f2 07 Labour costs.doc

Chapter07 Labor costsPriority = HighExam GuidanceYou will be expected to illustrate different remuneration policy and incentive schemes. Their characteristics must be always in your mind. And you must be familiar with the computation of total pay of employee. You will also need to be aware of the procedures and documents required for recording labour costs.1. Measuring labour activity1.1 Corresponding concepts1.1.1 Production is the quantity or volume of output produced.1.1.2 Productivity is a measure of the efficiency with which output has been produced. It is also called efficiency ratio.Productivity/efficiency ratio=Expected hoursActual hours=Actual outputExpected outputRatio 100% :efficient labourRatio 100%:worked above capacityRatio 100%:worked below capacity1.1.5 Capacity ratio represents how much production capacity is utilized.Capacity ratio=Actual hours takenBudgeted hoursRelationship between the three ratiosProduction volume ratio = Efficiency ratio X capacity ratioExample:Rush and Fluster Co budgets to make 25,000 standard units of output(in four hours each) during a budget period of 100,000 hours. Actual output during the period was 27,000 units which took 120,000 hours to make.Required:Calculate the efficiency, capacity and production volume ratios.1.2 How to enhance production and productivity?Production can be increased by the following ways.a) Working overtimeb) Hiring extra staffc) Sub-contracting some work to an outside firmd) Managing the work force so as to achieve more output.Productivity would be improved if a production department produces the same amount of output as soon as possible.1.3 Effect of productivity on costAn increase in productivity will reduce labour cost per unit.Example:Clooney Co has a production department in its factory consisting of a work team of just two men, Doug and George. Doug and George each work a 40 hour week and refuse to do any overtime. They are each paid $100 per week and production overheads of $400 per week are charged to their work. In week one, they produce 160 units of output between them. Productivity is measured in units of output per man hour. In week two, management pressure is exerted on Doug and George to increase output and they produce 200 units in normal time. In week three, Doug and George agree to work a total of 20 hours of overtime for an additional $50 wages. Output is again 200 units and overhead charges are increased by $100.2002_dec Section A _20There would be an increase in the total cost for labour as a result of:(i) additional labour being employed on a temporary basis.(ii) a department with spare capacity being made to work more hours.(iii) a department which is at full capacity switching from the production of one product to another.Which of the above is/are correct?A (i) onlyB (ii) onlyC (iii) onlyD (i) and (iii) onlyAnswerA1.4 Effect of automation on productivityRising wage rates have increased automation, which in turn has improved productivity and reduced costs. Where automation is introduced, productivity is often, but misleadingly, measured in terms of output per man-hour. A new measure of productivity is required, that is output per machine hour.Example:Suppose, for example, that a work-team of six men (240 hours per week) is replaced by one machine (40 hours per week) and a team of four men (160 hours per week), and as a result output is increased from 1,200 units per week to 1,600 units.2. Remuneration policies2.1 Effect of labour remuneration policiesa) The morale and efficiency of employeesb) The cost of finished goods and services2.2 Time work (day-rate system)Employees are paid a basic rate per hour, day or week irrespective of production achieved. Wages = Hours worked rate of pay per hourIf an employee works for more hours than the basic daily requirement he may be entitled to an overtime payment.If an employee works unsocial hours he may be entitled to a shift premium.Summary of day-rate systema) They are easy to understand.b) They do not lead to very complex negotiations when they are being revised.c) They are most appropriate when the quality of output is more important than the quantity, or where there is no basis for payment by performance.d) Basic time rate provides no incentive to improve productivity and close supervision is necessary, thus bonuses or commissions are often paid to encourage efficient and effective working. Its effect on the cost per unit1-2_pilotpaper Section A _22Scaynes employs two types of labour: skilled workers, considered to be direct workers, and semi-skilled workers, considered to be indirect workers. Skilled workers are paid 10 per hour and semi-skilled 6 per hour.The skilled workers have worked 30 hours overtime this week, 10 hours on a specific order and 20 hours on general overtime. Overtime is paid at a rate of time and a half.The semi-skilled workers have worked 45 hours overtime, 15 hours for a specific order at a customers request and the rest for general purposes. Overtime again is paid at time and a half.What would be the total overtime pay considered to be a direct cost for this week?A 195B 285C 350D 485AnswerD2.3 Piecework schemesUnder this method, a fixed amount is paid per unit of output achieved, irrespective of time spent. Wages=Units produced Rate of pay per unitA guaranteed minimum wage will make them not to suffer loss of earnings when production is low through no fault of their own.Where an employee makes several different