CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.

AGRAWAL

CHAPTER-3
EMPLOYEE COST AND
DIRECT EXPENSES
TABLE OF CONTENTS:
1. Introduction
2. Labour Record Keeping and Time Monitoring
3. Time and Motion Study
4. Treatment of Items of Labour Cost
5. Job Evaluation and Merit Ranking
6. Labour Turnover
7. Labour Remuneration System and Group Bonus
8. Direct Expenses
9. Practical Problems
10. Past Exam Theory Questions

1. INTRODUCTION

It is another significant Component of cost, generally the second highest in the manufacturing concern and the
highest in the service industry.
Every organisation consists of people working in it and the success of an organisation largely depends on it’s
Human Resource i.e. the quality of people working in it. Unlike any other factor or production, It is not easy for
the management to deal with its human resource, since being human being they have feelings, emotions,
ambitions, sentiments, goals, etc. Therefore, management of an organization, often makes ensures to
remunerate and reward its employees in such manner that ‘An under-performing employee gets motivation
to improve his performance and a well-performing employee gets remuneration so that he can either
maintain/enhance its performance’. In order to take better care of it’s human resources, large organisations
have a separate dedicated department known an “PERSONNEL DEPARTMENT” or “HUMAN RESOURCE
DEPARTMENT” and this entire process of managing its human resources is referred as “HUMAN RESOURCE
MANAGEMENT (HRM)”.

Human Resource Management needs lot of planning and management and it entails lot of hindrances and
challenges like –
i) PLANNING Various Types and Number of employees required
Finding right talent and mapping it on right job
Under-utilisation or Over-utilisation of labour, both is HAZARDOUS!!!
ii) CHALLENGES From where to source labour – local, other state, expatriates?
Reservation, Castism, Political Influence, other such factors driving decision
Achieving Employer-Employee expectation equilibrium
Required type of labour may me limiting factor---Key Factor
iii) RISKS/THREATS Employee may turn disloyal---Employee Turnover
iv) SYSTEMS REQUIRED Standardization required as benchmark
Labour time needs recording------Time and Motion study

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 TYPES OF LABOUR

DIRECT LABOUR INDIRECT LABOUR

Those labours which are directly engaged on Those labours who are not directly engaged on
production of goods is known as Direct production of goods but which provides
support services are known as Indirect Labour.
Labour. Direct labour cost is defined as the
Indirect labour cost is not possible and
cost which can be identified with and allocated
economically feasible to trace to any specific
to cost centres or cost units. Ascertainment product. It is further discussed in the topic –
and treatment of Direct Labour Cost is covered Overheads.
in this topic.

“VARIOUS DEPARTMENTS INVOLVED IN OVERALL PROCESS OF HRM”

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2. LABOUR RECORD KEEPING AND TIME MONITORING

LABOUR RECORD KEEPING

TIME KEEPING TIME BOOKING

Time keeping refers to the correct recording of Time booking refers to the time spent by an
the employee’s attendance time. employee on a particular job/activity. Time
Methods of Time Keeping: Booking can be measured by maintaining Job-
(b) Manual Methods – Attendance Register, Cards.
Metal Disc/Token Method. Job-Cards are of two types:
(c) Automated Methods – Punch/Smart Card, (a) Job specific Job Card
Bio-Metric attendance, etc. (b) Employee specific Job Card
(a)

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

3. TIME AND MOTION STUDY

Time Study is defined as recording and analysis of time required for a job with a view to set standard time
requirements. Motion study implies analyzing the work into basic operations / motions / activities of a job.
These methods are complimentary to one-another. Father of this study is “GILBERTH”, who had studied the
movements required in laying bricks on a wall and reduced the number of movements from 18 to 6. He named
these motions as “THERBLIG”.
PROCEDURE –
1. Observation of workers to record their movement.
2. Classification of movements into NECCESARY and WASTEFUL.
3. Elimination of wasteful movements and improvisation of necessary movements.
4. Provision of standard tools and equipment to workers.
5. Observation of workers and recording time taken for necessary movements.
6. Determination of standard time = Average Time + Idle Time Allowance (Contingencies, Rests, etc.).
7. Addition of incentive margin, if any to attract efficient workers.

OBJECTIVES –
1. To determine the best way of doing things by avoiding wasteful movement.
2. To reduce stress and strain in job performance.
3. To determine standard time for completion of job.
4. To lay down norms for efficiency and performance evaluation.
5. To determine fair rate of wages based on output achievable per day.

