2.

2 Costing for labour costs

2.2.1 Define the direct labour and indirect labour cost

Labour
⚫ Is the human factor that converts raw materials into finished product
⚫ Two (2) Types of Labour Cost
Direct Labour Cost Indirect Labour Cost
⚫ Wages and remuneration ⚫ Wages which cannot be identified with a
paid for all employees’ particular product or service
effort and skills who ⚫ Does not directly affect the construction or
directly contribute to the composition of finished product
conversion of direct ⚫ Salaries are treated as overheads
material into saleable
products or services
Production Service Product Production Service Labour-
Output Examples Department Departments Related Costs
Examples ⚫ Cooks / Chef ⚫ Foremen ⚫ Maintenance ⚫ Premium
⚫ Machine ⚫ Kitchen ⚫ Supervisors Workers paid for
operator / helpers ⚫ Inspectors ⚫ Purchasing shifts
Assembler ⚫ Food tester ⚫ Forklift and Managers ⚫ Overtime
⚫ Welders ⚫ Nutritionist Crane ⚫ Storekeeper ⚫ Holiday
⚫ Assembly Drivers ⚫ Factory Pay
line ⚫ General Cleaners ⚫ Group
workers Worker ⚫ Security Insurance
⚫ Paint Guards ⚫ Pension
sprayers ⚫ Timekeepers ⚫ Uniform
⚫ Carpenter ⚫ Machine ⚫ Hospital
⚫ Baker Cleaners and dental
⚫ Tailor ⚫ Materials expense
handlers
⚫ Shop Clerks
⚫ Service
Workers

2.2.2 Explain recording and control labour costs

⚫ Time keeping / time recording is a detailed recording of attendance or the

time recording of attendance or the time employed on a given job or amount
of work done.

⚫ Example: Punch / Clock Card, Thumb Print Machine, Handwritten Time

Sheet.

⚫ Objectives of time recording are:

 ◼ to assist in the preparation of payrolls, and

◼ distribution of labour costs and other cost records.

⚫ Purposes of time recording:

◼ A basis of wage calculation

◼ An analysis of time spent on job

◼ Information for control and planning

2.2.3 Explain the different types of remuneration method

2.2.4 Calculate the remuneration using the different methods

2.2.5 Explain advantages and disadvantage of various remuneration methods

a. Time-based Schemes

⚫ Wages / Salaries are paid based on period of attendance

⚫ Commonly used:

◼Where the output is difficult to measure (Administrative Function,

Repairing Machinery)

◼When a job of high degree of skill and quality is extremely

important

⚫ Workers are paid based on the

number of hours they work (rate
per hour)
⚫ Illustration
Rate / Hour = RM2 / hour
Hour Worked = 40 hours

Wages = Hours worked X Rate per Hour

= 40 hours X RM2
(a) Flat Time Rate (Day Rate) = RM80
Advantages Disadvantages
⚫ Easy to ⚫ No incentives
compute and for employees
understand to increase
⚫ Facilitate production
planning for ⚫ Supervision
labour cost needed
⚫ Ensure quality ⚫ Efficient and
work as no inefficient
 hurry to workers are
complete the paid the same
job ⚫ Dissatisfaction
⚫ Income may arise
security as among the
regular and efficient
stable income workers. It
since the may result in
reate does not high labour
fluctuate with turnover of
changes in good workers.
output
⚫ Suitable for
direct and
indirect labour
⚫ Designed to provide a strong
incentive to efficient worker by
paying higher than inefficient
workers.
⚫ Illustration

Normal rate per hour = RM3 / hour

Normal output = 10 units / hour
High day rate = RM4 / hour
Output = 10 units / hour
A worked 40 hours completed 400 units
(inefficient workers)
B worked 40 hours completed 500 units
(b) High Day Rate (efficient workers)

Wages:
A = 40 hours X RM 3 = RM120
B = 40 hours X RM4 = RM160

Note: B is paid RM4/hour because B has

produced more than the normal output.
(500/40 hours = 12.5 units / hour)

