Essentials of Cost Accounting — Module 3

1. Accounting and: Control of Labour Cost: Timekeeping & Time Booking In manufacturing economics, Labour Cost represents the human effort expended in converting raw materials into finished goods. Unlike physical materials, human labor cannot be stored in warehouses; unutilized labor hours perish instantly as pure economic loss. Consequently, the control of labor costs through precise time accounting, productivity incentives, and turnover minimization is essential for operational efficiency. 1.1 Direct Labour vs. Indirect Labour
2. Direct: Labour (Prime Cost) Wages paid to workers who are directly engaged in altering the shape, condition, or structure of raw materials into finished goods.

Directly traceable to a specific job or production cost unit (e.g., lathe machinists, weavers, carpenters, assembly line welders).

1. Indirect: Labour (Factory Overheads) Wages paid to personnel who perform auxiliary services that assist production without altering the product directly.

Apportioned across jobs as factory, administrative, or selling overheads (e.g., factory supervisors, crane operators, security guards, storekeepers). 1.2 Timekeeping vs. Time Booking Architecture Accurate labor accounting requires two distinct but complementary time-recording functions:

Analytical Parameter Timekeeping (Gate Recording) Time Booking (Factory Floor Recording)

1. Core: Objective To record the total physical time a worker spends inside the factory premises (Arrival time,

Departure time, Total gross attendance). To record the exact time spent by a worker on specific production jobs, operations, or idle machine waiting.

1. Primary: Purpose Calculation of gross wage payable, attendance records, statutory overtime, and statutory leave benefits.

Ascertainment of direct labor cost for individual jobs, measuring worker efficiency, and allocating overheads.

1. Key: Mechanisms Attendance Registers, Metal Disc/Token Method,

Clock Cards (Punch Clocks), Biometric Fingerprint/Facial Scanners, RFID Cards.

Daily Time Sheets, Weekly Time Sheets, Job Cards (Job Tickets), Route Cards,

Piece Work Cards.

1. Department: Responsible Time Office / Security Gate at the factory entrance.

Shop-Floor Supervisors and Production Planning Department inside the factory. 1.3 Practical Methods of Timekeeping (Gate Recording)

1. Manual &: Mechanical Systems

• Attendance Register: Workers physically sign arrival and departure times; susceptible to proxy signing.
• Metal Disc / Token Method: Workers pick numbered brass tokens from a board at the gate and drop them into a locked box; timekeeper logs late arrivals.
• Clock Cards (Time Recording Clocks): Workers insert individual pre-printed cards into a punch clock that stamps exact date, hour, and minute.

1. Digital &: Biometric Systems Biometric Fingerprint & Facial

• Recognition: Eliminates buddy punching / proxy attendance entirely by capturing physiological identifiers.
• RFID Smart Cards & Geofencing: Contactless radio-frequency badges that automatically log gate passage and integrate with central payroll ERP. 1.4 Practical Methods of Time Booking (Shop Floor Recording) Time Booking Record Operational Mechanism Key Managerial Use

1. Daily: Time Sheet Worker records time spent on each individual job during a single working day.

Used in small workshops where workers switch between multiple quick jobs daily.

1. Weekly: Time Sheet Maintains a weekly summary of hours spent across various jobs; signed by supervisor.

Used in building contracting, maintenance crews, and repair yards.

1. Job: Card / Ticket Accompanying document issued for a specific batch/job; every operator stamps entry/exit time.

Directly accumulates direct labor hours to calculate total direct labor cost of the job.

1. Idle: Time Card Special colored ticket recording machine breakdown, waiting for materials, or power outages.

Segregates normal and abnormal idle labor hours for cost analysis and supervisory control. 1.5 Payroll Accounting & Gross-to-Net Wage Computation ∑ Worked Illustration: Factory Worker Payroll Slip & Cost Computation

• Worker Earnings Component: Basic Pay = ₹18,000 | Dearness Allowance (DA) = ₹6,000 | House Rent Allowance (HRA) = ₹3,000 | Production Bonus = ₹2,000.

1. Gross: Earnings = ₹18,000 + ₹6,000 + ₹3,000 + ₹2,000 = ₹29,000.

• Statutory Employee Deductions: Provident Fund (12% of Basic + DA = 12% × ₹24,000 = ₹2,880) | ESI (0.75% of Gross = ₹218) | Professional Tax = ₹200.