4. TREATMENT OF ITEMS OF LABOUR COST

5.
I. IDLE TIME: The difference between the time paid for and actual (effective) time worked for is known as
idle time. This can also be calculated as the difference between the time recorded as per Time Keeping
Records and as per the Time Booking Records. The idle time then is analysed into Normal and Abnormal
idle time.
Accounting Treatment:
(a) Normal Idle Time – In case of Direct workers cost of normal idle time is spread over expected
Productive Hours and thereby charged to Cost of Production as Labour cost.
(b) Abnormal Idle Time – Cost of abnormal idle time is transferred to Costing Profit & Loss Account.

II. OVERTIME: Time spent by labour over and above normal time is known as overtime and it is generally
paid at double the normal wage rate.

OVERTIME WAGES = NORMAL WAGES + OVERTIME PREMIUM

Treatment of Overtime Premium in Cost Accounting:

1. If overtime is resorted to at the desire or request of the customer, then overtime premium should
be charged to that job directly.

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 2. If overtime is required to cope up with the general production programmes or for meeting
urgent orders, the overtime premium should be treated as “Overhead Cost” of the particular
department or cost centres in which overtime work was done.
3. If overtime is worked in a department due to the fault or mistake of another department, then
the overtime premium should be charged to the latter department’s “Overhead Cost”.
4. If overtime is worked on account of abnormal conditions such as flood, earthquake, strike,
lockout, etc. then it should not be charged to cost, but should be transferred to Costing Profit and
Loss Account or Profit and loss A/c as the case may be.
5. If overtime is worked regularly due to shortage of Labour, then wage rate should be inflated
just like treatment of normal idle time.

As per the Factories Act 1948 “Where a worker works in a factory for more than 9 hours in any
day or for more than 48 hours in any week, he shall, in respect of overtime work, be entitled to
wages at the rate of twice his ordinary rate of wages.”

III. HOLIDAY AND VACATION PAY:

Employees are normally entitled to some paid holidays and vacation. Such payments may be included in
departmental overheads.

IV. NIGHT SHIFT ALLOWANCE:

It is treated as part of overheads.

V. FRINGE BENEFITS:
They may include sick pay, employer’s contribution to provident fund leave pay, gratuity, attendance
bonus etc. It is more appropriate to treat fringe benefits as a part of direct labour cost, but for
administrative convenience they are normally treated as a part of overheads.

5. JOB EVALUATION AND MERIT RANKING

JOB EVALUATION MERIT RATING

1. It is the process of determining relative worth of 1. It is the process of determining relative worth of
different jobs. a person in the organisation.
2. It is carried out with an intention to design the 2. It is carried out with an objective of promotion,
salary and wage structure. transfer, or appreciation of an employee.
3. A uniform and fair wage structure is devised 3. It ensures fair wages to workers on the basis of
during job evaluation technique. their performance and merit.
4. Factors Considered: 4. Factors Considered:
i. Analytical and Conceptual skill i. Experience
ii. Management and administration skill ii. Association with the organisation
iii. Behaviour skill iii. Productivity i.e., efficiency
iv. Technical skill or physical work, etc. iv. Behaviour, honesty, punctuality, sincerity,
etc.
v. Relative importance in the organisation.
vi. Specialised skill, etc.

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

6. LABOUR TURNOVER

It is the rate of change in the labour force during a specified period.

There are different causes for labour turnover, which can be broadly classified under the following three heads
(a) Personal Causes (b) Unavoidable Causes (c) Avoidable Causes.

Effect of Labour Turnover:

It increases the cost of production in the following ways -
(a) Normal flow of production is disturbed.
(b) Efficiency of new workers is lesser than the old or experienced workers.
(c) Additional cost of recruitment and training.
(d) Untrained or new workers causes more breakage of tools, wastage of material, defective, etc.

LABOUR TURNOVER RATIOS

REPLACEMENT METHOD SEPARATION METHOD

FLUX METHOD ACCESSION METHOD

No. of employees accessed = Replacement + Addition

7. LABOUR REMUNERATION SYSTEM AND GROUP BONUS

Sr. Remuneration
Wages Calculation
No. System
1) TIME RATE SYSTEM
i. Ordinary Time Hours worked x Rate per hour
Rate System OR
Days worked x Rate per day
OR
Weeks worked x Rate per week
ii. High Wage Plan With a view to attract efficient and motivated workers, wages are paid on the
basis of the time rate higher than industry average. The well paid workers are
required to achieve pre-determined standards during regular working hours.
Generally overtime is not paid in this case.
iii. Differential Workers are paid according to comparative ability, skill & speed. Efficient
Time Rate (or workers in the same group are paid at higher rate and less efficient workers
measured day are paid at lower rate. It requires merit - ranking of workers. The efficiency is
work rate) thus awarded and an incentive exists for improvement of skill and
performance.

