ADVANCED COST ACCOUNTING - IIycmou.digitaluniversity.ac/WebFiles/MCom (M17) Semester -I...ADVANCED COST ACCOUNTING - II CAG 102 YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY Dnyangangotri,

ADVANCED COST ACCOUNTING - II

CAG 102

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITYDnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra

Copyright Yashwantrao Chavan Maharashtra OpenUniversity, Nashik.

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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY

Vice-Chancellor : Dr. M. M. SalunkheDirector (I/C), School of Commerce & Management : Dr. Prakash DeshmukhState Level Advisory CommitteeDr. Pandit Palande Dr. Suhas Mahajan Dr. V. V. MorajkarHon. Vice Chancellor Ex-Professor Ex-ProfessorDr. B. R. Ambedkar University Ness Wadia College of Commerce B.Y.K. College, NashikMuaaffarpur, Bihar Pune

Dr. Mahesh Kulkarni Dr. J. F. Patil Dr. Ashutosh RaravikarEx-Professor Economist Kolhapur Director, EDMU,B.Y.K. College, Nashik Ministry of Finance

New Delhi

Dr. A. G. Gosavi Dr. Madhuri Sunil Deshpande Dr. Prakash DeshmukhProfessor Professor Director (I/C)Modern College, Shivaji Nagar, Pune Swami Ramanand Teerth Marathwada School of Commerce & Management

University, Nanded Y.C.M.O.U., Nashik

Dr. Parag Saraf Dr. S. V. Kuvalekar Dr. Surendra PatoleChartered Accountant Sangamner Associate Professor and Assistant ProfessorDist. AhmedNagar Associate Dean (Training)(Finance ) School of Commerce & Management

National Institute of Bank Management , Y.C.M.O.U., Nashik PuneDr. Latika Ajitkumar AjbaniAssistant ProfessorSchool of Commerce & Management

Y.C.M.O.U., Nashik

Author Editor Instructional Technology Editing &Programme Co-ordinator

1) Prof. V. V. Morajkar Dr. Mahesh A. Kulkarni Dr. Latika Ajitkumar Ajbani10, Vidya Society, Shikhare Wadi, Research Guide, Assistant ProfessorNashik Road - 422 101. BYK College of Commerce, School of Commerce & Management

2) Dr. Suhas Mahajan Nashik - 422 005. Y.C.M.O.U., NashikResearch Guide,Ness Wadia College of Commerce,Pune - 411 001.

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Copyright Yashwantrao Chavan Maharashtra Open University, Nashik.(First edition developed under DEC development grant)First Publication : September 2015Type Setting : Omkar Computers and PrintersCover Print :Printed by :Publisher : Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.

CONTENTS

Topic 1 Labour CostingUnit 1 Methods of Remuneration 1-161.0 Introduction 1.1 Unit Objectives 1.2 Meaning of remuneration 1.3 Methods of remuneration 1.3.1Factors affecting selection of method 1.3.2 Time rate method 1.3.3 Piece rate method 1.4 Illustrations onTime rate and piece rate methods 1.5 Summary 1.6 Key Terms 1.7 Questions and Exercise 1.8 FurtherReading

Unit 2 Incentive Plans 17-362.0 Introduction 2.1 Unit Objectives 2.2 Incentive Plans : meaning and necessity 2.3 Different incentive plans2.3.1 Halsey incentive plan 2.3.2 Halsey weir incentive plan 2.3.3 Rowan incentive plan 2.3.4 Taylorsdifferential wage rate system 2.3.5 Emersons incentive plan 2.4 Summary 2.5 Key Terms 2.6 Questionsand Exercises 2.7 Further Reading

Unit 3 Preparation of Wage Sheets and Pay - Rolls 37-463.0 Introduction 3.1 Unit Objectives 3.2 Wage-sheets and pay-rolls - meaning 3.3 Necessity and importance3.4 Preparation of wage-sheets and pay-rolls 3.5 Types of frauds and their prevention 3.6 Control on labourcost 3.7 Summary 3.8 Key Terms 3.9 Questions 3.10 Further Reading

Topic 2 ExpensesUnit 4 Meaning and Definition 47-524.0 Introduction 4.1 Unit Objectives 4.2 Expenses - meaning and definition 4.3 Types of Expenses 4.3.1Direct expenses4.3.2 Indirect expenses 4.4 Summary 4.5 Key Terms 4.6 Questions and Exercises 4.7Further Reading

Topic 3 OverheadsUnit 5 Classification Overheads 53-665.0 Introduction 5.1 Unit Objectives 5.2 Meaning and definition of overheads 5.3 Classification of overheads meaning and necessity 5.4 Methods of classification of overheads 5.4.1 Classification according to function5.4.2 Classification according to elements 5.4.3 Classification according to behavior or variablility 5.5 Summary5.6 Key Terms 5.7 Questions 5.8 Further Reading

Unit 6 Collection and Codification 67-746.0 Introduction 6.1 Unit Objectives 6.2 Collection - meaning and sources 6.3 Codification of overheads 6.3.1Meaning and necessity 6.3.2 Methods of codification of overheads 6.4 Summary 6.5 Key Terms 6.6 Questions6.7 Further Reading

Unit 7 Allocation, Distribution and Primary Distribution 75-907.0 Introduction 7.1 Unit Objectives 7.2 Stages in absorption of overheads 7.3 Allocation of overheads 7.4Distribution of overheads 7.5 Primary distribution of overheads 7.6 Summary 7.7 Key Terms 7.8 Questionsand Exercises 7.9 Further Reading

Unit 8 Secondary Distribution of Overheads 91-1288.0 Introduction 8.1 Unit Objectives 8.2 Secondary Distribution of Overheads 8.2.1 Non-reciprocal basis ofapportionment 8.2.2 Reciprocal basis of apportionment 8.3 Methods used for secondary distribution of overheads 8.3.1 Simultaneous Equation Method 8.3.2 Repeated Distribution Method 8.3.3 Trial and Error Method 8.4Summary 8.5 Key Terms 8.6 Questions and Exercises 8.7 Further Reading

Unit 9 Absorption of Overheads, Absorption of Factory Overheads

129-1649.0 Introduction 9.1 Unit Objectives 9.2 Absorption of overheads 9.2.1 Actual Overhead Rate 9.2.2 Pre-determined Overhead Rate 9.3 Methods of absorption of overheads 9.4 Methods of absorption of factoryoverheads 9.4.1 Percentage of direct materials cost 9.4.2 Percentage of direct wages 9.4.3 Percentage ofprime cost 9.4.4 Direct labour hour rate 9.4.5 Machine hour rate 9.4.6 Rate Per unit of production 9.5Summary 9.6 Key Terms 9.7 Questions and Exercise 9.8 Further Reading

Unit 10 Absorption of Office and Administration and Selling and DistributionOverheads 165-172

10.0 Introduction 10.1 Unit Objectives 10.2 Methods of absorption of office and administration overheads10.2.1 Percentage of works / factory cost 10.2.2 Percentage of sales 10.2.3 Apportionment betweenmanufacturing and selling divisions 10.2.4 Transfer to costing Profit and Loss Account 10.3 Methods ofabsorption of selling and distribution overheads 10.3.1 Rate per unit 10.3.2 Percentage of selling price10.3.3 Percentage of works/factory cost 10.4 Summary 10.5 Key Terms 10.6 Questions 10.7 FurtherReading

Unit 11 Under and Over Absorption of Overheads 173-18411.0 Introduction 11.1 Unit Objectives 11.2 Meaning of under and over absorption of overhead 11.3 Causesof under and over absorption 11.4 Treatment of under and over absorption 11.5 Illustrations 11.6 Summary11.7 Key Terms 11.8 Questions and Exercises 11.9 Further Reading

Unit 12 Some Special Items of Overheads 185-20112.0 Introduction 12.1 Unit objectives 12.2 Special items of overheads and treatment to be given to them12.2.1 Interest on capital 12.2.2 Cash discount 12.2.3 Packing expenses 12.2.4 Defective or spoiled work 12.2.5 Depreciation 12.2.6 Obsolescence loss 12.2.7 Idle capacity cost 12.2.8 Research and developmentcost 12.2.9 Cost of fringe benefits to employees 12.2.10 Drawing and designing office cost 12.2.11 Expensesof cost accounting department 12.3 Summary 12.4 Key Terms 12.5 Questions 12.5 Further Reading

INTRODUCTION

This book of self - instructional material is based on the syllabus for thesubject Advanced Cost Accounting (M.Com : ACG 102), This book is writtenafter taking into consideration the revised syllabus prescribed for the M.Comstudents of Yashwantrao Chavan Maharashtra Open University, Nashik from June,2015. We hope that the book will help the students in understanding the theory aswell as the practical part related to the topics included in the syllabus for thesubject.

The information provided in this book is given in easy language to enablethe students to understand the theorotical as well as practical problems related tothe various topics. We have kept in mind the fact that the students are not able tohave constant interaction with the subject teachers and sufficient illustrations havebeen provided for the benefit of these students. While giving the theoraticalinformation at appropriate stages, we have provided charts and figures to enablethe students to understand and remember the information easily.

The authors welcome any valuable suggestions made by the students andteachers.

The authors and editors are greatful to the authorities of YCMOU guidenceand co-operation provided by them.

