Cost

Accounting
UNIT-
2
 Unit - 2

Direct and Indirect Labour , Attendance and Pay

2.1 roll procedure
2.2 Labour turnover
2.3 Idle time and over time
2.4 Remuneration and incentive scheme
2.5 Classification of Overheads
2.6 Overhead rate
2.7 Over and under absorption of overheads
2.8 Machine hour rate
2.
1
D i re c t and I n d i re c t L a b o u r ,
Att e n d a n c e and Pay r o l l
p ro c e d ure
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Meaning of Labour

Labour or Manpower represents human resources used
in production.
 Skills of labour helps in lowering down the costs of units
produced besides raising the quantity and quality of
production.

According to Cost Accounting Standard – 7 (ICAI),
employee cost is “the aggregate of all kinds of the
consideration paid, payable and provision made for the
future payments, for the services rendered by the
employees of an enterprise. Consideration includes wages,
salaries, contractual payments and benefits, as applicable,
or any payment made on the behalf of employee.
 Cont‟d….
Labour Cost is of two kinds –

Direct labour Cost – It is the cost of employees which
can be attributed to a cost object in an economically
feasible way. It is the cost of labour directly engaged in
the production work and can be conveniently identified
or attributed wholly to a particular job, process or cost
unit.
The example of direct labour is wages paid to workmen
put on definite jobs or products in the factory.
 Cont‟d….
 Indirect Labour Cost- It is the wages paid to the
workers who are not directly engaged in the converting
raw materials into finished goods. Such costs cannot
be conveniently identified with a particular cost object.
The wages are indirect when the workers are not
directly engaged in the manufacturing of products and
the wages cannot be identified to particular jobs or
products.
Example – Wages paid to supervisor, workmen,
watchmen, foremen etc.
 Example
 A worker might be engaged in doing a particular work
concerned with manufacturing a commodity and after
an hour the same worker might be placed on a
different job concerned with, time keeping or
supervision. In such a case the wages paid for the first
hour should be treated as direct and for the rest of the
period, indirect.
 It is to be noted that the classification of labour
between direct and indirect labour also depends upon
criteria laid down by management for the work and
nature of industry.
 Control of Labour Cost
There are mainly 5 departments in an organisation which deals
with labour.
1. Personnel Department – This is a service department and is
mainly concerned with the proper selection and training of
workers and placing them on jobs for which they are best
suited.
2. Engineering department – The department prepares and
plans specification of jobs makes job analysis, conducts time
and motion studies, makes provision for safe working
conditions and supervises production activities.
3. Time – keeping department – This department is concerned
with recording of workers time, which is necessary for
attendance, wage calculations and but also for the purpose of
cost analysis and apportionment of cost over various jobs.
 Cont‟d…
4.Payroll Department – this department maintains a
record of job classification and wage rate of each
employee and performs the function of computation of
wages payable to them preparing payroll or wage
sheet.
5.Cost Accounting Department – This department
accumulates and classifies all cost data of which labour
is one important element. It analyses the payroll and
prepares routine and special labour cost reports for
submission to management.
 1. Personnel Department

This department is concerned with
recruitment, discharge and transfer etc., of a
labour.
 On engaging a new worker, the personnel office
will prepare an Employee Record Card.
 This card will show full personal details of the
employee, particulars of the previous
employment, wage rate payable and his/her
medical category.
 2. Engineering Department
 This department helps in maintaining control over
working conditions and production method for each job,
process or department. It performs functions like –
1. Preparation of plans and specification of each job

2. Conducting time and motion studies

3. Making job analysis and setting piece rates

4. Providing safe and efficient working conditions.

5. Supervising production activities in various

production departments.
 3. Time-keeping Department
 The main function of this department is to accurately
record each worker‟s time of arrival and departure in
the factory and also the time spent on different jobs
or processes.
 It embraces 2 functions – time keeping and
time booking.
 Time keeping – recording arrival and departure time
of workers for attendances purpose and for
calculation of wages.
 Time booking – recording time spent by workers on
different jobs or processes for determining labour
cost of jobs.
 Cont‟d…
Methods of Time Keeping –
 Attendance Register

 Token or Disc method

 Time – recording clocks

 Biometric clock

Method of Time Booking

 Job Ticket

 Combined time and Job

Card
 Daily Time sheet

 Weekly time sheet

 Piece work card

 Payroll Department
 The payroll department is responsible for the
important task of computation and disbursement of
wages payable to workers.
 It records hours worked and wages earned, makes
payroll deductions, determines thenet amount due,
maintains a permanent earnings record for each
employee and provides the treasurer‟s office with
the necessary records to make payments.
 Cont‟d…
Functions –
 To maintain a record of job classification,
department and wage rate of each employee.
 To verify and to summarize the time of each worker
as shown on the daily time cards.
 To prepare the payroll and compute the wages
earned by the each employee.
 To compute the payroll deductions.
 To maintain permanent payroll records of each
employee.
 To make wage payments.
 Cost Accounting Department
 The Cost Accounting department is responsible for recording
separately the entries in respect of wages paid to direct and
indirect labour.
 The direct labour costs are taken as basic or prime cost of
production and indirect labour costs as overhead expenses.
 Analysis of labour costs into direct and indirect helps in exercising
control over labour costs.
 The primary responsibility to report to management regarding
any loss of labour time, wastage and inefficiencies etc. lies with
Cost Accounting Department.
 The Costing Department has also to compare the actual labour
costs with the pre-determined standard or budgeted costs and
show the causes of any variance to the management.
2.
2

L a b o u r Tu r n o v e r
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Labour Turnover


It is a common feature that some workers leave the
organisation and new workers join in place of those
leaving.
 This change in work force is known as Labour Turnover.

