TOPIC 3

45 BASIC COST ACCOUNTING

THE COST CLASSIFICATION :46 BASIC COST ACCOUNTING
COSTING FOR LABOURS
TOPIC 3

3.
3.1. Define the direct labour and indirect labour cost

3.2 Explain recording and control labour costs
3.3 Explain the different types of remuneration

method
a. Time-based Schemes
b. Piecework Schemes
c. Bonus/Incentives Schemes
3.4 Calculate the remuneration using the different
methods
3.5 Explain advantages and disadvantage of
various remuneration methods
3.6 Explain the labour productivity and the effects
of labour turnover

47 BASIC COST ACCOUNTING

1. TOPIC 3: THE COST CLASSIFICATION: COSTING FOR LABOURS
3.
3.1. Define the direct labour and indirect labour cost

DEFINTION OF LABOUR

The workforce in a business, specifically workers who work in the
factory area. It represents one of the components in the total
production cost.

Labour can have different skill levels or grades such as skilled, semi-
skilled and unskiled labour. It can also be either direct labour or
indirect labour.

 What is the Cost of Labour?
o The cost of labour is the sum of all wages paid to employees, as well as
the cost of employee benefits and payroll taxes paid by an employer.
The cost of labour is broken into direct and indirect (overhead) costs.
o Direct costs include wages for the employees that produce a product,
including workers on an assembly line, while indirect costs are
associated with support labour, such as employees who maintain
factory equipment.
o For a manufacturing business firm engaged in producing a specific
product, labour costs are accumulated and charge to the product as
they are produced.
o Labour is a major cost in most of organization.

The difference between direct labour and indirect labour

DIRECT LABOUR

• Direct labor refers to any employee that is directly involved in the
manufacturing of a product.

• This cost is charged to all units produced during the reporting period.
The basis for charging the cost is the number of hours of labour
actually used in the production process.

• eg: If your business manufactures bicycles, the employees producing
the bicycles are considered direct labor.

48 BASIC COST ACCOUNTING

INDIRECT LABOUR (FACTORY)
• Indirect labor is labor that is not directly related to the production of a

product.
• This cost is assigned to a cost pool, from which it is allocated to the

units produced during the reporting period.
• Depending on the level of allocation sophistication, several cost pools

may be used, each of which has a separate allocation methodology.
• eg: Once a product has been completed, the salespeople you

employ would be responsible for selling the product they would be
considered indirect labor.

o The only type of labour that should be included in the direct labour
classification is for those employees directly involved in the
manufacturing process, such as people working on an assembly line or
operating machinery.

o It does not include any support or supervisory staff, such as the factory
janitorial, maintenance, administrative, and management employees.

3.2. Explain recording and control labour costs
 THE ENGAGEMENT OF LABOUR
o The engagement of labour is delegated by the management to the
personnel officer.
o The personnel officer carries out this work in response to a properly
authorized request for employees received from departmental
manager.
o The procedure upon engagement of labour is as follows:
 Notice is given to the department concerned. When the
employee reports for duty he sees the personnel officer and is
given a copy of the work rules.
 Notice is given to the wages office. This notifies them of the new
employee’s name, the date of commencement, department, rate
of pay and clock number.

 TERMINATION OF EMPLOYMENT
o When an employee leaves his employment for any reason, the
personnel officer should seek to find out that reason.
o The employee should give a prior notice for resignation.

49 BASIC COST ACCOUNTING

3.6 Explain the labour productivity and the effects of labour turnover

 LABOUR TURNOVER RATE
o Any changing of employees occasions loss to a manufacturer
o Labour turnover is the rate at which employees leave employment at
the factory.
o Can be calculated as:

FORMULA

Labour The average of

Turnover = (employees leaving replace + replace for the year) X 100
Rate The average number of employees for the year

EXAMPLE 3.1
This information is extracted from Evon Company relating its employees
for the year ended 2020. The number of employee employed on 1.1.2020
is 120. During the year, 24 new employees were employed and 18 left.

