Employee Cost and Direct Expenses PDF

Employee Cost and 3 Direct Expenses CHAPTER Labour Cost The term labour refers to all human resources of the organization It may include workers, employees, staff, salesmen etc. The compensation paid to...

Employee Cost and 3 Direct Expenses CHAPTER Labour Cost The term labour refers to all human resources of the organization It may include workers, employees, staff, salesmen etc. The compensation paid to all labour is known as labour cost It can be either in monetary terms or non-monetary terms. Employee Cost It is wider term than labour cost. It includes wages, salary, bonus, incentive etc. paid to an employee and charged to a cost object as labour cost. In general, both labour cost and employee cost are used interchangeably. Direct Labour Labour which can be readily identified with a specific job, contract or work Cost order. Its cost is directly charged to the specific job or order and forms part of prime cost. It generally varies directly with the volume of output i.e. positive relation with output. Indirect Labour Labour which can’t be readily identified with a specific job, or order. Cost Its cost can’t be charged directly to specific job or order and is treated as part of overheads. It may or may not vary directly with the volume of output. Employee Cost The ultimate aim should be to keep the wages per unit of output as low as Control possible and this can be achieved by increasing efficiency. Factors for Correct assessment of manpower requirement Control of Control over time-keeping and time-booking Employee Cost Time and motion study Control over idle time and overtime Control over employee turnover Wages and incentive system Job evaluation and merit rating Employee productivity Department Personnel Department Related with Engineering and Works Department Employees Time-keeping Department Payroll Department Cost Accounting Department Personnel This department is related to recruitment, evaluation performance etc. of department employees Various departments provide their requirement of employees through employee requisition form based on which it searches the right candidate for that department. It ensures that person on job has the required qualification and skills for the job It ensures proper training for the workers whether new or existing. It maintains all records of personal and job related of all employees It also evaluates performance from time to time. Engineering It is responsible for preparation of plans and specifications of each job or and Work Study work. Department It provides training and guidance to employees through which they can perform their work in the better way. It supervises production activities It conducts motion and time studies It undertakes job analysis and also job evaluation. Time-keeping It is concerned with the maintenance of attendance records i.e. time Department keeping It records the time spent by an employee on various jobs i.e. time booking etc. Payroll It is responsible for preparation of payroll of the employees. Department It disburses salary and wages payment. Cost It is responsible for accumulation and classification of employee costs. Accounting It analyzes and allocate costs to various cost centers or cost objects. Department It classifies direct wages which are to be included in direct cost of goods or services It classifies indirect wages which are to be treated as indirect employee cost and thus becomes part of respective department overheads. It calculates the cost of idle time or the loss incurred It calculates the amount of abnormal loss or gain which is to be transferred to P&L Time Keeping It means recording the arrival and departure of each worker. or Attendance It is concerned with the attendance and wage calculation of the employees. Procedure It is a way is to record the total time spent by the workmen in a factory. This job is done by a job keeper. It includes time booked and lost or idle time. Objectives of Preparation of payroll time keeping Computation of labour cost including overtime etc. For ascertaining idle time For overhead distribution For disciplinary purpose 52 Cost and Management Accounting PW Various Manual Methods methods of (a) Attendance Register time book keeping  A register is kept to record the arrival and departure time  It is simple and suitable for small organizations (b) Metal Disc or Token Method  It is very old and obsolete in practice now.  Each employee is allotted metal disc or token bearing his identification number.  It is handed to the time keeper who record the token number in register. Automated or Mechanical Methods (a) Punch Card Attendance  A punch card contains data related to employee in digital format.  An employee either insert or wave card to a card reader which records the time in and time out of the employee.  This system does not require time keeper and minimize risk of error and manipulation. (b) Bio-metric Attendance  In this system, attendance is marked on the basis of physical and behavioral traits of an employee e.g. finger print, eye retina, face etc.  It reduces the risk of time manipulation and proxy attendance.  It is costly thus not suitable for small organizations. Requisite of System should not allow proxy under any circumstances a Good Time System should be able to record time of piece employees Keeping System Both arrival and departure time should be recorded by system System should be mechanical to reduce chances of manipulation Late comers should record late arrivals System should be simple, smooth and quick Time Booking It means analyzing, charging or booking the total time spent on various jobs, day-by-day and person-by-person. It refers to method wherein each activity of an employee is recorded. For example, if a worker spends 8 hours in a day, the total time may be further analyzed as 3 hours on Job A, 2 hours or Job B, 4 hours on Job C and 1 hour normal idle time due to lunch etc. Uses of Time It is used to compute the cost of the job or activity based on the time spend on Booking that job or activity. It helps to measure the efficiency of employees by comparing the actual time taken by an employee with the standard time that should have been taken. It helps to analyze variance in time taken and thereby fixing responsibility for the same. Employee Cost and Direct Expenses 53 Methods of It can be done through preparing Job Card. time booking Job card can be of two types: (a) Analysis of time with reference to job  A separate job card is maintained for each job.  It records the total time spend on that job or operation.  It helps to compute employee cost of that job quickly (b) Job card with reference to employee  It keeps records of time spent by an employee in the organization including the idle time  It helps in reconciliation of employee’s job time with attendance time Payroll Steps involved in payroll procedure are as follows: Procedure Attendance and time details List of employees and other details Computation of wage and other incentive Payment to employees Deposit of statutory liabilities Idle Time It is the time during which workers remain idle i.e. no production is carried out. The employer has to pay for this time though he doesn’t derive any benefit of it. In other words, it is the difference between the time for which workers are paid and the time they actually spend on production or jobs. Normal idle It is the almost unavoidable time and employer has to bear its cost. time Causes - going from one job to other, personal needs and tea breaks etc. Treatment  It is treated as a part of cost of production.  In case of direct workers normal idle time is considered while setting standard hours or standard rate.  In case of indirect workers, normal idle time is considered for the computation of overhead rate. Abnormal idle It is avoidable in nature. time Causes – due to strike, machine breakdown, power failure etc. Treatment  It may be treated as a loss and charged to Costing P&L Account.  