Revision Module | Labour Costing .

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 . Costing Revision Module
By GOURAV KABRA

Chapter #2

LABOUR COSTING

List of Topics:
1. Total Wages Calculation
2. Labour Turnover – Separation, Replacement & Flux Methods
3. Bonus Plans – Halsey & Rowan
4. Other Plans

Topic #1
TOTAL WAGES CALCULATION
1. Total Earnings = Basic + Dearness Allowance + Other Allowances + Bonus + Employer’s
Contribution to PF & ESI.
2. Effective Hourly Cost = Total Earnings/Productive Hours.

Question #1
‘X’ an employee of ABC Co. gets the following emoluments and benefits:
(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.
‘X’ 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 ‘X’.

Solution
Total Earnings pm = Basic + DA + Bonus + Other Allowance + Employer’s Contn to PF
= 10,000 + 2,000 + 20%(10,000 + 2,000) + 2,500 + 10%(10,000 + 2,000)
= ₹ 18,100

Total Earnings pa = ₹ 18,100 X 12 = ₹ 2,17,200.

Total Productive Hours = 2,400 – 400 = 2,000 hours
Effective Hourly Cost = ₹ 2,17,200/2,000 = ₹ 108.60/Hour.

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Revision Module | Labour Costing .

Topic #2
LABOUR TURNOVER
1. LR (Separation Method) = Separations/Avg. No. of Labour X 100
2. LR (Replacement Method) = Replacement/Avg. No. of Labour X 100
3. LR (Flux Method) = (Separation + New Accessions)/Avg. No. of Labour X 100
Here, New Accessions = Replacement + Fresh Joining

Question #2
The Accountant of Y Ltd. has computed employee turnover rates for the quarter ended 31st
March, 20X1 as 10%, 5% and 3% respectively under ‘Flux method’, ‘Replacement method’ and
‘Separation method’ respectively. If the number of workers replaced during that quarter is 30,
FIND OUT the number of workers for the quarter
(i) recruited and joined and
(ii) left and discharged and
(iii) Equivalent employee turnover rates for the year.

Solution
(i) Avg. No. of Labour = Replaced / LR (Replacement Method)
= 30/5% = 600

Also, Recruited & Joined = (Avg. No. of Labour X Flux Rate) – Separation
= (600 X 10%) – (600 X 3%)
= 60 – 18 = 42 workers.
(ii) Left & Discharged = Separations = 600 X 3% = 18 workers.
(iii) Equivalent Employee Turnover Rate p.a.:
(a) Separation Method = 3% X 12/3 = 12%
(b) Replacement Method = 5% X 12/3 = 20%
(c) Flux Method = 10% X 12/3 = 40%

Topic #3
BONUS PLANS
1. Halsey Plan: Total Earnings = (T.T. x Rate) + (50% x T.S. X Rate)
2. Rowan Plan: Total Earnings = (T.T. x Rate) + (T.T. / T.A. x T.S. x Rate)
3. Effective Hourly Rate: Total Earnings / T.T.

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 . Costing Revision Module
By GOURAV KABRA

Question #3
A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of ₹ 30 per hour. The standard time
per unit for a particular product is 4 hours. Mr. P, 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.
STATE what could have been his total earnings and effective hourly rate, had he been put on
Halsey Incentive Scheme (50%)?

Solution
Let, Time Taken = ‘x’
Therefore, Time Saved = 4 – x

Total Wages = Effective Hourly Rate x Time Taken = (T.T. x Rate) + T.T. / T.A. x T.S. x Rate
Or, 37.5X = 30X + [x/4 x (4 – x) x 30]
Or, x = 3 Hours.

Total Earnings = (3 Hours x ₹ 30) + [50% x (4 – 3) x ₹ 30] = ₹ 105.

Effective Hourly Rate = Total Earnings / Time Taken = ₹ 105 / 3 Hours = ₹ 35/Hr.

Question #4
Two workmen, ‘A’ and ‘B’, produce the same product using the same material. Their normal wage
rate is also the same. ‘A’ is paid bonus according to the Rowan system, while ‘B’ is paid bonus
according to the Halsey system. The time allowed to make the product is 50 hours. ‘A’ takes 30
hours while ‘B’ 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 ‘A’ is ₹ 3,490 and for ‘B’ it is
₹ 3,600.
Required:
(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.