Advantages Disadvantages
⚫ Labour cost ⚫ Employees
per unit cannot earn
decreases as more than the
 the output fixed hourly
increases rate for their
⚫ Easy to extra effort
compute and ⚫ No guarantee
understand that the
⚫ High quality scheme will
output work
achieved consistently
⚫ Give incentive ⚫ Employee may
to good or prefer to work
skilled at normal rate
workers of output
⚫ Reduce
dissatisfaction
among workers
⚫ Able to
attract higher
grade workers
⚫ Employees are paid based on
agreed level of wages for a
specified level of performance
⚫ Illustration
Production (units) Rate / hour (RM)
101-200 3
201-300 4
301-400 5
⚫ Calculation
Workers Unit Hours Wages
(c) Measured Day Rate
(40 hour produce worked earned
- week)
X 120 40 40xRM3
=
RM120
Y 260 40 40xRM4
=
RM160
Z 380 40 40xRM5
=
RM200
b. Piecework Schemes

⚫ Relates to individual effort and payment based on the achievement

/ production

⚫ Produce more and earn more

⚫ Based on the principles than an

employee requires encouragement
to work
⚫ Paid based on the number of units
produced
⚫ Amount of attendance is less
significant
⚫ Used when quantity output and
quality control are important
⚫ Formula:
⚫ Wages = Units Produced X Rate
per Unit
⚫ Illustration

Abu is employed by a company. He is

paid RM2 for each unit he produces.
Abu produced 150 units.

(a) Straight Piecework

Wages = 150 units X RM2 = RM300

Advantages Disadvantages
⚫ Strong ⚫ Quality
incentive to affected
increase
production
⚫ Less ⚫ Working
supervision efficiency
will reduce
when
employee is
satisfied with
their pay
⚫ Simple to ⚫ No minimum
calculate and wage.
easy to Fluctuation in
understand wage earned
 by workers
⚫ Fixed ⚫ Slow
overhead inexperience
cost per unit workers and
decrease as trainees are
output being
increase penalised (low
income)
⚫ Improve ⚫ Establishing
morale piece rate
because involve
effort is exoensive
rewarded negotiation
with
employees
⚫ Attract more ⚫ Involve a
efficient much more
workers since complex
they have the recording
opportunity system than
to earn time rate
higher wage
⚫ Apply guaranteed minimum wage
⚫ Protect employees by guaranteeing
them minimum weekly wage based
on hourly rate multiply by
employee’s number of attendance
hours
⚫ Applies when the level of piece
work earnings is below the
guarateed minimum level
(b) Piecerate With Guaranteed
⚫ Provides security for employees
Minimum
receivin low wages due to cikness,
delays, machine breakdowns, tool
breakage and shortages
⚫ Disadvantage: Flat rate per unit
being charged
⚫ Formula: Wages = Hours worked X
Guaranteed Time Rate + No of
units X rate / unit
 ⚫ Illustration

Rate / Unit = RM0.60

Guaranteed time rate = RM1.50 / hour
Hour worked = 40 hr
Below 100 units the guaranteed
minimum weekly wage is paid.

40 hours X RM1.50 = RM60

Workers Units Wages
Produced
A 80 RM60
B 100 RM60
C 120 120units x
RM0.60 =
RM72
D 140 140units x
RM0.60 =
RM84
(c) Differential Piece Rate ⚫ Objective: It encourages
employees to increase production
by offering an increase rate per
unit at different levels of
production
⚫ The rate per piece or rate per
standard hour of production is
increased as the output level rises
but only applies to the additional
unots, not to all the units achieved.
⚫ Illustration
Standard rate / unit = RM0.60
Standard output = 2 unit / hour
Hours of production per week = 40
hours

Level of Rate
Production
Less than 80% of standard
standard rate
Standard Standard rate
More than 120% of
 standard standard rate
Note:
Standard hours is the amount of work
that should be performed in one hour
under standard condition
A standard hour is a mesurement of
standard output X hour

c. Bonus/Incentives Schemes

⚫ Include all influences (negative and positive) that will motivate

employees

⚫ To give incentive to efficient workers

⚫ Classified as financial and non financial

⚫ Types:

◼Individual Bonus Scheme

◼Overtime

◼Group Bonus

Individual Bonus Scheme

⚫ Individual employees qualify for a bonus on top of their basic wage, each
person bonus’ is calculated separately
⚫ Charged to production overhead
⚫ The individual can earn bonus by working at an above target standard or
efficient
⚫ Based on the relation between the time allowed and the time taken, and is
usually calculated on the operative’s basic pay
Total Wages Basic Wage + Bonus
Time Allowed (TA) Time allowed set for a particular job
Time Taken (TT) Actual hours worked
Time Saved (TS) When the worker takes less time than
TA
Bonus Based on a percentage of the time
saved
⚫ Illustration
Time allowed for production of doughnut is pieces per hour. The wage rate is
RM per hour. Hours to produce Ben worked 7 hours to produce 1200 pieces of
doughnuts.
Calculate the time saved and bonus payment to Ben (assuming bonus is 40% of
 time saved).
TA to produce 1200 pieces is:
TA = 1200 / 100 = 12 hours
TT = 7 hours
TS = TA - TT
= 12 hrs - 7 hrs
= 5 hrs
Bonus = 40% X 5 hrs X RM5.00
= RM10.00

Overtime
⚫ Extra hours worked over and above basic hours / normal working hours
required by management
⚫ OT hours = Hours worked - Basic Hour
⚫ OT rate is higher than basic rate. Example: Basic rate is RM2/hr whereby
OT rate is 1.5 times higher. Thus, OT rate = 1.5X2 = RM3/hr
⚫ Gross Wage = Basic Wage + Bonus + OT premium
⚫ Illustration
The following relates to a company which practises payment by result scheme.
Employees are paid bonus based on 30% of time saved. The basic working hour
per week is 40 in production department of the company. Overtime premium is
payable at one and half a time for the first 4 hours and two times for the
following overtime worked. Payment is made in full for all units produced
including rejected units.
Employee Unit TA / unit TT (hr) Rate per Rejected
Produced (hr) hr (RM) unit
A 500 0.10 40 4.50 25
B 880 0.05 42 5.00 30
C 280 0.15 48 4.00 10
Calculate for each employee the following:
a. Bonus earned
b. Overtime premium
c. Gross wage earned
d. Wage cost
e. Effective wage rate per hour
Answer:
A B C
A. Bonus earned RM13.50 RM3 -
B. Overtime - RM15 RM56
premium
C. Gross wage RM193.50 RM218 RM216
earned
D. Wage cost RM0.41 / good RM0.26 / good RM0.80 / good
unit unit unit
E. Effective wage RM4.83 RM5.19 RM4.50
rate per hour

Group Bonus
⚫ Applied collectively to two or more operatives working as a group
⚫ Their duties must be interdependent and have common incentives
⚫ Objectives:
⚫ To create team spirit
⚫ To encourage the eliminatio of wastes in term of materials and time
⚫ To ensure that both supervisors and operators take and interest in the
performance of others
⚫ To obtain economical production at high level
⚫ Bonus is based on cost saving. Time saved (TS) is the total time saved by all
individual in a group.
⚫ TS by all employees = TT by an emplyee / TT by al lemployees X % Basic
Rate
Or
Any other formula depending on the organization’s policy

Advantages and Disadvantages of Group Bonus Scheme

Advantages Disadvantages
⚫ Encourage team spirit ⚫ Imbalanced satisfaction by the
efficient worker and inefficient
worker
⚫ Easier to administer ⚫ No individual incentive
⚫ Assist in reduction of labour ⚫ Any discrepancy of members will
unover, spoilage, waste and affect the whole group
absenteeism performance (sickness, holidays)
⚫ Helps in performance appraisal ⚫ May result additional
administrative costs
⚫ Increase productivity of ⚫ Quality may be deteriorated due
inefficient worker to bulk output
⚫ Reduced the amount of ⚫ Not easy to determine various
supervision as each member in the classes of workers in the group to
group will inspect each other to share bonus
 ensure each member has
performed his task satisfactory in
order to qualify for bonus

Illustration
In the wood machining of a company, a group bonus scheme operates. Under the
scheme, time save is shared among the members of the group pro-rate to the
work and is paid at agreed percentages of the hourly base-rates.
Overtime is paid at time plus one half for the eight hours in excess of 40 hours
and double for hours in excess of 48.
Bonus is calculated weekly nd for a given week, use the following information to
calculate:
A. Time allowed and time saved for each of the three work groups and
B. For each employee:
⚫ Bonus hours and bonus earnings
⚫ Basic wage including overtime
⚫ Gross wage
Group Cabinets Bunks Kitchen
Actual hours worked 60 40 50
Out Completed 20 26 25
(units)
Ime allowed per unit 5 3 4
completed (hours)
Rejected work (not - - -
paid for)