You are required to calculate:
a) The number of employees on 31.12.2020
b) Labour turnover rate

Solution:
a) The number of employees on 31.12.2020

No. of employees at 1.1.2020 120
(+) New employees 24
(-) Employees left (18)
No of employees at 31.12.2020 126

b) Labour turnover rate

The average of

= (employees leaving replace + replace for the year) X 100

The average number of employees for the year

[ 24 + 18 ] / 2 X 100
=

[ 120 + 126 ] /2

50 BASIC COST ACCOUNTING

= 21 X 100
123
= 17.07%
-

ENRICHMENT EXERCISE 3.1

Question 1

S & S Company produced the detail about labour turnover for its employees

No. of employee at the beginning of the period Department Department
The addition of employee during the period X Y
No. of employees leaving during the period 72 34
14 9
11 7

You are required to calculate:
a) The number of employee at the end of the period
b) Labour turnover rate for each department

Question 2
Here is the record of labour turnover of the Company Jayasama:

No. of employees beginning period Department Department Department
New employees A B C
Employees left 235
210 105 35
11 20 20
9 10

You are required to calculate:
a) The number of employee at the end of the period
b) Labour turnover rate for each department

-

51 BASIC COST ACCOUNTING

 CAUSES OF LABOUR TURNOVER

Avoidable causes

Low wages Unsatisfactory Bad relations Unsuitable of
and earning working among workers job
and supervisors
conditions

Unavoidable Causes

Termination of service due to Retrenchment or lay off due to
misbehavior or indiscipline shortage of resources

 COST OF LABOUR TURNOVER
o Preventive costs
 Preventive costs include all the costs which are incurred to prevent
workers from leaving the organisation and keeping them satisfied.
 These are the examples of preventive costs:
a) A personnel department incurs costs on recruitment, selection,
training and other things related to employment.
b) The cost incurred for providing medical benefits to the worker.
c) Welfare include facilities like sports, transport, canteen and
housing. These facilities will prevent workers from leaving.
o Replacement Costs
 Replacement costs include the costs which are incurred for the
recruitment and training of new workers.
 Also, they cover costs which arise as a result of wastage, losses,
lower production because of less competent and inexperienced
new employees.
 Replacement costs consider the following factors:
a) The increase in costs of the personnel department due to the
recruitment of new workers.
b) The loss of production time as the new workers need to be given
training.

52 BASIC COST ACCOUNTING

c) The inefficiency of new workers and will affect production.
d) Costs of breakages of tools and equipment due to inexperienced

workers.

 LABOUR RECORDS AND PROCEDURES
o A record of time worked is required for hourly workers and also salaries
workers if they are paid overtime and this system is known as TIME
KEEPING.
o Objectives of time keeping:

Enable payroll department to Enable cost accounting
calculate and prepare payroll. department to charge direct

costs to jobs, process and
indirect labour costs to
overhead.

Time Recording • Provide record of time spent in a factory.
or Time • Common system used is punch card/clock

Keeping cards. Employees need to punch in and punch
out the cards when arrive and depart from the
Time Booking factory.

Time Sheets • A form of timekeeping to record the time spent
on a job/ operation in a factory.
Job Cards
• The information should be available to
reconcile with the time recorded n the punch
card/clock card.

• Information on the time sheets is completed by
employee. i.e. hour spent on the job and must
be signed by their supervisor

• Is used to find out labour times spent of each
order or job. It is prepared separate for each
job /order. The card will move from worker to
worker as the job progress.

 TIME KEEPING RECORDS
o Attendance records
 The clock card is used by each worker, and a time recording clock
usually based at the entrance to the building.

53 BASIC COST ACCOUNTING

 The worker has to punch each time he comes in and leaves the
factory.

o Output records
 The following are typical records:

Daily and These are records, filled in by the worker and
weekly countersigned, which show how he spent his time
time sheets during the day.

Job cards A job card relates to a single job or batch and is
likely to contain entries relating to numerous
employees.

Operating These cards are also known as piecework tickets,
cards are provided for each operation. So each
operation will have at least one card.

