Labor Costing

Questions & Solutions

Theoretical Question & Solution
Question:
What is Labor Cost?
Solution:
Labor cost is an important element of cost. It also forms significant part of prime cost and total cost.
Labor cost refers to the amount of money paid to the people who are engaged in the production of
goods.
The cost of labor is the sum of all wages paid to employees, as well as the cost of employee
benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect
(overhead) costs.
Examples:
1. Wages paid to production workers
2. Salaries paid to Managers and staff
3. Cost of training staff members
Purposes of Labor Cost:
• To calculate the correct gross and net wages for each employee.
• For financial accounting purposes.
• For management accounting purposes (i.e. stock valuation)
• Decision making and control purposes
Elements of Labor Cost:
Labor Cost can either be direct, or Indirect they include.
• Basic Wages.
• Overtime premium
• Bonus payment
• Idle time
• Labor turnover.
Question:
Discuss Types of Labor Cost.
Solution:
There are 2 types of labor cost which are as follows:
Direct Labor:
Direct labor is that labor which is directly engaged in the production of goods or services and which
can be conveniently allocated to the job, process or unit. According to
ICMA, “Direct Labor cost is that cost which can be identified with and allocated to cost centers or
cost units.” For example, labor engaged in making the bricks, carpenter for making furniture etc.
Feature of direct labor:
1. Direct labor is a part of prime cost;
2. It can be attributed to finished goods;
3. Its cost can be identified with total cost of production;
4. It varies with change in output;
5. It can be controlled.
Indirect Labor:
Indirect labor is that labor which is not directly engaged in the production of goods and services but
which indirectly helps the direct labor engaged in production.
ICMA defines indirect labor cost as “cost other than direct wages cost. For example, mechanics,
supervisors, chowkidars, watchmen, sweepers, foremen etc.
Features of indirect labor:
1. It is as importance as direct labor;
2. Its cost cannot be allocated but can only be apportioned;
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3. It cannot be identified with the finished product;
4. It does not vary with the change in production;
5. It cannot be controlled;
Its cost is treated as overheads.
Differences between direct labor and indirect labor:

Question:
Discuss the Important Factors for the Control of Labor Cost.
Solution:
To exercise an effective control over the employee costs, the essential requisite is efficient
utilization of employee and allied factors. The main points which need consideration for controlling
employee costs are the following:
(i) Assessment of manpower requirements.
(ii) Control over time-keeping and time-booking.
(iii) Time & Motion Study.
(iv) Control over idle time and overtime.
(v) Control over employee turnover.
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(vi) Wage and Incentive systems.
(vii) Job Evaluation and Merit Rating.
(viii) Employee productivity.
The chart below lists some common jobs and whether the role should be considered direct or
indirect labor:

Question:
Define Productivity.
Solution:
Productivity may be defined as the measurement of production performance using the expenditure
of human effort as a yardstick. It is the amount of goods and services a worker produces. Perhaps
productivity could also be described as the efficiency with which resources are converted into
commodities and/or services. Greater productivity can achieved by better processes, improved or
modern equipment, or any other factor that improves the utilization of the work force. Changes in
the utilization of labor force often require changes in methods of compensating labor, followed by
changes in accounting for labor costs.
Question:
Discuss various types of Remuneration Method.
Solution:
Incentive plans typically involve wage rates based upon various combinations of output and time.
Many wage incentive systems retain the names of industrial engineers and efficiency experts who
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originated the plans — the Taylor Differential Piece Rate Plan, the Halsey Premium Plan, the
Bedaux Point System, the Gantt Task and Bonus Plan, and the Emerson Efficiency System. Most of
these plans — like obsolete machinery — are no longer used, but many adaptations are still in use.
In order to demonstrate the operation of incentive wage plans, the straight piecework plan, the 100
percent bonus plan, and the group bonus plan are discussed as representative examples.