It is defined as „ the rate of change in the
composition of the labour force in the organisation.
 Causes of Labour Turnover
Avoidable causes –
 Low wages and allowances

 Unhappy relationship with co-worker and

supervisor
 Unsatisfactory working condition

 Trade union rivalry

 Lack of medical facilities, transport facilities, etc.

 Inadequate job security and retirement benefits.

 Cont‟d……
Unavoidable Causes –
 Death or retirement

 Illness or accident

 Domestic problem

 Seasonal nature of business

 Change in plant location

 Personal betterment

 Personal dislike for the job

 Discharge on disciplinary

ground
 Cost of Labour Turnover
Preventive Costs – These are the costs which are incurred to
keep the work force satisfied and to prevent them from
leaving the organisation.

Cost of Personnel Department – only that portion of this
cost which can be attributed to the efforts of the personnel
department in maintaining good relations between
management and workers
 Cost of medical services

 Pension Schemes

 Cost of welfare activities, e.g. canteen meals, transport

facility etc.
 Extra bonus and other perquisites
 Cont‟d……
Replacement Costs –
 Cost of recruitment and selection of new employees.

 Cost of training of new workers.


Loss of output due to time gap in recruiting
new workers
 Loss due to ineffi
ciency of new worker

Cost of accidents due to lack of experience of new
workers
 Reduction and Control
 Devising a suitable and satisfactory wage policy.

Providing working conditions conducive to health
and efficiency.

Impartial and sympatheticattitude of
personnel management.

Introduction of financial and non- financial
incentive plans
 Providing promotional opportunities
 Encouraging labour participation in the management
 Introduction of the effective grievance procedure
 Measurement of Labour Turnover
1.Separation Method – It takes into account only
those workers who have left during a particular
period.
Labour Turnover Rate
= No. of workers who have left during that period
*100 Average no. of workers during that period

2.Replacement Method – Thismethod takes into account

only those new workers who have joined in place of those
who have left.
Labour Turnover Rate
= No. of workers replaced during that period
*100 Average no. of workers during that
 Cont‟d……
3.Flux rate method – the method takes into account both
the number of replacements as well as number pf
separations.
Labour Turnover rate
= Number of Separations + No. of
Replacements*100 Average number of workers in
the period
OR
= (Number of Separations + No. of Accessions) *100
Average average number of workers in the period
 Question 1
The following information is available –
Number of workers on 1 April, 2018 950
Number of workers on 30 April, 2018 1050
Number of workers who quit in April 10
Number of workers discharged in April 30
Number of workers engaged in April 140
( Including 120 on account of expansion.)
Calculate Labour turnover rate by (i) Separation Method (ii)
Replacement Method (iii) Flux Method
 Question 2
Calculate Labour turnoverrate by (i)
Separation Method (ii) Replacement Method (iii) Flux
Method
No. of beginning
At the workers onofthe
thepayroll 900
month At the end of month 100
0
During the month, 10 workers left, 40 persons were
discharged and 150 workers were recruited. Of these,
25 workers are recruited in the vacancies of those
leaving, while the rest were engaged for an expansion
scheme.
 Practice Question 1
The Cost Accountant of Y Ltd hascomputed labour
turnover rates for the quarter 31 March 2012 as
10%, 5% and 3% under flux method, Replacement
method and separation method respectively. If the
number of workers replaced during that quarter 1s
30, find out the number of (1) workers recruited
and joined (2) workers left and discharged.

Ans – No. of workers who joined –

42 No. of workers who left - 18
2.
3

I d l e Time Overtime
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Idle Time
 Idle time represents time lost by workers who are
paid on time basis.

It is defined as “the difference the time for which
employees are paid and the employees‟ time
booked against the cost object.”

It represents the time for which they are paid but
no production is obtained.

For example, time lost between factory gate and
the department, time when production is interrupted
by machine maintenance.
 Causes
1.Productive Causes- which results in loss of production.
 Idle time due to machine breakdown

 power failures

 Waiting for tools and/or raw materials

 Waiting for work

 Waiting for instructions

It can be controlled by proper planning, strict

supervision and proper maintenance of plant and machinery.
2. Administrative causes – Idle time may also be caused on
account of administrative causes.
e.g. in the periods of depression the factory may not be in a
position to utilise its capacity to the fullest extent. The management
may not like to terminate the services of their trained workers.
 Cont‟d……
3.Economic causes – Idle time may also be caused by fall
in the demand of products may be due to severe
competition, seasonal nature of certain industries etc.
where production cannot be evenly distributed throughout
the year. E.g. sugar industries work only for 6 to 8 months
and for rest of the months workers are idle and they are
paid by the management.
4.Abnormal Causes – Idle time may arise on account of
abnormal causes e.g., strikes, lock outs, floods, fire etc.
Such idle time is uncontrollable. It is due to defective
planning, inefficiency or bad luck.
 Accounting Treatment of Idle Time
Idle Time Cost Treatment

(a) Cost of normal & controllable idle It is treated as a part of cost and
time( e.g., Machine breakdown, waiting hence treated as part of production
for work/tools, waiting for instructions or overhead
materials)
(b) Cost of normal but uncontrollable idle It is treated as a part of cost and hence
time (e.g., set up time for machine, interval charged directly to by inflating wage rate.
between one job and another, personal (if wage rate is ₹5 per hour, the worker‟s
needs) effective hours during 8 hour work is 7 hours
only, then inflated wage rate will be =
5*8/7 = 5.71
(C) Cost of abnormal idle time It is not treated as part of cost and hence
charged to Costing Profit and Loss
Account.
 Control of idle time
From control point of view, idle time should be divided
into controllable and uncontrollable. Idle time arising out
of controllable causes should be properly analysed and
responsibility should be fixed on appropriate individuals.
The following steps can control idle time –

Production must be properly planned so that
imbalances in the production are avoided.