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Sr. Remuneration
Wages Calculation
No. System
2) PIECE RATE SYSTEM
i. Straight Piece No. of units produced x Piece Rate
Rate Efficient worker produces more units and get higher wages and less efficient
worker produces less units and get lower wages.
In this system, worker is responsible for his own efficiency.
Piece rate is calculated by considering Standard time and Normal Wage rate.
ii. Differential Under this system, the rate per piece increases as output level rises.
Piece Rate
a. Taylor It provides low piece rate for output below standard and higher piece rate for
output above standard.
% Efficiency Applicable Piece Rate
< 100 % Lower Piece Rate i.e. 83.33% or 80% of Normal Piece rate
> 100 % Higher Piece Rate i.e. 125% or 120% of Normal Piece rate
Higher Piece Rate is 1.5 times of Lower Piece Rate.
b. Merrick Efficiency % Applicable piece Rate
Upto 83 1/3% Normal piece rate
83 1/3% - 100% 110% of normal piece rate
Above 100% 120% or 130% of normal piece rate
Actual Output
Efficiency % =  100
Std. output in Actual Hrs.
OR
Std. hours for Actual
output
Efficiency % =  100
Actual hours
3) Gantt Task Bonus Efficiency Wages Basis
Plan < 100% Ordinary Time Rate
= 100% 120% of ordinary Time Rate
> 100% 120% of normal piece rate
e.g. 3 workers Ananta, Mahavir and Govinda were assigned 3 identical jobs.
Std. time for completing each job - 6 hours
Std. hourly wage rate - Rs. 30
Ananta completed the work in 4 hours, Mahavir in 6 hrs and Govinda in 8
hours. Workers are paid effective wage rate under Gantt Task Bonus System.

Appraisal of Performance
Workers Performance Basis of Wages
Ananta above Std. 120% of normal piece rate
Mahavir at Std. 120% of ordinary time rate
Govinda below Std. Ordinary Time rate

Piece rate = Std. time x hourly rate

= 6 x Rs. 30 = Rs. 180 for job

Wages for a job:

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Sr. Remuneration
Wages Calculation
No. System
Ananta - 120% of Rs. 180 = Rs. 216
Mahavir - 6 x Rs. (120% of Rs. 30) = Rs. 216
Govinda - 8 x Rs. 30 = Rs. 240

Effective hourly rate:

Ananta = Rs. 216 / 4 = Rs. 54
Mahavir = Rs. 216 / 6 = Rs. 36
Govinda = Rs. 240 / 8 = Rs. 30
4) a. Halsey (Hour Worked x Hourly Rate) + 50% (Time saved x Hourly Rate)
Premium Bonus eg. During 40 hours week ended, Mr. X produced 1200 units. Std. output per
hour = 25 units. Hourly wage rate = Rs. 30.
Find out weekly earnings of Mr. X under Halsely Premium Bonus.
Wages –
= (40 hrs. X 30) + 50% (8 x Rs. 30)
= 1200 + 50% x 240
= 1200 + 120
= Rs. 1320
b. Halsey - Weir The system is similar to Halsey Premium Bonus except, the percentage of
bonus may vary from 30% to 70%.
5) Rowan Premium (Hours worked  hourly rate) +
Bonus
Actual Hrs.
(Hrs. Saved  Hourly Rate)
Std. Hrs.
eg: Refer Halsey ex.
40
= (40  30) + (8  30)
48
= 1,200 + 200
= Rs. 1,400
6) Barth Variable Hourly Rate x Std. time (hrs.)  Hours worked
Sharing Plan
Under this plan efficient worker is rewarded with higher wages and lower
efficient worker is penalised with lesser wage payment.
7) Emerson Efficiency (Hours worked x Hourly rate) + Emersion Bonus % x (Hour worked x Hourly
Bonus rate)

Emerson Bonus % -
Efficiency Level Bonus
upto 66 2/3% Nil
66 2/3 % to 100 % Between 0 to 20%
Bonus increases for every % increase in efficiency
level and rises to 20% at efficiency level of 100%
(Refer Emersion Table)

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 Sr. Remuneration
Wages Calculation
No. System
Over 100% A bonus of 20% + additional 1% bonus for every 1%
increase in efficiency level.
8) Bedaux Point (Hours worked x Hourly Rate) + 75%
 Bedaux Po int saved 
  Hourly Rate 
 60 
Bedaux Point Saved = Std. Points – Actual Points