Editor Authors

TOPIC 1 Labour Costing

Unit 1 Methods of Remuneration

Unit 2 Incentive Plans

Unit 3 Preparation of Wage Sheets andPay - Rolls

Unit 1 Methods of Remuneration

Structure

1.0 Introduction

1.1 Unit Objectives

1.2 Meaning of remuneration

1.3 Methods of remuneration

1.3.1 Factors affecting selection of method

1.3.2 Time rate method

1.3.3 Piece rate method

1.4 Illustrations on Time rate and piece rate methods

1.5 Summary

1.6 Key Terms

1.7 Questions and Exercise

1.8 Further Reading

1.0 Introduction

In the previous Units information has been provided about labour, types oflabour, time-keeping, time-booking and reconciliation of time-kept with time booked.In this unit, we shall now consider information about the reward given to labour.Such reward is known as wages, salaries and collectively as remuneration. It canbe paid by using certain methods of remuneration and amount of remuneration isconsidered as the cost of labour.

1.1 Unit Objectives

After studying the information given in this Unit you should understand :

Meaning of remuneration;

Time-rate method and its advantages and disadvantages;

Piece- rate method and its advantages and disadvantages; and

How amount of remuneration is calculated under time-rate method andpiece rate method.

Methods of Remuneration

Advanced Cost Accounting - II

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1.2 Meaning of Remuneration

As per the Oxford Dictionary, remuneration money paid for work done.It is a reward given to an employee who has done work assigned to him by hisemployer. Remuneration paid to workers in the factory is know as wages. Theworkers have to use physical strength / labour and skills for doing the work getwages form the employer. They perform work of operating machinery, mixingand heating of materials and shaping or moulding of materials to manufacture aproduct or products and in return for it receive wages. There are other employeeswho perform clerical or similar type of work and are employed in the office or thesales department. They use intelligence, thinking, power and skills to performclerical work or typing work or operating of computers or work of recordingaccounting or other information needed for decisions making and for implementationof policies. Remuneration paid to these employees in known as salaries.Remuneration thus includes wages as well as salaries. However, when we usethe term labour cost. It includes wages and cost of monetary and non-monetaryammenities provided to direct and indirect workers employed to work in the factory.Wages paid to direct workers are direct wages and they are included in the amountof prime cost while wages paid to indirect workers are recorded as indirect labourcost and are included in the calculation of the amount of Factory Overheads.salaries paid to the office employees is one of the items of office and AdministrationOverheads and salaries paid to the employees doing the work of selling anddistribution of finished product is one of the items of Selling and DistributionOverheads.

In this Unit, the term remuneration is used as wages of workers.

1.3 Methods of Remuneration

Owner of a factory or management of an industrial concern employs requirednumber of and required type of workers for performing certain work which resultsin producing certain product or products needed by customers in the society. Theworkers use their physical power, intelligence and skills for doing the work ofproduction assigned to them. The work done by them may be completion of jobs,operations or processes which lead to manufacture of products or rendering ofservices and for such work the owner or the management has to pay remunerationto them. For calculating the amount of remuneration payable to the workers thereare basically two methods as under :

1. Time Rate Method, &

2. Piece Rate Method

In order to encourage and reward increase in efficiency and productivityamong workers some incentive plans have been introduced by relying on timefactor or quantity of work done or combination of both these factors. However,before obtaining detail information about the two basic methods and the variousincentive plans it will be proper to consider the factors which help in section of a



NOTES

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good method of remuneration.

1.3.1 Factors Affecting Selection of Method

Management of every concern is required to select method of remunerationwhich it uses for paying remuneration to its employees. While selecting a methodof remuneration it should take into consideration many factors such as the natureof work performed by workers, measurability of work done, risk involved inperformance of the work, whether quantity of output is dependent on the speedof machine or on the productivity of worker, whether the work is to be done infactory premises under the supervision of foreman or whether it is done by theworker at his home independently. After considering the information related tothese factors it should be decided whether time rate method or piece-rate methodor a particular incentive plan of remuneration should be followed for calculatingwages payable to the workers.

A method of remuneration to be regarded as a satisfactory or good methodshould fulfill the following conditions :

1. It should be acceptable to both- employer and workers. If workers or theirunion does not accept the selected method of remuneration it will result intoslowdowns and stoppages of work.

2. It should be flexible so that it can be adjusted to the changing situationeasily.

3. It should possess stability and the need to change it should arise only inexceptional situation. Frequent changes made in the method of remunerationmake the workers suspicious about honesty of the management.

4. It should be easy to understand. Once it is explained as to how remunerationamount is calculated, it should enable the workers to calculate and verifythe amount paid to them as remuneration for work done by them.

5. It should assured payment of a certain minimum amount of wages to theworkers. This enables the workers to concentrate their attention on thework they perform.

6. It should encourage the workers to increase their efficiency and productivity.

7. It should help the management to control labour turnover as well as labourabsenteeism.

1.3.2 Time Rate Method

Time rate method is the oldest method of remunerating the labour. In thismethod remuneration is agreed to be paid to labourers at agreed rate per unit oftime. The unit of time may be an hour, a day, a week, a month or more than that,i.e. quarter of a year, half year or a year. Taking into consideration the timeworked by a worker and the rate pre-determined for the time unit the remunerationpayable to him is calculated. If a worker is paid at R 8 per hour and if he has



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worked for 8 hours in a day, according to the time rate method his remunerationfor the day will be 8 hours x ` 8 per hour = ` 64.

Time rate method is a simple and easy to understand method and it isregarded as a suitable method under the following situations :-

1. When the work is such that the quantity of work cannot be exactly andaccurately measured.

2. When the quality of work is more important than the quantity produced,e.g. In case of an artistic painting the quality of painting is more importantand the artist may take a few days or a few weeks to complete the painting.

3. When the nature of work is such that the outcome of the work cannot beseen or shown. Watchman or security man working in a factory or malldoes his work but cannot show how much work he has done. Therefore, heis paid remuneration on time rate basis only.

4. A worker completing a certain stage in the process of production, he cannotdecide the quantity which he can produce. His work is dependent upon theflow of the process and the speed of his predecessor and successer worker.Time rate becomes a suitable method of remuneration in such case.

5. When the work to be done needs more intelligence and thinking than thephysical energy time rate method of remuneration is the proper method. Anemployee drafting a report or a mechanic who has to repair a machine byfinding out the fault in it cannot decide how much time they will need fortheir work.

6. When the quantity of work of the workers is governed by the speed of themachine and the speed cannot be altered by the workers, they should bepaid remuneration on time rate basis.

Advantages of time rate method :

1. It is simple to understand and easy to calculate wages.

2. As workers are paid wages on the basis of time and not by counting quantityof work done, the workers take proper time for completing all operations.They avoid haste in doing the work and so quality of work is ensured inthis method.

3. Guarantee of wages is provided to the workers. If the workers are presentfor work they are paid for that time even though they may not be able towork due to power failure, breakdown of machinery or an accident thathas taken place in the factory.

4. Since workers operate the machines and equipment by taking properprecautions and at proper speed, cost of repairs and maintenance is reducedand the possibility of accident and injury to workers is minimised.

5. Time rates can be fixed according to the nature, importance, responsibilityto be taken and skill and intelligence needed for different types of work.



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Thus justice can be done in paying remuneration to different grades ofworkers. Senior and experienced workers get more remuneration becauseof their seniority, increments and promotions. This helps in reducing labourturnover in the concern.

Disadvantages of time rate method :

1. Wages are paid on the basis of time and not by considering the quantity ofwork done. As a result of this there is no encouragement provided to theworkers to increase their productivity.

2. If an average worker and efficient worker are doing the same type of workand work for the same time they get the same amount of wages eventhough the quantity of work done by the efficient worker is more in quantitycompared to work done by the average worker. The efficient workertherefore, either joins another concern which rewards his efficiency bypaying him on piece-rate basis or he also tends to reduce the quantityproduced. Both these things affect the concern adversely.

3. Labour cost per unit increase in time rate of wages. Wages paid remainthe same for a certain time but if output produced in that time reduces thelabour cost per unit of product increase and competitive strength of theconcern becomes less.

4. As the workers get wages even for the idle time the workers develop thetendency to increase idle time. They may not take proper care of themachines used by them because breakdown of the machinery does notreduce the amount of their wages. They may waste time in chit-chatting,visiting the canteen etc. and if this is to be controlled strict and closesupervision arrangement will have to be made by the management.

1.3.3 Piece rate method

Piece rate method which is also known as piece-work rate or paymentby results is a method in which the wages are paid to the workers according tothe quantity of work / output is completed by them. Per unit rate is fixed for eachtype of output and the amount of wages payable to a worker is calculated bymultiplying the number of units produced and accepted by the piece-rate applicableto him. The piece-rate may be stated as per unit, per kg. per square-foot, perbrass etc. according to the nature of the output. Thus if the piece- rate is fixed fora painter at `70 per brass of coloring and if the painter has colored 8 brass ofa wall in 3 days, his remuneration for 3 days will be calculated as 8 brass x `70per brass = ` 560.

Piece-rate method is found suitable in the following situations :-

1. Work is standardised and can be measured easily and accurately.

2. Where worker can increase his output by using his skill and efficiency.

3. Work performed is of repeatitive nature.



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4. Where standard time for doing work can be decided accurately.