Straight Piecework Plan:

The straight piecework plan, one of the simplest incentive wage plans, pays wages above the base
rate for production above the standard. The production standard is computed in minutes per piece
and is then translated into money per piece.
i.e., Straight Piece Work Earnings = Units Produced x Rate Per Hour
If time studies determine that five minutes is to be the standard time required for producing one
unit, the standard rate is 12 pieces per hour. If a worker's base pay rate is $3.72 per hour, the piece
rate is $.31. A worker is generally guaranteed a base pay rate, even if he fails to earn that amount in
terms of output. If a worker's production exceeds 12 pieces per hour, the $.31 per unit still applies.
In the table below, with standard production of 12 pieces per hour and with a guaranteed hourly
rate, the labor cost per unit of output declines until the standard is reached and then remains
constant at any level of output above standard.

While piece rates reflect an obvious cause-effect relationship between output and pay, the incentive
is effective only when workers can control their rates of output. Piece rates would not, of course, be
effective where output is machine-paced. As previously stated, modification of production
standards and labor rates becomes necessary when increases in output are the result of the
installation of new and better machines.
100 Percent Bonus Plan:
The 100 percent bonus plan is a variation of the straight piecework plan. It differs in that standards
are never stated in terms of money, but in time per unit of output. Instead of a price per piece, a
standard time is allowed to complete a job or unit; and the worker is paid for the standard time at
his hourly rate if the job or unit is completed in standard time or less. Thus if a worker produces 100
units in an 8-hour shift and the standard time is 80 units per shift (or 10 units per
hour), he would be paid his hourly rate for 10 hours. In other variations of the 100 percent bonus
plan, savings are shared with the foreman and /or the company.
Hours of work and units produced are reported to the payroll department where the reported hours
worked are multiplied by the hourly production standard to determine the standard units. The
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worker's hourly production is then divided by the standard quantity resulting in the production
indicator, or efficiency ratio.
Where, Efficiency Ratio =
The efficiency ratio multiplied by the worker's base rate results in the hourly earnings for the
period. The table below illustrates how earnings are computed, assuming standard production to be
15 units per hour.

Group Bonus Plan:

Each worker in the group receives his hourly rate for production up to the standard output. Units
produced in excess of the standard are regarded as time saved by the group, and each worker is in
effect paid a bonus for time saved as well as being paid for time worked.
The following table illustrates the operation of a 100 percent group bonus plan. A crew of 10 men
uses costly equipment, and each man is paid $5 an hour for a regular 8-hour shift. Standard
production is 50 units per hour, or 400 units per shift; overhead is $320 per 8-hour shift, or $40 per
hour.

WAGE INCENTIVE TIME STANDARDS VIA LEARNING CURVE THEORY:

The learning curve theory stipulates that every time the cumulative quantity of units produced is
doubled, the cumulative average time per unit is reduced by a given percentage; that is, "the last
unit will cost (in time, hours, or dollars) a given percentage less than the last unit produced prior to
doubling the quantity. If it is assumed that this reduction is 20 percent, it means that the second unit
requires 80 percent of the time required for the first unit; the fourth unit, 80 percent of the second;
the eighth unit, 80 percent of the fourth; and so on. With this theory, the following table of values
for an 80 percent learning curve can be computed, assuming that 10 direct labor hours are required
to produce the first unit:

The results indicate that the rate is constant at each doubling of the accumulated number of times
the task is performed. The figures in the second column are the cumulative average times per unit.
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To estimate the total time needed to perform the task the first 32 times, the calculation would be 32
X 3.3 = 105.6 hours; for the first 64 times, 64 X 2.6 = 166.4 hours; etc.
The 80 percent learning curve is used here for illustrative purposes. The actual percentage will, of
course, depend on the particular situation. At the extremes, the actual percentage could range from
100 percent (if no learning occurs; i.e., 100 minutes X 100% = 100 minutes), to 50 percent.
At the latter extreme, if the average accumulated time for the first unit is 100 minutes, then the time
for the second unit must equal zero (i.e., 100 minutes X 50% = 50 minutes — accumulated average
time per task unit at the 2 task units level, or a total of 100 minutes for the 2 accumulated units).
Taylor’s differential piece rate system:
This system was introduced by Taylor, the father of scientific management to encourage the
workers to complete the work within or less than the standard time. Taylor advocated two-piece
rates, so that if a worker performs the work within or less than the standard time, he is paid a higher
piece rate and if he does not complete the work within the standard time, he is given a lower piece
rate. The features of this system of wage payment are as follows:
(i) There is no guaranteed wages.
(ii) Standard time is fixed for each work.
(iii) Two differential piece rates are fixed:
‘Lower piece rate’ i.e. 80% of the normal piece rate for the workers produce below the
standard out. ‘Higher piece rate’ i.e. 120% of the normal piece rate for the workers produce
standard output or more than standard output.
( Some authors use 83% and 125% or 175% for lower and higher piece rate respectively.)
Multiple Piece Rates or Merrick Differential Piece Rate System:
This method seeks to make an improvement in the Taylor‟s differential piece rate system. Under
this method, three-piece rates are applied for workers with different levels of performance.
Efficiency Levels Piece Rate Applicable
Less than 83.33% Normal Piece Rate
From 83.33% to 100% 110% of Normal Piece Rate
More than 100% 120% of Normal Piece Rate
Gantt’s Task and Bonus Plan:
Under this method a standard time is fixed for a task to be performed by workers. Actual time taken
is compared with the standard time and efficiency is ascertained.
(1) Time wage are paid to the workers whose performance is below 100%, i.e., those who take more
than the standard time.
(2) Time wages and 20% of time wages as bonus are paid to those workers who take standard time
to complete the job (whose performance is at 100%)
(3) Wages at high piece rate on the whole output are paid to the workers who take less than standard
time (whose efficiency is above 100%).
Emerson’s Efficiency Plan:
Under this plan, a standard time is fixed for every job or work. Worker‟s output is measured as a
percentage of the standard fixed. When a worker‟s efficiency reaches 662/3% of the standard, he
becomes eligible to get bonus at given rate. The rate of bonus increases gradually when efficiency
percentage goes up from 67% to 100% of the basic time rate. For every additional 1% efficiency
beyond 100%, additional bonus is 1% of the time rate.
Efficiency Levels Bonus
Below 66.66% No Bonus. Only time wages are paid.
66.66% to 100% Bonus starting from 0.01% to 67% efficiency
gradually touches 20% at100% efficiency.

Above 100% Bonus of 20% of time rate + 1% additional bonus for

each additional 1% efficiency beyond the 100%.
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Emerson‟s plan is beneficial to the workers as they are guaranteed with time wages and also are
entitled to get bonus. Even average workers can earn bonus since it starts at 662/3 % of the
standard. When workers attain and cross the standard by reaching and surpassing 100% efficiency
level, bonus also accelerates.
Straight Piece Rate Method:
The worker receives a flat rate of wages per unit of output. This is the simplest method.
Earnings = No. of Units × Rate per Unit
Hasley Premium Bonus Scheme (50% Sharing):
This system was introduced by F.A. Halsey, an engineer of America in 1891. The main features of
this system are as follows:
(i) Standard time is fixed for each work.
(ii) It guarantees the hourly wages to workers for the actual time taken.
(iii) Bonus is paid if the time is saved.
(iv) Bonus is equal to 50% of the time wages of time saved.
So, Earnings = TT x TR + TS x TR x 50%
Where,
TT = Time Taken, TR = Time Rate, TS = Time Saved
Rowan Premium Bonus Scheme:
This incentive system was introduced by James Rowan of Scotland. The difference between Halsey
plan and Rowan Plan is the calculation of the bonus. Under this method also the workers are
guaranteed the time wages but the bonus is that proportion of the wages of the time taken which the
time saved bears to the standard time allowed.
So, Earnings = TT x TR + x TT x TR
Where,
TT = Time Taken, TR = Time Rate, TS = Time Saved, ST = Standard Time
Bedaux Point System:
Under the scheme originated by C.E. Bedaux, time wages is guaranteed. Earnings increase after the
worker attains 100% efficiency level. Standard time and standard work is measured in terms of
Bedaux points, which are also known as B‟s. „B‟ means a standard work performed in a standard
minute. In other words, one „B‟ unit represents the amount of work which an average worker can do
under normal conditions in one minute allowing for the relaxation needed. Workers get a bonus
which is equal to 75% of B‟s saved.

