Assignment on Labor

7/29/2019 Assignment on Labor

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Introduction:

Labor cost is another important element of cost in the total cost ofproduction. In fact for the non-manufacturing business, laborconstitutes the highest proportion of the total cost, especially inservice sector like banking, insurance, BPO, KPO, Consulting, financialservices etc. The basic aim of management is to keep monitoring thelabor productivity v/s the total labor cost to achieve the object of lowper unit labor cost. Higher the productivity, lower will be the laborcost per unit. In this sense, there has to be proper control overutilization of the work force and the salaries and wages bill for anorganization. People work all over in an organization in variousfunctions. In order to carry out these functions efficiently and

effectively, the organization must have good human resourcespolicies and practices. In a manufacturing set-up where there is alarger proportion of workers and existence of trade unions, there hasto be a cordial relationship between management and union toensure motivated performance. In the service sector, labor cost bearsthe highest percentage to the total. The purpose of cost accountingfor labor is two-fold viz. one to ascertain the cost and two to provideinformation to the management for the purpose of taking decisionswith respect to labor. The decisions are in the areas of Manpowerplanning Recruitment Training & development Salaries, wages andbenefits labor productivity & efficiency Retention and labor turnover


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In these days of growing economy and dearth of quality humanresources, management of labor cost becomes very crucial. From theview point of labor cost control, the areas where proper systems arerequired could be listed as:

(a) Employee attendance & time recording: In smaller organizations amanual register is maintained, where each employee has to mark hisattendance. In larger organization, electronic tools of recordingattendance are used. An electronic card is swiped to record dailyentry and exit. Some organizations use the finger print savvy cards aswell. The good old days of time keeping office at the factory gate areno more in existence. b) Time booking to the cost centre and costunits: Time is recorded against the job or contract or a project so thatthe direct labor cost can be computed. In the service industry also,time is recorded on specific activities.

Direct and Indirect labor Cost:

Direct labor cost is that portion of salaries and wages which can beidentified with a single cost unit. In other words when the time spentby the workers can be directly linked with a cost unit, it will be costedas direct labor otherwise it will fall under the category of indirectlabor cost. A worker working in the production department may not

necessarily be directly identified with a cost unit. E.g. a foreman or asupervisor or a production planning officer cannot be linked with acost unit and therefore will be indirect labor. Hence just because aperson works in production department does not mean he is a directlabor. Also, if a person working on jobs directly spends some time onrepair of a machine, cost of that time should be taken as indirectlabor cost. The distinction between direct and indirect labor dependsmainly on whether the labor time is in sync with the cost unit or not.The direct labor cost is taken as a part of Prime Cost, whereas theindirect cost is considered as an item of overhead. Indirect workerworking with production department will constitute as Production

overhead, whereas those working for Administration, selling &distribution departments will be included in Administration, selling &distribution overheads.

Remuneration methods & Incentive schemes:


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The employees working in any organization are compensated by wayof salaries, wages and other benefits. These payments are made inreturn of the services rendered by the employees. These servicescould be: - Engaging in the process of transformation of raw materialinto finished product or - Supporting the process of transformation bydoing other functions The salaries, wages and statutory benefits puttogether are called as remuneration. The incentives are paymentsand benefits given to stimulate better performance or paid in returnfor a better performance. The incentives could be in monetary as wellas non-monetary terms. While the remuneration is always individualbased, incentives could be based on group performance.


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labor Cost and Direct Expenses:

Characteristics of a sound Remuneration system:

(a) It should be easy to understand for everyone and easy toimplement.

(b) It should provide for a reward for good work and penalty for badworkmanship.

(C) It should help keeping labor turnover within stable limits

(d) It should be able to attract talent and retain them

(e) It should minimize absenteeism

(f) It should reflect a fair return to employees in consistence withefforts put in by them

(g) It should boost productivity and performance

(h) It should be flexible enough to factor in effects of changes in costof living, and systems of similar companies in the same industry.

The payments could be broadly classified into those paid on the basisof time spent by an employee irrespective of output produced by him,called Time Rate. Those paid on the basis of output given by theemployee irrespective of the time spent by him, called Piece Rate

Based on these two basic payment methods, many variants thereofhave been developed over the last couple of centuries. Many of thesesystems were developed keeping in view the manufacturing industry,where measurement of physical performance is relatively easier. Inmodern times, especially for indirect workers, many of these planswill not work. Indirect workers and staff & managers are usually paidon time basis only. The following shows the classification of various

remuneration methods:

(A) Time based

(B) Results based


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(C) Combined time and piece rates

(D) Bonus Systems

(A-1) Flat time rate

(B -1) Straight piece rates

(C-1) Emersons efficiency

(D-2) Halsey - plan

(A-2) High Wage System

(B - 2) Standard hours piece rates

(C-2) Gnatt task plan

(D-2) Halsey - Weir

(A-3) Graduated time rate

(B - 3) Differential piece rates Taylor & Merrick plans

(C-3) Points system


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(D-3) Rowan plan

(D-4) Barth plan (D-5) Accelerating premium plans


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longer period and it also may not be possible to keep wages always athigher level compared to industry.

(A 3) Graduated Time rate: Under this method, payment consists of

two portions one based on regular time base payments and theother is linked to cost of living (e.g. dearness allowance) and meritawards. As the cost of living is taken care of, the system has anadvantage. Its further enhanced by the fact that the method rewardsindividual merits. However, merit rating is highly subjective and thusthe method is difficult to implement. It is difficult to calculate the costof the cost unit. It is generally observed that trade unions prefer timebased payments as they do not have to guarantee output. Thevariations in the time based payments do not really bring in anyadditional benefits and they are difficult to sustain in the longer run.