Repairs and maintenance of plant and machinery should
be regularly undertaken to avoid breakdown.
 Raw materials, tools and instructions should reach the worker

well in time so that no time is wasted waiting for them.

 Supervision should be tightened.
 Overtime

Overtime is defined as the time beyond normal
working hours, which is usually paid at higher rate
than the normal time rate.
 According to the Factories Act, 1949, a worker is
entitled to overtime wages, when he works for more
than 9 hours on any day or more than 48 hours in a
week.

Overtime is a costly affair and should be avoided
as far as possible due to disadvantages attached to
it.
 Disadvantages of overtime
 It leads to excessive labour cost.

During overtime hours, labour productivity is
decreased because of diminishing labour efficiency.
 It puts extra strain on plant and machinery.
 It has a bad effect on health of workers.
 It increases other costs such as cost of electricity.

If overtime is not properly
distributed among the workers , it may lead to
discontent.
 Treatment of Overtime

In case overtime wages are necessary to be paid on
account of the intention to increase the general output of
the factory, then treat them as Works Overhead.
 If overtime is due to special request of customer, then
treat as direct expense and recover from that job only.
 If overtime is due to abnormal reasons( breakdown of
machinery) should be treated as an abnormal expense
and charge to Costing P & L A/c.
2.
4

Remuneration and Incentive

Scheme
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Time wage system
 The payment is made according to time for which worker is
working.
 The time- rate is fixed beforehand and workers are
remunerated for hours of work done by them.

E.g. An employee has to work 8 hours daily in a factory
and the rate per hour is ₹2. The total remuneration per
day shall be ₹8 * ₹2 = ₹16.
 There is a guarantee given to the worker that he will get a
fixed minimum for a specified period of time. (The wage
must not be lower than the minimum wage under the
Minimum Wage Act)
 Output produced by worker is not relevant for calculating
wages.
 Cont‟d….
This method is suitable in following cases –
 where strict supervision is possible,


where quality of output has a greater role to
play quantity;
 where it is not possible to measure the work done;


Where the production passes through different
operations and delays and disturbances can be
avoided.
 Where output cannot be measured in quantitative

terms.
 Where the work is done on small scale so that
 Advantages
 Simplicity- The labour as well employer can easily
understand this system, and amount of wages to be
paid can be calculated without any tedious
mathematical calculations.

Stability of wages and sense of security to workers –
wages are not related to the quantity or quality of
work done. Monthly, daily or hourly wages rates are
fixed and labourers are assured that certain amount of
wages to be received after definite period.
 Cont‟d…..

Unity in Labour – No hard line of distinction is
drawn between an efficient and inefficient worker on
the basis of production. This promotes a feeling of
unity among the workers.
 Economy – Detailed records regarding the work
done by the labour is not required. This results in
economy of administrative overheads.
 Quality production – Since wages are fixed workers
are not hasty and they can use their best of talent to
make quality production.
 Disadvantages
 No distinction is made between efficient and inefficient workers. They
are treated alike and thus there is no inducement for hard work.

The workers becomes lazy and dull and try to avoid work, and thus
production suffers.

“Soldering” is common practice when a firm follows time- wage
system. The workers try to make work last as long as possible so that
earnings may be greater. Thus, labour cost per unit increases.
 Discontentment among the efficient workers as their hard work is not
properly awarded.

Employer is interested in maximum production and employee is
interested in maximum earnings.

A close supervision is needed . Appointment of additional
supervisors increases cost of manufacture.
 Piece wage system

Under this system payment is made in proportion to
the work done, no regard being given to time taken in
performing the work.

The worker is paid for the total of goods or output
produced.

E.g. if the rate per unit is ₹10 and units produced is
10 units then, wage = 10*10 = 100
 Cont‟d….
Suitability –

where production is standardised and
repetitive in nature.
 when the aim is continuous maximum production.

 where the output of workers can be measured.


Where workers continue at the
same job for long periods.

where the standard time required to complete a job
can be measured accurately.
 Cont‟d……
Advantages –

As remuneration is provided in proportion to the
work done, it provides strong incentive to work
more.

Each worker tries his best to produce more to earn
higher wages, this leads to increase in production.

On account of increase in production, fixed cost per
unit is reduced resulting in higher profits.

This system is equitable as wages are paid
according of efficiency of each worker.
 Strict supervision is not necessary.

 Thismethod is simple and easy to understand.

 Cont‟d……
Disadvantages –

Thismethod lays too much stress on quantity of
production and ignores quality of work.
 This system does not guarantee minimum wages to a

worker.

In greed to produce more, workers may cause wastage
of materials and damage to plant and machinery.
 Injurious to health of workers.