If bonus is given to the extent of the value of the entire time saved, then the scheme will be called
the 100% Bedaux Scheme. But if nothing is mentioned, it is assured that it is 75% Bedaux Scheme.
Under 75% Bedaux Scheme, the labor cost increases till 100% efficiency and then starts declining.
Under the 100% Bedaux Scheme, the labor cost remains constant after the 100% level is reached.
Idle Time – Analysis and Control:
It is the time during which the worker is not engaged in production but paid for even such time.
Idle Time=Total Time (as per time keeping record) - Productive time (as per time booking record).
Types of Idle Time:
Normal idle time: It is inherent in any job situation and thus it cannot be eliminated or reduced.
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For examples: Time taken by workers to reach the production department from the main gate of
factory, Time lost between the finish of one job and starting the next job, tea break etc.
Abnormal idle time: It is the idle time which arises on account of abnormal causes. For example
strikes, lockout, floods, major breakdown of machinery, fire etc.
Accounting treatment of idle time:
Normal idle Time: The cost of normal idle time should be transferred to factory overheads for
absorption.
Abnormal idle time: The cost of abnormal idle time should be charged to Costing profit and loss
account.
Cost Accounting by Matz Usry, 8th Edition, Page-330
Question (Exercise-1):

Solution:

Question (Exercise-2):
100 percent group bonus plan. White Plains, Inc. produces printed circuits for the electronics
industry. The firm has recently initiated a 100 percent group bonus plan with standard production
set at 50 units per hour.
The company employs 10 workers on an 8-hour shift at $8 per hour. Depreciation on plant
equipment is $9 per hour, and other overhead is applied at $7 per hour.
Production for the first week under the 100 percent group bonus plan was:
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Solution:

Question (Exercise-3):
Incentive wage plans. Standard production for an employee in the Assembly Department is 20 units
per hour in an 8-hour day. The hourly wage rate is $8.
Required: Compute the employee's earnings under each of the following conditions (carrying all
computations to three decimal places):
(1) If an incentive plan is used, with the worker receiving 80% of the time saved each day, and
records indicate:

(2) If the 100 percent bonus plan Is used and 840 units are produced in a 40-hour week.
(3) If an incentive plan is used, providing an hourly rate increase of 5% for all hours worked each
day that quota production is achieved, and records indicate:
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Solution:

Question (Exercise-4):
Incentive wage plan evaluation. Electroscan Company, a relatively small supplier of computer-
oriented parts, is currently engaged in producing a new component for the computer sensory unit.
The company has been producing 150 units per week and factory overhead (all fixed) was estimated
to be $1,200 per week. The following is a schedule of the pay rates of three workers assigned to the
new component:

Customers have been calling in for additional units, but management does not want to work more
than 40 hours per week. To motivate its workers to produce more, the company decided to institute
an incentive wage plan. Under the plan, each worker would be paid a base rate per hour, as shown
in the following schedule, and a premium of $1 per unit for all units when the total number exceeds
150.