 THE PAYROLL DEPARTMENT
o Preparation of the payroll from time sheet, job cards and operating
cards is done by the payroll department.
o The following are the objectives of the payroll department:

To compute To prepare To maintain To calculate
employee departmental individual payroll taxes
employee
wages payroll payroll records
summaries

3.3. Explain the different types of remuneration method
3.4. Calculate the remuneration using the different methods
3.5. Explain advantages and disadvantage of various remuneration methods

 THE METHODS OF REMUNERATION
o An important aspect of labour cost control is a wage system designed
primarily for exercising management control over employees.
o Basically, there are two main scheme of payment for employees:

Payment on the basis Payment by results
of time attendance (piecework)

(time basis)

54 BASIC COST ACCOUNTING

METHOD OF REMUNERATION

Time based Payment by result
Scheme

Piecework Scheme Bonus Scheme

Time rate Piecework
with
Differential Halsey Halsey Rowan
guaranteed piece rate -weir
minimum

 Payment on The Basis of Time Attendance (TIME BASIS)
 Worker is paid at an hourly, daily or weekly rate and his
remuneration depends upon the time which he is employed and
not upon his production.
 Overtime is often paid for hours worked beyond a standard
number of hours or for work carried out on days which are not part
of the working week, eg: Saturdays or Sundays.
 Overtime is often paid at rates such as "time and a quarter", "time
and a half", or "double time".
"Time and a half", for example, means that 1.5 times the basic
hourly rate is paid.
 Time rate is often referred to as a "day rate"

FORMULA

Wages = Hours Attended X Rate of pay per hour

ADVANTAGES DISADVANTAGES

• Easy to compute • Payment is for attendance,
& understood by not for a work done
employers and
employees • Efficient employee can be
dissatisfied when inefficient
• Easy to adjust in colleagues receive the
wages same pay/incentive
negotiation
• Overtime can result from
slow working

55 BASIC COST ACCOUNTING

An employee is paid for 8 hours attendance time at a wage rate
of RM4 per hour and his job ticket shows that he had worked a
total of 7 ½ hours on Job No. 123.
The ½ hour which he is paid is termed idle time.

 Since this idle time is not productive, it is to be charged to
production overhead.

 When an employee is required to work overtime, he is normally
paid a premium rate. If he is paid time and a half, he will receive
one and half times his basic wage rate.

EXAMPLE 3.2
i. In a week Ali’s basic working hour is 44 hours and paid at the rate of RM

2 per hour. What is his gross wages in a week?

Solution: = Hours worked X Rate per hour
Basic Pay = 44 hours X RM 2
= RM 88

ii. If Ali worked 48 hours in a week and for overtime he will be paid 1.5
times higher from normal rate. What is his gross wages in a week?

Solution: = Hours worked X Rate per hour
Basic Pay = 44 hours X RM 2
= RM 88

Overtime Extra Hours Rate per Overtime
= X X
Premium worked
hour premium
= [48 - 44 hours] X RM 2 X 1.5

= RM 12

56 BASIC COST ACCOUNTING

Gross Wages = Basic Pay + Overtime Premium

= RM 88 + RM 12

= RM 100

-

ENRICHMENT EXERCISE 3.2

Kamal works an 8 hours day at a basic rate of RM 4. On a particular day, he
worked 10 hours. If overtime is paid at time and a half, calculate his basic
wages and the overtime premium.

 Payment by Results (INCENTIVE SCHEME)
 Paying wages on a time basis does not provide any incentive to
employees to work more efficiency.
 The employee is paid an agreed sum for each task carried out for
each unit of output completed.
 Units of output can be based on an agreed output per hour, which
is referred to as "standard hour produced"
 In some cases, employees may have a guaranteed minimum
wage.
 There are many possible types of incentive schemes which can be
devised.
 They are as follows:

Piecework Individual Group Bonus Profit Sharing
Scheme Bonus for for Exceeding Scheme
Efficiency
Standard Production
Targets

57 BASIC COST ACCOUNTING

 Piecework Scheme

FORMULA

Wages = Unit Produced X Rate of Payment per Unit

• Mostly used for direct workers.
• Fixed rate is paid for each unit produced.
• Worker’s wages depend upon his output and not upon the time he

spends in the factory.

EXAMPLE 3.3
Ahmad produces 100 units of products “AB10” & for every unit
produce he will be paid RM 5 per unit.

Solution: = Unit produced X Rate per unit
Basic Pay

= 100 units X RM 5

= RM 500

• Variation: Differential piece rate

Piecework with guaranteed
day rate

58 BASIC COST ACCOUNTING

PIECEWORK WITH GUARANTEED DAY RATE
 Workers are paid a guaranteed minimum pay rate when performance

are lower than normal (under uncontrollable situations).
 This method guarantees a day rate.
 If the employee piece rate earning below the day rate earnings, the

employee will be paid according to his day rate earnings

EXAMPLE 3.4

Busu produces 48 units per day. The rate per unit RM 2. He will be

paid minimum of RM 100 daily if output fall below 50 units per

day.

a) What will be his wages if he produces 48 units in a day?

