Chapter 3 - Labour 2011

Course Outline:

 Definition and classification of labor

 Methods of remuneration-Time Based and Output based
 Time based (straight time based and overtime)
 Output based (straight piecework, piecework with guaranteed minimum and differential
piecework)
 Advantages and disadvantages of each method

Learning Objectives:

After studying this chapter, you should be able:

 Distinguish direct labour with indirect labour

 Know the methods of time recording and time booking

 Calculate the remuneration of labour using time based scheme and output based or
incentive scheme

 Know the advantages and disadvantaged of each type of remuneration schemes

INTRODUCTION

 To transform materials into products or outputs, we need labour.

 These labour will be paid wages or salaries which is known as labour cost in
manufacturing organization.

 Example of labour costs are salaries, wages,overtime, bonus, medical expenses, etc.

 Labour costs comprises of 2 major types:

– Direct labour costs

– Indirect labour costs.

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NATURE OF LABOUR COSTS

Direct labour costs Indirect labour costs

- defined as “ cost of remuneration for - refers to wages which cannot be identified

employees’ efforts & skills applied directly
to a product@ saleable service & can be
identified separately in product costs.
- its are wages paid to all who are directly
involved in the production of an output @
providing the services
i.e salaries @ wages paid to the operators,
assemblers (manufacturing), the cooks, food
tester (restaurant) etc.
with a particular product@service & need to
apportion the costs between 2 @ more
products
- wages paid to production dept. such as
foremen, inspectors, supervisor @ service
dept. such as maintenance workers,
storekeepers, janitors.
i.e labour related costs: premium paid for
shifts, overtime, holiday pay, pension etc.

 Labour is only classified as direct when:

i. There is direct relationship to the product/output – physical association
ii. The labour cost may be measured – measurability
iii. The labour cost is sufficiently material in amount – materiality

 Difficulty in distinguishing direct labour & indirect labour

i. A labour item may be direct in nature but for practical reasons may not be able to
charge directly to a given product.
ii. i.e spray painting labour.( identified & charged to certain jobs/output)
iii. i.e Inspection work is considered as direct labour if each unit is tested to ascertain if
the product meets the specification but it would be indirect if it is done on a selective
basis.
iv. i.e short operations which take a short time to complete such as buffing & polishing
may be treated as indirect labour.

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LABOUR RECORDS & PROCEDURES.

 A record of time worked is required for all hourly employees and also for salaried
workers if they are paid overtime. This is known as timekeeping.
 The objectives of timekeeping is to provide the necessary information that enable the
payroll department
– to calculate and prepare the payroll
– to be used by the cost accounting department to charge direct labour costs to jobs,
processes, products, and indirect labour costs to overheads.

 TIME RECORDING
– Timekeeping is also known as time recording.
– Time recording will help to provide a record of time spent in a factory. It is also a
form of attendance record.
– The most common method used is punch card/clock cards. This scheme is widely
used and easy to operate.
– Each worker is given a punch card/ clock card and is required to clock in and
clock out daily.
– A security guard or more specifically a time keeper will be assigned to be in a
charge of time recording clock to ensure the workers do not help to stamp each
others card.

 TIME BOOKING
– Time booking is a form of timekeeping to record the time spent on a job or
operation in the factory.
– This information should be able to be reconciled with the time recorded in the
punch card/clock card.

METHODS OF REMUNERATION

 Remuneration is the reward for labour and service. There are two main categories of
remuneration i.e. time based scheme and output based or incentive scheme.
 The time based scheme is adopting a method of payment based on time which is based on
per hour, per day, per week or per month basis.
 There are two time based schemes. One is called Basic Scheme and the other is called
High Day Rate Scheme.

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Basic Scheme
 Using this scheme, earnings are calculated based on the number of hours spent at his/her
place of work. Thus,
 Gross Wages = Hours Worked x Rate Per Hour
Basic wages = Normal working hours X Rate per normal working hours
 If he works more than Basic Working Hours, additional hours are considered as overtime.
Overtime Hours = Hours Worked - Normal Working Hours
Overtime paid = Overtime Hours x Rate Per Overtime Hour
 Overtime hours are usually paid at a higher rate, example, 1 1/4 times, 1 1/2 times or 2
times higher.

Comprehensive Example:

Information below relates to Aidil, Adha and Fitri for a week.

Aidil Adha Fitri

Hours worked 40 hours 45 hours 37 hours
Rate/hour RM3.00 RM5.00 RM4.00
Normal working hours 38 hours 45 hours 40 hours

Required:

Calculate the gross wages that will be received by each employees if they were paid on hourly
rate. Overtime is paid at a premium of 20% on hourly rate.

Employees Normal wages Overtime hour Overtime paid Gross Wages

Aidil

Adha

Fitri

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Advantages and Disadvantages of Basic Scheme

 Advantages of Basic Scheme

a) It is widely used, simple to operate, and not much clerical work involved.
b) Easy for employees to understand.
c) Quality of work is higher because no hurry to complete the job.
d) Regular and stable income provides security.

 Disadvantages of Basic Scheme

a) There is no financial incentive to increase production. A worker may try to slow
down production to increase his wages by completing the job during overtime.
b) Efficient and inefficient workers are paid the same.
c) Dissatisfaction may arise among the efficient workers, it may result in high labour
turnover of good workers.
d) Constant supervision is necessary since there is no incentive to increase production.

High Day Rate Scheme

 The High Day Rate Scheme is designed to provide a strong incentive to good workers
by paying rates well above the normal rate.
 The high wage rate is offered in return of high standard of performance and output.
 the wage costs may increase but the increased productivity will help to reduce the
labour cost and the overheads cost per unit produced.