5. Where encouragement is to be provided to the workers to increase theirproductivity.

Advantages of piece rate method :

1. As wages are paid on the basis of unit of production, the direct labour costremains same and is known in advance.

2. Efficient workers get more amount of wages according to more quantityproduced by them. This gives encouragement to the workers to increasetheir efficiency still further.

3. Piece-rate method is easy to understand and simple to operate.

4. Amount of idle time is reduced because the workers concentrate on theirwork and try to increase their output. They do not waste their time inunnecessary activities.

5. Workers take proper care of their tools and machines because they knowthat breakdown of tools and machines will result in stoppage of productionand reduction in their wage amount.

6. Efficient workers earn more wages while inefficient workers earn lesswages. So inefficient workers leave their jobs and join another concernwhich pays wages on time rate method. Thus efficient workers only areretained in the concern.

7. When output increase due to piece-rate wages, the proportionate amountof fixed costs incurred on time basis is spread over a larger quantity thusbeginning down the fixed costs per unit of production. This helps in reducingthe cost of production per unit.

Disadvantages of piece rate method :

1. In this method remuneration of a worker depends on the quantity of workdone by him. With the objective of increasing his remuneration the workermay try to increase his output without taking rest and this adversely affectshis health.

2. Fixation of a correct piece-rate per unit is a difficult task. A lot of time andmotion studies will have to be conducted before it is fixed. If the rate isfixed high it becomes difficult for the management to lower it subsequentlyas this will create conflict between workers and management.

3. There is no guaranteed wage payable to workers under this method. Dueto any reason if the output of the worker reduces in any period, remunerationof the worker also decreases and it may be insufficient to satisfy even thebasic requirements of the worker and his family.

4. To increase his output the worker may use his tools and machines in areckless manner. This increase wear and tear of the machine and tools and



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Check Your Progress

i) What is the meaning ofremuneration ?

ii) Which are the mainmethods of remuneration?

iii) Which factors should beconsidered selectingmethod of remuneration ?

iv) How Time Rate Method isapplied ? State advantagesand disadvantages of theTime Rate Method.

v) What is the meaning ofprice-rate Method ? Whatare the advantages anddisadvantages of the Piece-rate Method ?

increase expenditure on repairs and maintenance. Risk of accident alsoincreases in such situation.

5. Due attention may not be given by workers to the specifications and qualityof the product. Loss due to defective production, spoilage and wastage ofmaterials takes place and the cost of production of good units increases.

6. Workers receive different amounts of remuneration as per the quantity ofwork done by them and this may cause riv. among the workers and thetrade union may find it difficult to bring unity among them. There is, therefore,opposition from the trade union leaders to the piece-rate remunerationmethod.

7. Management is required to make proper arrangements for inspection of theunits produced by the workers to make sure that the units are as per thestandard quality of the product fixed by it.

1.4 Illustrations on Time Rate and Piece RateMethods

ILLUSTRATION 1

Three workers, A, B, and C work in a factory. They are paid wages ontime-rate basis

A ` 45 Per hour

B ` 40 per hour

C ` 50 per hour

In a week of the month in August, 2014 they have worked for followinghours :

A 40 hours, B 48 hours, C 42 hours. Assuming that the factory paysdearness allowance of `200 per week to each worker, you are required tocalculate total wages payable to each worker for the week.

SOLUTION

Statements showing Total wages payable for a Week

Name of the Hours Worked Wage Rate Wages D.A. Total

Worker per hour for the per week Wages

` week ` `

A 40 45 1800 200 2000

B 48 40 1920 200 2120

C 42 50 2100 200 2300



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ILLUSTRATION 2

In X Co. wages are paid to the workers on time-rate basis. In addition tothe basic wages they are paid Dearness Allowance of `350 per week each. Theemployer contributes 8% basic wage to the Provident Fund of each worker andMedical Allowance at 2 % of the basic wage of each worker.

Vilas has worked for 45 hours in a week and his wage rate is 20 per hour,Calculate total amount payable to Vilas for the week and also calculate labourcost per hour for him.

SOLUTION

Calculation of total amount payable to Vilas for the week `Basic wages for 45 hours @ ` 20 per hour 900Add : Dearness Allowance for the week 350Add : Employers Contribution to Provident Fund of

Vilas @ 8% of his basic wages 72Add : Medical Allowance @ 2% of basic wages 18

Total Wages ` 1,340

Calculations of Labour Cost per hour :-

Vilas has worked for 45 hours in the week and labour cost incurred forhim amounts to ` 1,340 for that period

Labour cost per hour incurred for him = ` 134045 hrs.

= ` 29.777

ILLUSTRATION 3

From the following details provided to you about a factory worker calculatethis wages (consisting of normal working and overtime working) for a week :

Day Hours Worked Day Hours Worked

Monday 8 Friday 11

Tuesday 9 Saturday 6

Wednesday 10

Thursday 8

The factory follows a week of 6 days and except on Saturday daily hoursof work are 8 and on Saturday the working hours are 4.

The hourly rate of wages is 10 per hour during the normal hours of workand overtime rate is the normal rate for 9th hour and double the normal rate if aworker works on a day for more than 9 hours or upto 48 hours in a week at thenormal rate and beyond 48 hours at double the normal rate, whichever is morebeneficial to the worker.



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SOLUTION

Day Hours Normal Wages Over Time Overtime

Worked for the day Hours At Hours At Wages

@ ` 10 per Single Rate Double Rate `

hour

Monday 8 80 - - -

Tuesday 9 80 1 - 10

Wednesday 10 80 1 1 30

Thursday 8 80 - - -

Friday 11 80 1 2 50

Saturday 6 40 1 1 30

Total 52 440 4 4 120

Total wages for the week = Normal wages + Overtime wages

= ` 440 + ` 120

= ` 560

As per alternative available to the worker :-

For 48 hours at single rate of ` 10 per hour = ` 480

Overtime for 4 hours at double rate of ` 20 per hour = ` 80

Total Wages = ` 560

The worker receives total wages of ` 560 for the week under both thealternatives and so his total weekly wages are ` 560

ILLUSTRATION 4

Workers X and Y do the work of manufacturing a certain component of amachine. They work individually and are paid on piece- rate basis which is fixedat `4 per piece manufactured by them. In a week X has produced 130 componentsand Y has produced 138 components, calculate amount of wages payable to Xand Y for the week .

SOLUTION

Amount of wages under piece- rate method is calculated as under :-

Wages = No. of units produced x Piecerate wage

X has produced 130 components in the week

Wages payable to X = 130 components x `4

= ` 520



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Y has produced 138 components in the week

Wages payable to Y = 138 components x ` 4

= ` 552

ILLUSTRATION 5

In an assembly shop of an engineering concern four workers A, B, C andD work together as a group and are paid on group piece-rate at ` 4 per unit forthe units produced by the group. They also work on other jobs for remaining hoursand are paid on time rate basis which is as follows :-

A - ` 2 , B - ` 3 , C - ` 4 and D ` 4

In a week of 44 hours, the hours spent for group work by the four workersare as under :-

A - 40, B - 40, C - 30 and D - 20

In the week, the group has produced 150 units. Calculate total weeklyearnings of each worker taking into consideration their individual relativeefficiencies.

SOLUTION

Statement showing calculation of weekly earnings

A B C D

Hours spent on group work 40 40 30 20

Hours spent on individual jobs 4 4 14 24

Total hours worked in the week 44 44 44 44

Hourly rate for individual jobs ` 2 ` 3 ` 4 ` 4

Time rate wages for individual jobs ` 8 ` 12 ` 56 ` 96

Share in group wages for

150 units at 4 per unit in the

ratio of 2 : 3 : 3 : 2 ` 120 ` 180 ` 180 ` 120

Total earnings for the week ` 128 ` 192 ` 236 ` 216

Working Notes

1) It is mentioned in the problem that group earnings should be divided amongthe four workers by taking into consideration their individual relative efficienciesHourly rate for individual jobs done by A, B, C, and D is not same. A is paid 2, Bis paid ` 3, C ` 4, and D is paid ` 4 per hour. The difference in the hourly rateindicates their relative efficiency. But the hours spent for group work are alsodifferent for these four workers. So the individual relative efficiency and hoursspent for the group work by each worker are both to be considered for dividingthe group wages of ` 600 ( 150 units x 4 per units).



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The ratio for dividing group wages is worked out as under :-

Worker Hour Worked Hourly Rate in ` A 40 x 2 = 80 B 40 x 3 = 120 C 30 x 4 = 120 D 20 x 4 = 80

Group Wages of ` 600 are divided in the ration of 80 :120:120:80 i.e. 2:3:3:2among A, B, C, and D respectively

Thus, As Share = ` 600 x 2 /10 = ` 120

Bs Share = ` 600 x 3 /10 = ` 180

Cs Share = ` 600 x 3 /10 = ` 180

Ds Share = ` 600 x 2 /10 = ` 120

2) Alternatively, the weekly earnings of A, B, C and D can be calculated asUnder :-

`

Group Wages for 150 units @ ` 4 per unit 600Less : Individual Wages :-

A 40 hrs x ` 2 = ` 80B 40 hrs x ` 3 = ` 120C 30 hrs x ` 4 = ` 120D 20 hrs x ` 4 = ` 80 400Group Bonus = 200

Distribution of group bonus of 200 among A, B, C, D in the ratio of theirindividual wages of 80 : 120 : 120 : 80 i.e. 2 : 3 : 3 : 2 is done.