Solution:

Basic Pay = Unit produced X Rate per unit

= 48 units X RM 2

= RM 96 Compare
Guaranteed day rate = RM 100 which one is
# Gross Wages for Busu = RM 100
higher

b) What will be his wages if he produces 55 units in a day?

Solution:

Basic Pay = Unit produced X Rate per unit

= 55 units X RM 2

= RM 110 Compare
Guaranteed day rate = RM 100 which one is
# Gross Wages for Busu = RM 110
higher

-

-

59 BASIC COST ACCOUNTING

DIFFERENTIAL PIECE RATE
 Wages are paid at different rated which increase according to

productions.
 This scheme provides incentives for workers to improve their skills and

increase productions.
 The piece rates vary at different levels of efficiency.

EXAMPLE 3.5
Raman produced 200 units of output. The rates paid will be as
follows: -

Up to 100 units per day RM0.50 per unit
101 – 150 units per day RM0.60 per unit
151 – 200 unit per day Rm0.70 per unit

What will be his gross wages?

Solution:

Basic Pay = Unit produced X Rate per unit

= 100 units X RM 0.50 = RM 50

= 50 units X RM 0.60 = RM 30

= 50 units X RM 0.70 = RM 35

Gross Wages = 200 units = RM 115

-

-

ADVANTAGES DISADVANTAGES

• Managerial supervision is • Quantity increase but
not much needed for lower quality
production since each
worker assumes • Dispute about spoiled or
responsibility for his own sub standard work
time and output.
• The rate can be fixed too
• Higher production high or too low to start with
reduces overhead costs & it is difficult to change.
per unit of output.

60 BASIC COST ACCOUNTING

ENRICHMENT EXERCISE 3.3
Question 1

According to the information below, you are required to calculate gross
wages for each employee by using the method of:
(i) Time rate
(ii) Payment by results or piecework

Rate per hour (RM) Dean Sean Lean
Rates per unit (RM) 1.25 1.05 1.20
Unit produced 0.20 0.25 0.24
Time Taken (hours) 270 200 220
40 38 36

Question 2 Rate/unit (RM)
RM1.00/unit
Up to 100 units/day RM1.20/unit
101 – 200 units/day RM1.30/unit
201 – 300 units/day

Alex produces 250 units of output in a day, what will be his gross wages?

61 BASIC COST ACCOUNTING

 Individual Bonus for Efficiency Standard
• Employee is paid a basic rate per hour.
• If he completes his work in less than the standard or expected time,
he will earn a bonus.
• The bonus is calculated as an agreed percentage of the time
saved multiplied by the time rate.
• Bonus systems base employees' earnings on a combination of time
taken and work done, bonus is given if there is time saved.
FORMULA

Time Saved = Time Allowed - Time Taken

Time Saved = Standard Time - Actual Time

ADVANTAGES DISADVANTAGES

• Increase production • Difficult to set up fairly
without any dispute • Difficult to change
between the labor • Affect quality
and management

• Three types of bonus schemes are:

Halsey Bonus Halsey Weir Bonus Rowan Bonus
Scheme Scheme Scheme

62 BASIC COST ACCOUNTING

HALSEY BONUS SCHEME
 Under this scheme an employee is paid a basic rate per hour.
 If he completes his work less than the ‘standard or expected time’, he

earns a bonus.
FORMULA

Bonus = ½ X Time Saved X Rate per Hour

EXAMPLE 3.6

Amer is paid RM2.00 per hour for an 8 hours day. In oTnimeedtaakye,nhe

completes his job with standards times of 12 hours. Calculate his

wages. Time allowed

Solution: - Time Taken
Step 1 Time Saved = Time Allowed - 8 hours

= 12 hours
= 4 hours

Step 2 Bonus = ½ X Time saved X Rate per hour

= ½ X 4 hours X RM 2

= RM 4

Step 3 Basic Pay = Hours Worked X Rate per hour
= 8 hours X RM 2
= RM 16

Step 4 Gross Wages = Basic Pay + Bonus
- = RM 16 + RM 4
= RM 20

63 BASIC COST ACCOUNTING

HALSEY-WEIR BONUS SCHEME
 Under the Halsey-Weir scheme, a worker is entitled to bonus which is

equal to his time wage for 33 1/3 % (often 30%) of the time saved;
instead of 50% in case of the Halsey scheme.
 Thus except the above, there is no difference between the Halsey
scheme & the Halsey-Weir scheme.