Fixing equitable piece rate is quite difficult task and
may require considerable amount of work in the form of
time studies.
 This method is opposed by trade unions.

 Thismethod does not suit where work is of artistic in nature.

 Incentive Plans

To remove defects of both time wages and piece – wage
systems, incentive plans are used.

Under this, advantages of time wage and piece wage
are combined and incentive are provided to workers to
work hard.
 Minimum wages are guaranteed to each worker,

Incentives by way of bonus etc. are given to the efficient
workers for the time saved.

A standard time is fixed and the worker is to perform
the task within standard time. Standard time is fixed after
making time studies for performance of a specific task.
 Under this, both worker and employer are benefited from
the time saved.
 Halsey Plan
 This plan was invented by F. A. Halsey in 1891.
 It is a simple combination of time and piece rate system.

Workers are paid at a rate per hour for the actual
time taken.
 A standard time is set for each piece of work.

If a worker takes standard time or more than standard
time to complete his work, he is paid wages for the actual
time taken by him at the time rate. i.e. time wages ae
fixed.

If a worker takes less than the standard time he is paid a
bonus equal to 50% of the time saved at the time rate
fixed.
 T otal Earnings
= Time rate x time taken + 50% of (time saved * time rate )
 Example
 Standard time = 20 hours
 Time taken = 16 hours

 Hourly rate = ₹ 2 per hour

Calculate total earning as per Halsey

plan.

Total Earnings = 16*2 + 50%{ (20-

16)*2}
= ₹36.
 Advantages
 The system is easy to operate.

Both the employer and employee are benefited from
by this plan as the profit from time saving is divided
among both of them.
 It guarantees a minimum time wage to all workers. Thus,
slow and relatively inefficient workers have nothing to
fear from it.
 Disadvantages
 It is difficult task to determine a standard time.


Workers may object to this scheme as they are not
getting the full profit of the time saved.


 Rowan Plan
 This plan is similar to Halsey plan except in calculation of
bonus.

Wages are paid on time basis for the actual time
worked
by the workers.
 A standard time is set for each piece of work.

If a worker takes standard time or more than standard time
to complete his work, he is paid wages for the actual time
taken by him.
 If a worker takes less thanthe standard time he is paid a
bonus.

Bonus is the proportion of wages of actual time taken which
the time saved bears to the standard time.
 Bonus = Time saved / Time allowed X time
 Example
 standard time = 20 hours
 time taken = 16 hours

 hourly rate = ₹ 2 per hour

Calculate total earning as per Rowan

plan.

Bonus =(16/20)*4 * 2 = ₹6.40

Total Earnings = 16*2 + 6.40 =

₹38.40
 AdvantagesAnd Disadvantages

Merits and demerits of Halsey plan are also
applicable here.
 Other disadvantages are –

1. the calculations are complicated and hence

sometimes workers fail to understand the
computations.
2. Under some circumstances the wages of efficient
workers and not so efficient workers are same.
Example – Continuing the previous example , there is
an employee who finished the work in just 16 hours. So
his bonus would be =(16/20*4*2) = ₹ 6.40 equal
to the previous example.
Comparison of Halsey and Rowan Plan
 Taylor‟s differential piece rate system

This system was introduced by F W Taylor, the
father of scientific management.

A standard time is set very carefully after time
and motion studies.

Two piece rate are set for each job – the lower rate
and the higher rate.
1. lower piece rate is payable when workers takes s
longer time than the standard time to complete his
work. (inefficient workers) – 83% of normal piece rate
2. A higher rate is payable when the worker completes his
work within standard time. (efficient workers) – 120%
of normal piece rate.
 Example -
 Standard production 8 units per hour
 Working hours per day – 8 hours
 Lower rate – ₹ 5 per unit
 Higher rate - ₹ 8.75 per unit
 Worker X = 7 units per hour
 Worker Y = 9 units per hour

Wages of X = 7 units @ ₹ 5 = ₹ 35
Wages of Y = 9 units @ ₹ 8.75 = ₹
78.75

Huge difference in wages of efficient and

 Advantages and Disadvantages

This plan provides strong incentives to the
efficient workers.

The calculation of wages is not so difficult and can
be understood by the workers.
 However, some shortcomings

1. It severely penalizes the workers who produces

slightly less than the standard output.
2. It does not guarantee minimum wages
3. It makes a wide discrimination between efficient
and inefficient workers and thus created rivalry.
 Practice
Calculate Wages of Worker A and B from the
information given below –
Standard Production – 10 units per
hour Working hours in a day – 8 units
Production (Worker A, Worker B) – 70
units, 100 units
Hourly rate for less than the standard production is ₹ 2
per unit
Hourly rate for standard production and more than
standard production is - ₹ 3 per unit

Answer – Worker A - ₹
140
 Merrick Differential piece rate system
 This is a modification of Taylor‟s plan.

While Taylor prescribes 2 rates, Merrick‟s plan lays down 3
rates.