(B) Results based system (Piece Rates): These methods are based onthe output linked payments to workers. The payments are fixed perunit of output irrespective of the time taken by the worker to producea unit. The payment is simply calculated as rate per unit x unitsproduced. These payments may be released for a period e.g. day,week or a month. The output produced by the workers during thatperiod is multiplied by the pre-fixed rate per unit. The objective hereis to induce workers to produce more and thereby increase sales. Asworkers get more money, they tend to produce more. Sometimes

under such systems, the benefits of increased output are sharedbetween workers and the business. This method is simple tounderstand and easy to operate. The workers also prefer it as theycan earn more by producing more. The labor cost per unit is known inadvance and hence it helps in fixation of overhead rates based ondirect wages and therefore estimation of cost per unit is easy. Ifbenefits are shared with employees, they are motivated to put in theirbest efforts. However, fixing a piece rate itself is not a simple job.Considerable amount of engineering estimations, time and motionstudy and assessment of physical efforts needed to perform a job areneeded to arrive at a piece rate per unit. The nature of job should be

standard and repetitive for piece rate system to be successful. Itcannot be applied if the jobs are non-standard, and the specificationschange for every order received. Further, in the quest of increasingthe earnings workers may compromise quality. It may increasesupervision and cost of rework as well. It also may add to fatigue andincrease absenteeism.

(B 1) Straight Piece Rate: This is the simplest form of payment by


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results. Under this a predetermined rate per unit of output is applied.In a laundry, a worker may get GHc 0.50 for ironing one shirt. If on aday he irons 100 shirts, he will get (100x0.50) i.e. GHc 50. If he presses200 shirts he will get GHc 100 and so on.

(B 2) Standard Hour system of Piece rate: This is the result basedpayment with a time dimension factored into it. We have seen thattime and motion study and other engineering methods are used todetermine time based piece rate per unit. In addition, a standard timeis set up per unit of product. Workers are supposed to completeproduction of one unit within this allotted time. The rate is fixed perhour (or any other time unit). If the worker completes the job withinthe standard time, he is paid for the time he worked plus also for thetime saved based on the time rate. If he spends more than standardtime per unit of output, he is paid at this time rate for the time actuallyspent on the job. Thus this takes care of time performance as well. The

formula to work out the earnings as per this method is: Whenproduction is in excess of standard performance; Earnings = (Actualhours worked x hourly rate per day) + Hourly rate per day x (standardhours produced Actual hours worked) When production is at or belowstandard performance; Earnings = Actual hours worked x hourly rateper day. Consider in a factory the day has 8 working hours. A base ratefor a particular job is set as Ghc 0.625 per hour and performancestandard is 0.16 hours per unit. What will be the earning of Esther whoproduces 100 pieces in a day? What will Lucy earn if she produces 40units in a day? Standard time per unit = 0.16 hours, No of hours in aday = 8 hours Esther has produced 100 units in a day. The standard

hours for making 100 units @ 0.16 standard time per unit is (100 x0.16) = 16 hours She has completed this in 8 hours thus saving 8hours for which she gets paid extra. Her earnings will be: (0.625 x 8) +0.625 x (16 8) = GHc 10. Lucy has produced 50 units. The standardhours for producing 50 unit @ 0.16 hours is (50 x 0.16) = 8 hours Thismeans she has completed the production within the standard but notsaved any time. Her earnings will be: (0.625 x 8) = GHc 5. Thisexample shows how a worker is benefited when he or she saves timefor the organization. The worker who does not save time is notpenalized, but gets only paid for the time spent. This system is simpleto understand and operate. It can be applied for group installation type

of job and also where the jobs are of non-repetitive & non-standard innature. It takes into account the individual performances. Almost alldisadvantages of straight piece rate system are removed by thismethod. However, a great care needs to be taken for fixation of timeper unit of output. Also, there has to be close monitoring of quality ofthe performance. It has to be ensured that the worker does notcompromise quality in order to show time saved.


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(B 3) Differential Piece Rates: This system is based on the logic thatworkers should be rewarded for higher efficiency. The earningmethod offers a motivation for increasing productivity. These systemsare however difficult for workers to understand. There are twovariants of this system. One was developed by F. W. Taylor (thefather of scientific management in the early era of industrialrevolution) and the other by another expert Merrick. This method triesto penalize workers when they do not perform as per standard byapplying differential rates.

(a) Taylor Plan: The payment scheme is based on fixing two or morepieces rates a base level piece rate is used for workers who do notperform as per standard and a higher piece rate is used for workers

who perform as per standard. The difference between these two ratesis deliberately kept so wide that the award for efficient worker isreally goods and simultaneously, punishment for inefficient worker issevere. Consider a factory operates an 8 hour day. The standardoutput is 100 units per hour and normal wage is GHc 50 per hour. Thecompany operates Taylor plan as 80% of piece rate for workersperforming below standard and 120% of piece rate for performance ator above standard. Hourly rate paid = GHc 50 Standard output perhour = 100 units Normal piece rate = (50 / 100) = GHc 0.50 per unitFor performance below standard, the piece rate will be = 80% of GHc0.50 i.e. GHc 0.40 per unit & For performance at or above standard, it

will be = 120% of GHc 0.50 i.e. GHc. 0.60 per unit. It can be foundthat there is a differential of GHc 0.20 between the two piece rates.This will induce an ambitious worker to increase efficiency and earnmore. On the other hand, inefficient worker gets penalized for notachieving minimum standards. It will reduce fixed overheads per unitas it induces more production. The success of this plan dependshighly on setting a standard. Any error in fixation of the differentialrates could be disastrous. Also, this system does not guarantee anyminimum wages. Further the piece rates and standard are to be fixedin such a way that the earnings wont fall below minimum wages asper the law in force.