The following workers were employed based on the above information:

Abu Hasni Izan
Actual hours worked 56 54 40
(hrs)
Rate per hour (RM) 4 4.50 6
Bonus (% of base 50% 40% 60%
rate)

Answers:
Abu Hasni Izan

Bonus Hours
Answer:48 hours Answer:46 hours Answer:34 hours
Bonus Rate
 Answer: RM2 Answer: RM1.80 Answer: RM3.60

Bonus Earned
Answer: RM96 Answer: RM82.80 Answer: 122.40

Overtime Hours
Answer:16 hours Answer:14 hours Answer:0 hour

Overtime
Premium

Basic Wage
Answer: RM160 Answer: RM180 Answer: 240

Gross Wage

Answer:RM368 Answer:RM370.80 Answer:RM362.40

2.2.6 Explain the labour productivity and the effects of labour turnover

⚫ Labour turnover is the change in the labour force during a specified

period of time.

⚫ It is impotant for the management to keep labour turnover as low as

possible as excessive turnover can be very expensive and reduce
morale of the employees.

Labour Turnover Ratio =

Average number of employees leaving requiring replacement / Average number
of employees in the period X 100%
Illustration:
A company had its payroll for 120 employees at the beginning of the year. At
the end of the year, the number of factory employees employed was 125. During
the year it had to replace 16 employees who resign from the company.
Determine the labour turnover ratio.
Answer: 15.10%
Solution:

Causes of Labour Turnover

Voluntary Involuntary
⚫ Domestic reasons ⚫ Lack of ability
⚫ Personal advancement ⚫ Redundancy - Economic Factor
⚫ Higher wages ⚫ Dismissal for disciplinary reasons
⚫ Job dissatisfaction ⚫ Health reasons
⚫ Personality ⚫ Retirement
⚫ Marriage ⚫ Transport difficulties

Costs of Labour Turnover

Preventive Costs Replacement Costs
Costs incurred to keep the employees Consist of recruitment and training
happy and discourage them from costs, scrap and defective work during
leaving training, loss of production
Medical Services Full time doctors Administration Advertising,
and nurses reduce recruitment,
labour turnover interviewingm
and increases selection,
efficiency and engamenet,
productivity medical
examination
Sports, recreation Subsidised Training Employees have to
and other welfare canteens and be givem training,
activities better meals, even if skilled
housing schemes, workers are
educational engaged
facilites, social
clubs
Environment Improvement in Scrap and New employees
working conditions defective work may take time to
(Air-conditioning, attain the degree
Flexible working of efficiency of
hours, Increase in the employees
holiday they have
entitlement) replaced
Pension Scheme Replavement of Cost of tools and While on training
the present machine and during the
scheme by one breakages early periods
giving improved after completion
benefits on of training
retirement
Transport Company providing Accident due to Costs include
transport inadequate under-recovery of
facilities experience overhead, idle
time,
compensation
Personal Role of the
Development department in
helping to develop
and maintain a
contented
workforce (Care
about and respect
the employees,
consider and
support the
employees’
grievances)

TEACHING AND LEARNING ACTIVITY: PRACTICAL SESSION

TOTAL: 11 QUESTIONS
1. The following information is available on Department 3 of Ershad
Manufacturing Ltd. for a period of six month.

Number of people employed at the beginning of the period 36

Additions to the workforce during the period 7

Number of employees who left during the period 5

Calculate the labour turnover rate. (Answer: 16.22%)

2. S & S Company produced the detail about labour turnover for its employees.

Department X Department Y

No. of employee at the beginning of the 72 34

period

The addition of employee during the 14 9

period

No. of employees leaving during the period 11 7

You are required to calculate :

a) the number of employee at the end of the period

(Answer: Dept X = 75, Dept Y = 36)

b) labour turnover rate for each department

(Answer: Dept X = 17%, Dept Y = 22.86%)

3. The following information relates to two workers for a particular week in

July 2020.

