnover and THREE associated costs. (6.1)
8. True or false? Efficiency ratio × Capacity ratio = Productivity ratio. (6.2)
9. Suggest TWO causes of idle time. (6.3)
Study Question Bank

Estimated time: 40 minutes
Priority Estimated Time Completed
Q16 Three employees 20 minutes
Q19 MCQs 20 minutes

Additional
Q17 Direct and indirect

labour
Q18 Three components

EXAMPLE SOLUTIONS
Solution 1—Accounting Entries
(a) Calculation of Peter's net salary
$
Gross salary 5,000
Less deductions:
Personal income tax advance at 19% 950
Employees benefit contributions at 10% 500
Contributions to private pension fund at 5% 250
Net salary 3,300
(b) Journal entries on paying Peter

$
Dr Gross salary expense 5,000
Cr Personal income tax payable 950
Cr Benefits contributions 500
Cr Pension contributions 250
Cr Cash/bank 3,300
And employers' contributions:
$
Dr Payroll tax expense ($5,000 × 25%) 1,250
Cr Benefits contributions 1,250
(c) Journal entries on paying over-contributions
$
Dr Personal income tax payable 950
Dr Benefits contributions (500 + 1,250) 1,750
Dr Pension contributions 250
Cr Cash/bank 2,950
Check:
Total cost of employing Peter = gross salary + employers
contributions = $5,000+ $1,250 = $6,250
Total cash paid = net salary + contributions paid
= $3,300 + $2,950 = $6,250.
Solution 2—Direct Labour Cost

Direct Labour Costs $
15 workers × 14 days × 9 hours × $3.60 6,804
15 workers × 45 hours × $3.60 2,430
Total direct labour costs 9,234
Tutorial note: As the overtime premium ($1,215) is incurred in
making up for time lost is due to "natural causes" it most likely will
be recognised as a separate, indirect cost. However, variations are
possible. Normal hours per month are 2,700 for 450 units (i.e.
6 hours per unit). If 315 units were produced in 1,890 hours of
normal working (15 × 14 × 9) then 115 units were produced in 675
hours of overtime (i.e. less than 6 hours per unit). Variance analysis
(Session 16) is concerned with making such comparisons and
identifying the differences between actual and expected costs which
are reported separately.

Solution 3—Indirect Labour Cost
Both the overtime premium and the cost of the idle time are indirect
labour costs
Indirect labour costs $
Overtime premium (1,000 × 33 1/3% × $15) 5,000
Idle time (500 × $15) 7,500
Total indirect labour costs 12,500
Solution 4—Labour Ratios

1, 080 × 2
Efficiency ratio = × 100 = 105.9%
2, 040
2, 040
Capacity ratio = × 100 = 85.0%
2, 400
1, 080 × 2
Volume ratio = × 100 = 90.0%
2, 400
Check: 90.0% = 105.9% × 85.0%

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Session 6

Accounting for Labour

B. Cost Accounting Techniques

Understand the difference between direct and indirect labour (s.1.1).

(continued on next page)

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PAYROLL ACCOUNTING LABOUR COST

LABOUR TIME AND REMUNERATION LABOUR

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1.1 Direct v Indirect Labour Cost

1.2 Accounting Categories

1.2.2 Labour Cost Accounting

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2.2 Employees' Deductions

Period: March 20XX

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2.4 Accounting Entries

Periodically (e.g. monthly/quarterly) the employer pays the

Dr Personal income tax payable x

Example 1 Accounting Entries

Peter is the management accountant for Big Burger Co. He

(b) Journal entries on paying Peter

(c) Journal entries on paying over-contributions

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2.5 Source Documents

2.6 Payroll Analysis

3 Labour Cost Accounting

3.1 Source Documents

3.2 Job Costing System

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3.3 Journal and Ledger Entries

Total cost must be allocated and/or apportioned into direct and

Production overhead a/c

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4 Labour Time and Wage Routines

4.1 Clock Cards

4.2 Time Sheets

4.3 Job Cards

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5.1 Fixed Salaries

5.2 Time Rate (Also Called "Day Work")

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Illustration 2 Piecework Rate

Sarah Kowalski carves wooden animals for a small company supplying

5.3.1 Advantages 5.3.2 Disadvantages

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5.4 Premium Bonus Schemes

Illustration 4 Premium Bonus

5.4.1 Advantages of Individual Schemes 5.4.2 Potential Disadvantages of

5.4.3 Advantages of Group Schemes 5.4.4 Disadvantages of Group Schemes