(b) Merrick Plan: The punitive element under Taylor plan was quitesevere. It tends to discourage and attract average workers. Merrickmodified this differential system by introducing more slabs and byremoving the punitive element. He advocated that performance up toa certain level (although below standard level) should be rewarded at


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normal piece rate and then progressive slabs are provided torecognize above standard performance. He worked out the followingformula for differential payments: Up to 83 & 1/3rd % Above 83 &1/3rd up to 100% Above 100% at normal piece rate 10% abovenormal piece rate 20% over normal piece rate.

This system is not as harsh as the Taylor plan. But this also requiresthe standard fixation to be done very carefully. In the above example,the normal piece rate was fixed as GHc 0.50 per piece. A workerunder Merrick plan will guarantee this earning if he achieves anefficiency level of 83 1/3%. The worker, who performs above this andup to 100% mark, will get paid at GHc 0.55 per piece which is 10%above the normal level. A worker giving in performance above 100%will get paid at GHc 0.60 i.e. 20% above normal piece rate. Both theseplans however put a cap on maximum earnings. So the worker will

just ensure performance at 100% or slightly above and then does notimprove further as there is no additional incentive for him to do so.

(C) Combined Time and Piece rates: The combination of time basedand piece based methods of remuneration aim at combining thebenefits and removing the deficiencies of both specific time basedand specific piece rate systems. Basically this method has a combooffering for the workers a time rate, a piece rate and a bonus.Essentially for workers who do not perform as per standards, there is

a guaranteed time rate payment. For workers performing abovestandard there are piece rates with bonuses applicable for higherrewards. There are certain variants of this idea developed be experts.

(C -1) Emersons Efficiency Plan: The main features are guarantee ofdaily wages regardless of performance. A standard time is set for perunit of output or a volume of output per unit of time is taken asstandard. The following differential rates apply: Below 66 2/3rd %Paid at hourly rate. Above 66 2/3rd% up to 100% Hourly rate plusbonus for efficiency based on step rates Above 100% performance

increased efficiency. Additional bonus @ 1% of hourly rate for each1% in. The efficiency for this purpose is calculated as: On time basisPercentage efficiency = (Standard time allowed / Actual time) x 100On output basis Percentage efficiency = (Actual Production / Standardproduction) x 100. The system is certainly more worker centric thanTaylor and Merrick plans. They have an element of efficiency basedpayment so as to motivate workers. Also, a worker is kept interestedto improve even beyond 100% level as it includes additional bonus


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even above 100% level. It is however complicated to calculate andinvolves a lot of clerical work in keeping records of efficiency levels ofdifferent workers. It is difficult to adopt this for group jobs. Example:Consider a factory operates on 8 hour day basis and time rate is GHc8 per hour. Standard production is fixed at 500 units per week of 40

hours. The bonus slabs based on efficiency levels are fixed as below:

Efficiency levels 66 2/3% to 75% 76% to 80% 81% - 85% 86% - 95%96% to 100%

Bonus % 1% 2% 4% 10% 20%

Additional bonus of 1% is payable for each 1% improvement inefficiency above 100%. It is clear from the above that as efficiencygoes up workers get handsomely rewarded and the organization alsobenefits from increased production. This can be evident fromreduction in per unit labor cost as output goes up.

(C- 2) Gantt Task System: This combined method of remuneration issimilar to the Emersons method with a little variation. A performancestandard is set for each operation or group of operations. An hourlystandard rate is fixed. The worker who completes the job withinallotted time gets paid for the time plus a percentage of that time.Under this system, even supervisors are covered for bonus payments.He is paid for each of his subordinates that earned individualbonuses. The computation is usually done as follows: For outputbelow standard level Output at standard Output above standardguaranteed time rate payment Time rate plus Bonus of 20% of time

rate Bonus of 120% of normal piece rate. This method is suitable forworkmen with varying skills. It is equally attractive for less skilledworkers and beginners. Also, it provides enough motivation for highlyskilled worker who perform above standard as the payment after thatlevel is linked to the output by application of piece rate at a higherrate. This system is applicable effectively in engineering companies,machine tool manufacturing, and contract type of business. However,great care is needed for determining time rate, piece rate andstandard output norms. Example: In a factory the output produced byworkers in 8 hours is A- 8 units, B- 10 units and C- 15 units. Standardproduction in 8 hours is 10 units. Daily wages guaranteed are GHc 2

per hour. Bonus rate on time rate is 20%. Standard output per day is10 units. So A has performed below standard, B has achieved thestandard and C has performed above standard. Under Gantt Taskplan the earnings will be: A will get only time rate payment i.e. GHc16 (8 x2) B will get time rate + bonus @ 20% of time rate i.e. GHc 16+ 20% of GHc 16 = GHc 19.20 C will get piece rate payment which is120% of normal piece rate. The normal piece rate here is ((8*2)/10)i.e. GHc 1.60 per unit. 120% of this is GHc 1.92 per unit. C produced


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15 units, so he will get GHc 28.80. See how the earnings increasewith increase in productivity. The impact on per unit cost is worthnoticing. For A producing 8 units and getting GHc 16 the unit cost isGHc 2. For B producing 10 units and getting GHc 19.20, the unit costis GHc 1.92 and for C producing 15 units and getting GHc 28.80, the

unit cost is GHc 1.92.

(C 3) Points system: Under this method, the performance ismeasured in terms of points saved by the workers. Standards arealso fixed in terms of points and workers are paid bonus based on thepoints saved, either in full or a portion thereof. There are two variantsof the points system. The Bs are fixed based on a rigorous time andmotion study with time for actual work plus a reasonable allowancefor rest.

The Bedaux Method: The points are called as Bs. Hence a standardperformance one hour is expressed as 60 Bs. A standard number ofpoints are specified for a job. The worker gets a time rate paymentand a bonus. When the scheme was originally formed bonus wascalculated at 75% of points saved. Later it was modified to 100% ofpoints saved. The formula is: Time rate payment + (75% or 100%) of(points saved/60) x hourly rate Example: The standard time is 320 Bsand the worker consumes 240 Bs to complete a job. The hourly rate isGHc 10 per hour for an 8 hour day. Here the worker has saved 80 Bs.