So, As Share of Group Bonus = ` 200 x 2 /10 = ` 40

Bs Share of Group Bonus = ` 200 x 3 /10 = ` 60

Cs Share of Group Bonus = ` 200 x 3 /10 = ` 60

Ds Share of Group Bonus = ` 200 x 2 /10 = ` 40

Statement showing calculations of weekly earnings

Name of the Worker A B C D

` ` ` `

Time wages for group work 80 120 120 80

Time wages for individual jobs 8 12 56 96

Share in Group Bonus 40 60 60 40

Total earnings for the week 128 192 236 216



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1.5 Summary

Remuneration is the reward for the work done by the employees. For theworkers employeed to work in the factory the remuneration paid is known aswages. Wages paid to direct workers who perform the work of manufacturing bymixing, heating, cutting, shaping, moulding or by operating machines in the factoryare treated as direct wages and are included in the calculations of the prime costof a product or job or operation or process. Wages paid to indirect workers arecalled indirect wages and they are included in the amount of factory / productionoverheads. Remuneration paid to other employees who work in office or salesdepartment are called salaries and they are treated as office overheads or sellingand distribution overheads depending upon work performed by them in office orsales department, wages are paid for physical labour and skills used by the workersin performing work assigned to them by the owner or management of the industrialconcern.

There are two basic methods of paying wages to workers. First method isTime Rate Method and second method is Piece-rate Method. In time ratemethod wages are calculated on the basis of time unit which may be hour, day,week, fortnight or month. Wages are calculated for the time for which the workerswere present and the wage rate is different for different categories of workers.In time rate wages depend upon the time and wage rete applicable to a workerand output or quantity of work done by a worker is not taken into consideration. Apiece-rate implies rate of wage per piece or unit and according to the quantity ofwork done by a worker his wages are calculated for that quantity. For each typeof production work, a separate piece- rate has to be decided in advance.

1.6 Key Terms

i) Time Rate Method : It is the oldest method of remunerating workers andwage rate is fixed with reference to time unit which may be an hour, day,week, fort night, month, wages are calculated by considering the wage rateapplicable to the worker and the time for which the worker has worked.

ii) Piece Rate Method : It is a method of remuneration and wage rate isfixed for a unit, price, job, quantity or weight of a product. Remuneration ofa worker is calculated by considering the piece-rate applicable to him andthe pieces or quantity produced by him.

1.7 Questions & Exercises

A) Theory Questions :

1. What are the essential features of a good wage method ?

2. Explain Time Rate Method of remuneration stating advantages anddisadvantages of it ?



NOTES

12

3. What do you mean by Piece-rate method of remuneration ? Under whichsituation it becomes suitable ?

4. Explain Piece - Rate Method of remuneration and state advantages anddisadvantages of it.

B) Multiple Choice Questions

1. Efficient ------- booking help to minimise idle time.

(a) time

(b) wage

(c) work

(d) activity

2. Under piece rate system, there is always -------- of income

(a) fixed rate

(b) uncertainty

(c) certainty

(d) no change

3. Under piece wage system due to careless handling -------- of machineryincreases substantially.

(a) wear & tear

(b) appreciation

(c) fixed cost

(d) cost

4. The work which demands high degree of skill. A -------- system is moresuitable.

(a) Time-rate

(b) piece rate

(c) minimum rate

(d) part time work

Ans. : (1 - a), (2 - b), (3 - a), (4 - a).



NOTES

13

C) Exercises

1. Calculate the normal and overtime wages payable to a workman from thefollowing data :

Days Hours Worked

Monday 8

Tuesday 10

Wednesday 9

Thursday 11

Friday 9

Saturday 4

Normal Working Hours : 8 hours per day

Normal Rate : 50 paise per hour

Overtime Rate : Upto 9 hours in a day at single rate and over

9 hours in a day at double rate

or

upto 48 hours in a week at a single rate and over 48 hours at double rate, whichever is more beneficial to the workman.

2. A factory pays wages to its workers on time rate basis. The time rate ofwage is ` 12 per hour. It also pays Dearness Allowance to each worker atthe rate of ` 300 per week. In a week ending on 31st December, fourworkers, P, Q, R, and S have worked as indicated below :-

P 44 hours R 45 hours

Q 42 hours S 48 hours

You are required to calculate amount of wages payable to each workerand also the total amount payable to each of the four workers.

3. In a company wages are paid to workers on straight piece rate basis. Thepiece- rate fixed is ` 7.50 per unit produced. In May, 2014, Parag hasproduced 370 units and Santosh has produced 350 units. The companypays Dearness Allowance to each worker at a fixed rate of ` 1200 permonth and Medical Allowance of ` 150 per worker per month.

Calculate : i) Wages payable to Parag and Santosh, and

ii) Total earnings of Parag and Santosh for the Month of May, 2014

4. In a factory four workers A, B, C, and D work as a group and they are paid` 3 per article as wages for the articles produced by the group. In a weekof 42 hours the group has produced 278 articles and for this production theyhave worked for following hours in the group :



NOTES

14



NOTES

15

A 20 Hours

B 30 Hours

C 40 Hours

D 42 Hours

The remaining hours in the week are spent by them for working onindividual jobs for which the factory pays them on time rate basis. The timerates for them are as under :-

A ` 6 per hour

B ` 5 per hour

C ` 4 per hour

D ` 3 per hour

Calculate the earnings of each worker separately for the group workand also for individual jobs performed by them. Group wages are to bedivided among the workers by taking into consideration their individual relativeefficiency.

1.8 Further Reading

i) Cost Accounting - Jawahar Lal

ii) Cost Accounting - Principles and Practice - N. K. Prasad

ii) Cost Accounting - B. K. Bhar

iv) Advanced Cost Accounting - Nigam and Sharma

Unit 2 Incentive Plans

Structure

2.0 Introduction

2.1 Unit Objectives

2.2 Incentive Plans : meaning and necessity

2.3 Different incentive plans

2.3.1 Halsey incentive plan

2.3.2 Halsey weir incentive plan

2.3.3 Rowan incentive plan

2.3.4 Taylors differential wage rate system

2.3.5 Emersons incentive plan

2.4 Summary

2.5 Key Terms

2.6 Questions and Exercises

2.7 Further Reading

2.0 Introduction

In the previous Unit, you have studied the basic method of remuneration,viz. Time Rate Method and Piece-rate Method. In this Unit information is providedregarding some incentive plans and how total wages including basic wages andbonus payable to workers are calculated. Incentives plans are introduced by theowners of industrial concerns to encourage the workers to increase their efficiencyand productivity. Total wages received by workers, to whom incentives plans areapplicable, are more than the amount of wages they would have received understraight time rate method or straight piece-rate method of remuneration. Informationprovided in this unit helps to understand how the amount of incentive/ bonus payableto workers is calculated under each incentive plan.

2.1 Unit Objectives

Study of information provided in this Unit should enable you to understand :

Meaning and necessity of incentive plans;

Different incentive plans in existence, and

Incentive Plans


NOTES

17

How calculations of incentive amount is done under each incentive wageplan.

2.2 Incentive Plans : Meaning and Necessity

Incentive wage plan means a wage plan adopted by the owner ormanagement of an industrial concern according to which it is agreed that workerswill be paid an extra amount of wage in addition to the amount of basic wagecalculated under time rate method or piece rate method applied in the concern.When worker produces a product in less than the standard time allowed to him, hesaves some time and uses it for producing extra units of the product. Thus hehelps the owner to obtain more output in the same time and by selling the extraoutput the owner earns additional amount of profit. This becomes possible becauseof more efficiency shown by the worker and he appreciates this efficiency bysharing the benefit with the worker. Incentive wage plans give encouragement tothe workers to increase their efficiency and at the same time total earnings of theworkers also increase, thereby improving their financial position. If incentive wageplans are not in existence, the efficient workers will find that they receive sameamount of wages as are received by less efficient workers working with them. Insuch situation one of the following two things will happen :-

i) Efficient workers will become disinterested in maintaining and increasingtheir efficiency.

ii) Efficient workers will leave their present jobs and will join other concernswhich are implementing incentive wage plans for their workers.

Either of the above two alternative will cause loss to the present employerbecause he will be having only less efficient workers working in his concern.Output will reduce, labour cost per unit of output will increase and the employerwill find in difficult to sell his products in the competitive market.

2.3 Difference Incentive Plans

Incentive wage plans are possible under time rate method as well as underpiece-rate method of wages. Under time rate method, wage amount for timesaved is shared in different proportions by worker and owner. Accordingly incentiveplans under time rate method are as under :-

i) Halsey Incentive Plan,

ii) Halsey Weir Incentive Plan,

iii) Rowan Incentive Plan,

iv) Emersons Incentive Plan.

Under piece-rate method, the incentive plans are as under :-

Incentive Plans


NOTES

18

1) Taylors differential wage rate plan,

2) Gantt task and bonus plan.

[Gantt task and bonus plan is actually a combination of guaranteed timerate, time rate plus bonus and a high piece-rate. Under Gantt task and bonus plana standard for each type of work is set based on careful time and motion study. Aworker who completes the work in standard time is regarded as 100% efficient. Aworker having efficiency below 100% is paid a guaranteed time rate wages. Aworker having 100 % efficiency is paid time rate wages plus a bonus of 20 % ofthe time rate wages and a worker giving more than the standard output, he is paidat the high piece- rate already fixed in advance.]

