ACCOUNTING FOR LABOUR

The term labour cost represents wages paid to the workers employed in business organizations
for producing goods or rendering services. It also represents the various payments made to an
employee (worker), which are as follows:
1. Immediate monetary benefits:
a. Basic wages
b. Dearness allowance
c. Production bonus
2. Deferred monetary benefits:
a. Employers contribution to provident fund
b. Employers’ contribution to employees’ state insurance corporation
c. Retirement benefit like gratuity
d. Profit bonus
3. Fringe benefits: Free or subsidized food, housing, transport to office, medical facilities,
canteen, recreational activities and the like. The labour cost may be classified into;
Direct labour costs and Indirect labour cost.

Direct labour and indirect labour

For costing purposes, labour can be classified into two broad categories, i.e., direct labour and
indirect labour. The distinction between direct labour and indirect labour is important because
it helps:
i. To determine accurate product cost,
ii. To measure efficiency of performance,
iii. To minimize error in overhead allocation, and
iv. To ensure better cost analysis for decision making and control.

Direct labour can be described as the labour which is engaged directly in the manufacture of a
product or in a particular job or service and which can be conveniently allocated to the job,
process or production units. It is the labour engaged in changing composition, form or condition
of a product manufactured. It represents the labour who directly operates the manufacturing
machinery and equipment. It handles raw materials, work-in-progress and finished goods on
the production line. It can also call productive labour, process labour, operating labour and
prime cost labour.

The important features of direct labour are as follows:

1. It is conveniently identified and allocated to cost unit.
2. It varies directly with the volume of output.
3. It is engaged in the manufacture of goods or providing services.
4. It is engaged in altering the composition, form or condition of a product.
5. It is easily ascertained and controlled.

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Wages paid to direct labour are termed as ‘direct labour cost’, direct wages to manufacturing
wages and form part of prime cost.

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Indirect labour is that labour which cannot be easily and conveniently allocated to the job,
process or production unit. It represents labour which is not directly engaged in the
manufacture of a product or in a job or service but indirectly helps in production. In short, the
labour which cannot be directly identified with a job, process or operation, is generally treated
as indirect labour.

The importance of distinction between direct and indirect labour costs is to provide a more
accurate product cost and to exercise a strict control over labour cost. The direct labour cost is
charged to jobs and forms part of the prime cost, whereas indirect labour cost becomes a part
of overheads.

Methods of labour remuneration

Remuneration has been defined as the reward for labour and services rendered. All business
organizations should have a proper method of remuneration for their employees. The
management aim should be to achieve high productivity. So, it has to devise a method of
remuneration in such a way that it promotes goodwill and satisfaction among the labourers and
at the same time, increasing the efficiency, economy and productivity of the firms too. The
principles underlying the selection of a method of remuneration are:
1. The method has to ensure that fair wages are paid for a fair day’s work.
2. It should be simple to understand and easy to practice.
3. The workers should accept the method.
4. It should be comparable with the wages adopted in other similar industries, in a
particular geographical area.

The methods of labour remuneration are as follows:

 Time rate payment system,
 Piece rate payment system
 Prior agreement payment.

Time rate payment system

The time rate system is that system of wage payment in which the workers are paid on the
basis of time spent by them in the factory. Under this system, the workers and employees are
paid wages on the basis of time they have worked rather than the volume of output they have
produced. Hence, according to this system, wages are paid on hourly, weekly or monthly basis.
Under time rate system, the wages earned by a worker is determined by using the following
formula:
Wages earned = Time spent x Rate per hour

Advantages of time rate payment system

The following are some of the important advantages of time rate system of wage payment:
1. Time rate system is simple to understand and easy to calculate.

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2. Time rate system is quite useful for organizations that use costly inputs for quality
outputs. 3. Time rate system is beneficial for average and below workers.

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 3. Time rate system assures regular income and creates the feeling of economic security
among the workers.
4. Time rate system does not discriminate the workers and is preferred by trade unions.

Disadvantages of time rate system

The following are some notable disadvantages of time rate system of wage payment.
1. Time rate system does not help in increasing output and improving efficiency as there is
no correlation between effort and reward.
2. Time rate system is not justifiable between efficient and inefficient workers and skilled
and unskilled workers.
3. Time rate system pays for idle time, which increases the cost of production.
4. Time rate system encourages a go-slow tendency among workers during working hours
and encourages them to work overtime.
5. It is difficult to estimate exact labour cost in advance.
6. It requires strict supervision to get the required quantity of output.