Hence the payment based on75% bonus will be (10 * 8) + 75%(80/60)*10 = GHc 90.

The Haynes Manit System: This is similar to that of Bedaux. Thestandard unit of time is called a Manit. Bonus is calculated on thebasis of Manits saved multiplied by the value of one Manit. When thesystem was fixed originally, the bonus due to Manits saved wasshared as 50% to workers, 10% to Supervisors and 40% was retainedby the company. At present, the entire 100% is given to the workers.

(D) Premium Bonus or Incentive systems: These are also referred toas premium bonus plans that guarantee a minimum wages per hourplus a premium for output in excess of stipulated norms. Here as inmany of the above schemes, a standard time is determined for a jobor operation. The basic difference in the incentive plans and schemesdiscussed earlier is that under incentive plans, the savings on account


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of time is shared between employees and the organization. There aremany variants of this method. They are given below.

(D -1) Halsey plan: This was developed by Mr. F. A. Halsey. Under this

method the payment for work done is related to time taken to do ajob. If the time taken is equal to or more than the standard time, theworker is paid at time rate based payment. If actual time is less thanthe standard time, then the worker gets a bonus @ 50% of the timesaved. The balance 50% is retained by the business. The formula is:Total earnings = (Actual hours x hourly rate) + (hours saved x hourlyrate)/2. Example: Standard time to do a job is 15 minutes. Hourly rateis GHc 15. Time worked is 9 hours and output is 40 pieces. Thenormal time rate wages = 9 * 15 = GHc 135 Standard time for outputof 40 units = (40 * 15)/60 = 10 hours. The time taken is 9 hours,hence 1 hour is saved. So the bonus amount will be: (1 x 15)/2 = GHc

7.5. Total earning will be = GHc 135 + GHc 7.50 = GHc 142.50. Themain disadvantage is that it takes into account only time dimension.It does not guarantee quality output. The incentive is less attractiveto workers as compared to the other methods seen above as they aremade to share the benefit of their productivity.

(D -2) Halsey-Weir Plan: It was developed as a modified version ofHalsey plan. The bonus percentage was modified to 33 1/3% insteadof 50%. The other computations are same. This was developed by G &

J Weir ltd. Glasgow. The reduction in the bonus percentage makes thisplan unpopular.

(D -3) Rowan Plan: Under this method, a standard time is fixed. Theworker gets time rated pay as per time worked. The bonus shared isin proportion of time saved to standard time applied to the time ratedearnings. In other words, the percentage time saved is applied totime taken a payment is done for time actually taken plus theproportion of time saved. The formula for the bonus is: (Time saved /Standard time) * Actual hours * hourly rate. Consider the example

from (D -1) above, where actual time was 9 hours, standard time was10 hours and hourly rate is GHc 15, the payment under Rowan planwill be: (15 *.9) + (1/10)*9*15 = GHc 148.50.


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Group Bonus Schemes:

The remuneration methods discussed above were all related toindividual workers who need to do their jobs individually and not as a

team. In organizations where team work is more important, individualbonuses do not work. The team as a whole has to be motivated. Thusa plan is usually worked out whereby the bonus for increased outputis declared for the teams and then shared by individual members inagreed proportion. Such methods develop a sense of cooperationamong team members. It is useful when the measurement ofindividual work is not possible e.g. in case of construction of dams,buildings etc. The administration of these schemes is easier as therecord keeping is for a team output and not individuals. However, itsuffers from the fact that all team member are entitled for bonusirrespective of whether they contributed to the increased output or

not. The sharing of bonus may be done on arbitrary basis which maylead to dissatisfaction of workers. Further, amount per person may besmall. There are various schemes developed and used in differenttype of organizations. These are given below:

Priestmans Production Bonus: This is applicable in the manufacturingindustry. A standard output for the factory as whole is set. Workers &staff are rewarded if actual output increases above this standard inthe same proportion. If output does not exceed standard, then no

bonus is paid, but time rate is guaranteed. If the standard output is5000 kg and actual output is 6000 kg, then employees will get abonus equal to 20% of their wages which is equal to the 20% increasein production as compared to the standard. This method is useful incases of mass production and where there are no bottlenecks.

Towne gain sharing plan: This scheme encourages cost reductions bysupervisors and employees in general. As per this scheme, 50% of thesaving resulting out of savings in cost is paid to individuals pro rata inaddition to their normal wages.

Rucker plan: In this plan, the percentage of the added value is sharedamong the employees. Added value is defined as labor cost plusproduction overheads plus gross profit. If ratio of direct labor tovalue added is 80 % and the actual labor cost is 76%, then 4% ofadded value is distributed as bonus. The whole amount may not be


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distributed at once maybe 75% is released immediately and balanceis kept as reserve to be used when the performance is belowstandard.

Scanlon Plan: It is same as Rucker plan except that the proportion ofdirect wages to sales value of production is taken instead ofproportion of direct wages to value added.

Other Incentive Schemes:

These schemes may not be directly linked to individual or groupperformance. The employees receive additional remuneration, shares

in the company, and other perquisites. Such schemes can be dividedinto:

(a) Indirect monetary incentives viz. profit sharing & co-partnership,Indirect non-monetary incentives that are related to workingconditions, social benefits.

