Labor Costing

bayeyo pg-pandezileee, 2016 1
CHAPTER THREE
Labor costing

Labor costing
• Labor represents cost of services of human
resources/manpower.
• So, labor costing means determining cost for
labor.

• Total wages to be paid to different type of workers
are determined by the personnel department on the
basis of job evaluation
• Job evaluation is the scientific method of determining
relative worth of different jobs.
workers are classified into different pay scale on the
basis of qualifications, experience, skills,
responsibilities, work hazards, working conditions
etc.
Job evaluation

• It should be accepted by all employees
• It should be flexible to adapt to changes
• It should be economical to use
• It should stabilize the labor turn over
• It should provide for incentive wage plan
• It should minimize absenteeism
• It should be understood by all workers
Characteristics of good wage system

Bayeyo.pg-pandezileee, 2016 5
Methods of computing wages
Time Rate method:
•Under the time rate system, the unit of measurement is
time. This system disregard the output of workers. The
wage rate of workers may be determined on hourly,
daily, weekly or monthly basis. An hourly rate is
determined in advance at the time a worker is
employed. This rate is then multiplied by the number of
hours worked in a day, week or in a month. For instance
if there are 8 working hours in a day and the wage rate
per hour is Shs. 2 then the workers basic pay per day is
Shs.16

Advantages of time rate are;
It is simple to be understood by workers
Easy to calculate
It is readily acceptable by labor unions as it takes
care of he interests of average workers
Workers concentrate on the quality of jobs and not
quantity of jobs
The main dis-advantage is workers become lazy and
it discourages competent workers because there is
less incentive for hard workers

Piece rate method:
•Under this method an employee is paid per unit of
product, article or job completed. This method can be
used only if the work can be divided into uniform pieces.
If workers is paid Shs. 1000 to every 20 units then this
method is known as piece rate method.

Advantages of piece rate;
It provide incentives to more efficient worker
It does not require close supervision of employee.
The main dis-advantages are the workers can produce
inferior goods and the workers have no guarantee of
their monthly income

Other methods of computing wages
•High time rate for overtime: Under this method,
normal working hours are paid at the normal time rate
but for overtime worked during week days and at
weekends, a high time rate is paid in order to induce to
the workers to work for more hours.

• Example: If normal working hours are 8 hrs. from
Monday to Friday per day, and for Saturday 5 hrs.
extra time during week days is 50% higher than the
normal hourly rate. And for Sundays double the
rate. The hourly rate is 10 sh. If Kidire worked for 60
hrs. including 8hrs on Sunday what will be his total
wage in a week?

• Piece rate with guaranteed time rate:
Under this method, a specific amount is paid to the
worker on daily basis irrespective of units produced
by him during that period but if his output exceeds
beyond minimum limit then he is paid according to
piece rate method. This method ensures a specific
daily or monthly income to the workers. This is
because some times lower output might not be
workers fault, shortage of material, power failure and
machinery breakdown may be the reasons for lower
output.

For example if the guaranteed wage for Kilodi is Shs.
1500 and he is paid Shs 5 per units. Find out his
monthly wage if he produces.
i) 500 units
ii) 270 units per month

• Differential piece rate: Under this method piece
rate varies at different levels of out put. If the
workers produces more unit then he get higher
piece rate beyond a specific level of output.
• Example: K. lamis is paid Shs 5 per unit up to 100
units, Shs 6 per unit for 101 to 200 units and Shs 7
per unit produced in excess of 200 units. Calculate
her wage if she produced 300 units.
.

Premiums bonus schemes
• Premiums bonus schemes: A premium bonus is
paid to the workers according to hours saved.
According to premium bonus schemes, the savings
accruing to employers out of time saved by the
workers should be shared between the employers
and the workers. Premium bonus schemes
guarantees the worker a minimum wage per hour but
pays a premium for production in excess of the
stipulated wages.
Total pay of the worker =minimum wage+ bonus on
time saved
bayeyo g-pandezileee, 2016 14

• Three common types of premium bonus
schemes
Halsey: This scheme was originated by F.A Halsey.
Under this system if the worker completed the job in
less then the standard time or time allowed, he is
paid bonus in additional to a minimum hourly wage.
Halsey scheme= ½ (time saved*wage rate).
Where; time saved=(time allowed-time taken)

Halsey-weir: Under this scheme a worker shares
1/3% of the time saved.
Halsey- weir= 1/3 (time saved*wage rate)
Rowan: Under this system the workers obtain a
bonus as = time taken/time allowed* time
saved*wage rate
• Example: Nurumi completed a job in 45 hours for
which 60 hours were allowed. His wage rate is Shs
16. calculate Nurumi’s total wage using all schemes.

Centralized
Advantages;
• Less staff required; Paper work is reduced
• Less risk of duplication of items of stock
• Control of stock level is easy and simple
Disadvantages;
• Higher transport cost.
• Possibility of breaking down of transport vehicle
• Delay in supply of material to branches and
departments at distant places

Store keeping
Decentralized stores: When material are held by sub
stores in each department or branch then it is called
decentralized stores.
Advantages;
• No transport cost
• No delay in supply of goods
Disadvantages
• Many staff are required
• Series of formalities and paper works
• Difficulty in stock control

Store keeping
• Imprest stores: In this store material are held
in central store and issued to the sub stores
under imprest system.

Stock control
• Stock includes raw material, finished goods,
equipment, components, office stationary, goods
purchased for resale etc.
• Stock control means making sure that the business
has the right quantity of goods, at the right place and
in the right time.
• Objectives of stock control:
1. It prevent under-stocking and over-stocking.
2. Minimizes storage costs
3. Protection of materials from loss and wastage due to
defective storage.

Stock control
• Stock levels:
Some stock levels are set up by enterprise as a policy
matter:
These are as under:
Maximum stock level: Represents the upper level
beyond which the quantity of any item is not allowed
to rise.
Formula:
Max stock level= R.L+ RQ+( Min C*Min RP)

Stock control
• Minimum stock level: This is the lower limit below
which the stock of any item should not be allowed to
fall. This is technically known as safety or buffer
stock.
• Formula:
Min stock level= RL- (NC* NRP)

Stock control
• Re-order level: Is fixed between minimum
and maximum stock level. When stock of
material is reached at this level, the store
keeper should initiate actions for the
purchase of material.
Formula:
Re-order level= Max C* Max RP

Stock control
• Re-order quantity: This is the quantity for which a
purchase order is placed.
Formula:
Re-order quantity= Max SL- Min SL- (Min C* Min RP)
OR
Re-order quantity = EOQ
• Average stock levels= Min S.L+ Max S.L /2

Stock control
Where;
Max C = Maximum consumption
Min C = Minimum consumption
NC = Normal consumption ; average of max C and
Min C
Max RP= Maximum re-order period or lead time.
NRP = Normal Re- order period
R.Q = re-order quantity
Min SL = Minimum stock level
Max SL = Maximum stock level
•. bayeyo pg-pandezileee, 2016 25

Economic order quantity
• The quantity at which cost of having stocks is
minimum is known as economic order quantity.
• =√2*c*o/h
where; c= annual consumption/demand
o=ordering cost per order
h= holding cost per unit
• .

Labor Costing

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