Piece rate payment system

This system is also known as payment by result. When wages are paid on that basis of the
output of the workers without considering the time taken in performing work, it is termed as
piece wage.
Thus, under this system, the workers are paid on basis of quantity of work done, i.e., per unit of
output, per article, per job, commodity, etc. For computing total remuneration of workers, a
pre-determined rate per unit of output is multiplied by the total units produced. The rate is
fixed with the time and motion studies. The formula for wage computation under this system is:

Wages = Number of units produced x Rate of wage per unit

Wages = Units produced × Time allowed per unit × Rate per time allowed

Suitability of piece rate system

Piece rate system of payment of wages is considered suitable:
i. Where the quantity of work done can be precisely measured and standardized.
ii. Where the work is of competitive nature.
iii. Where it is possible to fix a fair and acceptable piece rate.
iv. Where the productivity is closely related to skill and efforts.
v. Where the quality of goods can be controlled.
vi. Where time cards are maintained for ensuring regularity and punctuality of workers and
uninterrupted flow of production.
vii. Where materials, tools and machines are pettily available to cope with the possible
increase in production.

Advantages of piece rate system

Important advantages of the piece rate system are:

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i. Fairness- under this system, the reward is related to effort. Efficient workers are
rewarded and inefficient workers are penalized.

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 ii. Increase in productivity- more work is turned out in a shorter period of time. Since
there is a direct incentive to work, there is always a tendency on the part of the worker
to produce more by adopting correct procedure and techniques of production.
iii. Decrease cost of production- increase in production results in lower costs due to the
reduction in fixed cost and overhead cost per unit of production.
iv. Easy determination of quotation price- the employer is able to know the exact labour
cost per unit. This will help to make quotations confidently and accurately.
v. Less supervision- as compared with the time rate system, the supervision costs under
this system are not high, because the workers are to be paid on the basis of
performance. The very attraction of greater reward for greater effort drives them to
work hard.
vi. Reduction of idle time- the quantum of idle time is minimized as workers know that
they will not be paid for idle time. Thus, it persuades them not to waste their time.
vii. Minimisation of loss due to breakage- the workers handle the machines, tools and
implements with great care which helps in minimization of loss resulting from breakage.
They know that the breakage will reduce their output which results in reduced wages.

Disadvantages of piece rate system

Some important disadvantages of the system are given below:
i. Difficulty in fixation of standard piece rate- setting of a standard rate involves a lot of
difficulties and a considerable amount of expense has to be incurred. If high piece rate is
established, it is very difficult reduce it subsequently.
ii. Ignores quality- as more output means more wages, the workers always in a hurry to
produce more. This results in production of standard items, high rate of rejection and
ultimately increase production cost per unit.
iii. Insecurity- the system does not provide guarantee of minimum of wages to the
workers. They feel in secured since they would get wages during the period when their
efficiency may get reduced factors beyond their control. Thus, at times, workers may be
earning even below the subsistence level.
iv. Conflict- The system may lead to conflict between the management’s and the workers,
if the output is low due to some fault of the management, as, bad quality of raw
material, frequent break-downs of machinery / failure, etc.
v. Expensive control systems- management is compelled to implement expensive control
systems of supervision and inspection for maintained of quality of output.
vi. Speeding- workers may speed up the work to produce more which cause great injury to
their health, speeding also cause undue wastage of raw materials and tear to machines.
vii. Effect on production schedule- workers may work at a speed for a day, earn more
wages and then absent themselves for a few days, work may affect the uniform flow of
production and the production may be disturbed.
viii. Increase cost of production- cost of production may increase due to more wastages of
materials, high cost of supervision and inspection, and wear and tear of machines.
ix. Frustration among less efficient workers- the system will frustrate the less efficient
workers and their efficiency may further decrease because of discontentment.