Profit Sharing: There is an agreement whereby the employees receive

a fixed share in profits off the company. The plan has to be declaredin advance so that the employees can go for it. Secondly, it has tohave a relationship with profit earned by the company. Thedisbursement of the amount is generally done on the basis of auditedaccounts after the end of the accounting year. The payments could bemade either in cash or deferred payments or a combination thereof.Such sharing plans inculcate a sense of partnership amongemployees and keep them engaged in the company for longer time. Ithas a positive effect on the moral and efficiency of the employees.The most common ways of profit sharing in Ghana are Bonus,Superannuation and gratuity which are deferred payments. The

minimum and maximum bonus payments are 8.33% and 20% of theannual salary subject to the available surplus profit. Companies maypay extra amounts as ex-gratia. Many Ghanaian companies follow thepractice of paying a certain number of days or months salary as abonus.


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Co-partnership: Under this method the ownership rights are extendedto all direct and indirect employees by permitting them to buy sharesin the company. This scheme is popularly called ESOPs (employeestock options) in which every employee is allowed to purchase sharesin the company at a pre-determined price which is usually lower than

the market price. The management rewards the employees with longservice tenure, loyalty etc. Employees become part owners of thecompany and therefore get motivated to earn profit for themselves.Limited companies and even private companies, co-operatives followthis practice. Over the last decades, banks in Ghana like First AtlanticBank have very successfully rewarded their employees through thestock options schemes. It has really done wonders to employeemorale. However, it is argued that when employees become partowners, their loyalty towards the trade union reduces.

Indirect non-monetary schemes: These schemes aim at improvingworking conditions in plant and other facilities. These benefits arenormally of a permanent nature as facilities once provided are rarelywithdrawn. The non-monetary benefits generally include: (a) Flexibleworking hours (b) subsidized canteen facilities ( c ) Educationalfacilities for children of employees (d) Housing colonies (e) Medicaland hospitalization insurance (f) Club memberships (g) Guest housefacilities (h) annual events, sports and other competitions (i) Culturalevents.

Incentives for Indirect workers and employees:

Doing well and getting rewards for good performance cannot berestricted to direct worker only. The other employees working withservice departments also contribute in furtherance of overall businessobjective. These employees render valuable support to direct workersby maintaining the facilities, providing administrative services such asaccounts, human resources, industrial relation, utilities etc. Theyensure smooth flow of activities in the business routines. As such it

makes a case of indirect workers to get incentives. The incentiveschemes for such workers cannot be based on same logic of schemesfor direct workers as there is no direct linkage with the final output.The incentives could be paid considering the type of activityperformed by different indirect departments and their activitymeasurement logic could be decided separately. If the work is routineand standard, the standards could be set and actual output measuredin comparison with the standards. Many times, group incentives will


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suit these workers more than the individual schemes. It is alsopossible to extend the logic applied for direct workers and pay acertain proportion of their incentives to the indirect workers. Whenthe output of such employees is not measurable, the incentives basedon cost savings or proportion of savings to value added could be

designed. Here are certain examples of incentives for indirectworkers. The maintenance workers are normally responsible forroutine inspection, preventive maintenance and breakdownmaintenance and repair work. For routine inspection & preventivework, standards can be established as a basis for incentive schemes.For repair work, special awards scheme may be introduced. Foremployees engaged in material handling and internal transportation,standards can be set for such activities based on time and distance.Quality control or inspection staff may be paid on the basis of qualityinspections done and this work can be standardized. There areroutine checks carried while checking the conformation to the quality

norms. Standards could be set for such activities. The inspectors willcover those who inspect incoming material, in process material andfinished goods. For office staff, generally group schemes are moresuitable. This could cover even the executives and managers. Manycompanies follow the spot award schemes and other recognitions likeexecutive of the month, the most customer oriented person, the mostquality conscious person etc.

Payroll Procedures:

Whatever remuneration methods and incentive schemes thecompany may have introduced, the real test of the pudding lies inhaving it. Similarly, accounting and disbursement of labor paymentsis a very important task. It has to be carried out efficiently, effectivelyand with vigilance month after month and year after year. If nothandled properly it could lead to labor disputes, litigations, non-adherence to statutory requirements etc. The payroll procedures inany organization must be properly set up and followed up. Theseprocedures can be divided into: (a) Employee records and master

data updation with salaries and wages details (b) Daily, weekly ormonthly attendance recording Computation of salary, wages,allowances, incentives and bonus payable and deductions (d)Disbursement of the salaries and wages in cash and / or throughbanks e) Accounting for payroll including provisions f) Analysis ofpayroll costs to help in budgeting & performance measurement Inorganization where the labor force is very large number, the recordsand processing of payroll is computerized. Many ERP systems provide


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a payroll module which integrates very well with the accounting andcosting modules. In smaller organizations, work may be handled insimple excel sheets. If the number of employees is very low, payrollmay be manually processed and handled. Employee Records andMaster data For every employee a master record sheet is maintained.

Every employee is given a distinct number called as employeenumber or ticket number. Each employee is assigned to a departmentwhich is basically a cost centre. Correct assignment of each person isessential for proper labor cost analysis into direct and indirect. Themode of payment is also indicated i.e. whether cash or cheques ordirect credit to employee bank accounts. This master sheet stores allpersonal details of employee and the salary details as per the termsof appointment. These salary details are used as a basis whenprocessing the payroll every month. As and when new appointmentsare done, the master data must be updated before processing thepayroll for that month. From control point of view only authorized

persons should be allowed to update the master records of salary andwages. Internal auditor may carry out checks to ensure this. When thesalary revisions are made, this master data needs to be revisedagain. This revision is also carried out by authorised persons onlybased on sanctioned revision letters. No alterations to this datashould be permitted, without proper authorization. The master dataalso stores information about compulsory statutory deductions likePF, FPF, ESIC etc. Attendance recording Companies use different toolsfor recording employee attendance such as manual registers, swipingcards, and remote log in for offshore employees. Workers andemployees may work from different locations and different cities or

even states. In such attendance data is updated daily at the centralpayroll department through computer networks. The leave cards arealso inputed to ensure that employee leaves are properly recorded toavoid erroneous without pay days. A cutoff date is fixed during thelast week of the month (generally 25th of the month) for passing onthe attendance data for payroll processing. The attendance of the lastweek is marked as full for current months payroll and adjustments ifany are carried out in the succeeding month. The dates for whichattendance is not marked and no leave is granted, are communicatedto the departmental heads for authorization purpose to indicatewhether they are to be treated as paid leaves or marked as without

pay. Computation of salaries and Wages For computing monthlypayroll, a lot of information has to be collected from variousdepartments. One of them is the attendance data and master data fornew employees as explained above. This information is generallyavailable in the HR department or payroll office. The otherinformation is collected from the following departments: (a)Information on piece rate related facts including standards; actualoutput is collected from production department for incentives and