Information about the incentive plans, the formulae to be used for calculatingtotal earnings under each incentive plan, advantages and disadvantages of theincentive plan and illustrations showing calculation of total wages payable toworkers under the incentives plans is provided below.

2.3.1 Halsey incentive plan

This incentive plan was introduced by F. A. Halsey in 1891. Halsey was anAmerican engineer. In this plan a standard time is fixed for each job in advance.A worker who completes the job in the fixed standard time or in more than thestandard time is paid time rate wages at a fixed time rate per hour. This guaranteesthe worker that he will receive wages at guaranteed hourly rate for actual hoursworked by him. Since the worker has taken standard or more than standard timeit is obvious that he is not an efficient worker and so is not entitled to receive anybonus or incentive wages. Incentive wages are given to the workers who completethe job in less than the standard time. The amount of wages for the time saved bythe workers is the total benefit and this benefit is shared by the worker and theemployer. In Halsey incentive plan the sharing is done 50 -50 between the workerand the employer though it may be changed in some concerns following this incentiveplan.

The amount of incentive received by a worker to whom Halsey incentiveplan is applicable is, thus 50 % of the wages for the time saved by him. He, ofcourse, receives his time wages for the actual hours worked by him, his totalwages can be calculated as follows :-

Total wages = Time actually worked x Time rate + 50% of wages

for the time saved

It can be put in a formula as under :-

TE = AH x HR + (SH-AH) x HR

Where, TE = Total Earnings

AH = Actual Hours Worked

HR = Hourly Rate of Wages

SH = Standard Hours

Incentive Plans


NOTES

19

ILLUSTRATION 1

In KD factory workers are paid incentive according to Halsey Incentiveplan. For a particular job standard hours for completion are 50 hours and the wagerate is `12 per hour. Worker Kiran has completed the job in 48 hours Bhima andworkers has completed the same job in 46 hours.

Calculate total earnings of Kiran and Bhima from the jobs.

SOLUTION

Standard time for the job 50 hours

Time rate of wages ` 12 per hour

Time taken by Kiran 48 hours

Time taken by Bhima 46 hours

Calculation of total earnings of Kiran :

TE = AH x HR x (SH AH) x HR

= 48 x 12 + ( 50-48) x 12

= 576 + ( 2 x 12)

= 576 + 12

= ` 588

Calculation of total earnings of Bhima :

TE = AH x HR x (SH AH) x HR

= 46 x 12 + ( 50 - 46) x 12

= 552 + ( 4 x 12)

= 552 + 24

= ` 576

It should become clear from the formula that the first part of calculations,viz., AH x HR shows the normal wages for the actual hours worked by theworker and the second part of calculations shown as addition is the amount ofincentive given to the worker.

The amount of total earnings of Kiran who has completed the job in 48hours appear more than the total earnings of Bhima who has taken only 46 hour tocomplete the job. An impression is likely to be created that more efficient workergets less amount of total earnings. But the impression is wrong because kiranstotal earnings are for 48 hours of work while Bhimas total earnings are for 46hours. Kiran can spend remaining 2 hours on some other job and Bhima cabspend 4 remaining hours on some other job and earn wages. If effective rate ofwage is calculated it is `588 / 48 hours = 12.25 for Kiran whereas for Bhima,It comes to ` 576 / 46 hours = `12.52

Incentive Plans


NOTES

20

ILLUSTRATION 2

In a factory standard time allowed for producing one unit is 3 hours. Basicwage rate is `5 per hour worked and dearness allowance is `0.80 per hourworked. Incentive payment is made to workers as per Halsey incentive plan. In aworking week of 48 hours, A worker has produced 20 units and B worker hasproduced 18 units.

Calculate the total earnings of A worker and B worker for the week.

SOLUTION

A worker has produced 20 units and the standard time allowed for theseunits is 20 units x 3 hours per unit = 60 hours.

A has worked for 48 hours in the week.

Time saved by A worker = 60 hours 48 hours = 12 hours

Calculation of the Total earning of A worker for the week

`

Basic wages for 48 hours x ` 5 = 240.00

Dearness allowance for 48 hours x `0.80 = 38.40

Incentive wages @ 50% of time saved which = 30.00

are 12 hours (50% of `60)

Total Earnings of A worker for the week = 308.40

B worker has produced 18 Units

Standard time for 18 units x 3 hours = 54 hours

B worker has worked for 48 hours in the week.

So he has saved ( 54 hours 48 hours) = 6 hours

Total Earnings of B worker :-

`

Basic wages for 48 hours x ` 5 = 240.00

Dearness allowance for 48 hours x `0.80 = 38.40

Incentive wages @ 50% of time saved which

are 12 hours (50% of ` 30) = 15.00

Total Earnings of B worker for the week = 293.40

Incentive Plans


NOTES

21

2.3.2 Halsey - Weir incentive plan :

This incentive plan is put forward by Mr. Halsey and Mr. Weir. It is similarto Halsey incentive plan with the only difference in the sharing of the bonus.Under Halsey plan, the amount of wages for time saved by a worker is shared bythe employer and the equally and so the worker receives incentive at 50% ofwages for the time saved by him. In Halsey Weir incentive plan the incentiveamount given to the worker is at 30% of wages for time saved by him. It meansthe employer receives benefit at 70% of wages for the time saved by the worker.

For calculating total earnings of a worker under Halsey-Weir plan the formulaused is as under :-

E = T x R + 30% (S T) x R

Where,

E = Total Earnings of worker

T = Time taken by worker to complete work

R = Time Rate of Wages

S = Standard Time allowed for completion of work.

ILLUSTRATION 3

In an industrial concern, Halsey-Weir incentive plan is followed forcalculating wages payable to workers. Standard time allowed for completion of acertain job is 30 hours and the time wage rate is 5 per hour. Pravin has completedthe job in 26 hours .

Calculate his total earnings for the job.

SOLUTION

E = T x R + 30 % (S T) x R

= 26 x 5 + 30% ( 30 -26 ) x 5

= 130 + 30 % (4) x 5

= 130 + 6

= ` 136

2.3.3 Rowan Incentive Plan

This incentive plan was introduced by James Rowan in Glasgow. Thisincentive plan is also based on time rate of paying wages to workers. The bonusor incentive wages are calculated by taking into consideration the time saved bythe worker but there is no fixed percentage as in case of Halsey premium plan. InRowan plan for calculating bonus the proportion of time saved to standard time iscalculated and bonus amount is the amount of wages for hours worked multiplied

Incentive Plans


NOTES

22

by this percentage. This method of incentive also gives assurance of wages to theworker for actual time worked by him at the time rate of wage.

Calculation of wages including incentive wages payable to a worker is doneas follows :-

Total Wages = Time worked x Time Rate + Time saved

x Time worked x Standard time

In formula form it can be stated as under :

TE = AH x HR + (ST - AH)

x AH x HRST

Where,

TE = Total Earning

AH = Actual Hours worked

HR = Hourly Rate of wage

ST = Standard Time allowed

ILLUSTRATION 4

In a factory standard time allowed for doing a job is 50 hours. Hourly wagerate is `10. Incentive wage plan applicable to the workers is Rowan incentivewage. Harish has completed the job in 45 hours Kumar has taken 48 hours andSudhakar has completed it in 40 hours.

Calculate the total earnings of Harish, Kumar and Sudhakar, also calculatethe effective rate of earnings per hour for the three workers.

SOLUTION

Formula for calculating total earnings of a worker under Rowan IncentivePlan :-

TE = AH x HR + ST AH

x AH x HR ST

Where,

TE = Total Earning

AH = Actual Hours taken for doing the job

HR = Hourly Rate of wage, and

ST = Standard Time allowed for doing the job

Incentive Plans


NOTES

23

Time Rate

Calculation of Total Earning of Harish

TE = 45 x 10 + 50 - 45

x 45 x 10 50

= 450 + 5

x 450 50

= 450 + 45

= ` 495

Effective Rate of Earning per hour = Total Earning Actual hours worked

= ` 495

45 hours

= ` 11

Calculation of Total Earnings of Kumar

TE = 48 x 10 + 50 - 48

x 48 x 10 50

= 480 + 2

x 48010

= 480 + 19.20

= ` 499.20

Effective rate of earnings per hour for kumar = ` 499.20

48

= ` 10.40

Calculations of Total earnings of Sudhakar :-

TE = 40 x 10 + 50-40

x 40 x 10 50

= 400 + 1

x 400 5

= 400 + 80

= ` 480

Effective rate of earnings per hour for Sudharkar = ` 480

40 hours

= ` 12

Incentive Plans


NOTES

24

ILLUSTRATION 5

Modern Electronics Company is a factory engaged in manufacturing variouselectronics units. The Co. has 48 hours working in a week. For workers producinga certain part time rate of wage is `12 per hour. Standard time for producing onepart is 40 minutes. A worker has worked for 48 hours in the week and has produced90 parts all of which have been accepted by the company as good parts.

Calculate total wages of the worker for the week under :

1) Time Rate method of remuneration,

2) Piece- rate method of remuneration,

3) Halsey incentive plan, and

4) Rowan incentive plan.