The lowest is for beginners, the middle rate is for
developing workers and the highest rate is for highly efficient
workers.
 the efficiency of the workers is determined in terms of %.
Level of efficiency Piece rate
Upto 83% Ordinary piece rate
Above 83% to 100% 110% of ordinary piece rate
Above 100% 120% of ordinary piece rate
 Example
Standard output – 150 units per day of 8
hour Piece rate = ₹ 0.20 per unit
Output of A 100 units, B 135 units and C 180 units.
Calculate the earnings of A, B and C workers
under Merrick‟s differential piece rate system and
Straight piece
rate system.
 Cont‟d…
Efficiency in % = Actual output *100
standard
output
A = 100/150 *100 = 66.67%
B = 135/150*100 = 90%
C = 180/150 *100 = 120 %
 rates applicable

A = ₹0.20 per unit (normal)

B = ₹0.20 *110% = ₹0.22
C = ₹0.20 *120% =
₹0.24
 earnings
A= 100 units* ₹0.20 =
₹20
B = 135 units * ₹ 0.22 = ₹
 Question
Calculate the earnings of workers as per Merrick‟s Multiple
Piece wage system from the following particulars –
Normal rate per hour ₹5.40
Standard time per unit 1
minute Output per day is as
follows – Worker A – 390
units
Worker B – 450 units
Worker C – 600
units
Working hours per
day are 8.
 Emerson efficiency plan
 This scheme is designed to give encouragement to the slow workers
to perform better than before.
 Time wages are guaranteed
 The standard output in this plan is fixed to represent
100% efficiency.
 A bonus is paid to a worker whose efficiency exceeds
66%.
Efficiency Bonus
Below 662/3% No bonus

662/3 to 100 % Bonus increases in step and rises to 20% at

100% efficiency
Over 100% 20 % bonus plus 1% for each increase
of 1% in efficicency
Cont‟d……
 Cont‟d…..
 Standard output in 8 hours = 60 units,
 Actual output in 8 hours = 72 units, 40 units, 60
units
 time rate = ₹ 2 per hour
 Calculate earnings under Emerson‟s Plan.
Cont‟d……
 Cont‟d….
 Advantages –
1. It guarantees minimum time wages.
2. It is easy to understand
3. It provides an incentive to beginners and even to those
who are less efficient.
 Disadvantages –

•the incentive offered is considered too

inadequate to motivate efficient and ambitious workers.
 Bedaux Plan

In this plan, standard time of each job is
determined in minutes known as bedaux points or
B‟s.
 One B represents the amount of work which an
average worker can do under ordinary conditions in
one minute.
 The standard time is determined by work study
and each job is assigned a number of B‟s.
 Bonus = No of B‟s saved X hourly rate X 75%
60
 Earnings = (hours worked X hourly rate) + Bonus
 Cont‟d……..
 Question
Standard time for job = 600 B‟s
Hourly Rate = ₹2 ; Time taken = 8 hours .
Calculate Total earnings as per Bedaux
plan .
Cont‟d….
 Cont‟d….
Advantages
 It guarantees minimum wages to all workers.

 Output of worker‟s is measured in terms of common

units B‟s. This makes the task of recording production of

workers easier and comparing it with standard.
 As the benefit of 25 per cent of time saved is given

to supervisors and indirect workers, Bedaux Plan

may be extended to the department as a whole,
including indirect workers.
 Cont‟d….
Disadvantages
 Detailed calculations of „B‟ units for a large number of

jobs involves enormous amount of clerical cost. This is

because accurate time study is required for every
operation. This system is thus comparatively costly.
 This system is generally not preferred by workers

because they do not get the full benefit of the time

saved by them.
 Question 1
A workman‟s wage for a guaranteed 44- hour week
is
₹7.50 per hour. The estimated time to produce one
article is 30 minutes and under an incentive plan, the
allowed is increased by 20 per cent. During a week,
a worker produced 100 articles. Calculate the wages
under each of the following methods – (i) Time rate
(ii) Rowan Plan (iii) Halsey system.
 Question 2
Standard time for completion of a task is 30 hours and
per hour rate is ₹3. In addition, for every hour worked,
there is a dearness allowance @ 0.30. Time taken by a
worker is 25 hours.
Calculate his earnings under
 Time wage system

 Halsey- plan

 Rowan – plan
 Question 3
A worker takes 9 hours to complete a job on daily
wages and 6 hourson a scheme of payment by results.
His day rate is ₹0.75 an hour, the material cost of the
product is ₹4 and overheads are recovered at 150%
of the total direct wages. Calculate the factory cost of
product under piece-work plan.
 Question 4

•Standard time for a job is 90 hours. The hourly rate of

guaranteed wage is ₹50. Because of the saving in time a
worker A gets an effectively hourly rate of wages of ₹60
under the Rowanpremium plan. For the same savings in the time,
calculate the hourly rate of wages a worker B will get under
Halsey Premium plan assuring 40% to worker.
 Question 5
Three workers A, B and C produces 80,100 and 120
pieces of a product on a particular day in May 2009. The
time allowed for 10 units for product is 1 hour and their
hourly rate is ₹4.
Calculate for each of three workers the following –
(i) Earnings for the day
(ii Effective rate of earnings per hour under
)
–
a) Piece- rate plan
b) Halsey premium bonus plan
c) Rowan premium bonus plan
 Question 6
Calculate the cost per unit and earnings per worker under
–(i Straight time rate
)
(ii) system Piece rate
(iii system
)
(iv Taylor‟s Differential
)
(v
Piece rate system
)
(vi
Merrick‟s differential piece rate
)
system
Normal Emerson‟s
rate per hour - effi
₹5ciency Bonus
plantime per unit – 12
Standard
minutesThe following particulars apply to a
factory where W, X, Y and Z work –
In
W a 40 hour week, the
X output was Y Z
as follows –
66 units 166 units 200 units 220 units
 Question 7
The firm employs five workers at an hourly rate of ₹2.
During the week, they worked for four days for a total
period of 40 hours each and completed a job for
which the standard time was 48 hours for each
worker.
Calculate the labour cost under the Halsey Method
and Rowan Method of incentive plan payments.
 Question 8
Standard Output per hour 5, Actual output in a 40
hour week is 220 units. Wage rate per hour is ₹10
per hour. Calculate total Earnings under:
(i) Straight time
(ii rate Piece rate
)
(iii) Taylor‟s Differential Piece rate system
(iv) Merrick‟s Differential piece rate
system
(v) Emerson‟s Effi ciency plan
(vi) Halsey Premium plan