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The piece rate is of the following type:
Straight piece rate- this is the simplest and the most common type of piece rate system. Each
operation, job or units of production is termed as a piece. The wage rate fixed for each piece is
called piece rate. The worker is paid wages on the basis of work done regardless of the time
taken to perform the work. The wage of a worker is calculated by multiplying the number of
units produced by him by the specified rate of each unit.
Wages = Number of units produced x Wage rate per unit

The piece rate is fixed with the help of work study. Standard time for each unit is ascertained
first. Piece rate is then calculated with reference to hourly rate of wage. For example, if hourly
rate of wage is Le10 and the standard time per unit is 90 minutes.

Piece rate with guaranteed time rate- under this system, workers are actually paid on the basis
of output and if the piece rate wages fall below the time rate wages, the worker is paid on time
rate basis.

The difference will be recovered from his wages when he earns more than the fixed wages. For
example, in a manufacturing concern, the piece rate is Le4 per unit, the time rate is Le8 per day
of 8 hours and the daily fixed work is 20 units.

If a worker manufactures 18 units in a day, the earnings Le72 (Le4 x 18 ) on the basis of piece
rate. But he will get Le80 as his time wages which is Le8 more than what he earns on piece rate
basis and this amount of Le8 paid to him in excess will be recovered from his wages whenever
his piece rate wages exceed the time rate wages.

But if the worker manufactures 22 units in a day, he will get Le88 ( Le4 x 22 ) on piece rate
basis. This system has all the merits of both the time and piece rate systems and removes
demerits of both. But it is very complicated and difficult system for the workers to understand.

Differential piece rate system- under the differential piece rate system, the payment of wages
is made to labour on the basis of piece rates varying with the level of efficiency of workers.
The system provides for higher rewards to more efficient workers. Under this system, there is
more than one piece rate to reward efficient workers and to encourage the less efficient
workers to improve. Payment at normal piece rate is made for work performed with and up to
the standard level of efficiency.

Payment is made at higher piece rate if the efficiency exceeds the standard. Higher piece rates
are also applicable for still high efficiency. The system motivates the workers to increase
productivity and earn higher wages. The system is complicated and expensive to operate and is
difficult for the workers to understand.

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Incentive Scheme
All incentive scheme relate payment to output in some way or another, there are innumerable
variations, some scheme applies to individual whilst another applies to group of workers, some
have direct and immediate relationship to output whilst other are more indirect.

Advantages
i. Increase production thereby increasing wages but also reducing overheads per unit,
particularly where there are substantial fixed overheads.
ii. May enable firm to remain competitive in inflationary conditions.
iii. May improve morale by ensuring that extra effort is rewarded.
iv. More efficient worker may be attracted by the opportunity to earn higher

Disadvantages
i. Frequently there are problems in establishing performance levels and rates with
frequent and continuous disputes.
ii. Some incentive schemes are complex and expensive to administer.
iii. Some groups of workers, although relatively unskilled, may earn higher wages through
incentive scheme whilst others engaged on skilled work may become resentful when
differentials are eroded.

Types of incentive scheme

There are two types of incentive scheme as follows:
1. Individual incentive scheme
2. Group incentive scheme

Individual incentive scheme- in general incentive scheme which relate to an individual worker
seem to be the more usual successful, probably because of the immediacy and direct
relationship between effort and reward. The following are typical examples: straight piecework
and differential piecework.

Group incentive scheme- although individually based incentive scheme is common and
frequently successful, on some occasions they are inappropriate and some form of group
scheme is used. This scheme is more appropriate:
1. Where production is based on a group or gang basis; coal mining, diamond mining etc.
2. Where production is integrated and all effort is directed towards the same end.
Example, all forms of production line manufacture etc.
3. Where the production method or product makes it infeasible to measure individual
performance.
Advantages of group incentive scheme
i. May build-up Closer Corporation in the group and a team spirit.
ii. Administratively simpler with far less recording of labour time, production rates etc.
iii. Support workers not directly associated with production can easily be included in the
scheme.
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iv. Greatly reduces the number of rates to be negotiated.

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 v. May encourage more flexible working arrangement within the group.

Disadvantages of group incentive scheme

Less direct than individual schemes so may not provide the same incentive.
Less hardworking members of the group receive the same bonus and may cause friction.

Premium bonus
This is an extra payment made to worker for spending less time to complete a job or to provide
an output than expected. This payment is based on ‘time saved’. Time saved can be calculated
as follows:
Time saved = Time allowed – Time taken

Time allowed- is the maximum time given to a worker to do a job or work.

Time taken- is the return hours used to do a job or work.