SOLUTION

1) Total wages under Time Rate Method :-

Total Wages = Hours worked x Hourly rate of wages

= 48 x 12

= ` 576

2) Total Wages under piece Rate Method :-

Standard time for producing one part is 40 minutes

Standard output in 1 hour of working is 60

x 1 = 1 parts

Wages for 1 hour are ` 12

Piece Rate of wages is ` 12 / 1 parts = ` 8 per part

The worker has produced 90 parts in the week, so his

Total wages for the week = No. of parts produced x Piece Rate

= 90 x ` 8

= ` 720

3) Total wages under Halsey Incentive Plan :-

Standard time for 90 parts at 40 minutes per part is 90 x 40 = 60 hrs 60

Actual time taken by the worker for producing 90 parts is 48 hours. Itmeans the worker has saved 60 - 48 = 12 hours while producing the parts in theweek.

His total wages under Halsey Incentive Plan will be :-

TE = AH x HR + 50% ( ST AH ) x HR

Incentive Plans


NOTES

25

4012

= 48 x 12 + (60-48) x 12

= 576 + x 12 x 12

= 576 + 72

= ` 648

4. Total wages under Rowan Incentive Plan :-

TE = AH x HR + ST AH

x AH x HR ST

= 48 x 12 + 60-48

x 48 x 12 60

= 576 + ( 1/ 5 x 576)

= 576 + 115.20

= ` 691.20

[ Note that the worker gets maximum amount of total wages under piecerate method and minimum amount under time rate method because under piece-rate he gets full benefit of his efficiency, does not receive any benefit under timerate method and he shares the benefit with his employer under Halsey IncentivePlan as well as Rowan Incentive Plan.]

Comparison between Halsey Incentive Plan and Rowan Incentive Plan :

i) Under both these incentive plans time saved out of the standard time allowedto the worker is considered for calculating bonus amount payable to theworker. However in Halsey Plan bonus is equal to 50 % of wages for thetime saved while in Rowan Plan there is no such fixed percentage andbonus amount is calculated by deciding the proportion of time saved to thestandard time and applying this proportion to the amount of wages of theworker for the time worked by him.

ii) Under Halsey plan when time saved by the worker is less than 50 % of thestandard time, the amount of bonus is less and bonus amount increase whentime saved starts increasing over 50 % of the standard time. In Rowanplan the amount of bonus increase upto 50 % of the standard time saved bythe worker and when he saves more than 50 % of the standard timeallowed, the bonus amount goes on decreasing. When time saved by aworker is 50% of the standard time allowed, the bonus amount receivableby the worker under Halsey plan and Rowan plan is equal.

2.3.4 Taylors differential wage rate system

F. W. Taylor, the father of scientific management, has introduced this systemof wage payment. He fixed standard time or standard output on the basis of timeand motion studies carried out for each type of production work. Taylor believedin penalising an inefficient worker and reward and efficient worker. So he suggested

Incentive Plans


NOTES

26

two separate wage rates for payments of wages to the workers. The lower rateof 80 % of the normal piece-rate or time rate is used for calculating wages ofworkers whose efficiency is below 100% and the higher rate o f 120% of thenormal piece-rate or time rate is used for calculating wages of workers whoseefficiency is at a or above 100 %.

ILLUSTRATION 6

In a factory standard output fixed for a day is 20 units and piece-rate is 5 per unit. Workers are paid wage according to Taylors differential piece- ratesystem.

In a days time X has produced 17 units, Y has produced 20 units and Z hasproduced 24 units.

Calculate the amount of wages for X, Y, and Z.

SOLUTION

X worker has produced 17 units and the standard output is 20 units.

So Xs efficiency is 17

x 100 = 85% 20

Xs efficiency is below 100% and so he will be paid at lower piece- ratewhich is 80% of ` 5 = ` 4 per unit

Xs wages = 17 units x ` 4

= ` 68

Y has produced 20 units which are equal to the standard output. So Y willbe paid at higher piece rate which is 120 % of ` 5 = `6 per unit.

Ys Wages = 20 units x ` 6

= ` 120

Z worker has produced 24 units which means his efficiency is

24 x 100 = 120%

20

Zs efficiency is above 100% and so he will be paid wages at the higherpiece rate of ` 6 per unit.

Zs wages = 24 units x ` 6

= ` 144

ILLUSTRATION 7

In Zed ltd. A manufacturing company standard time for producing one unitis 30 minutes. The hourly rate of wage is `20.

Worker Prabhakar has worked for 6 hours on a day and has produced 10

Incentive Plans


NOTES

27

units; worker Keshav has worked for 8 hours on the same day and has produced18 units.

You are required to calculate wages payable to Prabhakar and Keshavunder following methods.:-

i) Time rate method,

ii). Straight piece rate method, and

iii) Taylors differential wage rate method.

SOLUTION

1. Time Rate Method :

Prabhakar has worked for 6 hours in day.

His wages for the day will be = Hours worked x Hourly wage rate

= 6 hours x ` 20

= ` 120

Keshav has worked for 8 hours and so his wages for the day will be

= 8 hours x ` 12

= ` 96

2. Wages under straight piecerate method :

standard time for producing one unit is 30 minutes.

so standard output in one hour is 2 units

For one hour wages paid amount to ` 20

Piecerate wage is ` 20 2 units = ` 10

Calculations of wages of Prabhakar :

Wages = Units produced x Piece-rate of wages

= 10 x ` 10

= ` 100

Calculations of wages of Keshav :

Wages = Units produced x Piece-rate of wages

= 18 x ` 10

= ` 180

Incentive Plans


NOTES

28

3. Wages Under Taylors Differential Wage Rate Method :

Normal Piece rate is `10 per unit.

A worker whose output is below the standard output is to be paid at a lowpiecerate which is 80 % of normal piece-rate and a worker who is able to producestandard or above standard output is to be paid at high piece-rate i.e at 120 % ofnormal piece rate.

Calculations of wages of Prabhakar :

Prabhakar has worked for 6 hours and so the standard output for him is 12units, But actual output of Prabhakar is only 10 units. His efficiency is below100% and so he will be paid at 80 % of ` 10 = ` 8 per unit.

His wages = 10 units x `8

= `80

Calculations of wages of Keshav :

Keshav has worked for 8 hours and so standard output for him is 16 units.Actual output of keshav is 18 units which is more than the standard output. Sokeshav will be paid wages at 120 % of normal piecerate. Therefore he will bepaid wages at ` 12 per units.

His wages = 18 units x ` 12

= ` 216

Advantages of Taylors Differential wage rate system :

i) There is incentive provided to the efficient workers. Workers who haveefficiency at 100 % or more are paid wages at 120 % of the normal piece-rate and so the workers try to increase their efficiency.

ii) Workers having efficiency below 100% are paid at 80% of the normalpiece-rate and they are thus penalised. Once the inefficient workers becomesaware of this. They will either try to bring up their efficiency upto 100 %level or will leave their present employment and join some other concernwhere Taylors differential wage rate method is not adopted for wagepayment.

iii) Workers do not waste their time because the are interested in increasingtheir output and so there is no need for strict supervision on them.

iv) When more production is done the amount of fixed overheads is divided ona larger number of units and thus per unit amount of fixed overheads andthereby the cost of production per unit is reduced.

Disadvantages of Taylors Differential wage rate system

i) There is no guaranteed amount of wages for the days work done by theworkers.

Incentive Plans


NOTES

29

ii) The difference in the low piece-rate and high piece- rate is very wide(40% of normal piece-rate ). The difference in the wages amount of efficientand inefficient workers is a large one and this may cause discontent amongthe inefficient workers.

iii) Trade unions of workers dislike this method because unity of workers islost due to difference in the rate of which wages are paid to them.

2.3.5 Emersons Incentive Plan

In this incentive plan, which is introduced by Mr. Emerson, there iscombination of guaranteed time rate with incentive above certain percentage ofefficiency. For every job or operation a certain standard time is fixed. If the Job oroperation is completed by a worker in the standard time fixed for it, the efficiencyof the worker is regarded as 100%. A worker having efficiency below 66.67% isgiven wages at the guaranteed time rate but no bonus. Bonus is payable from66.67 % efficiency to 100% efficiency at pre-determined increasing percentagein such a way that at 100% efficiency the worker receives 20% bonus. If efficiencyis above 100% the worker gets 1% additional bonus for every 1%, increase inefficiency above 100%. It means if the actual efficiency of a worker is 125% hewill get 20% bonus for efficiency upto 100% and additional bonus of 25% sincehis efficiency above 100% is 25%. Thus the worker will get this time rate wages+ 45% of time rate wages as bonus amount. Workers achieving more than 100%efficiency thus are benefitted and they need not be contended with the objectiveof achieving 100% efficiency only.

ILLUSTRATION

In PQR company standard output fixed for a week 48 working hours is 200units and time rate of wages is ` 20 per hour.

In a week of 48 hours working actual output of 3 workers A , B, C is asunder:-

A 120 UnitsB 200 UnitsC 220 Units

Assuming that Emersons efficiency plan is applicable to the workers,calculate the total wages of A, B and C.

SOLUTION

In Emersons efficiency plan it is necessary to calculate the efficiencypercentage of each worker to decide whether he is eligible to get any bonus andif he is eligible how much bonus he will get.