 Advantages of High Day Rate Scheme

 Simple to operate and administer.
 Able to attract higher grade workers.

 Dissatisfaction among good workers is likely to reduce.

 Disadvantages of High Day Rate Scheme
 High output and high quality is difficult to achieve and maintain.

OUTPUT BASED OR INCENTIVE SCHEME FOR INDIVIDUALS

 An Output Based or Incentive Scheme is an incentive scheme which relates payment to

output i.e. the more the workers can produced the more they will be paid.
 It promotes efficiency and has a motivational force.
 Both the employees and employer benefit from a well-constructed incentive wage plan;
the employee through increased earnings and the employer through lowered unit costs.

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INCENTIVE SCHEME

 Some desirable characteristics of an incentive scheme are:

 The standards of performance should be achievable
 The scheme should only be implemented if it has been fully discussed, understood
and accepted by the employee
 Remuneration should be made immediately after the task is completed
 The standard set should not be changed too often

Advantages & Disadvantages of individual incentive scheme

 Advantages of individual incentive scheme

a) increase production helps to reduce overheads per unit cost
b) helps to improve morale because effort is rewarded
c) helps to attract more efficient workers because of the opportunity to earn higher wage.

 Disadvantages of individual incentive scheme

a) problem in setting the achievable standards that can satisfy the employees.
b) some schemes can be difficult to administer and may not be cost-effective after all in
terms of time spent on recording.

Straight Piece Rate

 There are three output based or incentive schemes namely, straight piece rate, piece rate
with guaranteed minimum and differential piece rate.
 Straight Piece Rate - using this scheme, earnings are related to effort and varies with the
rate of production. Thus,
Gross wages = Number of Units Produced x Rate Per Unit

Comprehensive example:

Below are the data for the four employees of a company in the month of February:
All four employess are paid based on output.

Unit Produced Unit Rejected

Employee Type Product A Product B Product A Product B
Alya Skilled 270 130 3 7
Afiqah Unskilled 250 110 9 5
Allen Skilled 200 300 12 3
Aiman Unskilled 120 210 13 9

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Additional information:
Rate for good unit is RM7 for product A and RM5 for product B

Required:
Calculate wages paid for each employee for the month of February.
Employee Product A Product B Gross Wages
Alya

Afiqah

Allen

Aiman

Advantages & Disadvantages of Straight Piece Rate

 Advantages of Straight Piece Rate

a) Wage calculations are simple and easy to understand
b) Since effort is rewarded there is a strong incentive to increase output
c) High production rates result in reduced overhead cost per unit

 Disadvantages of Straight Piece Rate

a) Quality may suffer and eventually increases production costs
b) Trainees and inexperienced workers are penalized if this scheme is applied to them
c) No minimum wages. Thus if a worker falls ill which results in low production, his
wages may be dropped to a low level.

Piece Rate with Guaranteed Minimum

 Piece Rate with Guaranteed Minimum

 Piece Rate with Guaranteed Minimum provides security for: employees receiving low
wages due to sickness, delays, machine breakdowns, tool breakage, shortages etc.
 It is impossible for the employees to earn their pay when these problems recur.
 In this payment scheme, a minimum wage is determined first.
 It is normally based on the basic scheme.

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Differential Piece Rate

 At a higher production level, the incentive effect will decline. The Differential Piece Rate
method seeks to overcome this problem of “inverse labour supply curve”. This is
especially true when the income level of the employee is high.
 Differential Piece Rate method encourages workers to increase production further by
offering an increased rate per unit at different levels of production.

Comprehensive Example:
Given below are the results for week 1 of February:

Worker Category Output

Pandir Skilled 260

Luncai Semi - skilled 150
Tuah Semi - skilled 250
Badang Skilled 270
Calculate the wages for each workers if they are paid on differential piecework at the rate given
below:
Units produced per week Rate per unit
Up to 50 RM1.20
From 51 -100 RM1.50
From 101 -200 RM1.70
From 201 - 300 RM2.20

Worker Output Differential piecework Gross Wages

Pandir 260 50 units x RM1.20 = 60
50 units x RM1.50 = 75
RM437
100 units x RM1.70 = 170
60 units x RM2.20 = 132
Luncai 150

Tuah 250

Badang 270

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OUTPUT BASED OR INCENTIVE SCHEME FOR GROUP

 There are occasions where individual Incentive Schemes are not suitable and group
Incentive Schemes are likely to be more appropriate. This is especially true when:
a) production or performance is based on a group e.g. road surfacing
b) production is integrated and all directed towards the same end e.g. assembly line
c) production methods make it not feasible to measure individual performance.

Advantages & Disadvantages of group Incentive Schemes

 Advantages of group Incentive Schemes

a) encourage team spirit among members
b) easier to administer

 Disadvantages of group Incentive Schemes

a) less hardworking members may get the same bonus as others
b) may not get the same motivation as the individual scheme.

PAST EXAM QUESTIONS

Year Course Code Question no

OCT 2010 ACC116/ACC165/ACC270 Q3
APR 2010 ACC270 Q3
OCT 2009 ACC270 Q5
OCT2009 ACC165 Q2
APR 2009 ACC270 Q3
OCT 2008 ACC270 Q3
APR 2008 ACC165 Q1d
APR 2008 ACC270 Q3
OCT 2007 ACC270 Q3
APR2007 ACC270 Q2
APR2007 ACC165 Q4
OCT2006 ACC270 Q2
APR2006 ACC270 Q3