types of product, a standard time allowance make it possible to add up the units to arrive at a total of piecework hours for payment purposes.Differential piecework schemes offer an incentive to employees to increase their output by paying higher rates for increased levels of production.What is conversion cost?Summary of piecework schemesa) They enjoy fluctuating popularity.b) They are occasionally used by employers as a means of increasing pay levels.c) They are often seen to drive employees to work too hard to earn a satisfactory wage.2006-Dec-44 An organization operates a piecework system of remuneration, but also guarantees its employees 80% of a time-based rate of pay which is based on $20 per hour for an eight hour working day. Three minutes is the standard time allowed per unit of output. Piecework is paid at the rate of $18 per standard hour.If an employee produces 200 units in eight hours on a particular day, what is the employees gross pay for that day? A. $128 B. $144 C. $160 D. $180Answer: DExample:The following levels of output produced in one day:Normal working day8 hoursHourly rate of pay (time basis)5.50 per hourStandard time allowed to produce one unit3 minutesPiecework rate0.10 per standard minutePremium bonus75% of time saved, in addition to hourly payRequired: For the following levels of output produced in one day:a) 80 units;b) 120 units;c) 210 units;Calculate earnings based on:1) Piecework, where earnings are guaranteed at 80% of time-based pay,2) Hourly pay with premium bonus.2.4 Bonus/incentive schemesThe characteristics of bonus/incentive schemes.a) Employees are paid more for their efficiency.b) The profits arising from productivity improvements are shared between employer and employee.c) Morale of employees is likely to improve since they are seen to receive extra reward for extra effort.The conditions required to operate successfully for a bonus/incentive scheme.a) Its objectives should be clearly stated and attainable by the employees.b) The rules and conditions of the scheme should be easy to understand.c) It must win the full acceptance of everyone concerned.d) It should be seen to be fair to employees and employers.e) The bonus should ideally be paid soon after the extra effort has been made by the employees.f) Allowances should be made for external factors outside the employees control which reduce their productivity (machine breakdowns, material shortages).g) Only those employees who make the extra effort should be rewarded.h) The scheme must be properly communicated to employees.2.4.1 High day-rate systemA high day-rate system is a system where employees are paid a high hourly wage rate in the expectation that they will work more efficiently than similar employees on a lower hourly rate in a different company.Example:If an employee would make 100 units in a 40 hour week if he were paid $2 per hour, but he were paid $2.50 per hour, if output is 120 units. Production overhead is added to cost at the rate of $2 per direct labour hour, costs per unit of output would be lower with the efficiency rising.The advantages of high day-rate systema) It is simple to calculate and easy to understand.b) It guarantees the employee a consistently high wage.The disadvantages of such schemes are as follows.a) Employees cannot earn more than the fixed hourly rate for their extra effort. b) There is no guarantee that the scheme will work consistently. c) Employees may prefer to work at a normal rate of output.Example:X Ltd has an average of 42 workers employed in one of its factories in a period. The company pays a basic rate of 4.60 per hour to all its direct personnel. This is used as the standard rate. In addition, a factory wide bonus scheme is in operation. A bonus of half of the efficiency ratio in excess of 100% is added as a percentage to the basic hourly rate, for example if the efficiency ratio is 110%, then the hourly rate is 4.83 (i.e. 4.60 + (5% X 4.60). During the period, 114,268 units of the companys single product were manufactured in 4,900 hours. The standard hour is 22 units.Required:Calculate the hourly wages rate paid and total wages for the period.4900*22=107800(114268-107800)/107800=6%2.4.2 Individual bonus schemesIndividual employees qualify for a bonus on top of their basic wage, with each persons bonus being calculated separately.To be successful, it must take account of the following factors.a) Each individual should be rewarded for the work done by that individual. b) Work should be fairly routine, so that standard times can be set for jobs.c) The bonus should be paid soon after the work is done, to provide the individual with the incentive to try harder.2.4.3 Group bonus schemesA group bonus scheme is an incentive plan which is related to the output performance of an entire group of workers, a department, or even the whole factory.The advantages of group bonus schemes.a) They are easier to administer because they reduce the clerical effort required to measure output and calculate individual bonuses.b) They increase co-operation between fellow workers.c) They have been found to reduce accidents, spoilage, waste and absenteeism.Serious disadvantages would occur in the following circumstances.a) The employee groups demand low efficiency standards as a condition of accepting the scheme.b) Individual employees are browbeaten by their fellow workers for working too slowly.Example:Which of the following statements is/are true about group bonus schemes?