GROUP BONUS SYSTEM:

Group Bonus refers to the bonus paid for the collective efforts made by a group of workers. Such a scheme is
introduced generally when individual efficiency cannot be established/measured for the payment of bonus.
The quantum of bonus is determined on the basis of productivity / output of the team as a whole. Bonus is
shared by the individual workers in specified proportions e.g. on proportion of time-based wages. Every
worker is paid wages according to hourly rate and group bonus is distributed between the worker and
foreman in proportion of wages drawn. Where individual efficiency is difficult to verify, it is difficult to
determine individual bonus, hence group bonus is calculated.
There following are few schemes of group bonus:
(i) Priestman’s Production Bonus: According to this method when the actual production in units or
points exceeds the standard units or point, a bonus is paid to the workers as additional wages
equivalent to the percentage of actual output over the standard output.
(ii) Cost Efficiency Bonus: Under this scheme, bonus is paid when the actual cost is reduced to below the
normal established targets. Targets for each cost elements (material, employee and overheads) are
set. If the measurement of actual performance shows a saving in the cost either in total or for cost
element (as the case may be), a fair percentage of the saving is distributed among the staff.
Three popular schemes usually used for calculating the amount to be distributed to workers as bonus
are as below:
(a) Nunn-Bush Plan: According to this plan a norm for direct employee cost is fixed and expressed as
a percentage of the sales value. The amount calculated at this percentage is credited to a fund. The
actual employee cost is debited to this fund and the balance remaining to the credit of this fund is
distributed as bonus to all the workers and employees.
(b) Scanlon Plan: Here also a is created for the normal cost of wages and salaries. This fund is debited
with the actual employee cost. Two-thirds to three-fourths of the credit balance, if any, is distributed as
bonus, the balance is kept as reserve for future set-backs.
(c) Rucker Plan: This plan is quite similar to Nunn-Bush Plan except that the percentage for crediting
the fund is based on the total value added by manufacturer (i.e. the total cost less the value of the
material) and not on total sales value.
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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

8. DIRECT EXPENSES

Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a
product or for provision of service and can be directly traced in an economically feasible manner to a cost
object. The following costs are examples for direct expenses:
(i) Royalty paid/ payable for production or provision of service;
(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provision of service.
The above list of expenses is not exhaustive, any other expenses which are directly attributable to the
production or service are also included as direct expenses.

MEASUREMENT OF DIRECT EXPENSES:

The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties and
taxes (for which input credit not available), commission and other directly attributable costs.
In case of sub-contracting, where goods are get manufactured by job workers independent of the principal
entity, are measured at agreed price. Where the principal supplies some materials to the job workers, the
value of such materials and other incidental expenses are added with the job charges paid to the job
workers.

TREATMENT OF DIRECT EXPENSES:

Direct Expenses forms part the prime cost for the product or service to which it can be directly traceable and
attributable. In case of lump-sum payment or one-time payment, the cost is amortised over the estimated
production volume or benefit derived. If the expenses incurred are of insignificant amount i.e. not material, it
can be treated as part of overheads.
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 9. PRACTICAL PROBLEMS

TYPE-1 “TREATMENT OF IDLE TIME AND OVERTIME”

Q1. Treatment of Idle Time REG. PAGE NO.

X an employee of ABC Co. gets the following emoluments and benefits:
Basic Pay – Rs. 10,000/Month
Dearness Allowance – Rs. 2,000/Month
Bonus – 20% of Salary and D.A.
Other Allowances – Rs. 2,500/Month
Employer’s Contribution to PF – 10% of Salary and D.A.
X’ works for 2,400 hours per annum, out of which 400 hours are non-productive and treated as normal
idle time. You are required to compute the effective hourly cost of employee ‘X’.

Q2. Treatment of Idle Time REG. PAGE NO.

In a factory working six days in a week, a workman is paid at the rate of Rs. 1000 per day basic plus D. A.
at 120% of basic. He is allowed to take 30 minutes off during his 8 hours shift for meals - break and a 10
minutes recess for rest. During a week, his card showed that his time was chargeable to:
Job-X: 15 hrs., Job-Y: 12 hrs., Job-Z: 13 hrs.
The time which was not booked was wasted waiting for a job. In cost accounting how would you allocate
the wages of the worker for the week? Give solution under two situations (a) factory pays only for six
days in week. (b) Factory gives paid holiday of one day / week in addition to 6 working days.

Q3. Treatment of Overtime REG. PAGE NO.