Armin Badul
Production units 320 360
Time taken 32 hours 42 hours
Time allowed 38 hours 48 hours
Rate of pay per hour RM3.00 RM2.90
Rate per unit RM0.40 RM0.30
You are required to calculate the workers’ remuneration based on Piecework
Scheme. (Answer: Armin = RM128; Badul = RM108)
4. Lee is a sole proprietor, involves in junk foods packaging and have two
workers, Dee and Vee. The following are the detail about the workers’ activities
for one week. Working hour for one week is 40 hours.

Dee Vee

Rate per hour RM3.20 RM2.75

Units completed 180 150

You are required to calculate the wages paid to each worker using the following
remuneration methods :

(a) Time-based Scheme (Answers: Dee = RM128; Vee = RM110)

(b) Piecework Scheme at RM0.75 per unit

(Answers: Dee = RM135, Vee = RM112.50)

(c) Bonus scheme which bonus will be paid at a rate RM2.40 per hour for time
saved. Time allowed is 15 minutes per unit.

Suggested Working:

Dee Vee
Time Allowed

Answer: 45 hours Answer: 37.5 hours

Time Saved
Answer: 5 hours Answer: 0 hour
Basic Pay
Answer: RM128 Answer: RM110
Bonus
Answer: RM12 Answer: RM0
Total Wage
Answer: RM140 Answer: RM110

(d) Differential Piece Rate based on :

First 100 units RM0.60 per unit

101 – 150 unit RM0.90 per unit

 Next 151 unit RM1.20 per unit

Answer: Dee = RM141; Vee = RM105

5. Surip worked at Production Department for Syarikat Perkilangan Maju

Jaya Sdn. Bhd which produced crystal vases at Balok. At the last week of July
2020, he completed 36 units of crystal vases and the detail about the
production as follows :

a) Working hour : 8.00 am to 5.30 pm

b) Working day : Sunday to Thursday

c) Rate per hour : RM2.50

d) Rate per unit : RM1.80

e) Standard time to complete 3 unit crystal vases was 5 hours

You are required to:

a) Calculate the basic pay for Surip during the period (Answer: RM118.75)

b) Calculate differential piece rate based on:

First 10 units - use above rate

11 – 20 units - RM2.00

21 – 30 units - RM2.30

next 31 units - RM2.60

Answer: RM76.60

c) If Surip worked from 8.00 am to 6.00 pm from Sunday to Thursday,

calculate the overtime premium and his gross pay if he is paid at time and
half for overtime.

Answers: RM9.38 and RM128.13

6. Lumut Blue Limited makes three products : Shampoo, Body Shampoo and
Soap. Data for the four weeks ended 31st July, 2020 relating to the products
and four employees are shown in the table below. Each worker is paid daily at
the rate of RM6.40 per hour.

Employees Actual Production in Units

 Hours Shampoo Body Shampoo Soap
Worked

Fatihah 170 97 80 -

Fatin 146 38 12 120

Farhan 162 - 54 156

Faizal 164 188 10 -

Total 825 325 290 320

Due to high demand last year, the company is considering changing the basis of
the remuneration scheme. The management accountant has come up with a
suggestion of a new scheme as follows:

Workers are paid based on the piece rates (given below) plus a bonus at a rate
of RM6.00 perhour on time saved by them.

Piecework rate per unit Standard hours allowed per

Product
(RM) unit

Shampoo 4.40 1

Body Shampoo 6.40 1.5

Soap 3.00 0.75

Calculate for the four weeks the gross wages earned by each employee using :

a) the present system (Answers: RM1088, RM934.40, RM1036.80,

RM1049.60)

b) the proposed piecework system

Suggested Working:

Fatihah Fatin Farhan Faizal

Time Allowed
Time Taken
Time Saved
Basic Pay
Bonus
Gross Wage Answer: Answer: Answer: Answer:
RM1,220.80 RM604 RM1,029.60 RM1,125.20
7. The Assembly Department of Decor Bhd employs three workers working 40
hours per week. Abu and Mat are semi-skilled workers, whereas Pin is a
skilled worker. The factory operates five days per week and the workers are
paid based on the hourly rate. Overtime premium paid is 40% of basic rate
and workers are also entitled for individual bonus of 50% on time saved.

Below is the information for the four weeks of July 2020 :

Employee Abu Mat Pin

Hours worked 165 163 160

(hour)

Rate per hour 10 10 12

(RM)

Output (unit) 6,720 6,600 8,500

Mat is required to work overtime in order to complete an urgent order from a

regular customer.

