Chapter 5 Study Text Chapter 7

Further Reading:
Labour costs
ACCA Study Text, F2: Management
Accounting, Chapter 7, 2009 edition, BPP
Learning Media Ltd, UK.
1. Common Methods of measuring labour activity
1.1 Production:
• refers to the quantity or volume of outputs produced
• can be raised through working overtime, hiring extra staff and
managing the work force so as to achieve more output
• can be reduced through cancelling overtime and laying off staff
1.2 Productivity:
• refers to a measure of the efficiency with which output has
been produced.
• In other words, productivity is a relative measure of inputs
actually consumed and the inputs that should have been
consumed to make outputs.
Note: if productivity ratio > 100%, the actual efficiency is greater than
standard or expected efficiency; therefore, the unit cost is reduced.

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Example:
Suppose that an employee is expected to produce 3 units
per hour. One unit is valued at 1/3 of a standard hour of
output. if, within 40 hours of work, the actual126 units were
made by the employee, therefore;
Production = 126 units per 40 hours
Productivity ratio = expected hours / actual hours
= (1/3 x 126 units) / 40 hours
= 42 hours / 40 hours = 105%
=> the employee works more efficiently than s/he is
expected because s/he actually spends 19.05 minutes
[60 mins/ (126/40)] only to produce 1 unit =
[(40 hrs / 126 units) x 60 mins] = 19.05 mins

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Other measures of labour activity

1 2 3 

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Do it...!
Suppose a company budgets to make 25 000 units (in four
hours each) during a budget period of 100 000 hours. Actual
outputs produced during the period were 27 000 units which
took 120 000 hours to make.
Required:
a) Calculate production volume ratio
b) Calculate capacity ratio

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Solution
a) Production volume ratio
= (27 000 x 4 hrs) / 100 000 hrs
= 1.08 or 108%

a) Capacity ratio = 120 000 hrs / 100 000 hrs

= 1.2 or 120%
=> Efficiency ratio = 1.08 / 1.20
= 0.9 = 90%
We can conclude that increase in production, in this case, is a
result of increase in actual hours consumed. Therefore, it does
not lead to increase in productivity (this is represented by poor
efficiency ratio)
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2. Remuneration Methods
2.1 Time-based system (Time work):
• refers to a day-rate system
• wages can be calculated as:
Wages = Hours worked x Rate of pay per hour
2.1.1 Overtime premium:
• is the extra rate per hour which is below basic daily rate
Question:
For example, a basic daily rate is $4 per hour. If a worker
works overtime, s/he will be paid $5 per hour. What is overtime
premium rate per hour?
Answer: Overtime premium rate = $5 - $4 = $1 per hour

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Do it...!
Suppose a company pay a basic daily rate $9 per hour to its
workers. If a worker works overtime, s/he will be paid $11 per
hour. During the week, 3 workers worked 48 hours each, and
normal hours per worker are 40 hours per week.

Required:
a) What is overtime premium rate per hour?
b) Calculate the total labour costs per worker who work
overtime for the week?

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Answer:
a) Overtime premium rate = $11 - $9
= $2 per hour

b) Total labour costs per worker = (1) Pay at basic rate

+
(2) Overtime premium
(1) Pay at basic rate = 48 hours x $9 per hour
= $432
(2) Overtime Premium = (48 hours – 40) x $2 per hour
= $16

=> Total labour costs per worker = $432 + $16

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= $448
2. Method of remuneration (Cont.)
2.2 Piecework scheme:
• wages are paid by unit produced and rate of pay per
unit produced.
• pieceworkers may be offered a guaranteed minimum
wage (to compensate loss of earnings)

Wages = Units produced x Rate of pay per unit

Note:
The more units the pieceworkers can make, the more they
earn. As output increases, wages increase and at the same
time the unit cost is reduced.