Calculate the earnings of A and B from the following particulars for a month and allocate the employee
cost to each job X, Y and Z:
A B
(i) Basic Wages (Rs.) 10,000 16,000
(ii) Dearness Allowance 50% 50%
(iii) Contribution to provident Fund (on basic wages) 8% 8%
(iv) Contribution to Employee’s State Insurance (on basic wages) 2% 2%
(v) Overtime (Hours) 10 -
The normal working hours for the month are 200. Overtime is paid at double the total of normal wages
and dearness allowance. Employer’s contribution to state Insurance and Provident Fund are at equal
rates with employees’ contributions. The two workers were employed on jobs X, Y and Z in the following
proportions:
Jobs X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%
Overtime was done on job Y.

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Q4. Treatment of Overtime (As per Factories Act 1948) REG. PAGE NO.
It is seen from the job card for repair of the customer’s equipment that a total of 154 labour hours have
been put in as detailed below:
Worker ‘A’ paid at Worker ‘B’ paid at Worker ‘C’ paid at
Rs. 200 per day of Rs. 100 per day of Rs. 300 per day of
8 hours 8 hours 8 hours
Monday (hours) 10.5 8.0 10.5
Tuesday (hours) 8.0 8.0 8.0
Wednesday (hours) 10.5 8.0 10.5
Thursday (hours) 9.5 8.0 9.5
Friday (hours) 10.5 8.0 10.5
Saturday (hours) - 8.0 8.0
Total (hours) 49.0 48.0 57.0
In terms of an award in an employee conciliation, the workers are to be paid dearness allowance on the
basis of cost of living index figures relating to each month which works out @ Rs. 968 for the relevant
month. The dearness allowance is payable to all workers irrespective of wages rate if they are present or
are on leave with wages on all working days.
Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 4 hours on
Saturdays; the workers are however paid full wages for Saturday (8 hours for 4 hours worked).
Workers are paid overtime according to the Factories Act, 1948. Excluding holidays, the total number of
hours works out to 176 in the relevant month. The company’s contribution to Provident Fund and
Employees State Insurance Premium are absorbed into overheads. Work out the wages payable to each
worker.

Q5. Treatment of Overtime REG. PAGE NO.

In a factory, the basic wage rate is Rs. 50 per hour and overtime rates are as follows:
Before and after normal working hours : 175% of basic wage rate
Sundays and holidays : 225% of basic wage rate
During previous year, the following hours were worked:
Normal time : 1,00,000 hours
Overtime before and after working hours : 20,000 hours
Overtime on Sundays and holidays : 5,000 hours
Total : 1,25,000 hours
The following hours have been worked on job ‘Z’ during the year:
Normal : 1,000 hours
Overtime before and after working hrs. : 100 hours
Sundays and holidays : 25 hours
Total : 1,125 hours
You are required to calculate the labour cost chargeable to job ‘Z’ and overhead in following instances:
(a) Where overtime is worked regularly throughout the year as a policy due to the labour shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.

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 TYPE-2 “LABOUR REMMUNERATION SYSTEMS”

Q6. Halsey and Rowan System REG. PAGE NO.

Calculate the total wages earned by a workman for a working day of 8 hours under Halsey & Rowan
Plans: Standard production per hour 20 units, Actual production of the day is 200 units and Wages rate
per hour Rs. 30

Q7. Halsey and Rowan System REG. PAGE NO.

From the data given below, calculate the comparative Works Cost for a job in Factory A and Factory B:
Factory A Factory B
Method of payment of wages Halsey Plan (50%) Rowan Plan
Standard time for the job 250 hours 240 hours
Actual time taken 200 hours 210 hours
Hourly rate of Wages Rs. 25 Rs. 30
Material cost for the job Rs. 10,000 Rs. 9,000
Factory Overhead 150% of wages 133% of wages

Q8. Halsey and Rowan System REG. PAGE NO.

A worker produced 200 units in a week’s time. The guaranteed weekly wage payment for 45 hours is Rs.
81/Hour. The expected time to produce one unit is 15 minutes which is raised further by 20% under the
incentive scheme. What will be the earnings per hour of that worker under Halsey (50 % sharing) and
Rowan bonus schemes?

Q9. Halsey and Rowan System REG. PAGE NO.

A skilled worker in XYZ Ltd, is paid a guaranteed wage rate of Rs. 30 per hour. The standard time per unit
for a particular product is 4 hours. P, a machineman, has been paid wages under the Rowan Incentive
Plan and he had earned an effective hourly rate of Rs. 37.50 on the manufacture of that particular
product.
What could have been his total earnings and effective hourly rate, had he been put on Halsey Incentive
Scheme (50%)?