It should be further analyzed into controllable and uncontrollable  Controllable abnormal time refers to the time that could have been saved had the management been more alert and efficient.  Uncontrollable abnormal time refers to time lost over which management does not have any control. Overtime It the work done beyond normal working hours. Overtime payment consists of two elements i.e. normal wages for overtime work and premium payment for overtime work. Overtime payment = Wages paid for overtime at normal rate + Premium for overtime 54 Cost and Management Accounting PW Overtime It is the extra amount of wages paid over the normal rate. Premium According to Factories Act of 1948, a worker is entitled for overtime at double the rate of his wages if he works more than 9 hours in a day or more than 48 hours in a week. Treatment If it is restored at the desire of the customer, then the entire amount of overtime of overtime should be charged to the job directly. premium If it is due to a general pressure of work to increase the output, the premium as well as overtime wages may be charged general overheads. If it is due to the negligence or delay of workers of a particular department, it may be charged to the concerned department. If it is due to abnormal reasons, it may be charged to costing profit and loss account. Time rate wage In this system, a worker is paid at a fixed rate per hour or per day or per system month for the time devoted by him irrespective of the volume of production during that time. The time rate may be fixed with reference to rate prevailing in the industry for similar work but should not be less than the minimum wages fixed under the Minimum Wages Act or any other Act for the time being in force. Wages = Actual time devoted × Time rate Advantages of It is easy to understand and simple to operate time wage rate It provides guaranteed time wages to workers system Workers concentrate on the quality rather than the quantity of job. There is reduced damage or rough handling of machines, tools and equipments due to slow and steady pace of the workers. Disadvantages It does not act as an incentive to workers. of time wage It tends to increase overhead cost and labour production cost per unit. rate system There develops a tendency to go slow during the normal working hours in the hope of getting overtime wages. High degree of supervision is required to secure a fair day’s work. Output Based Under this system, a worker is paid at a fixed rate per unit produced or job or Piece rate completed. wage system In this system, time spent on job is not considered for calculating wages. Wages = Number of units produced × Price rate per unit Advantages of It is easy to understand and simple to operate piece rate wage It acts as an incentive to workers to produce more and earn more. system It tends to reduce overhead cost and labour cost per unit because of high production. It eliminates the tendency of workers to go slow as remuneration is directly linked with performance. Low degree of supervision is required because the worker themselves take care of the time and output. It simplifies cost ascertainment because labour cost per unit is available in advance. Employee Cost and Direct Expenses 55 Disadvantages It does not guarantee time wage to workers and hence workers feel insecure. of piece rate Workers tend to increase the quantity ignoring the quality thereof. wage system There may be excessive damage to machines, tools and equipment and excessive wastage of materials due to speedy pace of workers. The calculation of piece rate is more difficult than time rate. It is usually opposed by trade unions and workers. It is detrimental to the long term health and working efficiency of the workers. It is not suitable for setting up group incentive plans. Halsey This plan was introduced by F.A. Halsey, an American engineer. Premium Plan In this plan, standard time is fixed for a job and it guarantees the hourly wages to workers for the actual time taken. Bonus is paid equal to wages of 50% of the time saved. If the actual time taken is less than the standard time, the worker becomes eligible for bonus. Total Earnings = (H × R) + [50% × (S – H) × R] Halsey Weir Under this method, there is only one difference as compared to the Halsey Plan Plan and that is instead of 50% bonus for the time saved, it is 33.33 % of the time saved. Total Earnings = (H × R) + [33.33% × (S – H) × R] Advantages of It is easy to understand and simple to operate Halsey Method It guarantees the hourly wages to workers for the actual taken time It provides an incentive for an efficient worker who completes his work in less than the standard time It provides an incentive to the employer to provide better production facilities as he receives 50% share in savings achieved. Disadvantages It is difficult to fix standard time. of Halsey Incentive is not so strong as with piece rate system. Method The sharing principle may not be liked by employees. It does not give full protection to employer against wrong rate setting. Rowan Plan This premium bonus plan was introduced by Mr. James Rowan. Under this system, a standard time allowance is fixed for the performance of a job and bonus is paid if time is saved. Bonus is that proportion of time wages as time saved bears to the standard time. S H Total Earnings = (H × R) + ×H ×R S Advantages of It guarantees the hourly wages to workers for the actual time taken. Rowan Plan It provides more incentive to moderately efficient workers who save time. It provides an incentive to the employer to provide better production facilities as he receives a large share in savings achieved. The sharing principle appeals to the employer as being equitable. 56 Cost and Management Accounting PW Disadvantages It is difficult to understand and complex to operate of Rowan Plan It is difficult to fix standard time It does not provide adequate incentive for a very efficient worker who saves time more than 50% of the standard time. The sharing principle is not generally welcomed by employees. Absorption For direct workers, rate per hour can be used to charge cost to jobs or units. Rate of Total Estimated Cost monetary & non–monetary Employee Cost Rate per hour = Effective Employee Hours Effective employee hours = Total Hours – Normal idle time Efficiency Efficiency is related with performance of employee Rating Time allowed as per standard Efficiency in = ×100 Procedures Time taken If the time taken by a worker equals or less than the standard time then he is rated efficient. Procedure Determining standard time or performance standards for Efficiency Measuring actual performance of workers Rating Computation of efficiency rating Need for Efficiency is directly related with payment of the employee Efficiency Efficiency helps in determining manpower requirements Rating Employee It is determined by the input-output ratio Productivity Standard time Productivity = Actual time It can be improved by reducing the input for a certain quantity or value of output or by increasing the output from the same given quantity of input. Factors for Employing the worker who possess right type of skill Increasing Placing right type of person to a right job Employee Training young and old workers by providing them the right types of Productivity opportunities Taking appropriate measures to avoid the situation of excess or shortage of employees Carrying out work study for fixation of wages and for the simplification and standardization of work. Labour It is the rate of change it the labour force of an organization during a specified Turnover period. This rate of change is compared with a suitable index which acts as there meter to ascertain its reasonableness. Employee Cost and Direct Expenses 57 Methods for Separation Method calculation  Under this method, labour turnover is computed on the basis of of Labour separations from the organization during a period. Turnover No. of Seperations  Labour Turnover Rate = × 100 Average No. of