(vii) Rowan premium plan

Question 9
A worker under the Halsey method of remuneration has
a day rate of ₹ 12 per week of 48 hours, plus a cost
of living bonus of 10 paise per hour worked. He is
given an 8 hour task to perform, which he
accomplishes in 6 hours. He is allowed 30% of the
time saved as premium bonus. What would be his total
hourly rate of earnings, and what difference would it
make if he was paid under the Rowan method ?
2.
5

Classification o f
Overheads
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Meaning

Overhead is the aggregate of indirect
materials, indirect wages and indirect expenses.

overheads

functio element behaviour

n s

Production Indirect material Fixed

Administrative Indirect Labour Variabl
Selling & Indirect e
Distribution Expenses Semi-
variable
 Cont‟d….
 Production Overhead (factory Overhead) – They are the
expenditure incurred in connection with production operations.
They are the aggregate of factory indirect materials, indirect
labour and indirect expenses. They are the invisible part of the
finished products.
Example – indirect wages, factory power and light, depreciation of
plant and machinery of factory, repairs and maintenance.

Administration Overhead – These overheads are of general
nature and consist of all costs incurred in the direction, control
and administration of an undertaking, which are not related
directly to the production or selling and distribution function.
Example – Audit fees, Legal charges, postage and telephone and
office lighting.
 Cont‟d…
 Selling and Distribution Overhead – Selling overheads
are the cost of seeking to create and stimulate
demand or of securing order.
Example - Advertising, salaries and commission of sales
personnel, showroom expenses, bad debts and price
lists.
Distribution Overhead – It comprise all expenditures
incurred from the time product is completed in the
factory till it reaches its destination or customers. It
includes packaging cost, carriage outwards, delivery van
expenses warehousing etc.
 Cont‟d….

Indirect Material – These are the material cost, which
cannot be allocated but which are apportioned or
absorbed by cost centres. Example –coal, tools for general
use.


Indirect Labour - These are those labour costs, which
cannot be allocated but which are apportioned or
absorbed by cost centres. Example – wages of sweeper,
idle time wages.


Indirect Expenses – Expenses which cannot be allocated
but which are to be apportioned to or absorbed by the
cost centres are called indirect expenses. Example – Power,
 Cont‟d….

Fixed Overheads – These overheads remain unaffected or
fixed in total amount by fluctuations in volume of output.
Example – Building depreciation, rent and rates.


Variable Overheads – These is the cost which in aggregate
tends to vary in direct proportion to changes in the volume of
output. Variable overheads per unitremains fixed.
Example – Indirect Material, Indirect labour, power, light fuel etc.


Semi – variable overheads – These overheads are party
fixed and partly variable. Semi- variable overheads costs vary
in part with the volume of production and in part constant,
whenever there is a change in volume of production.
Example - Supervisory salary, repairs and maintenance.
 Segregation of Semi- Variable Cost
 The main purpose of classifying overheads into fixed and variable
is to help the management in decision – making and control of
expenditure.

As such, the semi- variable cost may pose a problem and thus,
the cost accountant must split them into fixed and variable
component.
1. High and low point – the difference between the highest and
lowest volume of output and the difference between the
corresponding costs are worked out. Then , the variable element per
unit is calculated –

Variable element per unit = Difference in semi – variable cost

Difference in units / outputs
 Question
Segregation of semi- variable costs into fixed and variable cost
–
Month Output Semi- variable Cost (₹)
January 80 2200
February 40 1600
March 120 2800
April 160 3400
May 200 4000
June 140 3100
 Cont‟d….
2. Method of Average –
 Under this method, data is divided into two parts.

e.g. it may be divided into - January to March and April
to June.

If the data is for odd number of months, the middle month
may be ignored.

Then average of output and cost is
separately computed for these two parts.

 Variable element per unit = Difference in Average Cost

Difference in average output
 Cont‟d…
3. Scatter diagram Method –
 This is a graphic method.
 Under this method, the semi- variable cost is plotted on
the Y axis and level of output is plotted on X axis.

After plotting all the points on the graph, a straight
line is drawn in such a way to represent an average of
all those points.
 This is also known as line of best fit or regression line.
 Cont‟d….
4. Simultaneous Equation Method –
 Overheads costs are segregated by means of an equation.

 Y= mX+C

 Y = total semi – variable cost

 X= volume of output

 C = fixed cost


m = slope of variable cost line, i.e. variable cost
per unit of output.
2.
6

Overhead R a t e
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Overhead Distribution
 Direct costs are charged direct to the cost centres without
difficulty.

Distribution of overhead costs to the cost centre is of the
most complex problems of cost accounting.

This is because overhead costs cannot be identified with
individual cost units and there are no accounting means for
such distribution.

