Assignment 2nd - 568 - Cost Management Accounting

Department of Business Administration
Block No. 13, Sector H-8, Allama Iqbal Open University, Islamabad.
Cost & Management Accounting (568)

Assignment No. 02
Submitted to:
Dr. Amir Hussain Shah
Department of Commerce, Block 13, Allama Iqbal Open University (AIOU) Sector H-8, ISLAMABAD (0300-970 4138)
Submitted by:
Muhammad Hammad Manzoor MBA (HRM) 2nd Semester
Roll No. 508195394 508, 5 Floor, Continental Trade Centre (CTC) Block 08, Clifton, KARACHI (0321-584 2326, 0322-555 5901)
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ACKNOWLEDGEMENT
All praises to Almighty Allah, the creator of the Universe who blessed me with the knowledge and enabled me to complete this research. I feel great pleasure and honor to express my sincere gratitude and heartfelt thanks to my worthy subject faculty member Dr. Amir Shah Sab, for his guidance, encouragement and friendly attitude during the present study and throughout the period of M.B.A (Semester II).
I pay my thanks to all the Faculty of the Department & AIOU Karachi Campus Staff for their kind support, constructive criticisms and real encouragement. I wish to thank Ms. Madiha Ahmed Khan for valuable discussions and knowledge sharing during the completion of this project. I further wish to record my thanks to all my students, class fellows, well wishers and especially Cere-e-Noor Management Usman Javed (Manager Production), Mr. Khizar Iftikhar, Khurram Shahzad, Rehan Hassan, Sohail, Waleem, Javed for their help, valuable suggestions, whole hearted cooperation and prayers.
Finally, I owe all my academic success and progress in life to my loving parents and sisters, whose affection, endless prayers, good wishes and inspiration remained with me for higher ideals of life.
M. Hammad Manzoor
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By: M. Hammad Manzoor, MBA HRM-II, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, Karachi. (Roll No. 508195394)
ABSTRACT
The study had been carried out by keeping in mind about the selection criteria for Labor plans and incentive schemes at Production Department, Cere-e-Noor, located in Hub ( Pakistan). Cere-e-Noor has been selected for the sake of the data analysis and working on its merits and demerits, the methodology includes the evaluation of the Labor Plans and Incentive Scheme, that how they work and different models had been discussed under this study used in the production department of Cere-e-Noor. After analyzing the different inputs and models used by Cere-e-Noors production department, results and conclusions were worked out from studies which lead the study for further SWOT analysis. SWOT analysis had been carried out and conclusion followed by recommendations had been made in this regards.
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Sr. No.
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Contents Description
Introduction
Labor Forms of Labor Control Types of Labor
Page No.
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Review of Literature
Labor Cost Controls Objectives / Methods of the Time Keeping Labor Turnover & Methods of Measurement of LTO Time Rate System, Uses & Advantages Sound remuneration system Piece Wage System Different methods of remunerating labor Group Bonus Schemes Company Profile Data Collection Methodology & Analysis
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Cere-e-Noor
33-43
Data Analysis
Demerits and Deficiencies Merits & Strengths
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Recommendations
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References
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Cost & Management Accounting (568) Introduction Labor:

Wage labour (or wage labor) is the socioeconomic relationship between a worker and an employer, where the worker sells their labour under a formal or informal employment contract. These transactions usually occur in a labour market where wages are market determined. In exchange for the wages paid, the work product generally becomes the undifferentiated property of the employer, except for special cases such as the vesting of intellectual property patents in the United States where patent rights are usually vested in the original personal inventor. A wage labourer is a person whose primary means of income is from the selling of his or her labour in this way. Manual labour (manual labor in American English) or manual work is physical work done by people, most especially in contrast to that done by machines, and also to that done by working animals. It is most literally work done with the hands (the word "manual" comes from the Latin word for hand), and, by figurative extension, it is work done with any of the muscles and bones of the body.
Forms of Labor Cost Control Direct Labor Cost:

Direct labor refers to labor engaged directly in the production of a product. Direct labor cost is the cost of all labor expended in converting raw materials into manufactured articles. Such direct costs of labor can easily be identified and allocated to cost units. It varies directly with the volume of output. It can easily ascertain and controlled because of its close proximity to the output. Wages paid to direct labor are known as direct labor cost. It forms part of prime cost.
Indirect Labor Cost:

It is the remuneration paid to those workers, who are not directly engaged in converting raw materials into finished products. Such costs cannot be conveniently identified with a particular product. Supervisors, inspectors, work auditors,
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instructors, watchmen are examples of indirect workers. Indirect labor cost is included in overheads.
Labor Cost Control:

The major element of cost in manufacturing concerns is labor cost. Workers contribute to the concerns through their time and energy. This needs adequate compensation to them. The compensation is known as wages. Labor consists of a lot different individuals with a different mental and physical capacity. Proper control of labor is, therefore, one of the important tasks of the management.
Objectives of Time Keeping in Labor Cost Control:

The objective of time keeping is to provide information for the 1. Preparation of pay rolls 2. Ascertainment of labor cost per unit of product 3. Allocation of overhead cost based on wages 4. Fulfillment of statutory requirements 5. Control of labor cost
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6. Determination of productivity of labor in the factory and 7. Promotion of punctuality and order among the workers.
Methods of the time keeping:

There are three methods of time keeping of workers.
i) Handwritten Method:
Attendance of each worker is recorded in the register maintained for timekeeping. The register consists of number of columns for each worker. Entries in the arrival and departure columns are made by the foreman. Literate workers generally sign against their entries to avoid dispute later. The method is simple and cheap. The possibilities of fake attendance or fraudulent marking of attendance may not be ruled out under this method.
ii) Token or disc Method:

An identification number or token number is allotted to each worker. The number is suitably painted or engraved on a round metal token with a hole in it. All such tokens are hung up in a serial order on a board at the factory gate. At the time of arrival, the worker collects his token from the board and drops in a box kept for the purpose at the factory gate. After 10 or 15 minutes of the normal time, the box is
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removed by the timekeeper. Those arrived late have to hand over their tokens personally at the time office so that exact time of their arrival can be noted. Based on the tokens dropped in the box, entries regarding attendance of workers are made in the Time Book. The time book is passed on to the wage section for payroll accounting. This method is no foolproof as a worker may try to get his absentee friends marked present by dropping their tokens in the box.
iii) Time recording clocks:

This is a mechanical method of recording attendance. It proves to be useful when the number of workers is large. The time of arrival and departure of a worker is recorded with the help of clock recorders. Each worker has a clock card, which bears his identification number. These cards are kept in a rack in a serial order. When workers report for duties, they take out their cards from rack one, get them punched by the Time Recording Clock maintained at the factory gate, and place them in rack two. When they leave, they again get their cards punched with time of departure and put them back in rack one. The method is quick, safe, scientific, reliable and accurate method of time keeping.
Is time keeping significant?

Yes, time keeping is a significant aspect. The following are the reasons for time keeping. i) It ensures discipline among workers ii) It is an in-built system of ensuring punctuality of workers iii) It boosts morale of personnel iv) It is an effective method of data collection for statistical purpose v) It helps in checking idle time and increases output by sticking on to production schedule vi) It assists computation of labor cost per unit vii) It ensures a productive environment in the undertakings
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Cost & Management Accounting (568) What is the meaning of Idle Time of Labor?
Normal Idle Time: This is wastage of labor time. Normal idle time cannot be totally avoided. Therefore, it is borne by the employer. For example, an employee takes time to reach from the entrance gate to the shop floor, where he works. The cost of normal idle time may be treated in two ways. They are as follows:
a. It is generally charged to factory overhead. Idle time is classified
according to causes and each type of idle time. It is allotted a separate standing order number. This will to an effective control. b. Wage rate may be inflated. It is because to make allowance for normal loss of labour time. Example The production time of a worker is only 7 hours during an 8 hours day. What is the inflated wage rate if he is paid Rs.10 per hour? The inflated wage rate is Rs. (8/7) X Rs.10 = Rs.11.43 Abnormal Idle Time: Abnormal idle time arises due to reasons in no way connected with usual routine manufacture and for which management must pay. For example, time lost due to strikes and lockouts, time lost in waiting for raw material etc. Poor planning, inefficient executions are some reasons for occurrence of abnormal idle time. It is generally adjusted through the costing profit and loss account.
Overtime:
It refers to a work done by an employee beyond normal working hours. The Factories Act lays down the rules for normal working hour. Any employee working for more than 9 hours per day or more than 48 hours per week is entitled to overtime payment. The Factories Act prescribes that the normal wage rate is to be doubled to compensate the overtime work. Therefore, the overtime work is a costly affair, which should be avoided. Disadvantages of having overtime work: (a) It leads to excessive labor cost (b) Diminishing labor efficiency gives rise to deteriorating labor productivity (c) It has a bad effect on the health of workers (d) Excessive use of plant and machinery gives rise to high wear and tear (e) There will be escalation of factory overhead. e.g., lighting etc. (f) Widespread discontent among workers due to uneven distribution of overtime is another demerit.
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Describe the term Labor Turnover. How is it measured? It is a common thing that workers in an undertaking leave the employment and new workers join in place of those leaving. The change in work force is known as labor turnover. Labor turnover is defined as the rate of change in the composition of the labor force in the organization. Though labor turnover is a normal process, the frequent changes in the composition of labor affect the continuity as well as the productivity of the organization. Labour turnover can be measured by two methods.
a. Separation method:
This method takes into account only those workers who have left during a particular period. The formula is:
b. Replacement method:
This method considers only those workers who join in place of those who have left. Its formula is:
If new workers are engaged for expansion programme or any other such purpose, they are not considered for this composition.
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Cost & Management Accounting (568) c. Flux method:

This method shows the total change in the composition of labor force due to separation and additions of workers. The formula is:
This method considers only those workers who join in place of those who have left. Megaton Co. has following information
Calculate the Turn Over?
What is Time Wage System & how we evaluate? Wages are based on the amount of time spent by worker inside the factory. He may be paid on hourly basis, daily basis or monthly basis. Calculation of wages under this method of remuneration takes into account a. the time for which the workers are engaged on the job and b. the rate per unit of time fixed for payment
A worker gets Rs. 15 per hour. He works for 8 hours per day. He has been present for duties on 25 days during the month. What is his wage for the month? Solution: His wage based on Time Rate will be: Rs.15X8X25=Rs.3000/-
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Cost & Management Accounting (568) Advantages of Time Rate System:

(a) It offers a fixed minimum wage (b) It ensures simple calculation (c) It makes a stable and secure return to the workers (d) It ensures quality, care and efficiency (e) It promotes a sense of equality and unity among the workers (f) It is an economical system in respect of wage administration, material use, plant operation and quality control.
Disadvantages of Time method of wage payment:

(a) It ignores the individual quality and quantity of output (b) It reduces personal initiative to work faster (c) It treats both efficient and inefficient workers at par (d) It increases the cost of labour per unit because of the tendency to consume more time in finishing a job (e) It needs a close supervision to ensure continuity of operation
Remuneration methods & Incentive schemes