workers Replacement Method  Under this method, labour turnover is computed on the basis of replacements in the organization during a period. No. of Replacements  Labour Turnover Rate = × 100 Average No. of workers Flux Method  Under this method, labour turnover is computed on the basis of both separations and replacement from the organization during a period. No. of Seperations + No. of Replacements  Labour Turnover Rate = ×100 Average No. of workers No. of Seperations + No. of Joinee  Labour Turnover Rate = × 100 Average No. of worker Causes of Personal causes Labour  Change of job for betterment Turnover  Premature retirement due to ill health or old age  Domestic problems and family responsibility Avoidable causes  Low wages  Bad working conditions  Dissatisfaction with the job s  Lack of training facilities leading to the stagnation Unavoidable causes  Seasonal nature of the business  Change in plant location  Disability, making a worker unfit for work  Disciplinary measures  Shortage of raw material, power, slack market for the product etc. Effects of Increased costs of selection of new workers and their training High Labour Increase in scrap, wastes, etc. Turnover Increase in cost of supervision. Time lost between turnover and new recruitment. Efficiency of new workers is low Loss of output Reduction in sales 58 Cost and Management Accounting PW Cost of Labour Preventive Costs Turnover  These cost are incurred to prevent the labour from leaving the job.  These costs are incurred in the form of giving more and more benefits and incentives to workers like free medical facilities, transport facilities, rent free housing etc. Replacement Costs  These costs are incurred after workers have left the company.  Examples, cost of advertising the post, cost of recruitment and selection of workers, loss of production due to the delay in appointing new workers etc. Steps to Interview with each outgoing employees, to ascertain the reasons of his Minimize leaving the job. Labour Before recruiting workers, job analysis and evaluation may be carried out to Turnover ascertain the requirement of each job. Scientific system of recruitment, selection, placement and promotion should be used. The management should take the steps for creating a healthy working atmosphere. Use of committee to handle issues like control over workers, handling their grievances etc. Casual These are employed temporarily for a short duration to cope up with sudden Workers increase in volume of work. (Badli These are generally engaged on daily basis and are paid either at the end of Workers) the day or after a periodic interval. Wages paid are charged as direct or indirect labour cost depending on their identifiability. Outdoor These are the workers who don’t carry their work in factory premises. Workers Generally they carry out assigned work in their homes or a site outside the factory. Reconciliation of material issued from stores with the output should be prepared to avoid losses. Completion of output during the stipulated time should be ensured to meet the orders. Set-up Time It is the time incurred before the actual production of goods by machine or labour. It may be due to changes from one job to another or because of break-downs etc. It is also called as ‘Making machines ready time’. Treatment  Normal setting-up time – It is spread over jobs actually completed by inflating the rate.  Abnormal setting-up time – It is considered as loss & charged to Costing P&L Account. Employee Cost and Direct Expenses 59 Direct Expenses other than direct material cost and direct employee cost, which are Expenses incurred to manufacture a product or provision of service and can be directly traced in an economically feasible manner to a cost object. These form part of the prime cost. For example:  Royalty paid or payable for production or provision of service  Hire charges paid for hiring specific equipment  Cost for product/service specific design or drawing  Cost of product/service specific software  Other expenses which are directly related with the production of goods or provision of service Measurement These are measured at invoice price net of rebate or discount and includes of Direct duties and taxes (for which input credit is not available). Expenses In case of job work or sub-contracting, these are measured at agreed price. In case if principal supplies some materials to job worker, the value of such material and other identical expenses are added with the job charges paid to the job workers. PRACTICE QUESTIONS 1. The following information relates to the personnel Department of a factory for the month of September: Number of workers on September 1950 Number of workers on September 30 1,050 Number of workers who quit the factory in September 10 Number of workers discharged in September 30 Number of workers engaged in September (including 120 on account of expansion scheme) 140 Calculate the labour turnover rate and equivalent annual rate under the different methods. Ans. Separation – 4%, 48.67%; Replacement – 2%, 24.33%; Flux – 18%, 219%. 2. The cost accountant of SK Ltd. has computed labour turnover rates for the quarter ending 31st March as 10%, 5% and 3% respectively under ‘Flux Method’, ‘Replacement Method’ and ‘Separation Method’. If the number of workers replaced during the quarter is 30, find out the number of: [SM] (a) workers recruited and joined; and (b) workers left and discharged (c) equivalent employee turnover rates for the year Ans. (a) 42; (b) 18; (c) Separation – 12%; Replacement – 20%; Flux = 40%. 60 Cost and Management Accounting PW  3. The management of SK Ltd. is worried about their increasing employee turnover in the factory and before analyzing the causes and taking remedial steps; it wants to have an idea of the profit foregone as a result of employee turnover in the last year. [SM] Last year sales accounted to `83,03,300 and the P/V Ratio was 20%. The total number of actual hours worked by the direct labour force was 4.45 lakhs. The actual direct labour hours included 30,000 hours attributable to training new recruits, out of which half of the hours were unproductive. As a result of the delays by the Personnel Department in filling vacancies due to labour turnover, 1,00,000 potentially productive hours (excluding unproductive training hours) were lost. The cost incurred consequent on labour turnover revealed, on analysis, the following: Settlement Cost due to leaving `43,820 Recruitment Costs `26,740 Selection Costs `12,750 Training Costs `30,490 Assuming that the potential production lost due to labour turnover could have been sold at prevailing prices, find the profit/loss foregone last year on account of labour turnover. Ans. `5,57,930. 4. SK Ltd. is engaged in BPO industry. One of its trainee executives in the Personnel department has calculated labour turnover rate 24.92% for the last year using Flux method. Following is the data provided by the Personnel department for the last year: [MTP – Nov 2018] Employees At the beginning Joined Left At the end Data processor 540 1,080 60 1,560 Payroll Processors ? 20 60 40 Supervisors ? 60 — ? Voice Agents ? 20 20 ? Assistant Managers ? 20 — 30 Senior Voice Agents 4 — — 12 Senior Data 8 — — 34 Processors Team Leaders ? — — ? Employees transferred from the Subsidiary Company Senior Voice Agents — 8 — — Senior Data Processors — 26 — — Employees transferred to the Subsidiary Company Team Leaders — — 60 — Assistant Managers — — 10 — At the beginning of the year there were total 772 employees on the payroll of the company. The opening strength of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 : 3 : 2. Employee Cost and Direct Expenses 61  The company has decided to abandon the post of Team Leaders and consequently all the Team Leaders were transferred to the subsidiary company. The company and its subsidiary are maintaining separate set of books of account and separate Personnel Department. You are required to calculate: (a) Labour Turnover rate using Replacement method and Separation method. (b) Verify the Labour turnover rate calculated under Flux method by the trainee executive of the SK Ltd. Ans. (a) Replacement – 8.57%; Separation – 16.36%; (b) Flux = 112.46%. 