Therefore, such costs are analysed and distributed to
various cost centres on arbitrary basis.

Example – it is not possible to exactly calculate the
amount of rent to be charged to a particular cost unit and
thus, it is to be distributed on some arbitrary basis.
 Stepsin Overhead distribution
 Codification, Classification and collection of overheads.


Allocation and apportionment of overheads to production
and service departments.

 Re – apportionment of service departments costs to

production
departments.


Absorption of overheads of each production departments in cost
units.
 Codification & Collection of Overheads
 After overheads are classified, it is found useful to allot a
symbol or number to each group of expenses so that each
group can be easily identified.
 Suchnumber or symbol is called standing order number .

Such classification and codification is a perquisite for
collection of overhead.
 Production overheads should be collected understanding
order numbers.
 The main sources of from which overhead cost can be
calculated are – Invoice, Stores requisition, Wage sheet
analysis, journal entries.
 Allocation and Apportionment of
Overheads

The next step is to allocate and apportion the overheads to the
production and service departments. Such allocation and apportionment is
known as departmentalisation.

Departmentalisation is the process of allocation and apportionment of
overheads to different departments or cost centres. This involves two steps
–
1. Allocation of overheads – It is the process of charging the full amount of
overhead to a particular cost centre. This is possible when the nature of
expense is such that the it can be easily identified with a particular cost
centre.
Example – salary for a peon working for a particular department.
1. Apportionment of overheads - It is the process of splitting up an item of
overhead cost and charging it to the cost centres on the equitable basis.
This is done in case of overheads which cannot be charged wholly to a
particular production department.
Example – rent of the building will be distributed on the basis of area
occupied by each department.
 Bases of Apportionment
S.no Overhead Cost Bases of Apportionment
Rent and other building expenses
Lighting and heating
1. Floor Area or Volume of department
Fire precaution service
Air-conditioning
Fringe Benefits
Labour welfare expenses
2. Time keeping Number of workers
Personnel office
Supervision
Compensation to workers
Holiday Pay
3. Direct Wages
ESI and PF contribution
Fringe Benefits
 Cont‟d….
S.no Overhead Cost Bases of Apportionment
4. General Overhead Direct Labour Hours/
Direct Wages/Machine
Hours
Depreciation of plant and machinery
5. Repairs and maintenance of plant and machinery Capital values
Insurance of stock
Power/Steam Consumption
6. Internal Transport Technical Estimates
Managerial Salaries
7. Lighting Expenses No. of light points, area
8. Electric Power Horse power of machine/No. of
machine hours/Value of
machine
Material Handling Weight of material/Value of
9.
Stores Overhead material/Volume of material
Question 1 (Prepare Overhead Distribution
Summary)
 Cont‟d….
 Production Department – is one which that is engaged in the
actual manufacture of the product by changing the shape, form or
nature of material worked upon or by the assembling the parts
into finished products. (spinning department )

Service Department – Is one which is rendering a service to
the production department. It contributes indirectly to the
manufacture of the product. (canteen , accounting department )
 Re- apportionment of Service Department
Costs
 Once the overheads have been allocated and apportioned to
the service and production department, next step is to Re-
apportion the cost of service department to the production
departments.

This is necessary because our ultimate objective is to charge
overheads to the cost units and no cost units are produced in
service departments.
 This is called Secondary Distribution.
 Absorption of Overhead
 Once departmentalization of overheads is completed, the total cost
of each production department compromises of the following
1. Cost allocated and apportioned to the cost department.
2. Costs of service – departments re-apportioned to the production
department.
 The total overhead cost pertaining to a cost centre is then charged
to the units passing through that centre. This is known as absorption.
 This process has two step –
1. Computation of overheads absorption rate
2. Application of these rates to cost units.
 Computation of Overhead Absorption
rate
 Absorption rates are computedfor the purpose of
absorption of overheads in cost of the cost units.
 There are mainly Six methods for determining absorption rates
 Direct material cost percentage rate
= Production Department overhead/ Direct Materials *100
 Direct labour Cost percentage
= Production Department Overhead / Direct labour Cost *100
 Prime Cost percentage
= production Department overhead/ Prime Cost *100
 Direct Labour Hour Rate = Production overhead / Direct Labour hours
 Machine Hour Rate= Production Overhead / no. of machine hours
 Rate per Unit of output = Amount of overhead / no. of units
 Overhead Rate
 Overheads rates may be :(i) Actual or Predetermined (ii) Blanket
or Multiple.
 Actual overhead rate = Actual overhead / Actual base


Predetermined rate = Budgeted amount of overhead /
Budgeted base
 Blanket Rate – it is the single rate for the entire factory

formula = Total overhead for the factory / total number of units of

base for the factory.

Multiple rate – a number of separate rates for each
department, cost centre etc. For instance, separate rates may be
calculated for production department, product
 Question
2
In a company , the following particulars are available for the three month period ending on
31.12.2018. Compute departmental overheads for each of the production department Assuming
that overheads are recovered as a percentage of direct wages.
 Question 3

Calculate overhead rate for production departments, using direct wages as

Practice Question 1
 Practice Question 2

Apportion the cost of Department P and Q proportionate to Direct labour hours

and number of material requisition resp.
Answer
Total Overhead in Department A –
9000
Department B – 9600
Department C -
4400
2.
7

Under and Over A b s o r p t i o n o f

Overheads
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Under absorption and over – absorption of
overhead
 Overheads may be absorbed either on the basis of actual rates or
predetermined rates.