Q10. Straight, Differential, Halsey, Rowan REG. PAGE NO.

From the following particulars work out the earnings for the week of a worker under -
a. Straight Piece Rate
b. Differential Piece Rate
c. Halsey Premium System
d. Rowan System
Number of working hours per week - 48; Wages per hour Rs. 50;
Normal time per piece - 24 minutes; Normal output per week - 120 pieces.
Actual output for the week - 150 pieces, Differential Piece Rate - 80% of piece rate when output is below
standard and 120 % when above standard.

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Q11. Day, Piece Rate and Rowan System REG. PAGE NO.
Wage negotiations are going on with the recognized Labour Union and the Management wants you as the
Cost Accountant of the Company to formulate an incentive scheme with a view to increase productivity.
The case of three typical workers Mahavir, Ananta and Govinda who produce respectively 180, 120 and
100 units of the company’s product in a normal day of 8 hours is taken up for study.
Assuming that day wages would be guaranteed at Rs. 75 per hour and the piece rate would be based on a
standard hourly output of 10 units calculate the earnings of each of the three workers and the labour cost
per 100 pieces under (i) Day wages, (ii) Piece rate, (iii) Halsey scheme and (iv) Rowan scheme.
Also calculate under the above schemes the average cost of labour for the company to produce 100
pieces.

Q12. Halsey and Rowan System REG. PAGE NO.

The finishing shop of a company employs 60 direct workers. Each worker is paid Rs. 400 as wages per
week of 40 hours. When necessary, overtime is worked upto a maximum of 15 hours per week per
worker at time rate plus half of time rate as premium. The current output on an average is 6 units per
man hour which may be regarded as standard output. If bonus scheme is introduced, it is expected that
the output will increase to 8 units per man hour. The workers will if necessary, continue to do over time
up to the specified limit although no premium on incentives will be paid.
The company is considering introduction of either, Halsey Scheme or Rowan Scheme of Wage Incentive
system. The budgeted weekly output is 19,200 units. The selling price is Rs. 11 per unit and the direct
Material Cost is Rs. 8 per unit. The variable overheads amount to Rs. 0.50 per direct labour hour and the
fixed overhead is Rs. 9,000 per week.
Prepare a Statement to show the effect on the Company's weekly Profit of the proposal to introduce (a)
Halsey Scheme, and (b) Rowan Scheme.

Q13. Halsey and Rowan System REG. PAGE NO.

Two workers ‘A’ and ‘B’ produce the same product using the same material. Their normal wage rate is
also the same. ‘A’ is paid bonus according to Rowan scheme while ‘B’ is paid bonus according to Halsey
scheme. The time allowed to make the product is 50 hours. ‘A’ takes 30 hours while ‘B’ takes 40 hours to
complete the product. The factory overhead rate is Rs. 5 per person-hour actually worked. The factory
cost of product manufactured by ‘A’ is Rs. 3,490 and for product manufactured by ‘B’ is Rs. 3,600.
Required:
(i) Compute the normal rate of wages.
(ii) Compute the material cost.
(iii) Prepare a statement comparing the factory cost of the product as made by two workers.

Q14. Halsey and Rowan System REG. PAGE NO.

Mr. A is working by employing 10 skilled workers. He is considering the introduction of some incentive
scheme - either Halsey Scheme (with 50% bonus) or Rowan Scheme of wages . He feels that if the
proposed incentive scheme could bring about an average 20% increase over the present earning of the
workers, it could act as sufficient incentive for them to produce more and he has accordingly given this
assurance to the workers.
As a result of this assurance, the increase in productivity has been observed as revealed by following
figures for the current month:
Hourly rate of wages (guaranteed) Rs. 50

Average time for producing 1 piece by one worker at the

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 previous performance (This may be taken as time allowed) 2 hours
Number of working days in the month 25
Number of working hours per day for each worker 8
Actual production during the month 1,250 units
Required:
1. Calculate effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
2. Calculate the savings to Mr. A in terms of direct labour cost per piece under the above schemes.
3. Advise Mr. A about the selection of the scheme to fulfil his assurance.

Q15. Halsey and Rowan System REG. PAGE NO.

Two workmen, A and B, produce the same product using the same material. A is paid bonus according to
Halsey plan, while B is paid bonus according to Rowan plan. The time allowed to manufacture the
product is 100 hours. A has taken 60 hours and B has taken 80 hours to complete the product. The
normal hourly rate of wages of workman A is Rs. 24 per hour. The total earnings of both the workers are
same. Calculate normal hourly rate of wages of workman B.