The employees working in any organization are compensated by way of salaries, wages and other benefits. These payments are made in return of the services rendered by the employees. These services could be: - Engaging in the process of transformation of raw material into finished product or - Supporting the process of transformation by doing other functions The salaries, wages and statutory benefits put together are called as remuneration. The incentives are payments and benefits given to stimulate better performance or paid in return for a better performance. The incentives could be in monetary as well as non-monetary terms. While the remuneration is always individual based, incentives could be based on group performance.
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Cost & Management Accounting (568) Characteristics of Sound Remuneration System

a) It should be easy to understand for everyone and easy to implement. b) It should provide for a reward for good work and penalty for bad workmanship c) It should help keeping labour 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 with efforts put in by them g) It should boost productivity and performance h) It should be flexible enough to factor in effects of changes in cost of living, and systems of similar companies in the same industry. The payments could be broadly classified into Time Rate: - Those paid on the basis of time spent by an employee irrespective of output produced by him, called Time Rate. Piece Rate: - Those paid on the basis of output given by the employee irrespective of the time spent by him, called Piece Rate Based on these two basic payment methods, many variants thereof have been developed over the last couple of centuries. Many of these systems were developed keeping in view the manufacturing industry, where measurement of physical performance is relatively easier. In modern times, especially for indirect workers, many of these plans will not work. Indirect workers and staff & managers are usually paid on time basis only.
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The following chart shows the classification of various remuneration methods
Various Remunerati on Methods
Time Based
Result Based
Combined time and piece rate
Bonus System
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Time Based
Flat Time Rate
High Wage System
Graduated Time System
(A) Time based payments: These are basically called as Time Rates. Under this method, payment is made on time basis like daily, weekly or monthly irrespective of the results achieved during the time period. These payments are in conformity with the applicable laws such as Minimum Wages Act. The time based payments are useful in following situations: a. Where output is not distinguishable and measurable. In other words, its useful when theres no relationship between effort and output. b. Where a high level of skill and quality are required. c. Where supervision is good d. Where work is not repetitive This method is very easy to understand and operate, so less clerical work is involved. But it does not motivate increased output. Advance estimation of labour cost per unit becomes difficult. It does not distinguish between efficient and non-efficient workers. The variants of time rate are discussed below. There is no incentive to produce more within the same time as workers do not get additional remuneration for increased output. If overtime is paid for, there is a tendency among workers to go slow during normal time and earn more by working overtime. There is a likelihood of output getting suffered. Standards are difficult to set and operate under this method. Workers get paid for the time clocked (i.e. entry and exit to work place) and not as per time booked on actual work. This may lead to idle time which ultimately will increase cost of production. (A 1) Flat Time rate: The rates and time are fixed in advance per day, week or month.
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If worker work overtime, they are compensated at one and half or two times the ordinary rate. The earning therefore will vary as per the time worked. If a time rate is fixed as Rs 100 per day of 8 hours, and the worker works for four hours; he will get Rs 50. The merits and demerits are same as explained above. (A 2) High Wages System: This method is similar to the above except the fact that the time rate is fixed at a higher level compared to the rates prevailing in the industry. This is done to attract efficient and high performance workers and also to induce them to improve productivity as they would be satisfied with high level of earnings. However, the level of performance cannot be guaranteed over a longer period and it also may not be possible to keep wages always at higher 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 the other is linked to cost of living (e.g. dearness allowance) and merit awards. As the cost of living is taken care of, the system has an advantage. Its further enhanced by the fact that the method rewards individual merits. However, merit rating is highly subjective and thus the method is difficult to implement. It is difficult to calculate the cost of the cost unit. It is generally observed that trade unions prefer time based payments as they do not have to guarantee output. The variations in the time based payments do not really bring in any additional benefits and they are difficult to sustain in the longer run.
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Result Based
Straight Piece Rates
Standard Hour Piece Rates
Differential Piece Rates (Taylor & Merrick Plan)
Results based system (Piece Rates): These methods are based on the output linked payments to workers. The payments are fixed per unit of output irrespective of the time taken by the worker to produce a unit. The payment is simply calculated as rate per unit x units produced. These payments may be released for a period e.g. day, week or a month. The output produced by the workers during that period is multiplied by the pre-fixed rate per unit. The objective here is to induce workers to produce more and thereby increase sales. As workers get more money, they tend to produce more. Sometimes under such systems, the benefits of increased output are shared between workers and the business. This method is simple to understand and easy to operate. The workers also prefer it as they can earn more by producing more. The labour cost per unit is known in advance and hence it helps in fixation of overhead rates based on direct wages and therefore estimation of cost per unit is easy. If benefits are shared with employees, they are motivated to put in their best efforts. However, fixing a piece rate itself is not a simple job. Considerable amount of engineering estimations, time and motion study and assessment of physical efforts needed to perform a job are needed to arrive at a piece rate per unit. The nature of job should be standard and repetitive for piece rate system to be successful. It cannot be applied if the jobs are non-standard, and the specifications change for every order received. Further, in the quest of increasing the earnings workers may compromise quality. It may increase supervision and cost of rework as well. It also may add to fatigue and