5. In a factory working six days in a week and eight hours each day, a worker is paid at the rate of `100 per day basic plus D.A. @120% of basic. He is allowed to take 30 minutes off during his hours shift for meals-break and a 10 minutes recess for rest. During a week, his card showed that his time was chargeable to: [SM] Job X 15 hrs. Job Y 12 hrs. Job Z 13 hrs. The time not booked was wasted while waiting for a job. In cost accounting, state how would you allocate the wages of the workers for the week? Ans. X = `450; Y = `360; Z = `390; P&L = `120. 6. Mr. S an employee of SK Co., gets the following emoluments and benefits: [SM] (a) Basic pay `10,000 p.m. (b) Dearness allowance `2,000 p.m. (c) Bonus 20% of salary and D.A. (d) Other allowances `2,500 p.m. (e) Employer’s contribution to P.F. 10% of salary and D.A. Mr. S works for 2,400 hours per annum, out of which 400 hours are non-productive and treated as normal idle time. You are required to compute the effective hourly cost of employee Mr. S. Ans. `108.60. 7. A worker is paid `10,000 per month and a dearness allowance of `2,000 p.m. Worker contribution to provident fund is 10% and employer also contributes the same amount as the employee. The employees state insurance corporation premium is 6.5% of wages of which 1.75% is paid by the employees. It is the firm’s practice to pay 2 months’ wages as bonus each year. [SM] The number of working days in a year are 300 of 8 hours each. Out of these the worker is entitled to 15 days leave on full pay. Calculate the wage rate per hour for costing purposes. Ans. `83. 62 Cost and Management Accounting PW  8. It is seen from the job card for repair of the customer’s equipment that a total of 154 labour hours have been put in as detailed below: [SM] Worker ‘S’ paid at Worker ‘K’ paid at Worker ‘M’ paid at `200 per day of 8 `100 per day of 8 `300 per day of 8 hours hours hours Monday (hours) 10.5 8.0 10.5 Tuesday (hours) 8.0 8.0 8.0 Wednesday (hours) 10.5 8.0 10.5 Thursday (hours) 9.5 8.0 9.5 Friday (hours) 10.5 8.0 10.5 Saturday (hours) - 8.0 8.0 Total (hours) 49.0 48.0 57.0 In terms of an award in a labour conciliation, the workers are to be paid dearness allowance on the basis of cost of living index figures relating to each month which works out @ `968 for the relevant month. The dearness allowance is payable to all workers irrespective of wages rate if they are present or are on leave with wages on all working days. Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 4 hours on Saturdays; the workers are however paid full wages for Saturday (8 hours for 4 hours worked). Workers are paid overtime twice of ordinary wage rate if a worker works for more than 9 hours a day or 48 hours in a week. Excluding holidays the total number of hours works out of 176 in the relevant month. The company’s contribution to Provident Fund and Employees State Insurance Premium are absorbed into overheads. Work out the wages payable to each worker. Ans. Worker S = `16,47; Worker K = `864; Worker M = `2,838. 9. SK Ltd. Pays the following to a skilled worker engaged in production works. The following are the employee benefits paid to the employee: [RTP – Nov 2020] (a) Basic salary per day `1,000 (b) Dearness Allowance (DA) 20% of basic salary (c) House rent allowance 16% of basic salary (d) Transport allowance `50 per day of actual work (e) Overtime Twice the hourly rate (considers basic and DA), only if works more than 9 hours a day otherwise no overtime allowance. If works for more than 9 hours a day then overtime is considered after 8th hour. (f) Work of holiday and Sunday Double of per day basic rate provided works atleast 4 hours. The holiday and Sunday basic is eligible for all allowances and statutory deductions. Employee Cost and Direct Expenses 63  (g) Earned leave & Casual leave These are paid leave (h) Employer’s contribution to 12% of basic and DA Provident Fund (i) Employer’s contribution to 7% of basic and DA Pension fund The company normally works 8-hour a day and 26-day in a month. The company provides 30 minutes lunch break in between. During the month of August 2020, Mr. P works for 23 days including 15th August and a Sunday and applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours respectively without lunch break. On 5th and 13th August, he worked for 10 and 9 hours respectively. During the month Mr. P worked for 100 hours on Job no. SK103. You are required to calculate: (i) Earnings per day (ii) Effective wages rate per hour of Mr. P (iii) Wages to be charged to Job no. SK103 Ans. (i) `1,638; (ii) `269.70; (iii) `26,970. 10. In a factory, the basic wage rate is `100 per hour and overtime rates are as follows: [SM] Before and after normal working hours : 175% of basic wage rate Sundays and holidays : 225% of basic wage rate During the previous year the following hours were worked : Normal hours : 1,00,000 hours Overtime before and after working hours : 20,000 hours Overtime on Sundays and holidays : 5,000 hours Total : 1,25,000 hours The following hours have been worked on job ‘S’ Normal : 1,000 hours Overtime before and after working hours : 100 hours Sundays and holidays : 25 hours Total : 1125 hours You are required to calculate the labour cost chargeable to job ‘S’ and overhead in each of the following instances: (a) Where overtime is worked regularly throughout the year as a policy due to the labour shortage (b) Where overtime is worked irregularly to meet the requirements of production. (c) Where overtime is worked at the request of the customer to expedite the job. Ans. (a) `1,31,625; (b) `1,12,500; (c) `1,23,125. 64 Cost and Management Accounting PW 11. Calculate the earnings of S and K from the following particulars for a month and calculate the labour cost to each job A, B and C. [SM, Similar Nov 2020] S K Basic Wages `10,000 `16,000 Dearness allowance 50% 50% Contribution of provident fund (on basis wages) 8% 8% Contribution of employee’s state insurance (on basic wages) 2% 2% Overtime (hours) 10 --- The normal working hours for the month are 200. Overtime is paid as double the total of normal wages and dearness allowance. Employer’s contribution to state insurance and provident fund are at equal rates of employee’s contribution. The two workers were employed on jobs A, B and C in the following properties: A B C Worker S 40% 30% 30% Worker K 50% 20% 30% Overtime was done on Job B. Ans. Net Wages S = `15,500; K = `22,400; Labour cost of A = `19,200; B = `11,420; C = `12,480. 12. Calculate the earnings of a worker under Halsey system and Rowan system. The relevant data is as below: [SM] Time rate (per hour) `60 Time allowed 8 hours Time taken 6 hours Time saved 2 hours Ans. Halsey = `420; Rowan = `450. 13. M/s SK Private Limited allotted a standard time of 40 hours for a job and the rate per hour is `75. The actual time taken by a worker is 30 hours. You are required to calculate the total earnings under the following plans: [May 2019] (i) Halsey Premium Plan (Rate 50%) (ii) Rowan Plan (iii) Time wage system (iv) Piece Rate System Ans. (i) `2,625; (ii) `2,813; (iii) `2,250; (iv) `3,000. 14. A skilled worker in SK Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a particular product is 4 hours. Mr. S, a machine man has been paid wages under the Rowan Incentive Plan and he had earned an effective hourly rate of `37.50 on the manufacture of that particular product. [SM] What could have been his total earnings and effective hourly rate, had he been put on Halsey Incentive Scheme (50%)? Ans. `105. Employee Cost and Direct Expenses 65 15. Two workmen, ‘S’ and “K’, produce the same product using the same material. Their normal wage rate is also the same. ‘S’ is paid bonus according to the Rowan system, while ‘K’ is paid bonus according to the Halsey system. The time allowed to make the product is 50 hours. ‘S’ takes 30 hours while ‘K’ takes 40 hours to complete the product. The factory overhead rate is `5 per man-hour actually worked. The factory cost for the product for ‘S’ is `3,490 and ‘K’ it is `3,600. Required: [SM, Similar Nov 2019] (a) Compute the normal rate of wages (b) Compute the cost of materials cost (c) Prepare a statement comparing the factory cost of the products as made by the two workmen. Ans. (a) `20; (b) `2,500. 