Standard output for 48 hours working is 200 units which is 100% efficiency

As efficiency =120 Units

x 100200 Units

= 60 %

Incentive Plans


NOTES

30

Check Your Progress

i) What do you Understandby the term IncentivePlans ? Why incentiveplans are necessary ?

ii) Mention the incentiveplans you are studying inthis book ?

iii) Give the Formula for thefollowing plans :-

a) Halsey Incentive Plan,

b) Halsey Weir IncentivePlan,

c) Rowan Incentive Plans, and

d) Emersons Incentive Plan

e) Taylors Differential WagePlan

Since As efficiency is below 66.67 % efficiency he will get only guaranteedtime rate wages but no bonus.

As Total Wages = Hours worked x Hourly time rate

= 48 hours x ` 20

= ` 960

B has produced 200 units in 48 hours, therefore his efficiency is

=200

x 100200

= 100%

B will get his time rate wages plus 20% of time rate wages as bonus

Bs Total Wages = 48 x 20 + (20% of 48 x 20 )

= 960 + 20 % of 960

= 960 + 192

= ` 1152

C has produced 220 units in 48 hours.

Cs efficiency = 220 units

x 100 = 110%. 200 units

C will get his time rate wages + 20% bonus for efficiency upto 100% + 10%bonus for efficiency exceeding 100% efficiency.

Cs Total wages = 48 x 20 + ( 30% of 48 x 20)

= 960 + 30% of 960

= 960 + 288

= ` 1248

2.4 Summary

Incentive plans have been introduced over a period of time by ownersand management of industrial concerns to give encouragement to their workers toincrease their efficiencies. When efficiency is increased by a worker he takesless than the standard time allowed for completing a work or increases outputover expected quantity of output in the same time. In both these situations theemployer is benefitted because of reduction in the per unit cost or because of saleof additional quantity produced by the efficient workers. Employer, therefore,agrees to share the additional income with the efficient workers in a certainproportion. The share given to the worker is the incentive wage amount as the

Incentive Plans


NOTES

31

worker receives the incentive amount in addition to his normal wages. Sharing ofthe benefit with the workers is done in different proportions and so there aredifferent incentive wage plans. Halsey incentive plan, HalseyWeir incentive plan,Rowan premium plan, Emersons incentive plan, Taylors differential wage rateplan are some of the incentive wage plans which are discussed in this unit.

2.5 Key Terms

i) Incentive Wage Plan : It is a wage plan according to which the employeragrees to pay an extra amount of wage to those workers who do the workin less than the standard time allowed or who produce additional units ascompared to the number of units expected to be produced by them. Thisextra wage amount is in addition to the basic time rate wages or basicpiece-rate wages payable to the worker.

ii) Halsey Incentive Plan : It is an incentive plan according to which a workeris paid basic wages for the actual time worked at the wage rate applicableto him and additional wages for half of the time saved by him at his wagerate.

Total Earnings = Actual Hours x Hourly Rate + 1

(Standard Hours - Actual Hours) x Hourly Rate

iii) Halsey Weir Incentive Plan : This Plan is similar to Halsey IncentivePlan with the difference that the worker receives 30% of wages for timesaved as incentive amount instead of 50% amount received as incentiveamount under Halsey Incentive Plan.

Total Earning = T x R = 30% (S - T) x R

Where T = Time worked by worker

R = Rate of Time Wage

S = Standard Time Allowed to worker

iv) Rowan Incentive Plan :

Total Earnings = T x R = (S - T) x T x R

In this Incentive Plan the incentive amount is calculated by multiplying theamount of wage for the time worked by the worker by the proportion oftime saved to standard time.

v) Taylors Differential Wage Rate Plan :

Under this plan two separate wage rates are used for inefficient workerand efficient worker. Low wage rate is applicable to the workers whoseefficiency is less than 100% and the worker rate of wage is 80% of thenormal rate. High wage rate is applicable to workers who have 100% or

Incentive Plans


NOTES

32

2

S

more efficiency. The high wage rate is 120% of the normal wage rate.

vi) Emersons Incentive Plan :

Efficiency upto 66.67% - Only guarnteed time rate wages but no bonus.

Efficiency at or above 66.67% upto 100% - Bonus is paid at 20%

Efficiency above 100% - Bonus of 20% for efficiency upto 100% plus 1%bonus for every 1% increase in efficiency above 100% efficiency.

2.6 Questions and Exercises

A) Theory Questions

1. What do you understand by incentive wage plans ? Explain necessityand importance of incentive wage plans ?

2. Which are the incentive wage plans under time-rate method os remuneration?Explain how sharing of benefit is done with the workers under theseincentive wage plan ?

3. Compare Halsey Incentive Plan with Rowan incentive Plan in detail.

4. Explain how total earnings of a worker are calculated under the followingincentive wage plans :-

a. Halsey Incentive Plan,

b. Rowan Incentive Plan, and

c. Emersons Efficiency Bonus Plan.

5. How wages of a worker are calculated under Taylors Differential PieceRate method of remuneration ?

6. Taylors Differential Piece Rate Plan penalises inefficient worker andrewards more efficient worker. Explain.

B) Exercises

1. Calculate the total earnings and the effective rate of earnings of a worker,Sensible, under Halsey Premium Plan 50% of time saved and Rowan PremiumPlan separately with the help of following information.

Time Allowed - 90 Hours

Time Taken - 72 Hours

Rate of Wages - ` 25 per hours

Dearness Allowance - ` 1.25 per hour

Incentive Plans


NOTES

33

2. During one week the workman Trustworthy manufactured 200 articles. Hereceives wages for guaranteed 44 hours week @ `1.50 per hour. The estimatedtime to produce one article is 15 minute and under incentive scheme the timeallowed is increased by 20% . Calculate his Gross Wages under each of thefollowing methods of remuneration :

(i) Time rate

(ii) Piece Work with Guaranteed Weekly Wages

(iii) Rowan Premium Bonus

(iv) Halsey Premium Bonus, 50% to workman.

3. The Standard Time fixed for a job is 40 hours and the wage rate is 40 perhour. The worker is to get his normal rate for hours worked and half the normalrate for hours saved. Material required for the job costs `800 and the workoverheads are charged on the basis of `60 per labour hour. Calculate the totalwages and effective rate of earnings per hour if the job is completed in

(A) 32 hours, and

(B) 24 hours

Also calculate the Job Cost in both the cases.

4. With the help of the following information ascertain the wages payable toM and N under Taylors Differential Piece Rate System.

Standard Time 10 units per hour

Normal wage rate ` 1 per hour

Differentials to be applied :

80% of Piece-rate when below standard

120% of Piece- rate when above standard

In a day of 8 hours M produced 60 units and N 100 units.

5. From the following particulars you are required to calculate the weeklyearnings of a worker under :

i) Straight Piece Rate

ii) Taylors Differential Piece Rate

iii) Halsey Premium Scheme (50% sharing ) and

iv) Rowan Premium Scheme

Weekly Working Hours 48

Hourly Wage Rate `10

Normal Time Taken per Unit 20 minutes

Incentive Plans


NOTES

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Incentive Plans


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Normal Output per Week 120 units

Actual Output for the week 150 units

Taylors Differential Piece rate :-

80% of piece rate when output is below normal

120% of piece rate when output is at or above normal.

6. Honda Motor Cycles Ltd. Gurgaon has given you with the weekly reportof the two workers viz. Herdy and Sturdy. They get guaranteed wages of `10per hour. Their payments are made on weekly basis consisting 48 hours .

Worker Standard Time House Worked Units of

Per Unit Output Made

Hardy Half an Hour 48 110

Sturdy Half an Hour 48 80

Calculate the amount payable under :

i) Time Rate System

ii) Piece Rate system

iii) Piece Rate with Guaranteed Weekly Wages

iv) Taylors Differential Piece Rate Plan

v) Halsey Premium Plan

vi) Rowan Premium Plan.

7. Daily wage are rate guaranteed for a worker is ` 2 and the standard outputfixed for a week is 1,000 articles, representing 100% efficiency. The guaranteedwage rate is paid without bonus to those workers who show efficiency upto 70%of the standard. Beyond this, bonus is payable on graded scale in the fixed ratio tothe increased output as under :

Efficiency Bonus71% to 90% 10%91% to 100% 20%

Further increase of 1% in the bonus is given for every 1 % increase in theefficiency. Calculate the total earning of the following workers who have workedfor a week of 7 days.

Worker Output ( Articles)

Virendra 500

Jitendra 950

Mahendra 1,000

Rajendra 1,200

C) Multiple Choice Questions

1. Halsey Premium Plan was introduced in ----------- in 1891.

(a) France

(b) U.K.

(c) America

(d) England

2. Under Halsey Plan the incentive is not strong enough to include -------workers to work hard.

(a) normal

(b) general

(c) efficient

(d) unskilled

3. Under ----------- plan past performance is taken as the guidance fordetermining the standard time for each job.

(a) Rowan premium

(b) Halsey premium

(c) Tailor premium

(d) incentive premium

4. Under ---------- plan a less efficient and more efficient may get the sameamount of bonus.

(a) Halsey premium

(b) Rowan premium

(c) bonus

(d) Tailor premium

Ans. : (1 - c), (2 - c), (3 - a), (4 - b).