The first week the plan was put into operation, production increased to 165 units. The shop
superintendent studied the results and considered the plan too costly. Production had increased
10%, but the labor cost had increased by approximately 23.2%. The superintendent requested
permission to redesign the plan in order to make the labor cost increase proportionate to the
productivity increase.
Required:
(1) Calculate the dollar amount of the 23.2% labor cost increase.
(2) Give an opinion, supported by figures, as to whether the shop superintendent was correct in
assuming that the incentive wage plan was too costly, and discuss other factors to be considered.
Solution:
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Question (Exercise-5):

Solution:

Question (Exercise-6):
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6. Learning curve and construction time. A construction company has just completed a bridge over
the Visayan area. This the first bridge the company ever built and it required 100 weeks to
complete. Now having hired a bridge construction crew with some experience, the company would
like to continue building bridges. Because of the investment in heavy machinery needed
continuously by this crew, the company believes it would have to bring the average construction
time to less than one year (52 weeks) per bridge to earn a sufficient return on investment. The
average construction time will follow an 80% learning curve.
Required: Compute the number of additional bridges the crew must build to bring the average
construction time for all bridges constructed) below one year per bridge.
Solution:

Question (Exercise-7):

Solution:
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Question (Problem: 12-1):

Solution:
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Question (Problem: 12-2):

Solution:
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Question (Problem: 12-3):

Quarterly bonus allotment. Rosen and Haddad, Inc . manufacturer of standard pipe fittings for
water and sewage lines, pay a bonus to their employees, based upon the production recorded each
calendar quarter. Normal production is set at 240,000 units per quarter. A bonus of $.50 per unit is
paid for any units in excess of the normal output for each quarter. Distribution of the bonus is made
on the following point basis:

The employees‟ earnings are not penalized for any month in which the actual output falls below the
monthly average of the normal quarterly production. In such a case, the deficiency is deducted from
any excess in subsequent months before any bonus is earned by and paid to the employees.
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At the end of March, cumulative actual production amounted to 270,000 units.
Required:
(1) Calculate the amount of bonus payable to each group of employees. (Carry all calculations to
three decimal places.)
(2) Prepare journal entries at the end of each month to record the bonus liability on the basis of the
following production figures: January, 75,000 units; February, 94,000 units; March, 101,000 units.
Assume that all of the bonus is charged to Factory Overhead Control.
Solution:

Question (Problem: 12-4):

Incentive wage plans. The company‟s union steward complained to the Payroll Department that
several union members‟ wages had been miscalculated in the previous week. The following
schedule indicates the wages and conditions of the earnings of the workers involved:
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*Includes 45 pieces produced during the 6 overtime hours.

**Includes 50 places produced during the 4 overtime hours. The overtime, brought abut by the downtime, was necessary to meet
a -production deadline.
***Standard units for 40 hours production.
The company's union contract contains the following description of the systems for computing
wages in various departments of the company. The minimum wage for a worker is the base rate,
which is also paid for any downtime when the workers machine is under repair or there is no work.
Workers are paid 150% of base rates for overtime production is a standard workweek of 40 hours.
(a) Straight piecework. The worker is paid at the rate of $.66 per piece produced.
(b)Percentage bonus plan. Standard quantities of production per hour are established by the
Engineering Department. The worker's average hourly production, determined from the total hours
worked and the worker's production, is divided by the standard quantity of production to determine
an efficiency ratio. The efficiency ratio is then applied to the base rate to determine the worker's
hourly earnings for the period.
(c)Emerson efficiency system. A minimum wage is paid for total hours worked. A bonus
calculated from the following table of rates, is paid when the worker's production exceeds 6635% of
standard output or efficiency. The bonus rate is applied only to wages earned during productive
hours.