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bonus calculations. This is compiled based on job cards. Variableearnings need to be computed for various groups of workers as perschemes applicable to them (b) Information about various deductionsto be made is received from different departments. These deductionscould be for voluntary contributions to provident funds, repayment of

loans for housing & other reasons, telephone charges, recovery ofadvances, penalties, contribution to employee welfare society etc.( c ) Accounts department provides the information on Income tax tobe deducted. (d) Calculations are to be made for allowances that arebased on certain indices e.g. dearness allowances based on thedeclared cost of living index for the month. Once all calculations arecompleted, a payroll or wage sheet is prepared which summarizesemployee-wise salaries & wages, Allowances, various deductions andgross and net pay for the month. Depending on the need of theorganization and salary structure, the format of pay sheet may beformatted. The pay sheet is tallied with computation sheets of all

individual components of the labor cost to ensure that there are noerrors. Once finalized, the pay sheet is forwarded to accounts for thepurpose of accounting and disbursement. Individual pay slips are alsodistributed to all employees as information giving all the abovedetails of various payments and deductions. The pay slip serves as aproof of income for employee that can be submitted to variousauthorities by him. Disbursement of salaries and wages On gettingthe pay sheet the accounts person will arrange for cash and bankfunds as require. For workers to be paid in cash, he will organize thesealed envelopes with employee names written on them. Theenvelopes are distributed on an appointed day and employees are

asked to sign a register as acknowledgement. For those to be paid bycheque, the accountant prepares the account payee cheques anddistributes them the same way. For direct credits into the bankaccounts of the employees, an instruction letter is written to bank,signed by authorized signatories, giving in the details of net payamount and bank account numbers of concerned employees. Inmodern days, the method of directly crediting salary & wages to thebank accounts is very common and safe. Along with the salary &wages, the pay slips are also distributed. Accounting for payroll Thelast step in the payroll routine is to pass accounting entries in booksof account and also the necessary entries in the cost ledgers. There

are master account codes opened for each element of salary &deductions to keep a proper track of the same. The coding is a mustin case of computerized payroll. The accounting entry is posted tovarious cost centers and departments.

The organization will have to contribute to the provident fund and


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family pension fund. The deductions made for the same along withcompanies contribution has to be paid to govt. organization. Also thepayment of profession tax and income tax needs to be made. Theseentries are also simultaneously passed. In case of an integratedaccounting system, where cost and financial accounts are kept

together, the entries are passed accordingly.

Analysis of labor Costs:

There has to be regular analysis of costs incurred on the workforcewith regard to the compensation paid to them in various forms as wellas the utilization of the time by the workforce. As the objective ofcosting is to link the cost to the cost unit, the analysis of labor costs

must concentrate on this objective. The linking of the cost to the jobsor contracts or processes or the respective cost units is done throughthe job cards which record the job / contract number on which thetime is spent by the workers. The analysis is also done into direct andindirect labor cost. This is known from the departmental classificationof payroll. The total wage bill is bifurcated into the charge to be madeto WIP (for direct workers), production overheads (for indirect workersin factory), Administration overheads (indirect workers inadministrative departments), Selling & distribution overheads(indirect workers in sales, marketing and distribution). The analysiscould be further drilled down to the actual cost unit number.

Computer systems enable this analysis easily through drop downqueries, which enables a cost accountant to drill down from the paysheet all the way down to identification of every hour spent by eachemployee! The cost accountant is equally interested in analyzing andreporting how the time is utilized. This analysis could revolve aroundtotal time available, idle time, overtime etc. He uses various ratios tointerpret this e.g. idle time to total time, overtime to total time. Hewould also classify them further into normal and abnormal idle orovertime.

Treatment of Idle Time:

Idle time refers to the time for which workers or staff members arepresent on the work location, but no work is carried out. It indicatesthe time lost. Idle time cost refers to the salaries or wages paid forthe lost time. Technically speaking, the attendance card shows the


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time, but it is not booked on any job card or contract card. If notproperly controlled, idle time losses could become very severe andhave a major impact on cost of an item. It also reflects poorefficiency. Idle time could be caused by a variety of reasons someare beyond control of workers while they themselves are responsible

for the other reasons. The idle time, which cannot be avoided & isinevitable, is termed as Normal Idle time and the idle time whichcaused due to reasons that are within control of management andcould have been controlled through management action is called asAbnormal Idle time.