When actual rates are used, the overheads absorbed should be
exactly equal to the overhead incurred. In such a case there is no
problem of under or over absorption of overheads.

When a pre- determined rate is used, overheads absorbed
may not be equal to the amount of actual overheads, it is a case
of either under- absorption or over- absorption of overheads.
 Cont‟d….
 Under- Absorption – When the amount of overheads absorbed is less
than the amount of overheads actually incurred, it is called under-
absorption or under- recovery. This has the effect of under- stating
the cost because the overheads incurred are not fully recovered in
the cost of jobs, processes, etc.

Over – absorption – When the amount of overheads absorbed is
more than the amount of actual overhead incurred, it is known as
over- absorption or over- recovery. It has the effect of over- stating
the cost of jobs, processes.
 Example
Calculate the over- absorption or under – absorption of overhead
if
(i)Actual machine hours is 1500 hours,
(ii)Actual machinehours is 1900 hours.
Given that pre- determined overhead rate is ₹5 per machine
hour and actual overhead is ₹ 9000.
 Question 1
Particulars Estimated Actual

Factory Supervision 55000 51000
Given
Indirect Labour 110000 99000
Inspection 70000 73000
Maintenance 35000 39000
Indirect Material 25000 20000
Heat, light and power 20000 18000
Depreciation 35000 35000
Misc. factory overhead 10000 3000
Direct Labour Hours 144000 121500

Calculate
(i)Pre- determined and actual overhead rate based on direct labour
hours
(ii)determine the under or over absorption of overhead
 Question 2
Calculate (i) overhead rate per machine hour (ii) under or
over absorption of overheads
 Normal working weeks = 40 hours

 Number of machines = 15


Number of weekly loss of hourson maintenance = 4 hours
per machine
 Estimated annual overheads = ₹155520

 Number of weeks worked per year = 48

 Actual overhead incurred = 15000

 Machine hours produced actual = 2200 hours

Practice Question
 Causes of Over or Under absorption of
overheads
 Faulty estimation of overhead costs
 Faulty estimation of the quantity of output
 Seasonal fluctuation in the amountof overhead in the
certain industries.
 Unforeseen changes in the production capacity.
 Unexpected changes in the method of production affecting
changes
in the amount of overheads.
 Accounting treatment of under and
over- absorption of Overheads
Under or over – absorption of overhead is disposed of in accordance
with any of the following methods,
1. Use of Supplementary rate

2. Writing off to costing profit and loss account

3. Carry over to the next year

 Use of Supplementary rate
 Where the amount of under or over absorbed overhead is
significant, a supplementary overhead absorption rate is used to
adjust this amount in the cost. However, adjustment is made in the
(i) Work – in – progress (ii) Finished goods (iii) Cost of sales

In case of under- absorption, the overhead cost is adjusted by a
plus rate since the amount is to be added,

In case of over – absorption, the overhead cost is adjusted by a
minus rate sincethe amount is to be deducted.
Exampl
e

Solution
 Writing off to costing Profit and Loss Account

This method is used when the under or over absorbed
amount is quite negligible and it is not worthwhile to absorb it
by supplementary rate.

Under- absorption due to abnormal factors, like idle
capacity or defective planning, is also transferred to Costing
Profit and Loss account.
 This method suffers from theshortcoming that stocks of work – in
progress and finished goods remain under or over value and
are carried over to the next accounting year on such values.
 Carry over to the next year

Under this method the under or over absorbed amount is
transferred to overhead reserve account or suspense account for
carrying over to the next accounting year.
 This procedure is open to criticism on the ground that it is not
logical to carry over the overheads of one year to the subsequent
years for absorption.

But, this method can be usefully employed where the normal
business cycle extends over more than one year and overheads
are determined on a long- term basis.
Question
2.
8

Machine Hour R a t e
 SuggestedReadings:

1. Author – M N Arora
Title of Book – Cost Accounting Principles
and Practice
Publisher – Vikas Publishing House
2. Author – S N Maheshwari & S N Mittal
Title of Book – Cost Accounting: Theory and
Problem
Publisher – Shree Mahavir Book Depot
 Calculation of Machine hour rate
 The machine hour rate method is used for allocation of factory
overheads where the process of manufacture is carried out by
machines and very little or practically no manual labour.
 Overhead rate = Amount of factory overhead / Machine hours
 Cont‟d….( steps)
 All factory overheads are departmentalized and overheads of
service department is apportioned to production departments.
 Each production department is divided into suitable cost centres
comprising groups of similar machines, and total factory overheads are
apportioned among different cost centres.
 Machine hour rate is to be calculated for each machine separately
and, therefore, overheads of one machine cost centre will be apportioned
among the different machines to find out the amount of overheads per
machine.
 the overheads thus, calculated will be divided into (i) Fixed (ii) variable
expenses.
 An hourly rate of fixed charges will be calculated by totalling the
m and dividing by number of normal hours worked by the machines.
 The total of fixed charges rate and machine expense rate will
give the machine hour rate.
 Cont‟d…
Standing Charges –
 rent and rates

 heating and lighting

 Supervision

 Lubricating oil and consumable

stores
 Insurance

Miscellaneous Expenses

Machine Expenses –
 Depreciating

 Power


Practice Question 1
Solution practice Question 1
Practice Question 2
Solution Question 2
Practice Question 3
Practice Question 3