16. Mr. S is working by employing 10 skilled workers. He is considering the introduction of some incentive scheme - either Halsey Scheme (with 50% bonus) or Rowan Scheme - of wage payment for increasing the labour productivity to cope with the increased demand for the product by 25%. He feels that if the proposed incentive scheme could bring about an average 20% increase over the present earnings of the workers, it could act as sufficient incentive for them to produce more and he has accordingly given this assurance to the workers. [SM, Similar Jan 2021] As a result of this assurance, the increase in productivity has been observed as revealed by the following figures for the current month: Hourly rate of wages (guaranteed) `40.00 Average time for producing 1 piece by one worker at the previous performance 2 hours (This may be taken as time allowed) No. of working day in the month 25 No. of working hours per day for each worker 8 Actual production during the month 1,250 units Required: (a) Calculate effective rate of earnings per hour under Halsey Scheme and Rowan Scheme. (b) Calculate the savings to Mr. S in terms of direct labour cost per piece under the above schemes. (c) Advice Mr. S about the selection of the scheme to fulfill his assurance. Ans. (a) Halsey = `45; Rowan = `48; (b) Halsey = `8; Rowan = `3.20; (c) Rowan. 17. Wage negotiations are going on with the recognized employees’ union and the management wants you as an executive of the company to formulate an incentive scheme with a view to increase productivity. [SM] The case of three typical workers A, B and C who produce respectively 180, 120 and 100 units of the company’s product in a normal day of 8 hours is taken up for study. Assuming that day wages would be guaranteed at `75 per hour and the piece rate would be based on a standard hourly output of 10 units, calculate the earnings of each of the three workers and the employee cost per 100 pieces under (i) Day wage, (ii) Piece rate, (iii) Halsey scheme and (iv) Rowan scheme. 66 Cost and Management Accounting PW  Also calculate under the above schemes the average cost of labour for the company to produce 100 pieces. Ans. (i) `333.33; `500; `600; `450; (ii) `750; `750; `750; `750; (iii) `541.67; `625; `675; `600; (iv) `518.33; `666.67; `720; `613.25. 18. SK Ltd. is an engineering manufacturing company producing job order on the basis of specification given by the customers. During the last month it has completed three jo works namely A, B and C. The following are the items of expenditures which are incurred apart from direct materials and direct employee cost: [SM] (i) Office and administration cost - `3,00,000 (ii) Product blueprint cost for job A - `1,40,000 (iii) Hire charges paid for machinery used for job work B - `40,000 (iv) Salary to office attendants - `50,000 (v) One time license fee paid for software used to make computerized graphics for Job C - `50,000 (vi) Salary paid to marketing manager - `1,20,000. Required to calculate direct expenses attributable to each job. Ans. `1,40,000; `40,000; `50,000. PRACTICE QUESTIONS 19. From the following information, calculate employee turnover rate using – (a) Separation Method, (b) Replacement Method, (c) New Recruitment Method, and (d) Flux Method: [RTP – May 2020] No. of workers as on 01.04.2020 = 3,600 No. of workers as on 31.03.2021 = 3,790 During the year, 40 workers left while 120 workers were discharged. 350 workers were recruited during the year, of these 150 workers were recruited because of exists and the rest were recruited in accordance with expansion plans. Ans. (a) 4.33%; (b) 4.06%; (c) 5.41%; (d) 13.80%. 20. The information regarding number of employees on roll in a shopping mall for the month of December 2017 are given below: [ May – 2018] Number of employees as on 01-12-2017 900 Number of employees as on 31-12-2017 1100 During December, 2017, 40 employees resigned and 60 employees were discharged. 300 employees were recruited during the month. Out of these 300 employees, 225 employees were recruited for an expansion project for the mall and rest were recruited due to exit of employees. Assuming 365 days in a year, calculate Employee Turnover Rate and Equivalent Annual Employee Turnover Rate by applying the following: Employee Cost and Direct Expenses 67  (i) Replacement Method (ii) Separation Method (iii) Flux Method Ans. (i) 7.5%, 88.31%; (ii) 10%, 117.74%; (iii) 40%, 470.97%. 21. Following information is given of a newly setup organization for the year ended on 31st March, 2021: [July 2021] Number of workers replaced during the period 50 Number of workers left and discharged during the period 25 Average number of workers on the roll during the period 500 You are required to: (i) Compute the employee turnover ratios using Separation Method and Flux Method. (ii) Equivalent employee Turnover Rates for (i) above, given that for the organization was setup on 31st January, 2021. Ans. (i) 5%; 15%; (ii) 30%; 90%. 22. PQR Limited has replaced 72 workers during the quarter ended 31st March, 2022. The labour rates for the quarter are as follows: [May 2022] Flux Method 16% Replacement Method 8% Separation Method 5% You are required to ascertain: (i) Average number of workers on roll (for the quarter), (ii) Number of workers left and discharged during the quarter, (iii) Number of workers recruited and joined during the quarter, (iv) Equivalent employee turnover rates for the year. Ans. (i) 900; (ii) 45; (iii) 99; (iv) 64%; 32%; 20%. 23. The rate of change of labour force in a company during the year ending 31st March, 2013 was calculated as 13%, 8% and 5% respectively under ‘Flux Method’, ‘Replacement Method’ and ‘Separation Method’. The number of workers separated during the year is 40. You are required to calculate: (a) Average number of workers on roll (b) Number of workers replaced during the year (c) Number of new accessions i.e. new recruitment (d) Number of workers at the beginning of the year Ans. (a) 800; (b) 64; (c) 64; (d) 788. 68 Cost and Management Accounting PW 24. SK Ltd. wants to ascertain the profit lost during the year 2020-21 due to increased labour turnover. For this purpose, they have given you the following information: [RTP – May 2018] (1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60% of the experienced workers. Time required by an experienced worker is 10 hours per unit. (2) 20 of the output during training period was defective. Cost of rectification of a defective unit was `25. (3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours. (4) Selling price per unit is `180 and P/V ratio is 20%. (5) Settlement cost of the workers leaving the organization was `1,83,480. (6) Recruitment cost was `1,56,340 (7) Training cost was `1,13,180 You are required to calculate the profit lost by the company due to increased labour turnover during the year 2020-21. Ans. `9,00,000. 25. Calculate the employee hour rate of a worker S from the following data: [SM] Basic pay `10,000 p.m. D.A. `3,000 p.m. Fringe benefits `1,000 p.m. Number of working days in a year 300. 20 days are availed off as holidays on full pay in a year. Assume a day of 8 hours. Ans. `75. 