The possible causes of normal and abnormal losses can found insituations within the organization and those outside the organization.These are given below:

Normal Internal Reasons: Natural reasons

Abnormal

Normal breaks tea, lunch, Workers spending extra time naturalcalls, walk from factory after lunch, not getting back to gate to place

of work, normal place of work fatigue, weekly offs, paid holidays

Production reasons

Machine set up, changing tooling, Power failure, machine break,change-over from one job order to another, waiting for material,preventive maintenance and waiting for instructions

Administrative reasons

Internal meetings, gate meetings, Strikes, lockouts, high level oftraining programs attrition


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External Reasons:

General power failure in the area, Closure of business due to shiftseasonality or economic cycles, in demand, change in govt. rules,

technology, migrating workers

The above list is only illustrative and not exhaustive, as the list couldgo on endlessly. Whatever may be the reasons, efforts must be actionoriented and these actions are: Keeping normal idle time to absoluteminimum levels and Take immediate corrective actions to overcomereasons causing abnormal idle time

Analysis of Idle Time:

It is therefore necessary that a continuous analysis of idle time iscarried out by the cost accountant. There could be a systemdeveloped whereby the reason-wise analysis of idle time is done andreported. The idle time can be collected from the time sheets(attendance records) and workers job sheets. The supervisors mustkeep vigil to record the actual time lost on the job. Each job cardshows the time that is spent on different job orders. The total time

attended by the worker and the time spent by him on the jobs has tobe compared. Analysis & reporting of idle time helps management toexercise better control on it by removing or minimizing the effect ofreasons causing the loss due to idle time.

The reporting of idle time may be done at individual level anddepartmental level. These reports are made at frequencies dependingon the need of each organization. Any unusual time loss isimmediately escalated to higher levels.

Treatment of Idle time In cost and financial accounting: Differenttreatments are given to the normal idle time loss and abnormal idletime loss. (a) The loss on account of normal idle time is booked on therespective job (i.e. included in the prime cost of production of the job)through W.I.P. account. If it cannot be identified with jobs then it istaken as Factory Overheads. Normal idle time reported for indirect


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workers will be booked as Administration or selling & distributionoverhead. (b) The loss on account of abnormal idle time is directlycharged to the P & L account in cost and financial books.


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Overtime Cost:

Working beyond normal working hours is a usual phenomenon intodays industrial world. The work pressures and need to deliver

results fast, working long hours is considered as inevitable in manyorganizations. It could also be caused by understaffing and highattrition rates in the industry. However, not all this is paid for.Employees normally do not get paid extra for such long hours worked.For unionized workers, however, as per the agreement overtimes maybe paid for. Such payments are made usually at a higher rate(normally at double rate). It certainly adds to the cost ofmanufacturing. Hence the payment made for the overtime hoursworked comprises of Payment made at normal rates Premium paid forthe overtime hours

The supervisors or departmental heads normally permits overtime.There is a form called request for overtime wherein the details of joband reason for extra hours beyond normal working hours arementioned. If those fit, such extended working hours may bepermitted. The reasons for overtime may be: Illness of some workersmay force others to work extra and complete the work. It may be atthe request of customers to complete an order in quick time. Therecould be receipt of more orders than planned and it may not bepossible to immediately employ additional workers. Receipt of rush

orders

Treatment of overtime cost (a) If overtime is worked on specific jobsat the request of the customer, the cost is booked as a direct laborcost on that job (b) In other cases, normal payment for overtimehours may be taken as cost of production and the premium portion istreated as overheads. The idea of doing so is that the prime costcomparison should not get vitiated due to inclusion of premium in thecost. Some concerns allocate the overtime premium on all jobs doneduring the period. ( c ) If overtime is worked to recoup the lost hours

due to fire, floods etc., the premium portion is charged to P & Laccount. Control of Overtime work (1) It should be allowed only withprior permission. (2) It should be collected under an overtime ticketand assigned to the particular department (3) If it is becoming aregular feature, putting in more manpower may be considered. (4)Periodical reporting of overtime with the reason for extra hoursworked may be circulated for action by the different levels ofmanagement.


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(5) The effort should be to reduce overtime as it could lead to healthproblems, more fatigue, quality deterioration, increase in the cost ofpower & electricity, other facilities, more wear and tear of machineryetc.

Labor Turnover (LT)

Very high rate of attrition is a normal phenomenon in the Ghanianindustry today. organizations are fighting hard to keep it to affordablelevels, but it is increasingly difficult to control. organizations arefacing disruption in business activities due to a high employeeturnover rate. On the other hand companies are finding recruitmentdifficult as there is a dearth of skilled manpower. Although thebusiness entity is a going concern and a perpetual existence, thelabor force may come and go. labor turnover is defined as the rate ofchange in the average employee strength during a period. It iscaused by the displacement of manpower. There are two componentsto labor displacement one is separations and second recruitment.Both these may affect the turnover ratio with different severity. Ahigh labor turnover will add to costs and also disrupt businessactivities. Increase in costs is due to costs of replacements,recruitment, training etc. The business disruption is caused due to thelead time for recruitment and the time taken by new employees tostart contributing. Measurement of LT Like any other ratio, the LTcalculation results into a figure that speaks of a relationship betweentwo sets of figures. The two figures here are one, change inmanpower and second the number of employees. As the ratio isdefined as rate of change, a simple formula for calculating the LTratio is: LT Ratio =Employee Strength.

Change in manpower is understood to mean that the change iscaused due to separation as well as new additions to the manpower

strength. Also, the change is always related to a specific period oftime. So essentially we talk about the manpower strength at thebeginning of the period and the manpower strength at the end of theperiod. The practice is to consider a simple average of manpower inthe denominator. There are different connotations as to what shouldbe taken in the numerator: (a) Consider only separations (b) Consideronly replacements (c) Consider a combination of separation andreplacement. Based on these there are different formulae for


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computing the LT as follows:


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Separation Method: The LT is considered as relationship between totalnumber of separations during the period & average manpower duringthe period. Mathematically, it is shown as: LT Ratio = AverageManpower in the period X 100. If the manpower at the beginning ofthe year 2006 was 2500 and at the end of 2005 was 2600, the

average workforce is (2500+2600)/2 i.e. 2550. If 250 people have leftthe company during the year, the LT ratio is (250 / 2550) x 100 i.e.9.80% Accession method: Under this method, the total accession i.e.additions is considered in the numerator. The logic is that LT affectscosts and efforts for replacing the left employees. In above example,we had 2500 people in the beginning and 2600 at the end after 250people left. The accession will be 350 (2600+250-2500). The LT ratiohere will be (350/2550) i.e. 13.73% Replacement Method: Thismethod recognizes only replacement made in the numerator. Thelogic is that if there is no replacement theres no additional cost. Theformula here is: LT Ratio = Average Manpower in the period X 100

Avoidable Separation method: According to some experts, theseparations caused by reasons like retirement or death of employeescannot be included in the LT ratio. We should consider separationsdue to reasons that could have been avoided only. The formula hereis: LT Ratio =

Average Manpower in the period X 100.