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Example:
Penny Pincher is paid 50c for each towel she weaves/makes, but
she is guaranteed a minimum wage of $60 for a 40-hour week. In
a series of four week, she makes 100, 120, 140 and 160 towels.
Required:
a) Calculate her pay each week
b) Calculate conversion cost per towel if production overhead is
added at the rate of $2.50 per direct labour hour.
(All workings must be shown)

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Solution:
Outputs Conversion Unit Con.
b)
Weeks produced a)
Pay $ Overhead $ Cost $ Cost $
1 100 60 100 160 1.60
2 120 60 100 160 1.33
3 140 70 100 170 1.21
4 160 80 100 180 1.13

Workings: Fixed at $100 because DLH is fixed at 40 hrs per week

Pay = Units produced x Rate per unit

Overhead = $2.5 x 40 hrs = $100 per week
Con. Cost = Pay + Overhead
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Unit Con. Cost = Conv. Cost / Units produced
Do it...! (pay per week and CC per unit)
Dara is paid $1.00 for each chair he makes, but he is guaranteed
a minimum wage of $150 for a 40-hour week. Production
overhead is added at the rate of $4.50 per direct labour hour. In a
series of four week, Dara makes:
Weeks Units
1 200
2 210
3 230
4 350
Required:
a) Calculate his pay each week
b) Calculate conversion cost per chair
(All workings must be shown)
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Solution:

Weeks Units Pay Prodn't Overhead Con.Cost Con.Cost/unit

1 200 $ 200.00 $ 180.00 $ 380.00 $ 1.90
2 210 $ 210.00 $ 180.00 $ 390.00 $ 1.86
3 230 $ 230.00 $ 180.00 $ 410.00 $ 1.78
4 350 $ 350.00 $ 180.00 $ 530.00 $ 1.51
a) b)
Workings:
Pay = Units produced x Rate per unit
Overhead = $4.5 x 40 hrs = $180 per week
Con. Cost = Pay + Overhead
Unit Con. Cost = Conv. Cost / Units produced
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2. Method of remuneration (Cont.)
2.3 Bonus/Incentive scheme:
• employees are paid more for their efficiency
• employees and employers share profits arising from
productivity improvement
• employees receive extra reward for extra effort => increase
in productivity

Types of incentive schemes may include:

high day rate system
 profit-sharing schemes
 individual bonus schemes Read as part of your homework
 group bonus schemes
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 2. Method of remuneration (Cont.)
2.3.1 High-day rate system:
• 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 makes 100 units in a 40-hour week,
s/he will be paid $2 per hour; but if the employee makes 120
units in a 40-hour week, s/he will be paid $2.50 per hour, and if
production overhead is added to cost at the rate of $2 per direct
labour hour.
Required:
a) Calculate cost per unit at low day-rate
b) Calculate cost per unit at high day-rate

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Solution:
a) Cost per unit at low day-rate = 40x($2+2)/100
= $1.60 per unit

b) Cost per unit at high day-rate = 40x($2.5+2)/120

= $1.50 per unit

The high day-rate scheme would reward both employer (a lower

unit cost by 10c) and employee (extra 50c earned per hour)

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2. Method of remuneration (Cont.)
2.3.2 Profits-sharing scheme:
• employee receive a certain proportion of their company’s
year end profits
• the size of their bonus being related to their position in the
company and the length of their employment to date
2.3.3 Individual bonus scheme

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2.3.4 Group bonus scheme

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 3. Labour turnover
 The rate at which employees leave or join the company.
 The turnover rate should be kept as low as possible to avoid labour turnover
costs
 The labour turnover costs can be divided into Preventative costs and
Replacement costs

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Example: (Labour turnover)

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4. Accounting for labour costs

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4. Accounting for labour costs: Wage Control Account

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Format: Wages Control Account

Wages Control Account

Debit Credit
Net wage paid WIP:
Deductions: Production overheads:
X $ X $
X $ X $
X $ X $
X $ X $

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Example: Wages Control Account

Direct Labour = $44 700

Recognized as
Indirect labour wages

Indirect labour = $27 430

Hint:

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Solution:
Paid to employees

DR CR
DR

DR

Paid to tax depart. and insur CR in

Journal

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