Solution
Let, Material Cost = ‘X’ & Wage Rate/Hr = ‘Y’
Factory Cost = Material Cost + Total Wages + Factory Overheads
For Product A, Factory Cost = X + [30Y + (30/50 x 20 x Y)] + (30 x 5) = 3,490
For Product B, Factory Cost = X + [40Y + (50% x 10 x Y)] + (40 x 5) = 3,600

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Revision Module | Labour Costing .

Solving both equations, X = ₹2,500 & Y = ₹20/Hr

Computation of Factory Cost:

Particulars Product A Product B
Material ₹ 2,500 ₹ 2,500
Wages
A: (30 x 20) + (30/50 x 20 x 20) ₹ 840
B: (40 x 20) + (50% x 10 x 20) ₹ 900
Overheads
A: 30 Hours x ₹5/Hr ₹ 150
B: 40 Hours x ₹5/Hr ₹ 200
Factory Cost ₹ 3,490 ₹ 3,600

Topic #4
OTHER PLANS
1. Emerson Efficiency Plan
Below 66.66% Efficiency : Guaranteed Rate x Time Taken
66.66% to 100% Efficiency : 120% (Guaranteed Rate x Time Taken)
Above 100% : 120% (Guaranteed Rate x Time Taken) + 1% Extra
Bonus for Every 1% Extra Efficiency Above 100%

Note: Efficiency = SH / AH x 100 = AQ / SQ x 100.

2. Merrick Differential Piece Rate System

Up to 83% Efficiency : Ordinary Piece Rate x AQ
83% to 100% Efficiency : 110% (Ordinary Piece Rate x AQ)
Above 100% : 120% or 130% (Ordinary Piece Rate x AQ)

3. Gantt Task & Bonus System

When, AQ < SQ : Guaranteed Rate x Time Taken
When, AQ = SQ : 120% (Guaranteed Rate x Time Taken)
When, AQ > SQ : 120% (Ordinary Piece Rate x AQ)

4. Taylor’s Differential Piece Rate System

Less than 100% Efficiency : 80% or 83% (Ordinary Piece Rate x AQ)
100% Efficiency or more : 120% or 125% (Ordinary Piece Rate x AQ)

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 . Costing Revision Module
By GOURAV KABRA

Question #5
The management of a company wants to formulate an incentive plan for the workers with a view
to increase productivity. The following particulars have been extracted from the books of company:
Piece Wage rate ₹ 10
Weekly working hours 40
Hourly wages rate ₹ 40 (guaranteed)
Standard/normal time per unit 15 minutes.
Actual output for a week: 176 pieces
Differential piece rate : 80% of piece rate when output below normal and 120%
of piece rate when output above normal.
Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved.
Calculate:
(i) Earning of workers under Halsey’s and Rowan’s premium scheme.
(ii) Earning of workers under Taylor’s differential piece rate system and Emerson’s
efficiency plan.

Solution
Standard Time (Time Allowed) = 176 pieces x 15 mins / 60mins = 44 Hours
Actual Time (Time Taken) = 40 Hours
Time Saved = 44 Hours – 40 Hours = 4 Hours

(i) Halsey Plan: Total Wages = (40 x ₹ 40) + (50% x 4 x ₹ 40) = ₹ 1,680
Rowan Plan: Total Wages = (40 x ₹ 40) + (40/44 x 4 x ₹ 40) = ₹ 1,745.45

(ii) Efficiency = SH / AH x 100 = 44 / 40 x 100 = 110%

Total Wages Under:
Taylor Rule = 120% (Ordinary Piece Rate x AQ) = 120% (₹ 10 x 176 pc)
= ₹ 2,112
Emerson Plan = (120% + 10%) x (Guaranteed Rate x Time Taken)
= 130% x (₹ 40 x 40 Hours)
= ₹ 2,080

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Revision Module | Labour Costing .

Thank you!

COURSES OFFERED

CA Intermediate Paper 3 | Costing Paper 8 | FM & EFF

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