26. Following data have been extracted from the books of M/s ABC Private Limited: [Nov – 2018] Salary (each employee, per month) `30,000 Bonus 25% of salary Employer’s contribution to PF, ESI etc. 15% of salary Total cost at employees’ welfare activities `6,61,500 per annum Total leave permitted during the year 30 days Number of employees 175 Normal idle time 70 hours per annum Abnormal idle time (due to failure of power supply) 50 hours Working days per annum 310 days of 8 hours You are required to calculate: (1) Annual cost of each employee (2) Employee cost per hour (3) Cost of abnormal idle time, per employee Ans. (1) `5,07,780; (2) `234; (3) `11,700. Employee Cost and Direct Expenses 69 27. A total of 108 labour hours have been put in a particular job card for repair work engaging a semi-skilled and skilled labour (Mr. Deep and Mr. Sam respectively). [RTP – May 2022] The hours devoted by both the workers individually on daily basis for this particular job are given below: Monday Tuesday Wednesday Thursday Friday 10.5 8.0 10.5 9.5 10.5 The skilled labour also worked on Saturday for 10 hours. Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 5 hours on Saturdays; the workers are however paid full wages for Saturday (8 hours for 5 hours worked). Semi-skilled and skilled worker is paid ordinary wage @`400 and `600 respectively per day of 8 hours labour. Further, the workers are also paid dearness allowance @20%. Extra hours worked over and above 8 hours are also paid at ordinary wage rate however, overtime premium of 100% of ordinary wage rate is paid if a worker works for more than 9 hours in a day and 48 hours in a week. You are required to compute the wages payable to Mr. Deep (semi-skilled) and Mr. Sam (skilled). Ans. Deep = `3,240; Sam = `5,850. 28. A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours His wage rate is `5 per hour. Following additional information are also available: [May 2018] Material cost of work `50 Factory overheads 100% of wages Calculate the factory cost of work under the following methods of wage payments: (i) Rowan Plan (ii) Halsey Plan Ans. (i) `237.50; (ii) `225. 29. A skilled worker in PK Ltd. is paid a guaranteed wage rate of `15.00 per hour in a 48-hour week. The standard time to produce a unit is 18 minutes. During a week, a skilled worker – Mr. ‘A’ has produced 200 units of the product. The company has taken a drive for cost reduction and wants to reduce its labour cost. [Nov 2022] You are required to: (i) Calculate wages of Mr. ‘A’ under each of the following methods: (a) Time rate (b) Piece rate with a guaranteed weekly wage (c) Halsey Premium plan (d) Rowan Premium Plan (ii) Suggest which bonus plan i.e. Halsey Premium plan or Rowan Premium Plan the company should follow. Ans. (i) (a) `720; (b) `900; (c) `810; (d) `864; (ii) Halsey plan. 70 Cost and Management Accounting PW 30. SMC Company Limited is producing a particular design of toys under the following existing incentive system: [May 2023] Normal working hours in the week 48 hours Late shift hours in the week 12 hours Rate of payment Normal working: `150 per hour Late shift: `300 per hour Average output per operatior for 60 hours per week (including late shift hours): 80 toys The company’s management has now decided to implement a system of labour cost payment with either the Rowan Premium plan or the Halsey Premium Plan in order to increase output, eliminate late shift overtime and reduce the labour cost. The following information is obtained: The standard time allotted for ten toys is seven and half hours Time rate: `150 per hour (as usual). Assuming that the operator works for 48 hours in a week and produces 100 toys, you are required to calculate the weekly earnings for one operator under: (i) The existing time rate (ii) Rowan premium plan (iii) Halsey premium plan (50%) Ans. (i) `10,800; (ii) `9,792; (iii) `9,225. 31. A skilled worker is paid a guaranteed wage rate of `150 per hour. The standard time allowed for a job is 10 hours. He took 8 hours to complete the job. He has been paid the wages under Rowan Incentive Plan. [Dec 2021] You are required to: (i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan. (ii) Calculate the time in which he should complete the job, if the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of earnings. Ans. (i) `180; (ii) 7.14 hours. 32. A job can be executed either through workman S or K. S takes 32 hours to complete the job while K finishes it in 30 hours. The standard time to finish the job is 40 hours. The hourly wage rate is same for both the workers. In addition, workman S is entitled to receive bonus according to Halsey plan (50% sharing) while K is paid bonus as per Rowan plan. The works overheads are absorbed on the job at `7.50 per labour hour worked. The factory cost of the job comes to `2,600 irrespective of the workman engaged. Interpret the hourly rate and cost of raw materials input. Also show cost against each element of cost included in factory cost. Ans. Hourly rate of wage = `10; Cost of material = `2,000. Employee Cost and Direct Expenses 71 33. SK Pvt. Ltd. manufactures a product which requires skill and precision in work to get quality products. The company has been experiencing high labour cost due to slow speed of work. The management of the company wants to reduce the labour cost but without compromising with the quality of work. It wants to introduce a bonus scheme but is indifferent between the Halsey and Rowan scheme of bonus. [RTP – Nov 2019] For the month of March 2021, the company budgeted for 24,960 hours of work. The workers are paid `80 per hour. Required to calculate and suggest the bonus scheme where the time taken (in %) to time allowed to complete the works is (a) 100% (b) 75% (c) 50% & (d) 25% of budgeted hours. Ans. Earning per hour under Halsey = `80; `93.33; `120; `200; Under Rowan = `80; `100; `120; `140. 34. You are given the following information of a worker: [May 2011] (a) Name of worker : ‘S’ (b) Ticket No. : 002 (c) Work started : 1 April at 8am (d) Work finished : 5 April at 12 noon (e) Work allotted : Production of 2,160 units (f) Work done and approved : 2,000 units (g) Time and units allowed : 40 units per hour (h) Wage rate : `25 per hour (i) Bonus : 40% of time saved (j) Worker S worked 9 hours a day You are required to calculate the remuneration of the worker on the following basis: (a) Halsey plan and (b) Rowan plan Ans. (a) `1,100; (b) `1,200. 35. (a) Bonus paid under the Halsey Plan with bonus at 50% for the time saved equals the bonus paid under the Rowan System. When will this statement hold good? (Your answer should contain the proof). [SM] (b) The time allowed for a job is 8 hours. The hourly rate is `8. Prepare a statement showing: (i) The bonus earned (ii) The total earnings of employee and (iii) Hourly earnings Under the Halsey System with 50% bonus for time saved and rowan System for each hour saved progressively. Ans. (a) AH = 50% of SH; (b) (ii) Halsey = `64; `60; `56; `52; `48; `44; `40; `36; Rowan = `64; `63; 60; `55; `48; `39; `28; `15. 72 Cost and Management Accounting PW 36. A factory having the latest sophisticated machines wants to introduce an incentive scheme for its workers, keeping in view the following: [SM] (i) The entire gains of improved production should not go to the workers (ii) In the name of speed, quality should not suffer (iii) The rate setting department being newly established are liable to commit mistakes. You are required to prepare a suitable incentive scheme and demonstrate by an illustrative numerical example how your scheme answers to all the requirements of the management. Ans. Rowan Plan. 37. SK Ltd. operates a boutique which words for various fashion houses and retain stores. It has employed 26 workers and pays them on time rate basis. On an average an employee is allowed 8 hours for boutique work on a piece of garment. In the month of May 2021, two workers S and K were given 15 pieces and 21 pieces of garments respectively for boutique work. The following are the details of their work: [RTP – May 2021] S K Work Assigned 15 pieces 21 pieces Time Taken 100 hours 140 hours Workers are paid bonus as per Halsey System. The existing rate of wages is `60 per hour. AS per the new wages agreement the workers will be paid `72 per hour w.e.f. 1st June 2021. At the end of the month May 2021, the accountant of the company has wrongly calculated wages to these two workers taking `72 per hour. Required: (i) Calculate the loss incurred due to incorrect rate selection. (ii) Calculate the loss incurred due to incorrect rate selection, had Rowan scheme of bonus payment followed. (iii) Calculate the loss/savings if Rowan scheme of bonus payment had followed. (iv) Discuss the suitability of Rowan scheme of bonus payment for SK Ltd. Ans. (i) `1,320; `1,848; (ii) `1,400; `1,960; (iii) `80; `112. 