Flux Method: It takes into account the total displacement i.e.separations as well as accessions. So the numerator considersaverage of separations & accessions. The formula is: LT Ratio = 1 X(No of separation + No of Accessions) + Average manpower in theperiod X 100

Control over labor Turnover The first task for controlling the laborturnover is to diagnose the causes for the same. Once the causes arediagnosed, the efforts can be made to minimize the reasons of peopleleaving the organization. The process of recruitment, selection,training, placement, promotions could be properly systematized to

make employees remain with the organization. Many bigorganizations take help of consultants and experts in this area.Effective reporting of reason-wise separations serves a great deal informing policies to mitigate the labor turnover. The causes could beclassified as avoidable and non-avoidable. Avoidable causes:Dissatisfaction with remuneration, Improper working conditions -Dissatisfaction with job content - Unhappy with personal policies onincrements and promotions, Lack of proper facilities


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Unavoidable causes: Death, Retirement or ill health, Domesticreasons like marriage of female workers, Seasonal nature of business,Shortage of resources, Better prospects, physical reasons

Costs of labor Turnover: It is difficult to measure the labor turnovercosts correctly as it is difficult to link costs to the separation ofpeople. These costs are basically: (a) Preventive costs: Costsassociated with personnel administration, welfare facilities, employeedevelopmental programs, retirement policies, attractive remuneration(b) Replacement costs: Costs associated with recruitment, trainingand induction of new people, loss of production during the transitionperiod, cost of defective production, and cost of additional supervisionon new workers. These costs are generally treated as overheads as

they cannot be directly linked with cost units.

Measuring labor efficiency and productivity:

Employees help the process of converting raw material into finishedproduct. Even in the days of extensive automation, role of manpowercannot be underestimated. Organizations today take every possiblestep to attract and retain good manpower. The remuneration

methods, fringe benefits, working conditions etc. go a long way inensuring that employees remain engaged with the organization. Onemore factor is important in the process of rewarding good employeesfor their performance is measurement of the performance.Performance measurement involves the following steps:

(1) Defining the work properly this is done though setting up the jobevaluation, work study, time & motion study and other engineeringmethods. It is also necessary to define the complexity of the job,discipline required, degree of supervision needed.

(2) Defining the skills needed to perform a job After defining a job,the qualities and skills needed to perform the same are listed. It alsoincludes education, training, physical qualities, responsibility, etc.


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(3) Setting up job profile people are recruited considering therequirements defined under the above two steps. People should begiven a clear cut idea of their job profile. If job profile or description isnot properly defined, the employees wont be able to perform.

(4) Measurement of work done the work done by employees mustbe correctly measured. The measurement must be done incomparison with the targets set in the form of Key Result Areas(KRAs) for a period.

(5) Merit rating only measuring work is not enough to judge anemployee performance. His personal qualities and developmentshould also be tracked. Merit rating is a systematic evaluation of an

employees appraisal. The superior usually does it. It assessesemployee on the basis of work performance, interpersonal relations,cooperation, ability to lead etc. There may be different weightagesassigned to each of these factors and an overall rating is given.

Direct Cost:

Direct material plus labor plus other expenses together become prime

cost. Sum total of all indirect costs viz. indirect material, indirect laborand indirect expenses are called overheads. The expenses representthat part of the cost, which is other than material and labor. It isbasically cost of facilities or services, which are used as aids toproduction. The expenses again could be classified as direct andindirect. Direct expenses are those expenses (other than material &labor) which can be directly associated with a job or a process or acost unit. They are a part of prime cost. They are also referred to asChargeable expenses. They do not physically form part of the finalproduct like material cost, but facilitate the output directly. Examplesof direct expenses are: Royalties and patent fees paid for using

technology, Hire charges for special machines, facilities, tools etc thatare used in relation to a specific job or process. Sub-contractorscharges for getting some operations done by outsourcing Consultancycharges paid exclusively for a job Cost of special design, layoutArchitects fees, Traveling for a specific job.

The proportion of direct expenses in the total cost is usually small. In


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a factory, expenses that can be directly linked to productiondepartments also can be clubbed as direct expenses. Examples arepower & electricity charges paid based on the meter reading in theproduction departments. These are absorbed into the prime cost. Inservice industry, the direct expenses are related to the generation of

service. For example, a transporting company provides transportationservice. The expenses on the vehicle maintenance, petrol & fuel etccan be directly linked to a vehicle and can thus be treated as directexpense. For an educational institute, the charges paid foreducational consultants in developing the curriculum may be taken asdirect expense for that particular course. Certain expenses may bedirect expenses for certain costs centers but they are indirect for theproduction departments. These do not form part of prime cost, butabsorbed as overheads. Collection of direct expenses: Directexpenses are collected based on the vouchers indicating the specificjob or process numbers for which they are incurred or paid. There

could be agreements for payment of royalties. Provisions for directexpenses may be made based on specific purchase orders issued forhiring, consulting etc.

Treatment of direct expenses: The direct expenses are debited to theW. I. P. account of the specific job or process. In case of contracts orprojects, they are debited to the specific contract or project as thecase may be. In service industry, it is charged to the cost ofgenerating service.

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Assignment on Labor

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