Types of bonus scheme

There are various types of bonus scheme, but for the purpose of the examination we are going
to look at only three as follows:

Halsey premium plan- this may also be called 50 – 50 incentive scheme, where the worker is
paid bonus on half of the time saved at a basic rate per hour. It is calculated as follows:
Bonus = ½ x time saved x rate per hour

Advantages of halsey premium plan

i. It is easy to understand.
ii. It guarantees a minimum time wages to all the workers. Thus, slack and relatively
workers have nothing to fear from the scheme.
iii. The benefit resulting from saving in time is equally divided between workers and
employer.
iv. Bonus is separately calculated for each job.

Disadvantages of halsey premium plan

i. Workers do not like the employer to share the benefit of time saved.
ii. It does not provide the employer with full protection against loose rate setting.
iii. Extra efficiency of a worker is not fully rewarded.

Rowan method- this is sometime called individual bonus plan. It is similar to halsey plan, except
in the calculation of bonus. The amount of bonus is that proportion of the wages of time taken
which the time saved bears to the time allowed. It is calculated as:
Bonus = time taken x time saved x rate per hour
Time allowed
Advantages of rowan method
i. Like Halsey plan, it provides guaranteed minimum wage to workers.

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 ii. It protects the employers against loose rate setting.
iii. It pays a higher bonus than that under the Halsey plan up to 50% of the standard time
saved.
iv. The worker is not induced to rush through the work because if time saved is more than
50% of the standard time, the bonus increases at a decreasing rate.
v. It provides good incentive for comparatively slow workers and beginners.

Disadvantages of rowan method

i. Calculation of bonus is complicated and may not be easily understood by workers who
may suspect the employers motives.
ii. Payment under this plan is less than that under Halsey plan beyond 50% of the standard
time saved. It is thus unjust to extra efficient workers.

Halsey weir plan- this method is precisely the same as Halsey plan except that in Halsey Weir
Plan the bonus is equally to 30% or 1/3 of the time saved. It is calculated as:
Bonus = 30 x time saved x rate per hour
100

Overtime
Overtime is the time worked in excess of the normal time and is usually paid at a higher rate,
for example, time and a quarter (i.e., 1 ¼ x basic rate per hour).

Disadvantages of overtime
i. It leads to excessive labour cost.
ii. During overtime hours, labour productivity is decrease because of diminishing labour
efficiency.
iii. Certain overheads, like lighting cost, increase because of work in the evening.
iv. It pours an extra strain on plant and machinery.
v. It has a bad effect on the health of workers.
vi. Workers may develop a tendency to work in overtime and take overtime wages as a
part of their normal earning.
vii. If overtime work is not properly distributed among the workers, it may lead to disco
Control of overtime

The following steps should be taken in trying to control overtime cost as follows:
1. All overtime work should be duly authorized by production manager.
2. Overtime cost should be separately recorded for each department for proper planning
in future.
3. Total overtime premium should be regularly reported to the production management.
Idle time
Idle time is time paid for by the employer for which no work is done. It is a cost to the company.
Idle time may be normal or abnormal idle time;

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Normal idle time- this is the wastage of labour time which cannot be avoided and has to be
borne by the employer. For example, the time between completion of one job and the
commencement of the next.

Abnormal idle time- this is that idle time which arises due to reasons in no way connected with
the usual routine of manufacture and for which employer must pay. For example, time lost due
to breakdown of machinery, strikes and lockout etc.

Causes of idle time

Idle time may occur due to the following reasons:
 Machine breakdown
 Power failure
 Waiting for tools / raw materials
 Waiting for instructions etc.

Control of idle time

The following steps may be taken to control idle time:
i. Production should be properly planned so that imbalances in production are avoided or
reduced.
ii. Repairs and maintenance of plant and machinery should be regularly undertaken so as
to avoid breakdown.
iii. Raw materials, tools and instruction should reach the worker well in time so that no
time is wasted in their waiting.
iv. Supervision should be tightened.