1. Total: Deductions = ₹2,880 + ₹218 + ₹200 = ₹3,298.
2. Net: Take-Home Wage = ₹29,000 − ₹3,298 = ₹25,702. Total Employer Labour Cost = Gross Pay (₹29,000) + Employer PF (12% = ₹2,880) + Employer ESI (3.25% = ₹943) = ₹32,823.
3. Systems of: Wage Payment & Differential Piece-Rate Plans An effective wage payment system must achieve a dual balance: ensuring fair remuneration and economic security for workers while encouraging maximum labor productivity and low unit manufacturing costs. 2.1 Time-Rate Systems vs. Piece-Rate Systems
4. Time-Rate: System Wages = Hours Worked × Guaranteed Hourly Wage Rate.

• Advantages: Guaranteed steady income; high craftsmanship quality; zero equipment rushing.
• Disadvantages: Lacks incentive for high performers; requires strict supervision; ignores worker efficiency.
• Best Suited For: Precision toolmaking, artistic craftsmanship, testing/inspection jobs.

1. Straight: Piece-Rate System Wages = Units Produced × Fixed Rate Per Piece.

• Advantages: Direct incentive for speed; rewards efficiency; simplifies direct labor cost allocation.
• Disadvantages: Workers compromise product quality for speed; high machine wear and tear; zero guaranteed minimum wage.
• Best Suited For: Standardized mass production where output is easily measurable. 2.2 Differential Piece-Rate Systems (Taylor, Merrick & Gantt) Differential Plan Efficiency Thresholds & Wage Scaling Mechanism Key Behavioral & Managerial Impact

1. F.W. Taylor's Differential Piece Rate

• Output Below Standard: 80% of Normal Piece Rate (Severe penalty).
• Output At or Above Standard: 120% of Normal Piece Rate (Substantial reward).

Extremely harsh and autocratic; offers zero guaranteed minimum wage; penalizes slow learners ruthlessly.

2. Merrick's Multiple Piece Rate Plan

• Efficiency Up to 83%: Normal Piece Rate (100%).
• Efficiency 83% to 100%: 110% of Normal Piece Rate.
• Efficiency Above 100%: 120% of Normal Piece Rate.

A humanitarian modification of Taylor's plan; encourages average workers with progressive bonus steps without harsh wage deductions.

1. Gantt: Task & Bonus Plan

• Output Below Standard: Guaranteed Day Wages (Time rate).
• Output At Standard: Guaranteed Day Wage + 20% Bonus.
• Output Above Standard: High Piece Rate on entire output.

Combines time-rate security for beginners with explosive piece-rate rewards for high achievers. ∑ Worked Comparative Illustration: Taylor vs. Merrick Differential Wages

• Operating Data: Standard Output = 100 units/day | Normal Piece Rate = ₹5.00 per unit.
• Worker A (Output = 80 units → 80% Efficiency):
• Taylor (Below Std = 80% rate = ₹4.00): 80 × ₹4.00 = ₹320.00.
• Merrick (Up to 83% = 100% rate = ₹5.00): 80 × ₹5.00 = ₹400.00 (No penalty).
• Worker B (Output = 90 units → 90% Efficiency):
• Taylor (Below Std = 80% rate = ₹4.00): 90 × ₹4.00 = ₹360.00.
• Merrick (83% to 100% = 110% rate = ₹5.50): 90 × ₹5.50 = ₹495.00.
• Worker C (Output = 120 units → 120% Efficiency):
• Taylor (Above Std = 120% rate = ₹6.00): 120 × ₹6.00 = ₹720.00.
• Merrick (Above 100% = 120% rate = ₹6.00): 120 × ₹6.00 = ₹720.00.
• ANALYSIS: Merrick protects Worker A from unfair wage slashing while offering graduated incentives to Worker B.

1. Premium: Bonus Incentive Schemes: Halsey & Rowan Plans To overcome the disadvantages of both pure time rates and pure piece rates, industrial economists formulated Premium Bonus Plans, where workers receive guaranteed time wages plus a financial bonus proportional to the Time Saved ($S - T$). 3.1 Mathematical Formulations: Halsey vs. Rowan Plans

• MATHEMATICAL FORMULAS: PREMIUM BONUS INCENTIVE PLANS CAS-7 Labour Cost Engineering

1. Halsey P remium P lan (50% Sharing): To tal E arnings = (T × R) + [ ½ × (S − T ) × R ]

2. Halsey -Weir P lan (33⅓ % Sharing): To tal E arnings = (T × R) + [ ⅓ × (S − T ) × R ]

3. Row an I nc entiv e P lan: To tal E arnings = (T × R) + [ ( (S − T ) / S ) × T × R ] Where:

T: Actual Time Taken by the worker (Hours). S: Standard Time Allowed for the job (Hours).