FORMULA

Bonus = 1/3 X Time Saved X Rate per Hour

EXAMPLE 3.7
Encik Kamil is paid RM1 per hour. Time allowed is 50 hours. The time
taken by him is 40 hours.
Calculate his basic pay, bonus and his gross wage.

Solution: - Time Taken
Step 1 Time Saved = Time Allowed - 40 hours

= 50 hours
= 10 hours

Step 2 Bonus = 1/3 X Time saved X Rate per hour
= 1/3 X 10 hours X RM 1
= RM 3.33

Step 3 Basic Pay = Hours Worked X Rate per hour
= 40 hours X RM 1
= RM 40

Step 4 Gross Wages = Basic Pay + Bonus
- = RM 40 + RM 3.33
= RM 43.33

64 BASIC COST ACCOUNTING

ROWAN BONUS SCHEME
 Under this scheme bonus is calculated as the proportion of time taken

which the time saved bears to the time allowed.
 The bonus is paid at time rates.
 The Rowan Scheme protects the employer from loose rate-fixing by

reducing the bonus at high production levels.
 For this reason, this scheme of bonus is unpopular with the workers.

FORMULA

Time Taken
Bonus = Time Allowed X Time Saved X Rate per Hour

EXAMPLE 3.8
Mimi is paid RM2.40 per hour and is given a job which has a standard
time allowed of 12 hours. What should be her bonus pay for the job,
and total rate of pay per hour if the job takes 9 hours?

Solution:

Step 1 Time Saved = Time Allowed - Time Taken

= 12 hours - 9 hours

= 3 hours

Step 2 Bonus = Time Taken X Time X Rate per
= Time Allowed X Saved hour

9 hours 3 hours X RM 2.40

12 hours

= RM 5,40

Step 3 Basic Pay = Hours Worked X Rate per hour
= 9 hours X RM 2.40
= RM 21.60

Step 4 Gross Wages = Basic Pay + Bonus
= RM 21.60 + RM 5,40
= RM 27

65 BASIC COST ACCOUNTING

 Group Bonus for Exceeding Production Targets
• There are many incentive plans in industry which are related to the
output performance of an entire group of workers.
• Bonus is given based on group performance for exceeding
production targets.

ADVANTAGES DISADVANTAGES

• In increases co-operation • The employee groups
among fellow workers demand low efficiency
standards as a condition for
• It can reduce accidents, accepting the scheme.
spoilage and waste

• It reduces the clerical
effort required to
measure output and
calculate individual
bonuses.

FORMULA

% of Increase Actual Production – Standard Production X 100%

in Production = Standard Production

EXAMPLE 3.9
A company has a production standard of 150 units per day. A
bonus of RM100 will be paid for every 10% increase in production.
A group of 5 workers managed to complete 170 units in a day.
Calculate the bonus received by each worker in that group.

Solution:

% of Actual Production – Standard Production
Increase = Standard Production X 100%

in 170 units – 150 units X 100%
= 150 units

Production

= 13.33 % they are entitled for group bonus

66 BASIC COST ACCOUNTING

Group Bonus = 13.33 X RM 100
10

= RM 133.30

Individual Bonus = RM 133.30
5 workers

= RM 26,66 per worker

-

 Profit Sharing Scheme
• In a profit sharing scheme, employees receive a certain portion of
their company’s year-end profit.
• The size of the bonus being determined by their position in the
company and the duration of their employment

ADVANTAGES DISADVANTAGES

• Company needs • Employees must wait until the end
to pay only what of the year for a bonus. The
it can afford out company therefore expects a long
of its actual term commitment to greater efforts
profits. and productivity from its workers
without the incentive of immediate
reward;

• Factors affecting profit may be
outside the control of employees,
in spite of greater productivity on
their part;

• Too many employees are involved
in a single scheme for it to have a
sufficient motivating effect on
individuals.