38. The following expenditures were incurred in SK Ltd. for the month of March: [SM] (`) (i) Paid for power & fuel 4,80,200 (ii) Wages paid to factory workers 8,44,000 (iii) Bill paid to job workers 9,66,000 (iv) Royalty paid for production 8,400 (v) Fee paid to technician hired for the job 96,000 (vi) Administrative overheads 76,000 (vii) Commission paid to sales staff 1,26,000 You are required to calculate direct expenses for the month. Ans. `15,50,600. Employee Cost and Direct Expenses 73  SOLUTION OF PRACTICE QUESTIONS 3,600 3,790 19. Average number of workers = = 3,695 2 (a) Separation Method: No. of separations 40 120 Labour turnover rate = ×100 = × 100 = 4.33% Average number of workers 3,695 (b) Replacement Method: No. of replacements 150 Labour turnover rate = ×100 = × 100 = 4.06% Average number of workers 3,695 (c) New Recruitment Method: No. of newly recruited workers 350 150 Labour turnover rate = ×100 = × 100 = 5.41% Average number of workers 3,965 (d) Flux Method: No. of separations+No. of workers recruited Labour turnover rate = ×100 = 160 350 × 100 Average number of workers 3,695 = 13.80% 900 1100 20. Average number of workers = = 1000 2 (i) Replacement Method: No. of replacements 75 Labour turnover rate = ×100 = × 100 = 7.5% Average number of workers 1000 7.5 × 365 Equivalent Annual Labour turnover rate = = 88.31% 31 (ii) Separation Method: No. of separations 40 60 Labour turnover rate = ×100 = × 100 = 10% Average number of workers 1000 10 × 365 Equivalent Annual Labour turnover rate = = 117.74% 31 (iii) Flux Method: No. of separations+No. of workers recruited 100 300 Labour turnover rate = ×100 = × 100 Average number of workers 1000 = 40% 40 × 365 Equivalent Annual Labour turnover rate = = 470.97% 31 74 Cost and Management Accounting PW  No. of seperations 21. (i) Employee turnover ratio by separation method = ×100 Average no. of workers 25 = × 100 = 5% 500 No. of seperations & replacement Employee turnover ratio by flux method = ×100 Average no. of workers 25 50 = × 100 = 15% 500 5 (ii) Equivalent employee turnover ratio under separation method = × 12 = 30% 2 15 Equivalent employee turnover ratio under flux method = × 12 = 90% 2 22. (i) Replacement Method - Labour turnover rate = 8= Average number of workers = 900 (ii) Searation Method - Labour turnover rate = 5= Number of separations (left and discharged) = 45 (iii) Flux Method - Labour turnover rate = 16 = 45 + No. of recruitments & joinee × 100 900 Number of workers recruited & joined = 99 (iv) Equivalent Employee turnover rate 16 Flux Method – Labour turnover rate = × 12 = 64% 3 8 Replacement Method – Labour turnover rate = × 12 = 32% 3 5 Separation Method – Labour turnover rate = × 12 = 20%s 3 Employee Cost and Direct Expenses 75  No. of separations 23. Separation Method - Labour turnover rate = ×100 Average number of workers 40 5= ×100 Average number of workers Average number of workers = 800 No. of replacements Replacement Method - Labour turnover rate = ×100 Average number of workers No. of replacements 8 = ×100 800 Number of workers replaced = 64 No. of separations+No. of workers accessions Flux Method - Labour turnover rate = ×100 Average number of workers 40+No. of workers accessions 13 = ×100 800 Number of workers accessions = 64 Let workers at the beginning = y Workers at the begining+Workers at the end Average number of workers = 2 y+ y+new accessions-separations 800 = 2 1,600 = y + (y + 64 – 40) 1,600 = 2y + 24 y = 788 workers 50,000 24. Output by experienced workers in 50,000 hours = = 5,000 units 10 ∴ Output by new recruits = 60% of 5,000 = 3,000 units Loss of output = 5,000 – 3,000 = 2,000 units Total loss of output = Due to delay recruitment + Due to inexperience = 10,000 + 2,000 = 12,000 units Contribution per unit = 20% of `180 = `36 Total contribution lost = `36 × 12,000 units = `4,32,000 Cost of repairing defective units = 3,000 units × 0.2 × `25 = `15,000 Profit forgone due to labour turnover 76 Cost and Management Accounting PW  Particulars Amount (`) Loss of Contribution 4,32,000 Cost of repairing defective units 15,000 Recruitment cost 1,56,340 Training cost 1,13,180 Settlement cost of workers leaving 1,83,480 Profit forgone in 2017-18 9,00,000 25. (i) Effective working days in a year 300 Less: Leave days on full pay 20 Effective working days 280 Total effective working hours = 280 days × 8 hours = 2,240 (ii) Total wages paid in a year (`) Basic pay 1,20,000 D.A. 36,000 Fringe benefits 12,000 Total wages 1,68,000 1,68,000 (iii) Hourly rate = = `75.00 2,240 26. Calculation of effective hours Total working hours (310 × 8) 2,480 Less: Leave days (30 × 8) 240 Available working hours 2,240 Less: Normal loss 70 Effective working hours 2,170 Statement of employee cost per hour Particulars Amount (`) Salary (30,000 × 12) 3,60,000 Bonus (25% × 3,60,000) 90,000 Employees contribution to PF (15% × 3,60,000) 54,000 Employee welfare (6,61,500 ÷ 175) 3,780 Total Annual Cost (A) 5,07,780 Effective working hours (B) 2,170 Employee cost per hour (A ÷ B) 234 Cost of abnormal idle time per employee = `234 × 50 hours = `11,700 Employee Cost and Direct Expenses 77 27. Calculation of total normal hours to be paid for Mr. Deep (Semi-skilled) Day Actual Normal Extra Overtime Equivalent Total normal hours hours Hours hours normal hours for hours overtime worked payable A B C D=A–B E=D×2 F=B+C+E Monday 10.5 8 1 1.5 3 12 Tuesday 8 8 - - - 8 Wednesday 10.5 8 1 1.5 3 12 Thursday 9.5 8 1 0.5 1 10 Friday 10.5 8 1 1.5 3 12 Saturday - - - - - - Total 49 40 4 5 10 54 Calculation of total normal hours to be paid for Mr. Sam (Skilled) Day Actual Normal Extra Overtime Equivalent Total normal hours hours Hours hours normal hours for hours overtime worked payable A B C D=A–B E=D×2 F=B+C+E Monday 10.5 8 1 1.5 3 12 Tuesday 8 8 - - - 8 Wednesday 10.5 8 1 1.5 3 12 Thursday 9.5 8 1 0.5 1 10 Friday 10.5 8 1 1.5 3 12 Saturday 10 5 3+1=4 1 2 11 Total 59 45 8 6 12 65 Note: Mr. Sam will be paid for equivalent 8 normal working hours at ordinary wage rate, though 5 hours of working is required on Saturday because in question it is mentioned that both condition of 9 hour per day and 48 hour a week has to be satisfied. Thus, only 1 hour of overtime over 9 hours will be paid at overtime rate. Wages Payable Particulars Mr. Deep Mr. Sam Basic wage per hour 400 ÷ 8 = 50 600 ÷ 8 = 75 Dearness allowance per hour @ 20% 10 15 Hourly wage rate 60 90 Total normal hours payable 54 65 Total wages payable 3,240 5,850 78 Cost and Management Accounting PW  Std. time - Actual time 28. Wages in Rowan plan = (Actual time × wage rate) + × Actual time ×wage rate Std. time 5 = (15 × 5) + × 15 × 5 = `93.75 20 Wages in Halsey plan = (Actual time× wages rate) + [50%×(Std. Time - Actual time)×wage rate] 50 = (15 × 5) + × (20 – 15) × 5 = `87.5 100 Statement showing computation of factory cost Particulars Rowan Plan Halsey Plan Direct Materials 50 50 Direct Wages 93.75 87.5 Prime Cost 143.75 137.5 Overheads @ 100% of wages 93.75 87.5 Factory Cost 237.5 225 29. (i) (a) Time Rate wages = Hours worked × rate per hour = 48 hours × `15 = `720 (b)Piece rate wages = Units produced × Rate per unit = 200 units × `4.50 = `900 18 minutes (Rate per unit = × `15 = `4.50) 60 minutes (c) Halsey plan wages = (H × R) + [(S – H) × R × 50%] = (48 × 15) + [(60 – 48) × 15 × 50%] = `810 18 minutes (Standard hours = S = ×200 units = 60 hours 60 minutes H 48 (d) Rowan plan wages = (H × R) + [(S – H) × R ×] = (48 × 15) + [(60 – 48) × 15 × ] = `864 S 60 (ii) The company may follow Halsey premium plan over Rowan plan as the total wages paid is lower. 