Questions:
Q1. JUNE 2007
The following is a summary of the time sheets of Thomas Bakery Ltd.
Employees T. Sambou S. Davies A. Ginna D. Ayodele P. Jata
Grade A A B C E
Weekday normal rate 36 hrs 36 hrs 36 hrs 36 hrs 36 hrs
Weekday and quarter 6 hrs 4 hrs 2 hrs 4 hrs 4 hrs
Weekend time and half 2 hrs 4 hrs 2 hrs 4 hrs 2 hrs
Total time taken 44 hrs 44 hrs 40 hrs 44 hrs 42 hrs
The basic hourly rates of pay are as follows:
Grade A B C D
Rate Le8.70 Le10.12 Le11.50 Le13.80

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The company operates a payment by result scheme where workers are paid a bonus of half of
the time saved at their basic hourly rate.
The time allowed for the week was as follows:
T. Sambou S. Davies A. Ginna D. Ayodele P. Jata
54 hrs 50 hrs 48 hrs 42 hrs 40 hrs

You are required to calculate for each employee the:

a. Basic wage
b. Bonus payable to the employee
c. Total earnings for the week

Q2. JUNE 2004

In a payment by result scheme, employees are paid a bonus on hours saved at the basic wage
rates. The bonus hours gained is calculated on hours saved multiplied by the ratio of time saved
to time allowed. Jobs are carried forward from one week to another and no overtime is
required. Payment is made in full for total units produced. Details for the three employees are
as follows:
Charles David Eugene
Units issued to employees (in dozen) 40 65 35
Time allowed (hours) 108 125 75
Basic wage rate / hour Le14,000 Le10,000 Le16,000
Time taken (hours) 72 75 80
Rejects (units) 32 68 20

You are required to calculate for each employee:

a. Bonus hours earned
b. Bonus earned
c. Gross wages earned

Q3. In an assembly shop of a motor cycle factory 4 workers A, B, C and D work together as a
team and are paid on group piece rate. They also work individually on day rate jobs. In a 44
hour week the following hours have been spent by A, B, C and D on group piecework viz; - A 40
hours, B – 40 hours, C – 30 hours and D – 20 hours. The balance of the time has been booked by
each worker on day work jobs. Their hourly rates are:
A £5,000
B £7,500
C £10,000
D £10,000
The group piece rate is £1,000 per unit and the team has produced 150 units. The wages are
apportioned to each member of the group based on group hours worked.

Calculate the gross weekly earnings of each workmen taking into consideration that each
individual is entitle to a dearness allowance of £20,000 per week.

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Q4. June 2003
The following information related to the performance of three employees of Nurseway
Manufacturing Company Ltd. for the month of August, 2001.
Names Modu Fatu Mbye
Actual hours worked 400 450 500
Actual production units 5,000 4,800 18,000
Standard time in minute per unit 6 8 2
Actual labour hour rate D3.00 D4.00 D2.50

Additional information:
A personal bonus payment of 60% standard hour is made to each worker and it is paid at the
actual labour hours worked.
Required:
a. Standard hours produced
b. Bonus paid
c. Standard bonus saved
d. Total wages paid.

Q6. November 2001

You are given the following information:
Normal working days 10 hours
Guaranteed rate of pay D6.50 per hour
Standard time allowed to produced one unit 4 minutes
Piecework rate 15B per standard time
Premium bonuses 75% of time saved
The following levels of output were produced on one day.
80 units
120 units
220 units
You are required to calculate earning based on:
a. Piecework, were earnings are guaranteed at 80% of time-based pay.
b. Premium bonus system produced in one day.
Q7. June 2012
Below are shown some extract from the files of Lumea Limited.
(a) Personal files
Name Grade
S. J. Davies A
B. Grey B
A. M. Williams C
L. N. Colley A
C. Johnson B
J. O. Cole D

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 (b) Payroll – master file
Grade Basic rate per hour
A D24.60
B D22.20
C D19.50
D D17.40
(c) Production report – labour
Job Employees Normal hours Overtime hours
X145 S. J. Davies 14 16
‘ C. B. Grey 49 14
‘ V. C. Johnson 27 10
‘ J. O. Cole 42 18
Y282 S. J. Davies 12 22
‘ A. M. Williams 38 28
‘ L. N. Colley 47 42
‘ V. C. Johnson 41 36
Overtime is paid at ‘time and a half’ throughout the firm.
You are required to calculate the labour cost of jobs x145 and y282.
Q8. June 2006
The following is a summary of the time sheet of a workshop in a manufacturing enterprise.