2.7 Further Reading

i) Cost Accounting - Jawahar Lal

ii) Advanced Cost Accounting - Nigam and Sharma

iii) Cost Accounting - Principles and Practice - N. K. Prasad

Incentive Plans


NOTES

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Unit 3 Preparation of Wage-sheets andPayrolls

Structure

3.0 Introduction

3.1 Unit Objectives

3.2 Wage-sheets and pay-rolls - meaning

3.3 Necessity and importance

3.4 Preparation of wage-sheets and pay-rolls

3.5 Types of frauds and their prevention

3.6 Control on labour cost

3.7 Summary

3.8 Key Terms

3.9 Questions

3.10 Further Reading

3.0 Introduction

In Unit 1 and 2 different aspects of labour costs have been described indetail. In this Unit information about accounting of labour cost is provided. Thoughtotal amount of wages payable to each worker and other employees is calculated,it must be recorded in wage sheets and Pay Rolls and other allowances payableto them, gross amount payable to each employee, deduction of various amountsand net amount payable must be recorded in proper way. Preparation of wage-sheets and pay-rolls is not dependent upon wish of the owner/employer but it isan obligatory work to be done by the concern as per the provisions made in thePayment of Wages Act and Minimum Wages Act. Such records provide evidenceabout the remuneration paid to the employees. Whether the various calculationsregarding remuneration payable to employees have been correctly made anddisbursement of net amount payable to them has been properly done is verified bythe internal and external auditors and also by the Government officials appointedfor that work. Information about preparation of wage-sheets and pay-rolls anddisbursement of wage amount is provided in this unit.

Preparation of Wage sheetsand Pay-rolls


NOTES

37

3.1 Unit Objectives

After studying the information given in this unit, you should be able to

Understand ruling of wage-sheets and pay-rolls;

Know how information is recorded in the columns;

Understand types of frauds that can be committed in the work of preparationof records and disbursement of wages; and

Understand care to be taken to prevent the frauds.

3.2 Wage-sheets and Pay-rolls - Meaning

Wage-sheets and pay-rolls are the documents which are prepared to recordnames of workers and employees, duration for which wages and remuneration ispayable to them, amount of basic wages for that period and amounts of allowancesof various types, amount of incentive or bonus payable to the employee, grossamount of wages of remuneration, amount of deductions made from total earnings,net amount payable to employee and signature of the employee for checking thecorrectness of calculations shown against his name and for receipt of the netamount of remuneration. Wage-sheets are generally prepared for a week or adepending upon the practice followed in each concern. Wage-sheets are in theform of loose sheets while pay-rolls for other employees are in the form of aregister or a bound volume.

3.3 Necessity and Importance

Wage-sheets and pay-rolls are required to be prepared as they provideinformation in written form about employees to whom remuneration has beenpaid, calculations related to basic remuneration and others allowances to whichthey are entitled, deductions made from gross remuneration amount and net amountof remuneration which has been paid to them. These records enable the workersto check correctness of the amount being paid to them as remuneration for thework performed by them. They also provide evidence, as required by the provisionsof the Payment of Wages Act and the Minimum Wages Act, about fulfillment ofthese provisions by the employer. These records are therefore, preserved for along period of time.

The wage-sheets and pay-rolls are necessary to be prepared for recordinginformation in the financial accounts of the concern. The Accounts Departmentcomes to know the total amount required for payment of net remuneration if suchpayment is to be made in cash to the employees. Similarly information also becomesavailable regarding deduction made from the remuneration of the employees foremployees contribution to the provident funds, insurance premiums, income-tax,repayment of loans taken by the employees from the banks or other financial



NOTES

38

institutions, etc. and on the basis of this information arrangement can be made forsending the deducted amounts to the appropriate authorities.

Information available from the wage- sheets is also necessary for costingpurposes. Costing Department uses it for calculation of direct wages, indirectwages and indirect expenses i.e. overheads etc. Calculation of the labour costbecomes possible by using the information recorded in the wage-sheets and pay-rolls. For comparing labour cost over a certain period and for estimating labourcost for the future period, the information from wage-sheets and pay-rolls provesnecessary.

3.4 Preparation of Wage-sheets and Pay-rolls

The work of preparation of wage sheets and pay rolls and the actual paymentor disbursement of wages is generally entrusted to a separate department whichis called payroll department. The employees working in this department have tocollect the basic documents such as clock-cards, daily or weekly time sheets, jobcards or other similar documents which are used for time keeping and time bookingof the workers. The department prepares a list of all the workers by classifyingthe workers department wise and recording name, token/ticket number of theemployee, basic wage rate (on time basis or on piece-rate basis) of the worker.On the basis of the recording shown in the time keeping and time bookingdocuments received by it, the time worked by the employee is calculated andrecorded against the name of the employee. Hours of normal working and overtimeworking are shown against the name of employee and the rates at which wagesare calculated for normal hours and overtime hours, if mentioned. If the workeris entitled to get any bonus or incentive payment it is also shown in the appropriatecolumn. Amounts to be paid for allowances such as dearness allowance, travellingallowance, house rent allowance, etc. and the amounts payable for them are alsorecorded and the total of all these amounts is shown as the gross wages amount.Deductions made from the amount of gross wages of the worker are shownunder section of deductions having columns for each item of deduction and totalamount of deduction. Items of deduction are workers contribution to his ProvidentFund, Employees State Insurance (E.S.I.), Income tax, recovery of advance orloan from the worker, fines to be paid by the worker, etc. Net wages payable tothe worker is calculated by deducting total amount of deductions from the grosswages amount of the worker and the net wages amount is shown in net wagescolumn. If the wages are to be paid in cash, there is a last column in the wagesheet / payroll for obtaining signature of the worker as a proof of payment ofwages made to him.

A specimen of wages sheet / pay roll is given below :-



NOTES

39



NOTES

40

------

-----

-----

-----

-----

-----

-- C

ompa

ny L

td.

Wag

e Sh

eet /

Pay

roll

Dep

artm

ent

----

----

----

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----

--Fo

r th

e pe

riod

------

------

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Parti

cula

r of W

orke

rsH

ours

wor

ked

Earn

ings

Gro

ssD

educ

tions

Tota

lN

etSi

gnat

ure o

fW

ages

Ded

uctio

nW

ages

Wor

kers

Sr. No.

Name

Token No.

Rate

Grade

Total

Name

Over time

Normal

Over time

Bonus

D. A.

Othe

rAl

lowan

ces

P.F.

E.S.I.

Income Tax

Recovery ofLoans/Advances

Oth

ers

Prep

ared

by

----

-----

-----

----

-----

-Pa

ymen

ts m

ade

by -

------

------

--

Che

cked

by

-----

------

----

------

---

3.5 Types of Frauds and Their Prevention

Persons who prepare the wage sheets / payrolls and who make the paymentof net wages to the workers have opportunities to commit frauds. These fraudscan be of following types :

1. Inclusion of non-existing workers (also known as dummy or ghostworkers) in the wage sheets or pay rolls and arranging to obtain the netwages amount of such workers. The amount is shared by persons who arepartners in such fraudulent activities.

2. Showing absent workers as present for work and claiming wage amountsfor no work done and deceiving the employer.

3. Claiming wages at a higher rate than the actual rate applicable to someworkers. The difference due to calculation of wages at higher rate is eithertotally pocketed by the person who has committed the fraud or it is sharedwith the workers whose wage rate is fraudulently increased.

4. Making changes in the figure of hours worked and increasing total numberof hours worked, thereby receiving wages for hours not worked.

5. Showing bonus amount as payable to workers when actually no bonus ispayable to them.

6. Paying less cash than the amount of net wages due to workers and obtainingtheir signatures for the net wages received by bringing pressure on theworkers.

To prevent such fraudulent activities in preparation of wage sheets andactual disbursement of wages to the workers the management should not allot thework of preparation, checking and cash payment for net wages to the same persons.When X has prepared the wage sheet, Y should be asked to check the informationshown in the wage sheets and Z should be given the responsibility of paying cashto the workers. Each person should be asked to sign for the work done by him.Internal checks are thus created in this entire work and unless all of them agreeto commit fraud it cannot be committed. Supervisors or foreman should be askedto certify the hours of work recorded by the workers working under them. Thiswill prevent the tendency among the workers to show more hours as workedthan the actual hours worked by them and also absent workers cannot be shownas present for the work. The costing department should be instructed to prepareand submit to the management reports about labour cost for a specific period andif the labour cost shows wide variation the reasons due to which the variation hastaken place should be enquired into.

While doing the disbursement of the wages payable to the workers, theperson making the payment should do so only after proper identification of eachand every worker. If disbursement is done in each department the foreman in thedepartment can identify the workers working under him and the possibility ofpaying wages to a wrong person can avoided. Wages of a worker should not be



NOTES

41

given to another person unless the has been duly authorized to collect wageamount by the absentee worker.

3.6 Control on Labour Cost

Labour cost includes remuneration paid to direct and indirect workers, costincurred for providing fringe benefits, cost incurred for providing various welfarefacilities to the workers and cost incurred on departments such as personneldepar

Documents

ADVANCED COST ACCOUNTING - IIycmou.digitaluniversity.ac/WebFiles/MCom (M17) Semester -I...ADVANCED COST ACCOUNTING - II CAG 102 YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY Dnyangangotri,