Required: Prepare a schedule comparing each individual's gross wages per books with the gross
wages calculated. (AICPA adapted)
Solution:
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Question (Problem: 12-5):

Learning curve. Tierney Company uses labor standards in manufacturing its products. Based upon
past experience, the company considers the effect of an 80% learning curve when developing
standards for direct labor costs.
The company is planning the production of an automatic electrical timing device requiring the
assembly of purchased components. Production is planned in lots of five units each. A steady-state
production phase with no further increases in labor productivity is expected after the eighth lot. The
first production lot of 5 units required 90 hours of direct labor time at a standard rate of $9 per hour.
Required:
(1) Compute the standard amount the company should establish for the total direct labor cost
required for the production of the first 8 lots.
(2) Discuss the factors that should be considered in establishing the direct labor standards for each
unit of output produced beyond the first 8 lots. (CMA Adapted)
Solution:
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Question (Problem: 12-6):

Solution:
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Miscellaneous Problems & Solutions
Question (Labor Turnover):

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Question (Taylor’s differential piece rate system):

Solution:
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Question (Merricks’s Multiple or differential piece rate system):

Solution:

Question (Gantt’s task and bonus plan):

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Solution:

Question (Normal and over time wages):

Solution:
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Question (Cash required for wage payment):

Form the following details, ascertain the amount of cash required for payment of salary in a firm for
the month of april:
i) Normal time salaries Rs.75000
ii) Dearness allowance 15% of (i)above
iii) Leave salary 6 % of (i) and (ii)above
iv) Employee‟s contribution to E.S.I and P.F 3 % and 5 % respectively on (i) and II)above
v) Income tax deducted at source Rs.4500
vi) deduction for insurance premium5750
vii) Festival advance to be recovered from 50 employees at Rs. 125 per employees
viii) Employer also contributes an equal amount towards ESI and PF
Solution:
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Question (Labor cost per month):
From the following particulars, calculate the labor cost per man day of 8 hours.
i) Basic salary Rs. 5 per day
ii) Dearness allowance 20 paise per every point over 100 (cost of living index for worker) current
cost of living index is 800points
iii) Leave salary 5% of (i) and(ii)
iv) Employers‟s contribution to PF 8 % (i) and(ii)
v) Employer‟s contribution to state insurance 5 % of (i) , (ii) and(iii)
vi) Number of working day in a month 25 date of 8 hours each
Solution:
Statement of labor cost per month of shows

Question (Labor cost to the employer):

From the following data prepare a statement showing the cost per man- day eight hours.
a) Basic salary and dearness allowance Rs. 300 per month
b) Leave salary to the workman 6% of the basic and DA
c) Employer‟s contribution to P.F 6% of (a) and(b)
d) Employer‟s contribution to P.F 6% of (a) and(b)
e) pro data expenditure on amenities to labor Rs. 25 per head per month
f) Number of working hours in a month 200
Solution:

Question (Time and piece wages):

Mr. Ramesh works in a factory where the following particulars apply:
Normal rate per hour : Rs. 3.00
Normal piece rate : 20% more of time rate expected output is 40 units per hour. Ramesh produces
314 units in day calculate his wages for the day on (a) Time basis and (b) piece basis.
Solution:
Computation of wages on time basis:
Time wages = No. of hours worked x Rae per hour
= 8 hours x RS. 3 = Rs.24
Computation of wages on piece basis:
Normal rate per hour = RS.3 Increase in rate to be 20% Adjusted rate 3x120 % = Rs. 3.60
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Piece rate =Rs. 3.60/40 units = Re. 0.09
Piece wages = No. of units produced x rate per unit
= 314 units x 0.09 = Rs. 28.26
Question (Halsey plan):
A worker is paid at 25 paise per hour for completing a work within 8 hours. If he completes the
work within 6 hours. Calculate his wages under Halsey plan when the rate of premium is 50% .
Also ascertain the effective hourly rate of earning
Solution:
Total wages = (Time taken x Hourly Rate ) + (50/100 x Time saved and Hourly rate)
Wages or earnings under Halsey plan
=6 x 0.25 + 50/100 (8- 6) 0.25
= 1.5+ 0.25
Total earnings = Rs. 1.75
Effects hourly rate of earnings
= Total earnings/ Actual time
= 1.75/6
= Rs. 0.29 per hour
Question (Rowan plan):

Solution:
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True-False

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Multiple Choice Question

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