R: Hourly Wage Rate (₹ per Hour). (S − T): Time Saved by the worker (Hours). ∑ Worked Comparative Illustration: Halsey vs. Rowan Wage Computations

• Job Production Data: Standard Time ($S$) = 10 Hours | Hourly Wage Rate ($R$) = ₹60/hr | Actual Time Taken ($T$) = 6 Hours.
• Time Saved ($S - T$) = 10 − 6 = 4 Hours. Guaranteed Base Time Wages ($T imes R$) = 6 × ₹60 = ₹360.

Method 1: Halsey Plan (50% Bonus):

• Bonus = 50% × 4 hrs × ₹60 = ₹120 → Total Earnings = ₹360 + ₹120 = ₹480.

Effective Hourly Rate = ₹480 / 6 = ₹80.00/hr. Method 2: Rowan Plan (Proportional Bonus):

• Bonus = (Time Saved / Std Time) × Time Wages = (4 / 10) × ₹360 = ₹144 → Total Earnings = ₹360 + ₹144 = ₹504. Effective Hourly Rate = ₹504 / 6 = ₹84.00/hr.
• CRITICAL LAW: When Time Saved is less than 50% of Standard Time ($T > S/2$), the Rowan Plan yields higher earnings than the Halsey Plan. When Time Saved exceeds 50% ($T < S/2$), the Halsey Plan pays higher earnings. 3.2 Alternative Individual & Group Incentive Schemes Incentive Plan Mechanics & Formula Operational Application

1. Emerson's Efficiency Plan Guaranteed day wage up to 66.67% efficiency; gradual bonus starts at 66.67% (reaches 20% bonus at 100% efficiency); beyond 100%, 1% additional bonus for every 1% rise in efficiency.

Encourages slow and steady workers to cross standard thresholds without intimidation.

1. Bedeaux: Point Premium System Standard time divided into standard minutes called "Bedeaux points" (B's). Worker earns guaranteed hourly wage plus 75% bonus on B's saved; remaining 25% allocated to supervisory staff.

Incentivizes both floor workers and floor supervisors to maintain peak machine flow.

1. Scanlon: Plan (Group Incentive) A collective bonus based on the ratio of total labor costs to total sales value of production (SVOP). Reductions below standard historical payroll ratio are shared between workers and company.

Fosters enterprise-wide labormanagement cooperation and cost-saving suggestions.

1. Priestman: Plan (Group Output) A standard output is fixed for the factory as a whole. If total actual output exceeds standard, all workers receive a proportionate bonus percentage on base wages.

Suited for continuous assembly operations where individual output cannot be isolated.

1. Idle: Time & Overtime: Operational Control & Cost Accounting Treatment In any industrial enterprise, a discrepancy inevitably emerges between total gate attendance hours paid (Timekeeping) and productive hours booked on jobs (Time Booking). Managing this discrepancy requires strict cost accounting controls for Idle Time and Overtime. 4.1 Idle Time: Typology and Accounting Treatment
2. Normal: Idle Time (Unavoidable) Loss of time inherent in factory operations (walking from gate to shop floor, changing into uniforms, machine setup, tool sharpening, fatigue breaks).

• Accounting Treatment: Treated as a legitimate manufacturing cost; absorbed as part of Factory Overheads or adjusted by inflating the direct labor hourly wage rate.

1. Abnormal: Idle Time (Avoidable) Loss of time caused by managerial failure, negligence, or extraordinary mishaps (power breakdown, raw material stockouts, machine breakdown, strikes).

• Accounting Treatment: Excluded from product cost; transferred directly as a loss to the Costing Profit & Loss Account. 4.2 Overtime Premium: Statutory Mandates & Accounting Treatment Under Section 59 of the Factories Act, 1948, any worker working more than 9 hours in a day or 48 hours in a week must be paid overtime wages at twice the normal wage rate (Normal Wage + Overtime Premium).

Operational Circumstance for Overtime Cost Accounting Treatment of Overtime Premium

1. At Customer's Specific Urgent Request Charged directly to the specific customer job as a Direct Expense.

1. Due to: General Factory Workload / Seasonal Rush Treated as General Factory Overhead and absorbed across all jobs.
2. Due to: Departmental Bottleneck or Inefficiency Charged to the specific departmental overhead causing the delay.
3. Due to: Abnormal Delays (Fire, Strike, Flood) Charged directly to the Costing Profit & Loss Account. 4.3 Fringe Benefits, Labour On-Costs & Statutory Levies
4. Statutory: Employer Contributions Employees' Provident Fund (EPF Act, 1952): Mandatory 12% employer contribution on Basic + DA.

Employee State Insurance (ESI Act, 1948): 3.25% employer contribution for healthcare coverage.

Payment of Gratuity Act, 1972: Statutory terminal retirement benefit calculated at 15 days' salary per year of service.

