Accounting for Labour

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1 Introduction

This chapter details various methods by which labour may be paid (remuneration methods), and also looks at various ratios which can be useful in relation to labour.

2 Direct and indirect labour costs

All costs of indirect workers (i.e. those not directly involved in making products, such as maintenance staff and supervisors) are indirect costs.

For workers directly involved in making products:

• Direct costs are their basic pay, and any overtime premium paid for a specific job at the customer’s request.

• Indirect costs are general overtime premiums, bonus payments, idle time, and sick pay

3 Remuneration methods

There are three basic remuneration methods – time work, piecework, and bonus schemes.

• Time work

Wages are paid on the basis of hours worked.

For example, if an employee is paid at the rate of $5 per hour and works for 8 hours a day, the total pay will be $40 for that day.

Employees paid on an hourly basis are often paid extra for working overtime.

For example, an employee is paid a normal rate of $5 per hour and works 4 hours overtime for which he is paid at time-and-a half.

The amount paid for the overtime will be 4 x 1.5 x $5 = $30.

• Piecework

Wages are paid on the basis of units produced.

For example an employee is paid $0.20 for every unit produced, with a guaranteed minimum wage of $750 per week.

In week 1, they produce 5,000 units and so the pay will be 5,000 x $0.20 = $1,000 for the week.

In week 2, they only produce 3,000 units, for which the pay would be 3,000 x $0.20 = $600. However, since this is below the guaranteed minimum the employee will receive $750 for the week.

• Bonus (or incentive) schemes

There are many different ways in which a bonus scheme can operate, but essentially in all cases the employee is paid a standard wage but in addition receives a bonus if certain targets are achieved,

Bonus schemes will be revisited later in these course notes.

4 Labour ratios

There are various ratios that can be useful for management when managing labour. You should be aware of the following:

• Idle time ratio

Idle time is time for which the employee is being paid but during which they are not actually working (e.g. because the machine on which they work had broken down).

• Labour turnover ratio:

This measures the rate at which employees are leaving the company.

• Labour efficiency ratio:

This measures whether we are working faster or slower than expected.

• Labour capacity ratio:

This measures whether we were able to obtain more or less working hours than we originally budgeted on being available.

• Labour production volume ratio (activity ratio):

This measures whether we were able to produce more or less than we expected to produce based on the budgeted hours available.