Accounting for Labour - ACCA Shorthand notes (F2 - Cost Accounting)

Accounting for Labour explained

Direct and indirect Labour cost:

Direct labour cost make up part of the prime cost of a product and direct workers are those employees who are directly involved in making an organization’s product.

Indirect cost make up part of the overheads. Maintenance staff is indirect workers. it includes bonus pay, sick pay etc.

Overtime Premium

The difference between overtime and basic pay is known as overtime premium.

E.g:  Overtime premium= Overtime Pay – Basic Pay

Shift premium are similar to overtime premiums where the extra amount paid above the basic rate is treated as an indirect labour cost.

Payroll Department

The Payroll department is involved in carrying out functions that relate input labour costs to the work done. Payroll involves calculating gross wages from time and activity records. It carries out an analysis of direct wages, indirect wages, and cash required for payment.

Accounting for labour cost 

Labour cost is an expense and is recorded in an organizations income statement. Direct labour cost are credited from labour account while debited in work in progress account (WIP). Indirect labour cost is debited into the production overheads account.

Remuneration methods

Time-based System

Employees are paid at basic rate per hour, day, week or month.It does not provide any incentive for employees to improve productivity.

Total Wages= (hrs worked x basic rate per hrs) + (overtime hrs worked x Overtime premium per hrs)

Piecework systems

A system which pays a fixed amount per unit produced.

Total Wages= (Units produced x rate of pay pre Unit)

• Straight piecework system – to be paid a guaranteed minimum wage within a straight piecework system.

• Differential piecework System – involve different piece rates for different levels of productions.
  
  

Labour Turnover

Labour turnover is a measure of the proportion of people leaving relative to the average number of people employed.

Costs

 

• Replacement Cost

When an employee leaves the organization will incur costs that are associated with replacing the employee. This is known as replacement cost.

• Preventive Cost

To keep labour turnover minimum the organization will take some measures which has its own costs this is known as preventive costs.

Ratios

• Labour efficiency ratio

It measures the performance of the workforce by comparing the actual time taken to do a job with the expected time.

• Idle time ratio

Sometime the organization cannot get on with productive work and has no fault of its own. E.g. machine breakdown.

• Labour capacity ratio

The number of hours spent actively working as percentage of the total hours Available for work.

• Labour production volume ratio

It compares the number of hours expected to be worked to produce actual output with the total hours available for work.