Employees Grade Weekday Weekday Weekend Total hours Time

hours at hours at hours at taken allowed
basic rates time plus a time plus a

quarter Half
A . Cinna A 36 4 4 44 50
C .Adeyemi B 36 2 4 36 48
G . Bankole C 36 - - 36 42
M . Yanday A 36 6 4 46 54
A . Kargbo D 36 - - 36 36
S . Njai B 36 2 2 42 52
T . Joof E 36 2 2 40 48

The basic hourly rates of pay are as follows:

Grade A D9.40
Grade B D10.50
Grade C D9.90
Grade D D11.50
Grade E D11.90
The company operates a payment by results scheme where the employees are paid a bonus of
half the time saved at their basic hourly rate.

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You are required to calculate:
a. Basic wage b. Bonus payable c. Gross wage.

PAYROLL ACCOUNTING
Payroll accounting requires the provision of certain information relating to employees
attendance time, details of absenteeism, hourly rate of pay and details of various deductions
such as tax and national insurance contributions etc. To do this, most organization maintain a
special department called ‘the payroll department ‘.

Functions of the payroll department

1. To maintained a record of job classification, department and wage rate for each
employee.
2. To verify and to summarise the time of each worker as shown on the daily time cards.
3. To prepare the payroll and compute the wages earned by each employee.
4. To compute the payroll deductions.
5. To maintain a permanent payroll record for each employee.
6. To disburse wage payments.
The record of all this information above can be done on a document called ‘wage sheet /
payroll sheet’.

Payroll sheet
The main function of the payroll department is to prepare payroll sheet or wage sheet. Wage
sheet is a statement which list the workers, showing gross wages earned by them for a
particular period and actual wages payable to them after making necessary deductions.

Payroll analysis sheet

Names Hours Rate Basi Bon Overti Allowan Gro SS Unio Total Taxab Net
of worke s c us me ce ss F n reducti le wag
employe d wag wag dues on incom e
es e e
Le Le Le Le Le Le Le Le Le Le Le

Terms to know from the above format

i. Basic pay- this is the actual payment made to an employee for normal time spent on the job /
work (excluding overtime)
ii. Bonus- this is an extra payment made to employees as an incentive payment for achieving high
productivity or time saved during production.
iii. Overtime- this is an extra payment received by an employee for time worked in excess of the
normal time.
iv. Allowance- money that is paid by an employer to an employee for expenses incurred in
the course of his or her work for the company.
v. Gross wage- this refers to the amount earned by an employee before any deductions

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 are made.
vi. Social Security Fund- this is the contribution an employee made to a particular body as
a security when he / she is retired from work.
vii. Union dues- this is the contribution a worker made when he / she is a member of a
work place union / club.
viii. Taxable income- it is the income that is going to be tax or the income that is reliable for
tax out of the workers total income.
ix. Net wage- it is otherwise known as the ‘take home pay’. It is the remaining amount
after all deductions has been made against the employee total income.

Labour documentation / Time keeping document

1. Clock card- this card records the employee incoming time and outgoing time.
2. Job ticket- this is otherwise known as a job card. The card is used for recording the time
spent or worked on each job. A card is prepared for each job and is allotted to the
worker who takes up that particular job. The worker enters in this card the time of
starting as well as finishing the job.
3. Time sheet- this document records the time spent in the work place by an employee.
There are daily or weekly time sheet.
 Daily time sheet- the document where the time spent on each job during the
day is recorded.
 Weekly time sheet- the weekly time sheet record almost the same information
as the daily time sheet. The main difference is that instead of recording the job
done on each day only, record of work carried out is entered on a weekly basis.
4. Combined job and time card- this card combined two in one – the clock card and job
card i.e., it records both the attendance time as well as time spent on different jobs. Idle
time is automatically revealed as the difference between time and work done.
5. Piecework card- this card is used to record the time spent on the job as well as units
produced on each job. It takes into consideration rejected units and rate per unit. The
card is allotted to workers who are paid on piecework basis.

