LABOUR COSTS
LEARNING OBJECTIVE
- LABOUR COST
- CALCULATING GROSS PAY– Time Related pay
- CALCULATING GROSS PAY-OUTPUT RELATED PAY
- SALARIED EMPLOYEES-BONUSES
- TIME RATE EMPLOYEES – BONUSES
- GROUP BONUS SCHEMES
- GROUP BONUS SCHEMES
- PAYROLL
- NON-MANUFACTURING ORGANISATIONS
1.LABOUR COST
- Holiday : Employees have an agreed number of days holiday per year.
- Sickness : The organization will have its own policies regarding payment for sick leave as well as legal requirements for statutory sick
- Other periods of absence : A record needs to be kept of any other periods of absence by an employee.
- Clock Cards :
Definition: A clock card is a document which records the starting and finishing the time for an employee ( for example, 9 till 5.30 ) .
Clock cards are used as a source document in the calculation of the employee’s gross pay.
- Time sheets
A time sheet is a record of how a person’s time at work has been spent. The total hours that an employee has worked in a day or week are shown on the employee’s clock card but a breakdown of how those hours were spent is shown on the time sheet.
Idle time is the hours for which an employee is available and being paid, but during which no output is being achieved, for example due to machine breakdown or a shortage of work or materials. Idle time payments, whether paid to direct employees or to indirect employees, are normally classified as indirect labour costs.
- Job sheets
A job sheet records the number of each type of product that an employee has produced in the period.
Time sheets are prepared by employees who are paid for the number of hours that they work. However it is also possible to pay employee on the basis of the number of units of a product they produce, known as a results or piece rate basis.
2. CALCULATING GROSS PAY– Time Related pay
There are two main methods of calculating the gross pay of employees:
- Pay employees for the time spent at work ( time related pay )
- Pay employees for the time actually produced ( output related pay )
Time related pay : Time related pay employees can be split into two types, salaried employees and hourly rate employees.
Overtime : Overtime is the number of hours worked by an employee which is greater than the number of hours set by the organization as the working week.
Overtime Premium: Overtime Premium is the amount over and above the normal hourly rate that employees are paid for overtime hours.
Overtime Premium paid to direct employees may be classified as direct cost or as an indirect cost depending on the circumstances that cause the overtime to be worked.
- The premium paid for overtime that is worked because of a general increased level of activities in the organization is classified as an indirect cost or overhead.
- The premium paid for overtime that is worked at the specific request of a customer is charged as a direct labour cost to the customer’s order.
3.CALCULATING GROSS PAY-OUTPUT RELATED PAY
Definition : Payment by results or piecework is where a fixed amount is paid per unit of output achieved irrespective of the time spent.
Piece rate with guarantee : A Piece rate with guarantee gives the employee some security if the employer does not provide enough work in a particular period.
Differential Piecework: A Differential Piecework system is where the piece rate increases as successive targets for a period are achieved and exceeded.
4. BONUS SCHEMES
Bonuses may be paid to employees for variety of reasons. An individual employee, a department, a division or the entire organization may have performed particularly well and it is felt by the management that a bonus is due to some or all of the employees.
Basic principle of bonuses:
Basic principle of a bonuses payment is that the employee is reward for any additional income or saving in cost to the organization. This may be ,for example, because the employee has managed to save a certain amount of time on the production of a product or a number of products. This time saving will save the organization money and the amount saved will tend to be split between the organization and the employee on some agreed basis. The amount paid to the employee/employees is known as the bonus.
Method of Payment:
The calculation and payment of bonuses will differ for salaried employees, employees paid by results and employees paid on a time rate basis.
5. SALARIED EMPLOYEES-BONUSES
Salaried employees are paid a predetermined salary or wage every week or every month. It may also be the organization’s policy to pay employees a bonus each month, quarter or annually.
A flat rate bonus is where all employees are paid the same amount of bonus each regardless of their individual salary.
The principle behind such payments is that all of the employees have contributed the same amount to earning the bonus no matter what their position in the organization or their salary level.
A percentage bonus is where the amount paid to each employee as bonus is a set percentage of that employee’s annual salary.
6. TIME RATE EMPLOYEES – BONUSES
Hardworking employees are paid the same as less hardworking employees. The principle of a bonus or incentive schema for time rate paid employees is to encourage them to achieve additional output in the time they work.
The basis of bonus schemes in these instances is to set a predetermined standard time (or target time) for the performances of a job or production of a given amount of output. If the job is completed in less than the standard time or more than the given output is achieved in the standard time then this will mean additional profit to the employer.
Individual bonus schemes are those that benefit individual workers according to their own results. This additional profit earned by the individual employee will then be split between the employer and the employee in some agreed manner.
One approach would be to split the benefit of the time saving equally between the employee and employer. The formula that is used to calculate this is:
As an alternative, the proportion of the time saving paid to the employee based on the ratio of time taken to time allowed. Formula is:
Bonus= Time taken/Time allowed x time saved x rate paid.
7. GROUP BONUS SCHEMES
A group bonus scheme is where the bonus is based upon the output of the workforce as a whole or a particular group of the workforce. The bonus is then shared between the individual members of the group on some per-agreed basis.
8. PAYROLL
We can illustrate how gross pay becomes net pay in the following table:
SERVICE COST CENTRE EMPLOYEES:
The employees of a manufacturing organization do not all work for cost centers that actually produce the products. Many employees will work in service cost centers such as stores. the canteen, the accounts department and the sales division.
9. NON-MANUFACTURING ORGANISATIONS
SERVICE INDUSTRIES :
This might be an accountant that provides a tax service for clients or a transport organization which transports goods for customers.
COSTS OF SERVICE INDUSTRIES :
May service costs will be labor based, with all of the problems of overtime, holiday pay, bonuses etc. involved in such costs.