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increase absenteeism. The variants of piece rate system are discussed below: (B 1) Straight Piece Rate: This is the simplest form of payment by results. Under this a predetermined rate per unit of output is applied. In a laundry, a worker may get Rs 0.50 for pressing one shirt. If on a day he presses 100 shirts, he will get (100x0.50) i.e. Rs 50. If he presses 200 shirts he will get Rs 100 and so on. (B 2) Standard Hour system of Piece rate: This is the result based payment with a time dimension factored into it. We have seen that time and motion study and other engineering methods are used to determine time based piece rate per unit. In addition, a standard time is set up per unit of product. Workers are supposed to complete production of one unit within this allotted time. The rate is fixed per hour (or any other time unit). If the worker completes the job within the standard time, he is paid for the time he worked plus also for the time saved based on the time rate. If he spends more than standard time per unit of output, he is paid at this time rate for the time actually spent on the job. Thus this takes care of time performance as well. The formula to work out the earnings as per this method is: When production is in excess of standard performance; Earnings = (Actual hours worked x hourly rate per day) + Hourly rate per day x (standard hours produced Actual hours worked) When production is at or below standard performance; Earnings = Actual hours worked x hourly rate per day Consider in a factory the day has 8 working hours. A base rate for a particular job is set as Rs 0.625 per hour and performance standard is 0.16 hours per unit. What will be the earning of Anil who produces 100 pieces in a day? What will Sunil earn if he produces 40 units in a day? Standard time per unit = 0.16 hours No of hours in a day = 8 hours Anil has produced 100 units in a day. The standard hours for making 100 units @ 0.16 standard time per unit is (100 x 0.16) = 16 hours He has completed this in 8 hours thus saving 8 hours for which he gets paid extra. His earnings will be: (0.625 x 8) + 0.625 x (16 8) = Rs 10 Sunil has produced 50 units. The standard hours for producing 50 unit @ 0.16 hours is (50 x 0.16) = 8 hours This means he has completed the production within the standard but not saved any
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time. His earnings will be: (0.625 x 8) = Rs 5. This example shows how a worker is benefited when he saves time for the organisation. The worker who does not save time is not penalized, but gets only paid for the time spent. This system is simple to understand and operate. It can be applied for group installation type of job and also where the jobs are of non-repetitive & non-standard nature. It takes into account the individual performances. Almost all disadvantages of straight piece rate system are removed by this method. However, a great care needs to be taken for fixation of time per unit of output. Also, there has to be close monitoring of quality of the performance. It has to be ensured that the worker does not compromise quality in order to show time saved. (B 3) Differential Piece Rates: This system is based on the logic that workers should be rewarded for higher efficiency. The earning method offers a motivation for increasing productivity. These systems are however difficult for workers to understand. There are two variants of this system. One was developed by F. W. Taylor (the father of scientific management in the early era of industrial revolution) and the other by another expert Merrick. This method tries to penalize workers when they do not perform as per standard by applying differential rates. Taylor Plan: The payment scheme is based on fixing two or more pieces rates a base level piece rate is used for workers who do not perform as per standard and a higher piece rate is used for workers who perform as per standard. The difference between these two rates is deliberately kept so wide that the award for efficient worker is really goods and simultaneously, punishment for inefficient worker is severe. Consider a factory operates an 8 hour day. The standard output is 100 units per hour and normal wage is Rs 50 per hour. The company operates Taylor plan as 80% of piece rate for workers performing below standard and 120% of piece rate for performance at or above standard. Hourly rate paid = Rs 50 Standard output per hour = 100 units Normal piece rate = (50 / 100) = Rs 0.50 per unit
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For performance below standard, the piece rate will be = 80% of Rs 0.50 i.e. Rs 0.40 per unit & For performance at or above standard, it will be = 120% of Rs 0.50 i.e. Rs. 0.60 per unit. It can be found that there is a differential of Rs 0.20 between the two piece rates. This will induce an ambitious worker to increase efficiency and earn more. On the other hand, inefficient worker gets penalized for not achieving minimum standards. It will reduce fixed overheads per unit as it induces more production. The success of this plan depends highly on setting a standard. Any error in fixation of the differential rates could be disastrous. Also, this system does not guarantee any minimum wages. Further the piece rates and standard are to be fixed in such a way that the earnings wont fall below minimum wages as per the law in force. Merrick Plan: The punitive element under Taylor plan was quite severe. It tends to discourage and attract average workers. Merrick modified this differential system by introducing more slabs and by removing the punitive element. He advocated that performance up to a certain level (although below standard level) should be rewarded at normal piece rate and then progressive slabs are provided to recognize above standard performance. He worked out the following formula for differential payments: Up to 83 & 1/3rd % at normal piece rate Above 83 & 1/3rd up to 100% 10% above normal piece rate Above 100% 20% over normal piece rate This system is not as harsh as the Taylor plan. But this also requires the standard fixation to be done very carefully. In the above example, the normal piece rate was fixed as Rs 0.50 per piece. A worker under Merrick plan will guarantee this earning if he achieve efficiency level of 83 1/3%. The worker, who performs above this and up to 100% mark, will get paid at Rs 0.55 per piece which is 10% above the normal level. A worker giving in performance above 100% will get paid at Rs 0.60 i.e. 20% above normal piece rate. Both these plans however put a cap on maximum earnings. So the worker will just ensure to perform at 100% or slightly above and then does not improve further as there is no additional incentive for him to do so.
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PIECE WAGE SYSTEM A worker is paid a fixed amount per unit produced without any regard to the time taken under the piece rate system. The rate of payment under this method is related to the quantity of work done i.e., per unit of output, per article, per job or per commodity. The total units produced or manufactured by the worker during a period form the basis of computation of his wages for the period.
Advantages of Piece Wage System:

(a) The method provides a strong incentive because the remuneration is in direct proportion to the workers effort. (b) It simplifies costing because labor cost per unit is easily known in advance (c) The overhead per unit is reduced because of high production. (d) The piece rates are fixed after a careful time and motion study. Therefore, the system contributes a sound basis for production control. (e) Workers are self-motivated to maximize their income. Therefore, strict supervision is not required (f) The method is simple and is easily understood by the workers.
Disadvantages of Piece Wage System:

(a) It ignores quality of products in an effort to maximize output. (b) It destroys the long-term interest and continuity of engagement in the organization of the workers. (c) It creates dissatisfaction among workers owing to disparity in wages. (d) It needs a continuous supervision over the quality of operation. (e) It enhances wastage of materials. (f) It declines the level of labor discipline.
What is the main purpose of incentive plans?

Incentive plans attempt to combine the good points of both the systems. The primary purpose of an incentive plan is to induce a worker to produce more to earn a higher
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wage and at the same time to reduce unit costs. Producing more in the same period should result in higher pay for the worker naturally. It should result in a lower cost per unit for fixed factory overhead and for labor cost.
Combined Time and Piece Rate
Emersons Efficiency
Gnatt Task Plan
Points System
Combined Time and Piece rates: The combination of time based and piece based methods of remuneration aim at combining the benefits and removing the deficiencies of both specific time based and specific piece rate systems. Basically this method has a combo offering 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 above standard there are piece rates with bonuses applicable for higher rewards. There are certain variants of this idea developed be experts. (C -1) Emersons Efficiency Plan: The main features are guarantee of daily wages regardless of performance. A standard time is set for per unit of output or a volume of output per unit of time is taken as standard. The following differential rates apply: Below 66 2/3rd % Paid at hourly rate Above 66 2/3rd% up to 100% Hourly rate plus bonus for efficiency based on step rates Above 100% performance Additional bonus @ 1% of hourly rate for each 1% increased efficiency. The efficiency for this purpose is calculated as: On time basis Percentage efficiency = (Standard time allowed / Actual time) x 100 On output basis Percentage efficiency = (Actual Production / Standard production) x 100
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(C- 2) Gantt Task System: This combined method of remuneration is similar to the Emersons method with a little variation. A performance standard is set for each operation or group of operations. An hourly standard rate is fixed. The worker who completes the job within allotted 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 individual bonuses. The computation is usually done as follows: For output below standard level guaranteed time rate payment Output at standard Time rate plus Bonus of 20% of time rate Output above standard Bonus of 120% of normal piece rate This method is suitable for workmen with varying skills. It is equally attractive for less skilled workers and beginners. Also, it provides enough motivation for highly skilled worker who perform above standard as the payment after that level is linked to the output by application of piece rate at a higher rate. 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 and standard output norms. Example: In a factory the output produced by workers in 8 hours is A- 8 units, B- 10 units and C- 15 units. Standard production in 8 hours is 10 units. Daily wages guaranteed are Rs 2 per hour. Bonus rate on time rate is 20%. Standard output per day is 10 units. So A has performed below standard, B has achieved the standard and C has performed above standard. Under Gantt Task plan the earnings will be: A will get only time rate payment i.e. Rs 16 (8 x2) B will get time rate + bonus @ 20% of time rate i.e. Rs 16 + 20% of Rs 16 = Rs 19.20 C will get piece rate payment which is 120% of normal piece rate. The normal piece rate here is ((8*2)/10) i.e. Rs 1.60 per unit. 120% of this is Rs 1.92 per unit. C produced 15 units, so he will get Rs 28.80/See how the earnings increase with increase in productivity. The impact on per unit cost is worth noticing. For A producing 8 units and getting Rs 16 the unit cost is Rs 2. For B producing 10 units and getting Rs 19.20, the unit cost is Rs 1.92 and for C producing 15 units and getting Rs 28.80, the unit cost is Rs 1.92. (C 3) Points system: Under this method, the performance is measured in terms of points saved by the workers. Standards are also fixed in terms of points and workers are paid bonus based on the points saved, either in full or a portion thereof. There are two variants of the points system. The Bs are fixed based on a rigorous
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time and motion study with time for actual work plus a reasonable allowance for rest. The Bedaux Method: The points are called as Bs. Hence a standard performance one hour is expressed as 60 Bs. A standard number of points are specified for a job. The worker gets a time rate payment and a bonus. When the scheme was originally formed bonus was calculated at 75% of points saved. Later it was modified to 100% of points saved. The formula is: Time rate payment + (75% or 100%) of (points saved/60) x hourly rate Example: The standard time is 320 Bs and the worker consumes 240 Bs to complete a job. The hourly rate is Rs 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 = Rs 90 The Haynes Manit System: This is similar to that of Bedaux. The standard unit of time is called a Manit. Bonus is calculated on the basis of Manits saved multiplied by the value of one Manit. When the system was fixed originally, the bonus due to Manits saved was shared as 50% to workers, 10% to Supervisors and 40% was retained by the company. At present, the entire 100% is given to the workers.
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Cost & Management Accounting (568) Different Methods of remunerating labor? Premium Bonus Plans:
Premium Bonus Plans are known as Incentive Systems of wage payment. The system of wage payment under this plan aim at inducing workers to increased efficiency and greater output. Therefore, the plan is beneficial to both employer and employee. They combine the basic ideas of time and piece rate systems with an aim to avoid the demerits of these methods. They strike a balance between the two. The main features of most incentive plans are: (a) They combine both time and piece rate systems (b) The benefit of labour productivity goes to employer under time wage system and the benefit of piece rate system goes to workers. The benefit of premium bonus plan goes to both employer and employee. (c) They link payment to production either directly or indirectly (d) Time wages are guaranteed to all workers (e) They check the speed so as to that workers neither tend to slow down nor increase their speed (f) In addition to normal time wages, they ensure a bonus based on the time saved
(1) Halsey Plan:
F. A. Halsey, an American Engineer, evolved a method of incentive. The method recognises individual efficiency. It advocates a bonus based on time saved. A standard time is fixed for doing a job, by time and motion study. The main features of his plan are as follows: (a) Standard time and standard work are prescribed in advance. (b) Workers are paid for the actual time they take to finish a job as per the time rate (c) If an employee completes the job less than the standard time, he is entitled to receive a bonus for the time saved. (d) A bonus equal to 50% of the wage time saved is paid to the workers as a reward to his good work (e) Workers, who fail to achieve the standard, get the time wage .The rate of bonus under the Halsey Premium Plan may change according to the policies of an undertaking. It may be 1/3 of the wages of time saved in some cases.
Evaluation:
It is a simple system to operate. It is easily understood by employees. It guarantees the hourly wages to workers for the actual time. However, fixation of standard time is a difficult process. Employees, however, feel that they do not get the full benefit for the time saved under this system.
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Method of Computation:
(2) Halsey Weir Plan:

This method is more or less similar to the Halsey plan except that in Halsey Weir plan the bonus is equal to 30% of the time saved.
(3) Rowan Premium Plan:

Rowan plan is also similar to Halsey plan, except in the calculation of bonus. The main features of his plan are: (a) Workers receive remuneration based on actual time taken by them in completing the job. (b) Workers receive bonus for the time saved i.e., for the difference between the standard time and actual time. (c) Bonus is calculated as a proportion of the time wages as time saved bears to the standard time. The Rowan plan also guarantees wages on time basis. Its formula is:
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Evaluation: The merits and demerits of Rowan plan are similar to those of Halsey Plan. An additional advantage under Rowan plan is that the worker is not induced to rush through the work because if time saved is more than 50% of the standard time, the bonus will come down. However, the calculation of bonus is complicated. Example: The standard time allowed to complete a job is 100 hours and the hourly rate of wage payment is Rs. 5. The actual time taken by the worker to complete the job is 80 hours. Calculate the total wages of the worker based on (a) Time Rate (b) Piece Rate (c) Halsey Plan (d) Rowan Plan
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Cost & Management Accounting (568) Group Bonus Scheme:

Individual incentive plans become inappropriate when production depends on the collective effort of a group. For example, group effort alone is required in case of construction industries like construction of bridges and roads. It is, therefore, necessary to evolve a bonus scheme for collective efficiency. The main features of the group bonus system are: a. Bonus is given for collective efficiency in production b. Bonus is payable to a group of workers for their joint output over and above the given target c. Members of the group gets their bonus based on agreement d. Production is considered to be a team effort governing the efficiency of performance e. The aim is to create a team spirit for increased production and lower cost per unit. The remuneration methods discussed above were all related to individual workers who need to do their jobs individually and not as a team. In organisations where team work is more important, individual bonuses do not work. The team as a whole has to be motivated. Thus a plan is usually worked out whereby the bonus for increased output is declared for the teams and then shared by individual members in agreed proportion. Such methods develop a sense of cooperation among team members. It is useful when the measurement of individual work is not possible e.g. in case of construction of dams, buildings etc. The administration of these schemes is easier as the record keeping is for a team output and not individuals. However, it suffers from the fact that all team member are entitled for bonus irrespective of whether they contributed to the increased output or not. The sharing of bonus may be done on arbitrary basis which may lead to dissatisfaction of workers. Further amount per person may be small. There are various schemes developed and used in different type of organisations. These are given below: Priestmans Production Bonus: This is applicable in the manufacturing industry. A standard output for the factory as whole is set. Workers & staff are rewarded if actual output increases above this standard in the same proportion. If output does not exceed standard, then no bonus is paid, but time rate is guaranteed. If the standard output is 5000 kg and actual output is 6000 kg, then employees will get a bonus equal to 20% of their wages which is equal to the 20% increase in production as compared to the standard. This method is useful in cases of mass production and where there are no bottlenecks.
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Towne gain sharing plan: This scheme encourages cost reductions by supervisors and employees in general. As per this scheme, 50% of the saving resulting out of savings in cost is paid to individuals pro rata in addition to their normal wages. Rucker plan: In this plan, the percentage of the added value is shared among the employees. Added value is defined as labour cost plus production overheads plus gross profit. If ratio of direct labour to value added is 80 % and the actual labour cost is 76%, then 4% of added value is distributed as bonus. The whole amount may not be distributed at once may be 75% is released immediately and balance is kept as reserve to be used when the performance is below standard. Scanlon Plan: It is same as Rucker plan except that the proportion of direct wages to sales value of production is taken instead of proportion of direct wages to value added.
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Cost & Management Accounting (568) Other Incentive Schemes:

These schemes may not be directly linked to individual or group performance. The employees receive additional remuneration, shares in the company, and other perquisites. Such schemes can be divided into: - Indirect monetary incentives viz. profit sharing & co-partnership - Indirect non-monetary incentives that are related to working conditions, 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 declared in advance so that the employees can go for it. Secondly, it has to have a relationship with profit earned by the company. The disbursement of the amount is generally done on the basis of audited accounts after the end of the accounting year. The payments could be made either in cash or deferred payments or a combination thereof. Such sharing plans inculcate a sense of partnership among employees and keep them engaged in the company for longer time. It has a positive effect on the moral and efficiency of the employees. The most common ways of profit sharing in India are Bonus (governed by the payment of bonus act), Superannuation and gratuity which are deferred payments. The minimum and maximum bonus payments are 8.33% and 20% of the annual salary subject to the available surplus of profit. Companies may pay extra amounts as exgratia. Many Indian companies follow the practice of paying a certain number of days or months salary as a bonus. Co-partnership: Under this method the ownership rights are extended to all direct and indirect employees by permitting them to buy shares in the company. This scheme is popularly called as ESOPs (employee stock options) in which every employee is allowed to purchase shares in the company at a pre-determined price which is usually lower than the market price. The management rewards the employees with long service tenure, loyalty etc. Employees become part owners of the company and therefore get motivated to earn profit for themselves. Limited companies and even private companies, co-operatives follow this practice. Over the last decades, the IT companies in India like Infosys have very successfully rewarded their employees through the stock options schemes. It has really done wonders to employee morale. However, it is argued that when employees become part owners, their loyalty towards the trade union reduces. Indirect non-monetary schemes: These schemes aim at improving working conditions in plant and other facilities. These benefits are normally of permanent
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nature as facilities once provided are rarely withdrawn. The non-monetary benefits generally include: a) Flexible working hours b) Subsidised canteen facilities c) Educational facilities for children of employees d) Housing colonies e) Medical and hospitalization insurance f) Club memberships g) Guest house facilities at hill stations h) Recreation, annual events, sports and other competitions i) Cultural events
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Practical Study of
Cera-e-Noor
www.cera-a-noor.com
Manufacturer of finest tableware

Company Portfolio Cera-e-Noor plant located in the industrial area of city of Hub in Lasbela, Balochistan province of Pakistan, was acquired by the Hashoo Group in the year 2000. It is a state-of-the-art facility for the manufacture of crockery (tableware). The plant was designed and commissioned with the collaboration of French ceramic giant, Bernardaud Liamoges and technical/engineering expertise from other major players in the French ceramic industry such as Ceric and Cerlim. Notable features of the manufacturing unit are automatic plate lines, universal jiggering machines capable of producing extra large sized platters, PLC controls and highly advanced shuttle kilns for both gloss and biscuit firing. A Ceramics manufacturing company, Cera-e-Noor specializes in hospitality and domestic grade porcelain crockery and table ware. The state of the art facility included the latest technology and processes including automated lines, universal machines capable of producing extra large size plotter, PLC controls and highly advanced Shuttle kens of both glass and biscuit. Cera-e-Noor uses imported China Clay vitrified at extremely high temperatures to produce hardwaring and scratch resistant porcelains crockery and table ware in different grades. Cera-e-Noor porcelain is highly durable and four times stronger than conventional ceramics table ware and is microwave and diswasher sale. Limited addition customs design and grids can be commissioned suitable for Government or Corporate levels use. All products are entirely free from harmful material and exhibits excellent thermal stability. Apart from meeting the industry needs of the Hashoo Group, Care-e-Noor also caters to the needs of other customers in the commercial and domestic sectors as well as international markets at easy realistic prices. Being the only facility in Pakistan capable of manufacturing hard ceramic product in large quantities Care-e-Noor is committed to total customer satisfaction by
33

