LABOUR CONTROL

Learning Objectives
Meaning of Labour and Labour cost
Specify procedures for controlling labor costs.
Distinguish between features and methods of
hourly rate and piece-rate plans.

Payroll accounting
Accounting for Special Cases

Types of Labour Cost

Direct Labour : Represents
labour costs that
are traceable to individual jobs or process
worked on during the period [touch labour]. Eg
wages of supervisor and workers directly
engaged in the production.

Indirect Labor
Costs are incurred for a variety of jobs

that are related to the production process,

but are not directly identifiable with the
individual jobs worked on during the
period.

Indirect labor costs are charged to

manufacturing overhead costs or factory

overheads

Idle Time
Idle Time is the difference between the time for
which payment is made and the actual time
worked.

It is the time during which the worker did not

engage himself in productive work

Idle time may arise out of normal or abnormal

situations and it is the situation that will tell
whether it is a normal idle time (unavoidable idle
time) or abnormal idle time (avoidable idle time).

Causes of Idle Time

Avoidable Causes

Unavoidable Causes

Avoidable Causes
Failure of Power Supply
Breakdown of Machinery
Non-Availability of Material
Strike
Lock-out
Natural Calamities

Unavoidable Causes
Setting-up Time
Movement from Gate to Production Floor
Movement from One Job to Another
Time to Take Instruction
Tea-Breaks
Personal Needs
Minor Accidents
Seasonality of Industry

Accounting Treatment Of
Idle Time
All cost relating to idle time will be treated as indirect
labour [Manufacturing overhead] cost.

For example, the normal weekly working hours of a worker

are 48 and he is paid at P8.00 per hour. If he remains idle
for 6 hours due to power failure, then the cost of 42 hours
would be treated as direct labour cost and the cost of 6
hours (idle time) would be treated as indirect labour cost
[included in manufacturing overhead cost]

Direct labour [42 hrs x P8.00]

Manufacturing OH [6 hrs x P8.00]
P384

P336
48

2. OVERTIME
OT is the extra compensation paid to an employee who
works beyond the normal period of time.

Within overtime pay, the Overtime premium is the

additional rate an employee earns for working more
than a regular daily shift [extra rate]

Over-Time
Work Carried on Beyond Normal Hours
Rate of Payment is increased
Should be Avoided
Normal Causes OT charged to the concerned Job
or Batch

Abnormal Causes OT-transferred to Costing Profit

and Loss account

Causes of Over-Time
Completion of a Rush Order
Meeting a sudden spurt in demand
Completion of a Delayed Work
Making up for Loss of Production due to
Accidents, Flood or Other Natural Calamities

Accounting Treatment of
Overtime
Overtime is paid at a higher rate than the normal rate,
say time-and-a-half, double rate.

Example, for normal rate of P50.00, time-and-half will be

an OT rate of P75, double rate will be an OT rate of P 100.

The excess paid over normal rate is called Overtime

premium.

For the P 75.00 / hour rate, OT Premium is P25.00, and

P50.00 is Direct labour

For the P 100.00 / hour rate, OT Premium is P50.00, and

P50.00 is Direct labour

OT Premium is part of Manufacturing

Overheads

Example
A worker normally works for 48 hours per week at P8.00 per hour. In a
particular week, if he works for 52 hours and company pays him P12.00
[a rate of time-and-a-half] for every hour worked in excess of 48 hours,
the allocation of the labour cost of the worker would be made as follows:
Direct labour [52 hrs x P 8.00]

P416.00

Manufacturing OH [ 4 hrs x P4.00]

16.00 [Overtime Premium]

P432.00

Or present thus:
Direct labour for normal time [48 hrs x P 8.00]
OT:

Direct labour for over time

P384.00

[4 hrs x P 8.00]

Manufacturing OH [ 4 hrs x P4.00]

32.00

16.00 [OT Premium]

P432.00

Fringe Benefits
Fringe benefits are benefits that employers provide to
employees in addition to normal salaries or wages.
Examples of fringe benefits are hospitalization,
insurance programs, retirement plans, paid holidays
and stock options etc.
Accounting Treatment: Most of the companies treat
labour fringe benefits as indirect labour and, therefore,
include them in manufacturing overhead costs.

Systems of Wage Payment

Time Rate
Piece Rate

Time Rate
Wages are paid for the Time spent on the
job

Output is irrelevant
Rate per Hour. Per Day, or per Month
Suitable when Quality of work is
important

Trade Unions prefer this method

Monthly Payment goes with other
allowances

Advantages of Time Rate

Simplicity
Easier Computation
Encourages Skill Development
Guaranteed Wages
Minimum Loss to Material and Equipmnets
Equality of Wages
Team Work
Cordial Relation among the Workers
Support of Trade Unions

Disadvantages of Time
Rate System
Abilities are not Differentiated
No Incentive for Hard Work
Requires Supervision
Dissatisfaction of Efficient Workers
Low Morale
No Punishment for Inefficiency
Labour Cost is not a variable cost under this
system

Calculation of Wages under

Time Rate System

Total Wages = TT X TR where TT = Time Taken

TR =
Time Rate

Piece Rate System

Rate per unit of output
Output decides the wages payable
A standard time is taken and the
standard output is determined

Time Wages for the standard

output determines the piece rate

Advantages of Piece Rate

System
Efficiency is recognised
Motivates the workers
Reduces labour cost per unit
Labour cost is variable
Computation of labour cost in advance is
easy

Lesser Supervision
Less Idle Time

Determination of Piece
Rate

Total Wages = Output X Piece

Rate

Disadvantages of Piece
Rate System
Quality suffers
Difficulty of Fixing the standard output and Piece
Rate

More scrap and Defective Work

Damage to Tools and Equipment
No Guaranteed Wages
Uncertainty in Income
Trade Unions Oppose the System

Payment of Net Earnings

Accounting department sends the payroll record to the
treasurers office.

The treasurers office is responsible for making the

payments to employees.

Example: Suppose that in a given month the following

labour-related costs were incurred;

Total gross wages on time worked : P 100 000

[of which DL is P 75 000, P 25 000 is Ind. L.]

Summary of Entries
[Recording Wages]
Dr Wages Control / Payable Account
Cr Cash / bank

P 100 000

P 100 000

[Allocation of Gross Wages ]

Dr Work in Progress Control

P 75 000

Dr Factory Overhead Control

Cr Wages Control / Payable Account

25 000

P 100 000

THANK YOU