67 BASIC COST ACCOUNTING

PRACTICE QUESTIONS

QUESTION 1

Below are the details of the production from 2 workers of MMM brand of Kilang

Pakaian Sukan in a week 3 of March 2010.

Production Units Saniy Salman
Total Working hours (hour) 320 360
Time allowed (hour) 32 42
Rate per hour (RM) 38 48
3.00 2.90

Calculate the total wages for each of the worker based on:

a. Halsey Scheme
b. Halsey Weir Scheme
c. Rowan Scheme

QUESTION 2

Sindora Sdn Bhd paid their direct labor using the time rates. The company is
considering a new payment system based on unit produce. The following
information is available:

Weekly working hours 48

Hourly wage rate (RM) 8.00

Piece rate per unit (RM) 2.00

Normal time taken per piece 15 minutes

Actual output for the week 200 pieces

Differential piece rate up to 100 units per week RM 1.70 per unit

101 – 150 unit per week RM 2.50 per unit

151 – 200 units per week RM 3.50 per unit

You are required to work out the earnings for the week under:

a. Weekly working hours rate
b. Straight Piece Rate
c. Differential Piece Rate
d. Halsey Premium Scheme

68 BASIC COST ACCOUNTING

e. Rowan Premium Scheme

QUESTION 3

Syarikat Perniagaan Orang Bandar involved in manufacturing the Mini Car Toys.
Wan dan Rafi are their workers at Engine Department and they have different skills.
Information below shows their production in the month of June 2017.

Workers Production Time Allowed Time Taken
Wan 260 units 60 hours 100 hours
Rafi 160 units 90 hours 80 hours

Each of the worker were paid RM 5 per hour. You are required to calculate total
wages of each of the them by using Halsey Scheme Method.

QUESTION 4

Star Marketing makes three products: J, A and Y. Data for the year ended 31
August 2017 related to the products and employees, were as follows:

Employee Hours Product J Product A Product Y
Worked
Kay 2 040 hours 1 164 units 960 units -
May 1 750 hours 456 units 144 units 1 440 units

The employees were paid on a time based at RM 4.40 per hour. In an attempt to
increase production, Star Marketing proposed changing the basis on which
employees are paid based on output with rates given as follows:

Product Piece rate per
unit (RM)
J 4.40
A 6.40
Y 3.00

Using the information given, you are required to calculate the earnings for each
employee on the straight piecework scheme.

69 BASIC COST ACCOUNTING

QUESTION 5

Asley Sdn Bhd has three workers which has been assigned in the production
department. Below is the information given regarding the three workers:

Adam Keemi Ajiq

Unit Produced 1 250 1 500 1 750
Time Allowed per unit 2.5 min 1.75 min 2 min
Time Taken (hour) 50 h
Hourly rate of pay 48h 40 h RM 2.50
Cost per unit RM 3 RM 2.90 RM 0.61
RM 0.50 RM 0.53

You are required to calculate for each employee their earning based on:

a. Halsey Schemes
b. Rowan Schemes

QUESTION 6

The following information relates to 3 employees for one month:

Hours Worked Amar Anas Ansar
Rate of pay per hour 58 54 65
Unit of Output Achieved:
RM 12 RM 6.80 RM 10.75
Product A
Product B 142 172 92
Time Allowed (Per unit) 220 176 250
Product A
Product B 12 minutes
9 minutes

From the information given, calculate for each employee their earnings using:

a. Rowan Scheme
b. Halsey Scheme

QUESTION 7

Myra Sdn Bhs involved in the production of Karipap Sedap Halal for small and
medium industries. Jay, May and Ray are three full time workers who have
different skills and fully responsible for the productions.

70 BASIC COST ACCOUNTING

Below are the data that show the production for one week as at 31st Jan 2015 as
followed: (Wages payment is not included in deduction units)

Workers Number of Time Time taken Rate per Deducted
productions Allowed (hours) hour units
Jay per unit (RM)
May 2 550
Ray 1 950 (min) 42 5.50 150
1 480 1.0
1.5 40 4.80 170
2.0
38 4.20 130

Required:

Calculate total wages for each worker by using these techniques

a. Halsey Weir Bonus Schemes
b. Rowan Bonus Scheme