Chapter 7

ACCOUNTING FOR LABOUR

This chapter details various methods by which labour may be paid (remuneration
methods), and also looks at various ratios which can be useful in relation to
labour

1. Direct and indirect labour costs

All costs of indirect workers (i.e. those not directly involved in making products, such as maintenance
staff and supervisors) are indirect costs/overheads. For workers directly involved in making products:
Direct costs are their basic pay, and any overtime premium paid for a specific job at the customer’s
request. Indirect costs are general overtime premiums, bonus payments, idle time, and sick pay.
2. Remuneration methods
There are three basic remuneration methods:

Time work- Wages are paid on the basis of hours worked. For example, if an employee is paid at the rate
of $5 per hour and works for 8 hours a day, the total pay will be $40 for that day. Employees paid on an
hourly basis are often paid extra for working overtime. For example, an employee is paid a normal rate
of $5 per hour and works 4 hours overtime for which he is paid at time-and-a half. The amount paid for
the overtime will be 4 x 1.5 x $5 = $30

Piecework- Wages are paid on the basis of units produced. For example an employee is paid $0.20 for
every unit produced, with a guaranteed minimum wage of $750 per week. In week 1, they produce
5,000 units and so the pay will be 5,000 x $0.20 = $1,000 for the week. In week 2, they only produce
3,000 units, for which the pay would be 3,000 x $0.20 = $600. However, since this is below the
guaranteed minimum the employee will receive $750 for the week.

Bonus/incentive schemes- There are many different ways in which a bonus scheme can operate, but
essentially in all cases the employee is paid a standard wage but in addition receives a bonus if certain
targets are achieved.
 3. Labour ratios
๏Idle time ratio
Idle time is time for which the employee is being paid but during which they are not actually
working (e.g. because the machine on which they work had broken down).
Idle time ratio = idle hours X 100%
Total hours

๏Labour turnover ratio:

This measures the rate at which employees are leaving the company.
Labor turnover rate = Replacements x 100%
Average number of employees
๏Labour efficiency ratio:
This measures whether we are working faster or slower than expected.
Efficiency ratio = Expected (or standard) hours to make output X 100%
Actual hours taken
๏ Labour capacity ratio:
This measures whether we were able to obtain more or less working hours than we originally
budgeted on being available.
Capacity ratio = Actual hours worked X 100%
Budgeted hours
๏ Labour production volume ratio (activity ratio):
This measures whether we were able to produce more or less than we expected to produce
based on the budgeted hours available.
Production volume ratio = Expected (or standard) hours to make output X 100%
Budgeted hours

Question 1
An employee is paid on a piecework basis as follows:
1 to 500 units - $0.50 per unit
501 to 1000 units - $0.75 per unit
1001 to 1500 units - $1.00 per unit
Only the additional units qualify for the higher rates, and rejected units do not qualify for
payment.
During one day and employee produced 1200 units of which 32 were rejected.
How much did the employee earn for the day?

 $1168
 $1200
 $793
 $825
The employee will be paid for 1200 – 32 = 1168 units.
The pay will be:
500 X $0.50 = 250
500 X $0.75 = 375
168 X $1.00 = 168
1168 $793

Question 2
A company had 80 direct production workers at the beginning of last year and 60 direct
production workers at the end of last year. During the year a total of 45 employees had left the
company.
What was the labour turnover rate for the last year?

 35.7%
 21.4%
 64.3%
 75.0%
If no workers had been replaced, then at the end of the year there would be 80 – 45 = 35
workers. Since there were actually 60 workers at the end of the year, it must mean that 60 – 35
= 25 workers were replaced. The average number of workers of the year = (80 + 60) / 2 = 70
Therefore the labour turnover rate = 25 / 70 = 35.7 %
Question 3
A company budgeted on producing 20,000 units and taking 8000 labour hours. They actually
took 11000 hours to produce 25000 units.
What was the labour capacity ratio?

 110.0%
 90.9%
 72.7%
 137.5%
Capacity ratio = (actual hours worked / budgeted hours) X 100%
= (11000/8000) X 100%
= 137.5%
Question 4
A company budgeted on producing 20000 units and taking 8000 labour hours. They actually
took 11000 hours to produce 25000 units.
What was the labour efficiency ratio?

 90.9%
 110.0%
 137.5%
 72.7%
Actual hours worked = 11000
Standard hours for the actual production = (25000 / 20000) X 8000 = 10000
Efficiency ratio = 10000 / 11000 = 90.9%