Chapter07 Labor costs
Priority = High Exam Guidance
You will be expected to illustrate different remuneration policy and incentive schemes. Their characteristics must be always in your mind. And you must be familiar with the computation of total pay of employee. You will also need to be aware of the procedures and documents required for recording labour costs. 1. Measuring labour activity 1.1 Corresponding concepts
1.1.1 Production is the quantity or volume of output produced.
1.1.2 Productivity is a measure of the efficiency with which output has been produced. It is also called efficiency ratio.
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Expected hours Productivity/ = efficiency ratio Actual hours Actual output = Expected output Ratio > 100% : efficient labour Ratio < 100%: inefficient labour
Example:
Suppose that an employee is expected to produce 3 units in every hour that he works. The standard rate of productivity is 3 units per hour. If, during one week, the employee makes 126 units in 40 hours of work the following comments can be made.
1.1.3 Standard hour of production is a concept used in standard costing, and means the number of units that can be produced by one worker working in the standard way at the standard rate for one hour.
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Standard hour Budgeted output of production =
Budgeted hours 1.1.4 Production volume ratio
Expected hours to make output Production = volume ratio Budgeted hours Output measured in expected or standard hours = Budgeted hours Actual output = Budgeted output Ratio > 100%: worked above capacity Ratio < 100%: worked below capacity
1.1.5 Capacity ratio represents how much production capacity is utilized. Actual hours taken Capacity ratio =
Budgeted hours
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Relationship between the three ratios Production volume ratio
= Efficiency ratio X capacity ratio
Example:
Rush and Fluster Co budgets to make 25,000 standard units of output(in four hours each) during a budget period of 100,000 hours. Actual output during the period was 27,000 units which took 120,000 hours to make. Required:
Calculate the efficiency, capacity and production volume ratios.
1.2 How to enhance production and productivity?
Production can be increased by the following ways. a) Working overtime b) Hiring extra staff
c) Sub-contracting some work to an outside firm d) Managing the work force so as to achieve more output.
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Productivity would be improved if a production department produces the same amount of output as soon as possible.
1.3 Effect of productivity on cost
An increase in productivity will reduce labour cost per unit. Example:
Clooney Co has a production department in its factory consisting of a work team of just two men, Doug and George. Doug and George each work a 40 hour week and refuse to do any overtime. They are each paid $100 per week and production overheads of $400 per week are charged to their work.
ⅰ. In week one, they produce 160 units of output
between them. Productivity is measured in units of output per man hour.
ⅱ. In week two, management pressure is exerted on
Doug and George to increase output and they produce 200 units in normal time.
ⅲ. In week three, Doug and George agree to work a
total of 20 hours of overtime for an additional
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