consistently providing innovative and unmatched quality products through team efforts.
VISION OF THE COMPANY: We strive to be bench-marked against the best in the tableware industry. Our aim is to exceed our customer's expectations ensuring them of highest standards of service levels and unmatched product quality. FUTURE PLANS: In the future competition will increase in this market and there will be large availability of Chinese product at relatively low price. Customer will become brand & quality conscious. In future we plan to expand our product line by introducing more categories, designs & varieties in both casual & formal ware. We also plan to go beyond the national boundaries and market of products worldwide.
34
35
Genuine Hard Porcelain

36

Cera-e-Noor product line is unique it is the only facility in the country, manufacturing products of hard porcelain from imported quality China clay. Durable Decoration Due to extremely controlled temperature & atmospheric conditions in the fast firing fully automatic tunnel Kiln our decorations fuse with the glaze, which gives high degree of durability even after high dishwasher use. Domestic and Institutional Product Ranges Built-in versatility in our production systems allows us to offer both the fine tableware for home dinning & the tough thick ware for the institutional client. We can custom make company logos as well as design transfers according to specifications. Realistic Prices High speed, high volume production facilities combined with experienced technical staff ensures quality products at realistic prices. Try us - you will be pleasantly surprised. Free of Harmful Materials Strict quality control in the selection of raw materials for the composition is maintained to avoid hazardous material which can be injurious to health. High Durability Cera-e-Noor porcelain is vitrified at an extremely high temperature, making it four times stronger than conventional ceramic tableware and is dishwasher safe. Scratch Resistant The hardness of the Cera-e-Noor glazed surface can withstand tough commercial use with high resistance to scratching/silver marking.
37
Cost & Management Accounting (568) Turn Over Benchmarks

To achieve a target of PKR 222 million (2 million pieces) within the 1st year To achieve a target of PKR 400 million (4 million pieces) within the 2nd year To achieve a target of PKR 1 billion (8 million pieces) within the 3rd year
Profit Oriented Benchmarks

To achieve profit at the rate of 2% within the 1st year 2007-08 To achieve profit at the rate of 4% within the 2nd year of 2008-9 To achieve profit at the rate of 8 % within the 3rd Year of 2008-09
Sales Targets
To achieve a target Expand the number To achieve a target Expand the number To achieve a target Expand the number net sales of Rs. 222 million within the1st year of 2007-08 of dealers by 10 % net sales of Rs. 400 million within the 2nd year of 2008-09 of dealers by 30 % net sales of Rs. 1billion within the 3rd year of 2009-10 of dealers by 50 %
38
Cost & Management Accounting (568) Methodology Used:

Production Department of Cere-e- Noor has been selected for study the different Labor Plans Incentive schemes as discussed above. The working labors are 1200 in numbers and work under the different supervisors / foramens in three (03) working shifts of eight hours each.
39
Cost & Management Accounting (568) Turn Over Calculation Case for Year 2010:
Number Number Number Number Number of of of of of workers on 1 Jan 2010 workers on 31 Dec 2010 workers resigned workers discharged replacement 1000 1200 70 20 80
Calculated Turn Over:

Average Number of workers Number of workers left 1. Separation Rate 2. Replacement Rate 3. Flux Rate (1000+1200)/2 =1100 (70+20) = 90 (90/1100)/100 = 8.18% (80/1100)/100 = 7.27% ((90+80)/1100)/100 = 15.45%
Time Wage System used at Cere-e-Noor:

Time wage system is also being used at Cere-e-Noor production department; around 150 of the labor are working on time wage system. One of the practical calculations regarding the time wage system is as follow: A worker gets Rs. 15 per hour. He works for 8 hours per day. He has been present for duties on 25 days during the month. What is his wage for the month? Solution: His wage based on Time Rate will be: Rs.15X8X25=Rs.3000/-
Piece Wage System used at Cere-e-Noor:

Piece wage system is also being used at Cere-e-Noor production department; around 300 of the labor are working on piece wage system. One of the practical calculations regarding the time wage system is as follow: The rate of labour per tea set is Rs. 80/- The worker has completed 20 tea sets during a week. What is the wage of the worker? Solution: His wage based on piece rate will be: Rs. 80 X 20 = Rs.1600
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Cost & Management Accounting (568) Bonus System Case Study of Cere-e-Noor During the first week of July 2010, the workman Mr. Ahsan manufactured 300 Jugs. He receives wages for a guaranteed 48 hours week at rate of Rs. 4/- per hour, the estimated time to produce one tea set is 10 minutes and under incentive scheme the time allowed is increased by 20%. Calculate his gross wages according to: Piece work with guaranteed weekly wages Rowan premium plan Halsey premium plan Solution: Calculation of Gross Wage under Price Work Plan:
Standard Time to Produce One Jug Standard Production for one hour Standard Production for 48 Hours Or One Week Actual production for a week Price Rate
Wage Per Hour = Rs. 4 Standard Production per Hour = 6 Price Rate= 4/6 = Gross Wages = Actual Production x Rate per price Gross Wages of Mr. Ahsan= 300 x 0.67 = 200
= = = =
10 Minutes 60 / 10 = 98 x 6 = 588 Jugs 300 Jugs
6 Jugs
= Wage per hour / Standard production per hour
So Gross Wages of Mr. Ahsan = Rs. 200. Explanatory Note:

Actual Production of Mr. Ahsan is above standard production so he will be paid under price work system.
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Cost & Management Accounting (568) Calculation of Gross Wages under Premium Plan:
Time allowed for one Jug Time allowed for 300 Jugs Time allowed for 300 Jugs Time Taken Times Saves Basic Rate Per Hour Basic Wages:
Time Taken x 48 x Rate per hour 4 = 192
= = = = = =
(10+10x20/100) 12 x 300 3600 / 60 48 Hours 60 48 Rs. 4.
= 12Minutes = 3600 = 60 Hours
12 Hours
Add Bonus:
Time Saved / Time allowed x time take x rate 12 / 60x48x4 Total Gross Wages = Basic Wages + 192 + Basic Bonus 38.4
38.4
230.4
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Cost & Management Accounting (568) Calculation of Gross Wages under Hasley Premium Plan:
Time allowed for one Jug Time allowed for 300 Jug Time allowed for 300 Jugs Time Taken Times Saves Basic Rate Per Hour Basic Wages:
Time Taken x 48 x Rate per hour 4 = 192
= = = = = =
(10+10x20/100) 12 x 300 3600 / 60 48 Hours 60 48 Rs. 4.
= 12Minutes = 3600 = 60 Hours
12 Hours
Add Bonus:
Time Saved x rate 1/2 12 / 4 x 1/2 Total Gross Wages = Basic Wages + 192 + Basic Bonus 24
24
216
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Cost & Management Accounting (568) Merits, Demerits, Strengths and Deficiencies: Merits & Strengths:
Premier local manufacturer of porcelain tableware. Part of the elite Hashoo group -the owners and operators of two leading chains of hotels namely Marriott and Pearl Continental Holds good repute for salaries and wages disbursement Holds the time wage plans Holds the Piece Wage Plans Utilizes the Incentive Bonus Schemes plans Hasley Plans are applied in incentive schemes. Profit sharing schemes are also utilized in the production department
Demerits and Deficiencies:

Result based programs schemes are plans are generally apply to the less numbers of labors. Co-partnership is offered less in number to the workers of the company Cultural Events are generally hold once in a year. Flexible work hours are not in practice in general No medical insurance to the kids of the general labour
Opportunities:
Huge growing domestic market Enhancement of the factory units will provide the opportunity of employment Growing purchasing power of people within the economy More and more consumers are becoming brand conscious Modern lifestyles markets are growing.
Threats:
Turnover of the labor is increasing Skilled labor may join other factories in Increasing prices of raw material Political stability is at a decline Growing Manufacturing Power of China (they can do reasonable quality at low cost) Increasing energy costs.(Oil & Electricity)
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Cost & Management Accounting (568) Recommendations:

Enhance the application of the various numeration methods for better results of the production and profitability. Combined Piece time and piece rates should have to apply in more appropriate way. Enhance the manufacturing plant capacity to get the maximum number Co-partnership should be offered to the labor staff for more confidence level to the lower staff. Enhance the labor wages per hours and monthly salary Enhance HRD to meet the appropriate professional needs for onward competition Medical facility should also be provided to the children of the labors. Flexible hours should be mandatory part of the working for the labors. Pension plans should be implemented for the future satisfaction of the labor. Exclusive incentive plans should be adopted for better competition.
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References:
A special tribute and thanks to the following professionals of Cera-e-Noor for cooperating in providing data and fruitful assistance.
Name
Eshan Ali Muhammad Usman Javed
Designation
Manager HR Manager Production
Contacts
eali@cera-e-noor.com.pk javd.u@cera-e-noor.com.pk
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Sr. SGM Operation Manager Process Plant Asst. Field Process GM GM Sr. Chief Production Production sEngineer Maintenan Operators Manager/ (Tech. & Finance Process Engineer Process Operati Engineers Coord.) Plant ce ng manager Engineer
Officer
Dr. Amir Hussain Shah Block No. 13, Commerce Department, AIOU, H-8 ISLAMABAD. (0300-970 4138)
M. Hammad Manzoor 508195394 # 508, 5th Floor, CTC Continental Trade Centre, Block-08 08, KARACHI. (0321Clifton 584 2326) Cost & Management Accounting 02 568
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Assignment 2nd - 568 - Cost Management Accounting

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Assignment 2nd - 568 - Cost Management Accounting

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Department of Business Administration

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568) Introduction Labor:

Forms of Labor Cost Control Direct Labor Cost:

Indirect Labor Cost:

Cost & Management Accounting (568)

Labor Cost Control:

Objectives of Time Keeping in Labor Cost Control:

Cost & Management Accounting (568)

Methods of the time keeping:

ii) Token or disc Method:

Cost & Management Accounting (568)

iii) Time recording clocks:

Is time keeping significant?

Cost & Management Accounting (568)

Cost & Management Accounting (568) c. Flux method:

Calculate the Turn Over?

Cost & Management Accounting (568) Advantages of Time Rate System:

Disadvantages of Time method of wage payment:

Remuneration methods & Incentive schemes

Cost & Management Accounting (568) Characteristics of Sound Remuneration System

Cost & Management Accounting (568)

The following chart shows the classification of various remuneration methods

Various Remunerati on Methods

Combined time and piece rate

Cost & Management Accounting (568)

Flat Time Rate

High Wage System

Graduated Time System

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Straight Piece Rates

Standard Hour Piece Rates

Differential Piece Rates (Taylor & Merrick Plan)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Advantages of Piece Wage System:

Disadvantages of Piece Wage System:

What is the main purpose of incentive plans?

Cost & Management Accounting (568)

Combined Time and Piece Rate

Gnatt Task Plan

Cost & Management Accounting (568)

Cost & Management Accounting (568)

(1) Halsey Plan:

Cost & Management Accounting (568)

(2) Halsey Weir Plan:

(3) Rowan Premium Plan:

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Cost & Management Accounting (568) Group Bonus Scheme:

Cost & Management Accounting (568)

Cost & Management Accounting (568) Other Incentive Schemes:

Cost & Management Accounting (568)

Cost & Management Accounting (568)

Manufacturer of finest tableware

Cost & Management Accounting (568)