1. Accounting: Treatment of Labour On-Cost

• Method A (Direct Inclusion): Inflating direct labor hourly wage rate to absorb fringe benefits directly into prime cost.
• Method B (Overhead Absorption): Aggregating all fringe benefits into Factory Overheads and apportioning them via departmental overhead rates.

1. Labour: Turnover & Learning Curve Theory Labour Turnover (LTO) is the rate at which workers leave an organization and are replaced by new recruits.

Excessive labor turnover destabilizes production schedules, escalates recruitment/training costs, and impairs factory productivity. 5.1 Methods of Measuring Labour Turnover

• MATHEMATICAL FORMULAS: LABOUR TURNOVER RATES Workforce Stability Analytics

1. Separatio n: Metho d = [ Number o f Separatio ns / Av erage Number o f Wo rkers ] × 100
2. Replac ement: Metho d = [ Number o f Replac ements / Av erage Number o f Wo rkers ] × 100
3. Flux: Metho d = [ (Separatio ns + Ac c essio ns) / Av erage Number o f Wo rkers ] × 100

• Where: Average Workers = (Number of Workers at Beginning + Number at End) ÷ 2. ∑ Worked Illustration: Labour Turnover Computation
• Workforce Data for the Year: Beginning Workers = 900 | Ending Workers = 1,100 → Average Workers = (900 + 1,100)/2 = 1,000 workers.
• Number of workers who resigned / left (Separations) = 50 workers.
• Number of workers recruited: 40 recruited to replace departed staff (Replacements), 160 recruited for factory expansion (New Accessions).

Total Recruited = 200.

1. Separation: Rate = (50 / 1,000) × 100 = 5.0%.
2. Replacement: Rate = (40 / 1,000) × 100 = 4.0%.
3. Flux: Rate = [ (50 Separations + 200 Total Recruits) / 1,000 ] × 100 = (250 / 1,000) × 100 = 25.0%.

• VERDICT: A 4% replacement rate reflects healthy stability, while the 25% flux rate reflects aggressive workforce expansion. 5.2 Wright's Learning Curve Theory (Experience Curve) Formulated by T.P. Wright in aircraft manufacturing, Learning Curve Theory asserts that as the cumulative volume of units produced doubles, the cumulative average direct labor hours required per unit decreases at a constant percentage rate (typically an 80% Learning Curve).
• Managerial Costing Implication: Direct labor cost per unit is highest for initial prototype batches and declines systematically as workers master repetitive tasks, enabling aggressive forward pricing and accurate budget forecasting. 5.3 Economic Costs of Labour Turnover: Preventive vs. Replacement

1. Preventive: Costs (Incurred to Retain Workers) Expenditure on medical amenities, factory canteen subsidies, employee welfare programs.

Competitive pensions, gratuity, and performance bonus schemes.

• Accounting Treatment: Treated as indirect labor cost and absorbed as Factory/Administrative Overhead.

1. Replacement: Costs (Incurred Due to Departures) Recruitment advertising, interview screening, pre-employment medical checks.

Induction training costs, loss of output from novice trainees, increased tool breakage.

• Accounting Treatment: Apportioned to departments on the basis of number of replacements. 5.4 Worked Numerical Illustration: Wright's 80% Learning Curve Doubling Model ∑ Worked Illustration: 80% Cumulative Average Learning Curve Application
• Prototype Production Data: First unit ($N = 1$) requires 100 direct labor hours at a wage rate of ₹50/hr. Learning rate = 80%.
• Batch 1 (Cumulative Units = 2): Cumulative Average Time/Unit = $100 imes 0.80 = mathbf{80 ext{ hours/unit}}$. Total Time for 2 units = $2 imes 80 = mathbf{160 ext{ hours}}$. Time for 2nd unit = $160 - 100 = mathbf{60 ext{ hours}}$.
• Batch 2 (Cumulative Units = 4): Cumulative Average Time/Unit = $80 imes 0.80 = mathbf{64 ext{ hours/unit}}$. Total Time for 4 units = $4 imes 64 = mathbf{256 ext{ hours}}$. Time for 3rd & 4th units = $256 - 160 = mathbf{96 ext{ hours}}$ (Avg 48 hrs/unit).
• Batch 3 (Cumulative Units = 8): Cumulative Average Time/Unit = $64 imes 0.80 = mathbf{51.2 ext{ hours/unit}}$. Total Time for 8 units = $8 imes 51.2 = mathbf{409.6 ext{ hours}}$.
• Direct Labor Cost Trend: Unit 1 Cost = 100 × ₹50 = ₹5,000 → Cumulative Average Unit Cost for 8 units = 51.2 × ₹50 = ₹2,560 per unit (48.8% Cost Reduction).
• STRATEGIC TAKEAWAY: Failure to account for the learning curve results in severe cost overestimation and uncompetitive tender bids.