Q16. Halsey and Rowan System REG. PAGE NO.

Standard Time for a job is 90 hours. The hourly rate of Guaranteed wages is Rs. 50. Because of the saving
in time a worker a gets an effective hourly rate of wages of Rs. 60 under Rowan premium bonus system.
For the same saving in time, calculate the hourly rate of wages a worker B will get under Halsey premium
bonus system assuring 40% Bonus to worker.
Q17. Halsey and Rowan System REG. PAGE NO.
The standard time for a job is 50 hours. The hourly rate of guaranteed wages is Rs. 9. Because of saving in
time, a worker X gets an hourly wages of Rs. 10.80 under Rowan premium bonus system. For the same
saving in time, calculate the hourly rate of wages a worker Y will get under Halsey premium bonus
system assuming 50 per cent Bonus to worker.

Q18. Guaranteed Hourly Rate, Piece Rate and Rowan System (SH) REG. PAGE NO.
A Company is undecided as to what kind of wage scheme should be introduced. The following particulars
have been compiled in respect of three systems, which are under consideration of the management.
Workers
A B C
Actual hours worked in a week 38 40 34
Hourly rate of wages Rs. 6 Rs. 5 Rs. 7.20
Production in units
Product P 21 - 60
Product Q 36 - 135
Product R 46 25 -
Standard time allowed per unit of each product is:
P Q R
Minutes 12 18 30
For the purpose of piece rate, each minute is valued at Rs. 0.10

You are required to calculate the wages of each worker under:

(i) Guaranteed hourly rates basis

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(ii) Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed hourly rate) if his
earnings are less than 50% of basic pay.
(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.

Q19. Halsey and Rowan System REG. PAGE NO.

PQR Ltd. has worker Mr. Y. Target / Standard given to Y is 50 units per hour. His hourly rate is Rs. 60 per
hour. Mr. Y has worked for 8 hours per day on Monday, Tuesday and Wednesday, Thursday each and his
output was as follows:
Day Output units
Monday 360
Tuesday 600
Wednesday 800
Thursday 850
Calculate wages of Y day wise under Halsey Plan and Rowan Plan.

TYPE-3 “GROUP BONUS SYSTEM”

Q20. Group Bonus System – Basic Question REG. PAGE NO.

A, B and C were engaged on a group task for which a payment of Rs. 72,500 was to be made. A’s time
basis wages are Rs. 800 per day, B’s Rs. 600 per day and C’s Rs. 500 per day. A worked for 25 days; B
worked for 30 days; and C for 40 days. Calculate the share of bonus to be distributed among the workers
and total earnings thereof.

Q21. Group Bonus System REG. PAGE NO.

In a unit, 10 men work as group. When the production of the group exceeds the standard output of 200
pieces per hour, each man is paid an incentive for the excess production in addition to his wages at
hourly rates. The incentive is at half the percentage, of excess production over the standard production.
Each man is paid an incentive at the rate of this percentage of a wage rate of Rs. 20 per hour. There is no
relation between the individual workman’s hourly rate and the Bonus rate.
In a week, the hours worked are 500 hours and the total production is 1,20,000 pieces.
a. Compute the total amount of the bonus for the week
b. Calculate the total earnings of two workers A and B of the group -
A worked 44 hours and his basic rate per hour was Rs. 22
B worked 48 hours and his basic rate per hour was Rs. 19.

TYPE-4 “LABOUR TURNOVER RATIOS”

Q22. Labour Turnover Ratios REG. PAGE NO.

From the following information, calculate Labour turnover rates under various methods:
No. of workers as on 1.1.2005 = 7,600
No. of workers as on 31.12.2005 = 8,400
During the year, 80 workers left while 320 workers were discharged. 1,200 workers were recruited
during the year of these, 300 workers were recruited because of exits and the rest were recruited in
accordance with expansion plans.

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Q23. Labour Turnover Ratios REG. PAGE NO.
The Accountant of Y Ltd. has computed employee turnover rates for the quarter ended 31st March, 2018
as 10%, 5% and 3% respectively under ‘Flux method’, ‘Replacement method’ and ‘Separation
method’ respectively. If the number of workers replaced during that quarter is 30, find out the number of
workers for the quarter (i) recruited and joined and (ii) left and discharged and (iii) Equivalent employee
turnover rates for the year.

Q24. Labour Turnover Ratios REG. PAGE NO.