30. (i) Weekly earning for one operator under existing time rate = (48 hours × `150) + (12 hours × `300) = `10,800 (ii) Weekly earning for one operator under Rowan premium plan H = (H × R) + [(S – H) × R × ] = (48 × 150) + [(75 – 48) × 150 × (48 ÷ 75)] = `9,792 S (iii) Weekly earning for one operator under Halsey premium plan = (H × R) + [(S – H) × R × 50%] = (48 × 150) + [(75 – 48) × 150 × 50%] = `9,225 Employee Cost and Direct Expenses 79  H 8 31. (i) Total earnings = (H × R) + [(S- H) × R × ] = (8 × 150) + 10 8 150 = `1,440 S 10 1,440 Effective hourly rate of earning = = `180 8 (ii) Let actual time = y Total Earnings = (H × R) + [(S – H) × R × 50%] (y)(180) = (y × 150) + [(10 – y) × 150 × 50%] 180y = 150y + 750 – 75y 105y = 750 y = 7.14 hours ∴ Required actual hours = 7.14 32. Let hourly wage rate `X and let Cost of raw material `Y Cost Sheet S K Cost of Raw Material Y Y Normal wages 32X 30X Bonus (1/2 × 8 × X) = 4X (10 × 3/4 × X) = 7.5X Factory Overheads (7.5 × 32) = 240 (7.5 × 30) = 225 Factory Cost 2600 2600 Y + 36X + 240 = 2,600 ….. (1) Y + 37.5X + 225 = 2,600 …. (2) Y = 2,360 – 36X By Putting Y’s value in equation (2) 2,360 – 36X + 37.5X + 225 = 2,600 1.5X = 15 X = 10 Y = 2,360 – 36 × 10 = Y = `2,000 Cost Sheet S K Cost of Raw Material 2,000 2,000 Normal wages 320 300 Bonus A = (1/2 × 8 × 10) 40 B = (10 × 3/4 × 10) 75 Factory Overheads (7.5 × 32) 240 (7.5 × 30) 225 Factory Cost 2600 2600 80 Cost and Management Accounting PW 33. The cost of labour under the bonus schemes are tabulated as below: Time Time Wages Bonus Total wages Earning per hour Allowed Taken Halsey Rowan Halsey Rowan Halsey Rowan (3) (6) (7) (8) (9) (1) (2) (4) (5) = (2)×80 = (3)+(4) = (3)+(5) = (6)÷(2) =(7)÷(2) 24,960 24,960 19,96,800 – – 19,96,800 19,96,800 80.00 80.00 24,960 18,720 14,97,600 2,49,600 3,74,700 17,47,200 18,72,000 93.33 100.00 24,960 12,480 9,98,400 4,99,200 4,99,200 14,97,600 14,97,600 120.00 120.00 24,960 6,240 4,99,200 7,48,800 3,74,400 12,48,000 8,73,600 200.00 140.00 * Bonus under Halsey Plan = 50% of (Time Allowed – Time Taken) × Rate per hour Time taken ** Bonus under Rowan Plan = × Time saved × Rate per hour Time allowed Rowan scheme of bonus keeps checks on speed of work as the rate of incentive increases only upto 50% of time taken to time allowed but the rate decreases as the time taken to time allowed comes below 50. It provides incentives for efficient workers for saving in time but also puts check on careless speed. On implementation of Rowan scheme, the management of ADV Pvt. Ltd. would resolve issue of the slow speed work while maintain the skill and precision required maintaining the quality of product. 34. Remuneration under Halsey Plan = (40 × 25) + (40% × 10 × 25) = 1,000 + 100 = `1,100 Remuneration under Rowan Plan = (40 × 25) + (10 × 25 × 40 / 50) = 1,000 + 200 = `1,200 Working note: Time worked 1.4.11 = 9 hours 2.4.11 = 9 hours 3.4.11 = 9 hours 4.4.11 = 9 hours 5.4.11 = 4 hours 40 hours Time allowed = 50 hours (2,000/40) Time taken = 40 hours Time saved = 10 hours 35. (a) Bonus under Halsey plan = Bonus under Rowan plan AH 50% × (SH – AH) × R = × (SH – AH) × R SH AH 50% = SH 50% × SH = AH Employee Cost and Direct Expenses 81  Hence, when the actual time (AH) taken is 50% of the time allowed (SH), the bonus under Halsey and rowan plan is equal. (b) Statement of Earnings Bonus Total Total Hourly Hourly Bonus under Basic Earnings Earnings Earnings Earnings Time Under Rowan SH AH Wages under under under under Saved Halsey (AH× 8) B Halsey Rowan Halsey Rowan (50%×C×8) ×C×8 A (D + E) (D + F) (G ÷ B) (H ÷ B) C= A B D E F G H I J (A – B) 8 8 - 64 - - 64 64 8 8 8 7 1 56 4 7 60 63 8.57 9 8 6 2 48 8 12 56 60 9.33 10 8 5 3 40 12 15 52 55 10.40 11 8 4 4 32 16 16 48 48 12 12 8 3 5 24 20 15 44 39 14.67 13 8 2 6 16 24 12 40 28 20 14 8 1 7 8 28 7 36 15 36 15 36. (i) Rowan scheme of premium bonus (variable sharing plan) is suitable incentive scheme for the workers of the factory. If this scheme is adopted, the entire gains due to time saved by a worker will not pass to him.  Illustration  Time allowed = 4 hours  Time taken = 3 hours  Time saved = 4 – 3 = 1 hour  Rate = `5 per hour Time taken 3  Bonus = × Time saved × Rate = × 1 × 5 = `3.75 Time allowed 4  In the above data, 1 hour saved results in gain of `5 out of which `3.75 is passed on to the worker in form of bonus and the balance `1.25 remains with the management. In other words, worker is given with 75% of the time saved in form of bonus. (ii) Another feature of this scheme is that a worker cannot increase his earnings or bonus by merely increasing its work speed. The reason for this is that the bonus under Rowan Scheme is maximum when the time taken by a worker on a job is half of the time allowed. As this fact is known to the workers, therefore, they work at such a speed which helps them to maintain the quality of output too. 82 Cost and Management Accounting PW   Illustration  Assume above illustration data: Time taken 2  Bonus when time taken is 2 hours = × Time saved × Rate = × 2 × 5 = `5 Time allowed 4 Time taken 1  Bonus when time taken is 1 hours = × Time saved × Rate = × 3 × 5 = `3.75 Time allowed 4  The above data shows that when time taken is half of the time allowed, the bonus is maximum. When the time take is reduced from 2 to 1, the bonus amount decreases by `1.25. (iii) Lastly, Rowan system provides a safeguard in the case of any loose fixation of the standards by the rate-setting department. It may be observed from the following illustration that in the Rowan Scheme the bonus paid will be low due to any loose fixation of standards. Workers cannot take undue advantage of such a situation.  Illustration  Assume in above illustration that if the rate setting department erroneously sets the time allowed as 10 hours instead of 4 hours, than bonus will be as follows: Time taken 3  Bonus = × Time saved × Rate = × 7 × 5 = `10.50 Time allowed 10  The above data shows that bonus paid for saving 7 hours is `10.50 which is approximately equal to 2 hours wages. In other words, bonus paid to the worker is low. 37. Basic Calculation Particulars S K Actual hours taken 100 hrs. 140 hrs. Standard hours 15 × 8 = 120 hrs. 21 × 8 = 168 hrs. Hours saved 20 hrs. 28 hrs. (i) Statement of calculation of loss due to incorrect rate selection Particulars S K Wages due @ `60 (A) (100×60) + (20×60×50%) (140×60) + (28×60×50%) = 6,600 = 9,240 Wages paid @ `72 (B) (100×72) + (20×72×50%) (140×72) + (28×72×50%) = 7,920 = 11,088 Extra wages paid (B – A) 1,320 1,848 Employee Cost and Direct Expenses 83 (ii) Statement of calculation of loss due to incorrect rate selection under Rowan system Particulars S K Wages due 100 140 @ `60 (A) (100×60) + (20×60× ) = 7,000 (140×60) + (28×60× ) = 9,800 120 168 Wages paid 100 140 @ `72 (B) (100×72) + (20×72× ) = 8,400 (140×72) + (28×72× ) = 11,760 120 168 Extra wages paid 1,400 1,960 (B – A) (iii) Statement of calculation of saving due to Rowan system Particulars S K Extra wages paid under Halsey 1,320 1,848 Extra wages paid under Rowan 1,400 1,960 Difference (loss) (80) (112) (iv) Rowan scheme of incentive payment has the following benefits which is suitable with the nature of business in which SK ltd. operates: (a) Under Rowan scheme, workers cannot increase their earnings or bonus by merely increasing its work speed. Bonus under Rowan is maximum when the time taken by a worker on a job is half of the time allowed. As this fact is known to the workers, therefore they work at such a speed which helps them to maintain the quality of output too. (b) It the rate setting department commits any mistake in setting standards for time to be taken to complete the words, the loss incurred will be relatively low. 38. Calculation of Direct Expenses (`) (i) Paid for power and fuel 4,80,200 (ii) Bill paid to job workers 9,66,000 (iii) Royalty paid for production 8,400 (iv) Fee paid to the technician 96,000 Total direct expenses 15,50,600  84 Cost and Management Accounting PW