Semi-skilled workers are required to complete one unit of product within 1.5
minutes, whilst 1.2 minutes is allowed for skilled workers.

You are required to calculate the basic pay, overtime pay (if any), bonus pay
(if any) and gross pay for each worker for the month of July 2020.

Suggested Working:

Abu Mat Pin

Time Allowed
Time Taken
Time Saved
Basic Pay
Bonus
Overtime
Gross Pay Answer: Answer: Answer:
RM1,685 RM1,652 RM1,980

8. Aries Corporation produces a product called Venus. The normal working hours
for the company is 40 hours a week.

Bakar, who is a skilled worker, worked 46 hours in the second week of July,
while Chong, who is a semi-skilled worker, worked 51 hours for the same period.
Skilled workers are paid RM6.00 per hour and semi-skilled workers are paid
RM4.50 per hour.
Overtime is paid at a premium of 60% of the normal hourly rate and bonus will
be paid based on 40% of the time saved at the normal hourly rate.

Total output produced by Bakar is 312 units while Chong produced 210 units.
The standard time to produce a unit of Venus is 10 minutes and 15 minutes for
skilled workers and semi-skilled workers respectively.

You are required calculate the gross wages for each employee for the second
week of July.

Answers: RM312 and RM261.90

9. The following data relates to 3 workers of AF Industrial for first week of

July 2020.

Employees Dafi Ismail Sabri

Units completed 180 170 180

Time allowed per unit 15 12 16

(minute)

Time taken (hour) 38 32 43

Rate per hour (RM) 1.50 1.30 1.40

Rate per unit (RM) 0.30 0.25 0.20

(a) Calculate the workers’ remuneration based on Piecework scheme.

Answers: RM54, RM42.50, RM36

(b) In the second week of July 2020, Dafi, Ismail and Sabri need to complete
340 units, 280 units and 360 units respectively in order to complete an order
from customer. Their hours worked for the order as follows :

Dafi - 90 hours

Ismail - 59 hours

Sabri - 100 hours

Calculate the overtime premium and gross pay for each worker if they were paid
1¾ for overtime premium.

Suggested Working:

Dafi Ismail Sabri

Time Allowed
Time Taken
Overtime ( hours)

Basic Pay
Overtime (RM) Answer: 5.63 Answer: RM2.93 Answer: RM4.20
Gross Pay Answer: Answer: Answer:
RM140.63 RM76.63 RM144.20

9. (a) Syarikat Perniagaan Orang Bandar involved in manufacturing Mini Car

Toys. Wan and Rafi are their workers at Engine Department and they have
different skills. Information below shows their production in the month of July
2020.

Workers Production Time Allowed Time Taken

Wan 260 units 60 hours 100 hours
Rafi 160 units 90 Hours 80 hours

Each of the worker are paid RM5 per hour. You are required to calculate the
basic pay for each of them. (Answers: RM500, RM400)

(b) Star Marketing makes three products: J, A and Y. Data for the year ended
30th June 2020 related to the products and employees were as follows:

Employee Hours worked Product J Product A Product Y

Kay 2,040 1,164 960 -
May 1,750 456 144 1,440
The employees were paid on time based at RM4.40 per hour. In an attempt to
increase production, Star Marketing proposed changing the basis on which
employees are paid based on output with rates given as follows:

Product Piece rate per unit (RM)

J 4.40
A 6.40
Y 3.00
Using the information given, you are required to calculate the earnings for each
employee on the straight piecework scheme. (Answers: RM11265.60;
RM7248)

10. The following table contains related information of 3 Waterlily Industries

workers for the month of July 2020:

Ali Auni Anis

Units produced 300 215 210
Damaged units 0 6 8
Time taken / 50 55 60
week (in hours)
Standard time / 4% more than 15% more than 20% more than
week time taken time taken time taken
Rate per hour (in 30 20 25
RM)
Rate per unit (in 21.50 20 23
RM)

Additional Information:

(i) Normal time starts from 9am to 7pm and the workers work 5 days a
week.

(ii) The factory decides to pay for damaged units because the raw materials
used are not of high quality.

(iii) No overtime paid for extra time taken.

Based on the information above, you are required to calculate the basic pay for
each worker.

Answers: RM1500, RM1100, RM1500