The rate of change of labour force in a company during the year ending 31st March, 2013 was calculated
as 13%, 8% and 5% respectively under 'Flux Method', 'Replacement method' and 'Separation method'.
The number of workers separated during the year is 40.
You are required to calculate:
(i) Average number of workers on roll.
(ii) Number of workers replaced during the year.
(iii) Number of new accessions i.e. new recruitment.
(iv) Number of workers at the beginning of the year.

Q25. Ascertainment of Impact on Profitability due to LTR REG. PAGE NO.

The management of a company is worried about their increasing labour turnover in the factory and
before analysing the causes and taking remedial steps, they want to have an idea of the profit foregone as
a result of labour turnover in the last year.
Last year sales amounted to Rs. 83,03,300 and the profit-volume ratio was 20 per cent. The total number
of actual hours worked by the Direct Labour Forces was 4.45 lakhs. As a result of the delays by the
Personnel Department in filling vacancies due to labour turnover, 1,00,000 potentially productive hours
were lost. The actual direct labour hours included 30,000 hours attributable to training new recruits, out
of which half of the hours were unproductive. Productive Hours lost in training are not included in above
1,00,000 Hours.
The costs incurred consequent on labour turnover revealed on analysis the following:
Settlement costs due to leaving Rs. 43,820
Recruitment costs Rs. 26,740
Selection costs Rs. 12,750
Training costs Rs. 30,490
Assuming that the potential production lost as a consequence of labour turnover could have been sold at
prevailing prices, find the profit foregone last year on account of labour turnover.

10.PAST EXAM THEORY QUESTIONS

Q1. Enumerate the causes of labour turnover.

Ans. Causes of Labour Turnover: The main causes of labour turnover in an organisation/industry can be
broadly classified under the following three heads:
(a) Personal Causes;
(b) Unavoidable Causes; and
(c) Avoidable Causes.

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Personal causes are those which induce or compel workers to leave their jobs; such causes include the
following:
(i) Change of jobs for betterment.
(ii) Premature retirement due to ill health or old age.
(iii) Domestic problems and family responsibilities.
(iv) Discontent over the jobs and working environment.
Unavoidable causes are those under which it becomes obligatory on the part of management to ask one
or more of their employees to leave the organisation; such causes are summed up as listed below:
(i) Seasonal nature of the business;
(ii) Shortage of raw material, power, slack market for the product etc.;
(iii) Change in the plant location;
(iv) Disability, making a worker unfit for work;
(v) Disciplinary measures;
(vi) Marriage (generally in the case of women).
Avoidable causes are those which require the attention of management on a continuous basis so as to
keep the labour turnover ratio as low as possible. The main causes under this case are indicated below:
(i) Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,
(ii) Strained relationship with management, supervisors or fellow workers;
(iii) Lack of training facilities and promotional avenues;
(iv) Lack of recreational and medical facilities;
(v) Low wages and allowances.

Q2. Define ‘Labour Turnover’. How is it measured? Explain.

Ans. Labour turnover in an organisation is the rate of change in the composition of labour force during a
specified period measured against a suitable index. The standard of usual labour turnover in the industry
or labour turnover rate for a past period may be taken as the index or norm against which actual
turnover rate should be compared.
The methods for measuring labour turnover are:
Replacement method: This method takes into consideration actual replacement of labour irrespective
of no. of workers leaving.
Number of employees replaced during the year
Replacement method = × 100
Average number of employees on roll during the year
Separation method: In this method labour turnover is measured by dividing the total no. of separations
during the period by average no. of workers on payroll during the same period.
Number of employees separated during the year
Separation method = × 100
Average number of employees on roll during the year
Flux method: This method takes into account both the replacements as well as no. of separations during
the period.
 No. of employees replaced + No. of employees replaced 
 during the year during the year 
Flux method =   × 100
 No. of employees separated during the year 
 
 

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Q3. How would you account for idle capacity cost in Cost Accounting?
Ans. Idle capacity costs are treated in the following ways in Cost Accounts:
(i) If the idle capacity cost is due to unavoidable reasons: A supplementary overhead rate may be
used to recover the idle capacity cost. In this case, the costs are charged to the production capacity
utilised.
(ii) If the idle capacity cost is due to avoidable reasons: Such as faulty planning, etc. the cost should
be charged to Costing Profit and Loss Account.
(iii) If the idle capacity cost is due to trade depression, etc.,: Being abnormal in nature the cost
should also be charged to the Costing Profit and Loss Account.
(iv) If the idle capacity cost is due to seasonal factors, then the cost should be charged to cost of
production by inflating overhead rate.
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“Experience is counted with repetitions in a year and not just years of repetition”
ANSHUL A. AGRAWAL
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