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 Questions
Q1. The data below is extracted from the books of Frank Turay Ltd. for the month ended 30th
June 2011.
Basic wages (Le) Overtime allowance (Le)
Gibrila 20,000 1,000
Lusine 15,000 2,500
Mohamed 18,000 1,250
Kpana 28,000 3,000
Tommy 30,000 2,000
The following information is also relevant:
a. All employees are also entitled to rent subsidy at the rate of 20% of basic salary. b.
b. Every employees total tax liability 5%. c.
c. NASSIT contribution is 10% of basic salary. d.
d. A standard amount of Le200 per month is deducted from salary as welfare. e.
e. Union dues concented by employees is Le400 per month.
You are required to prepare the payroll for the month of June 2011.
Q2. JUNE 2002
Bafana Ltd. employs six workers and pays them ¢800 per hour. Details of hours worked during a
month are as follows:
Name of employees Hours worked
Adu 160
Fori 200
Mefa 140
Daye 120
Impe 180
Amoah 150
The expected monthly working period is 160 hours per worker and any overtime is paid at time
and a quarter. In addition each worker receives a taxable rent allowance of 20% of total hourly
wages. All workers contribute 5% of total earning to social security and 5% to provident fund.
Income tax rates are first ¢40,000 is tax free; the next ¢40,000 10%, and the remainder 12%.
You are required to prepare a payroll for Bafana Ltd. showing net earnings for each employee.
Q3. JUNE 2015
Toyin Ltd. work a 40 hours week. Employees are paid $2,000 per hour and overtime is paid at
time and a quarter. Workers contribute 5% and 10% of their basic salary towards social security
and provident fund respectively both of which are deducted before tax.
The company also contributes 5% of each worker basic wages towards social security and 5%
towards provident.

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Tax is applied on earning at 5% for the first $40,000 and 10% for any amount in excess of
$40,000. The following employees worked week 3 of September, 2004 for the respective
number of hours indicated:

Adotey 50 hours
Bangoura 40 hours
Daikate 55 hours
Adeyemi 45 hours
Conteh 60 hours
You are required to:
(a) Prepare the payroll;
(b) Compute the total labour cost for Toyin Limited.
Q4. The following information below relates to the earnings of seven employees of Exams
Enterprise for the month of April 2001.
Name of employees Number of hours worked Rate per hour (¢)
Esi 315 380
Abena 380 380
Amit 450 500
Yaaya 400 500
Awoh 185 2,000
Mansa 280 1,500
Bedu 250 600
You are given the following additional information:
a. Non-taxable rent allowance enjoyed by all employees is 10% of basic earnings.
b. Income tax: 7 ½ % for all earnings above ¢100,000 10% for all earnings above ¢200,000
12% for all earnings above ¢30,000
c. Social security contribution is 5% for all employees.
d. Health insurance is ¢100,000 per employee. This is not subject to tax.
e. Awoh and Mansa belong to the senior staff club and pay monthly dues of ¢20,000.
You are required to prepare a payroll, showing:
a) Basic earnings
b) Taxable earnings
c) Total deductions
d) Net earnings.
Q5. November 2010
Baba carpentry works employs four men in its polishing department. All work is done on a job
order basis. During the first week of February 2009, each man worked a full 20 hours week with
output as follows:
Employees Guaranteed hourly minimum Units produced
Rate (Le)
John 6,000 2,000
Kofi 6,800 1,600
Braimah 6,000 2,500
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 Nketia 6,400 1,800
Additional information:
 Wages are paid on piecework basis at Le60 per unit produced subject to the guaranteed
hourly minimum rate.
 All employees contribute 5% of their gross pay to social security.
 Income tax is 10%.
You are required to prepare the payroll for the first week of February, 2009.

Q6. November 2004

Oluwa Enterprises pays wages of C40 per unit produced subject to a guaranteed minimum
wage of C40,000 a week.
Production for week 42 was as follows:
Ade 950 units
Bola 1,200 units
Rotimi 1,000 units
Samiyi 1,500 units
In addition, the employees contribute 5% of each wages towards social security fund and
another 5% towards provident fund.
You are required to prepare a payroll to show each workers wages and the total labour cost of
Oluwa Enterprises.

LABOUR TURNOVER
In all business organization, it is a common feature that some workers leave the employment
and new workers join in place of those leaving. This change in work force is known as labour
turnover. Labour turnover is thus defined as the rate of change in the composition of the labour
force in the organization. Labour turnover varies greatly between trades and industries. For
example, where part time and seasonal labour is employed, the rate will be higher.