(i) Group bonus schemes are appropriate when increased output depends on a number of people all making extra effort(ii) With a group bonus scheme, it is easier to award each individuals performance(iii) Non-production employees can be rewarded as part of a group incentive schemeA. (i) onlyB. (i) and (ii) onlyC. (i)and (iii) only Answer: C2.4.4 Profit sharing schemesA profit sharing scheme is a scheme in which employees receive a certain proportion of their companys year-end profits.The advantage of these schemes is that the company will only pay what it can afford out of actual profits and the bonus can be paid also to non-production personnel.The disadvantages of profit sharing are as follows.a) Employees must wait until the year end for a bonus. The company is therefore expecting a long-term commitment to greater efforts and productivity from its workers without the incentive of immediate reward.b) Factors affecting profit may be outside the control of employees, in spite of their greater efforts.c) Too many employees are involved in a single scheme for the scheme to have a great motivating effect on individuals. Incentive schemes involving sharesA share option scheme gives its members the right to buy shares in the company at a set date in the future and at a price usually determined when the scheme is set up. Golden HandcuffsAn employee share ownership plan（ESOP） is a scheme which acquires shares on behalf of a number of employees, and it must distribute these shares within a certain number of years of acquisition.Those schemes make workers feel they have a stake in the company which employs them. The disadvantages of these schemes are as follows.a) The benefits are not certain, as the market value of shares at a future date cannot realistically be predicted in advance.b) The benefits are not immediate, as a scheme must be in existence for a number of years before members can exercise their rights. Value added incentive schemesValue added = sales - cost of bought-in materials and servicesThe advantage of value added over profit as the basis for an incentive scheme is that it excludes any bought-in costs, and is affected only by costs incurred internally, such as labor.Example:Swetton Tyres Co manufactures a single product. Its work force consists of 10 employees, who work a 36-hour week exclusive of lunch and tea breaks. The standard time required to make one unit of the product is two hours, but the current efficiency ratio (or productivity) being achieved is 80%. No overtime is worked, and the work force is paid $4 per attendance hour.Because of agreements with the work force about work procedures, there is some unavoidable idle time due to bottlenecks in production, and about 4 hours per week per person are lost in this way.The company can sell all the output it manufactures, and makes a cash profit of $20 per unit sold, deducting currently achievable costs of production but before deducting labour costs.An incentive scheme is proposed whereby the work force would be paid $5 per hour in exchange for agreeing to new work procedures that would reduce idle time per employee per week to 2 hours and also raise the efficiency ratio to 90%.Required:Evaluate the incentive scheme from the point of view of profitability.2006-Dec-SectionA-11 A jobbing company operates a premium bonus scheme for its employees of 75% of the time saved compared with the standard time allowance for a job, at the normal hourly rate. The data relating to Job 1206 completed by an employee is as follows:Allowed time for Job 12064 hoursTime taken to complete Job 12063 hoursNormal hourly rate of pay$8What is the total pay of the employee for Job 1206?A. 24B. 30C. 32D. 38Answer: B3. Recording labour costs3.1 Personnel departmentResponsibilitiesa) Engagement, transfer and discharge of employees.b) Classification and method of remuneration. c) Prepare personnel record cardd) Maintain records of overtime and shift working.e) Issuing reports to management on normal and overtime hours worked, absenteeism and sickness, lateness, labour turnover and disciplinary action.3.2 Production planning departmentThis department is responsible for the following.a) Scheduling workb) Issuing job orders to production departmentsc) Chasing up jobs when they run late3.3 Timekeeping departmentThe timekeeping department is responsible for recording the attendance time and job time of the following.a) The time spent in the factory by each workerb) The time spent by each worker on each jobThe relevant use of this information P1483.3.1 Attendance timeTime of absence/arrival/breaks/departure should be included in an attendance record.3.3.2 Job timeWhen the work is not repetitive, the following records are required.a) Daily time sheetsb) Weekly time sheetsc) Job cardsd) Piecework ticket/Operation card3.3.3 Idle timeThe idle time ratio is useful because it shows the proportion of available hours which were lost as a result of idle time.Idle time ratio=idle timetotal timeClock cardsThese record the time of arrival, time of breaks and time of departure for employees.Time sheetsThese record how employees time has been spent.Job cardsThese prepared for each job. When an employee works on a job he records on the job card the time spent on that job. Job cards also carry instructions to the operator on how the job is to be carried out.Route cardsThese are similar to job cards, except that they follow the job through the works and carry details of all operatio