Measurement of labour turnover

To facilitate compositions between different periods and different undertakings, labour
turnover may be expressed in a rate. There are three alternative methods by which this rate is
computed. Once a particular method is used, it should be consistently followd for comparative
analysis. The methods are:
1. Separation method – this method takes into account only those workers who have left
during a particular period. The formula is:

No. of workers left during a period x 100

Average No. of workers during the period

Average No. = No. of workers in the + No. of workers at the

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 beginning end of the period
2

2. Replacement method – this method takes into account only those workers who have
joined in place of those who have left. Its formula is:
No. of workers replaced during the period x 100
Average No. of workers during the period
If new workers are engage for expansion programme or any other such purpose, they
are not considered for this computation.
3. Flux method – this shows the total change in the composition of labour force due to
separations and additions of workers. The formula is:
No. of workers left + No. of workers replaced x 100
Average No. of workers
Causes of labour turnover Labour turnover reports should be prepared regularly to be placed
before the management, giving a break-down of the causes as the why the workers left. The
causes may be classified in to two broad categories:
(a) Avoidable causes;
(b) Unavoidable causes.

Avoidable causes. This include:

i. Low wages and allowances
ii. Unhappy relations with co-workers and supervisors
iii. Unsatisfactory working conditions
iv. Trade union rivalry
v. Lack of medical facilities, transport facilities etc.
vi. Inadequate job security and retirement benefits.
Unavoidable causes. This include:
i. Personal dislike for job or environments
ii. Death or retirement
iii. Illness or accident
iv. Domestic disputes
v. Discharge on disciplinary grounds
vi. Marriage – particularly in the case of women workers.

Effect of labour turnover

A certain amount of labour turnover will always take place. To a limited extent this may be
welcome particularly at the lower management level in that it creates vacancies for internal
promotions and maintains the morals high for the young and the ambitious. Moreover, new
workers bring new ideas and methods of doing work from other concerns.
Labour turnover is expensive and generally it should be minimized because it results in
increased cost of production for reasons stated below.
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Cost of labour turnover
The cost of labour turnover may be broadly classified into two broad categories:
1. Preventive costs,and
2. Replacement costs.
Preventive costs – these costs are those which are incurred to keep the work force satisfied
and to prevent or discourage them from leaving the organization. These include:
1. Cost of personnel management – only that portion of this cost which can be attributed
to the effort of the personnel department in maintaining good relations between
management and workers.
2. Cost of welfare activities and services, e.g., canteen meals, co-operative stores,
educational and transport facilities, housing schemes, etc.
3. Cost of medical services.
4. Pensions schemes – to provide security and retirement benefits.
5. Extra bonus and other perquisities (in excess of those given by other similar concerns)
to discourage their defecting to other undertakings.
Replacement costs – these costs include all such losses and wastages arising because of the
inexperienced new labour force replacing the existing one as well as the cost of recruitment
and training of the new workers. These include:
1. Cost of recruitment and selection of new employees.
2. Cost of training of new workers.
3. Loss of output due to sometime gap in obtaining new workers.
4. Loss due to inefficiency of new workers.
5. Cost of accidents due to lack of experience of new workers.
6. Cost of scrap and defective work of new workers.
7. Cost of tools and machine breakdown due to faulty handling by new workers.
Reduction and control of labour turnover
Labour turnover may be reduced by taking action on the basis of avoidable causes given earlier.
The following steps may be taken in this regard:
1. Devising a suitable and satisfactory wage policy.
2. Providing working conditions conducive to health and efficiency.
3. Impartial and sympathetic attitude of personnel management.
4. Introducing financial and non-financial incentive plans.
5. Providing promotional opportunities.
6. Encouraging labour participation.
7. Introducing effective grievance procedures.
8. Strengthening the welfare measures.
Treatment of cost of labour turnover
The preventive cost of labour turnover should be apportioned to various departments on the
basis of number of workers in each department.
Regarding the replacement costs, if the replacement is due to the fault of a particular
department, it should be directly charged to that department. If labour turnover is due to the
defective management policy, the replacement cost should be apportioned to various
departments on the basis of number of workers in each department.

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 Questions:
Q1. British Biscuit Company supplies you the following information:
No. of workers on 1st April 1993 400
No. of workers on 30th April 1993 500
No. of workers resigned 35
No. of workers discharged 10
No. of replacements 40

Calculate labour turnover rate.

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