ACCOUNTING FOR LABOUR

The following statements relate to labour costs:

There would be an increase in the total cost for labour as a result of:

(i) additional labour being employed on a temporary basis

(ii) a department with spare capacity being made to work more hours

(iii) a department which is at full capacity switching from the production of one product to another.

Which of the above is/are correct?

• A (i) only

• B (ii) only

• C (iii) only

• D (i) and (iii) only

Answer explanation

Statement (i) is correct, because extra spending would be incurred to pay the additional

temporary staff. Statement (ii) is incorrect, because total spending on labour is unaffected

when spare capacity is utilised and idle time reduced. Statement (iii) is also incorrect, because

total labour costs will not be increased by switching labour from working on one product to

working on another product. However, there is an opportunity cost in switching labour. This

is the total contribution forgone by no longer producing and selling the original product. This

opportunity cost would be a relevant cost in evaluating a decision to switch the labour from

one product to the other. Even so, as worded, statement (iii) is incorrect.

A manufacturing firm is very busy and overtime is being worked.

What would the amount of overtime premium contained in direct wages normally be

classed as?

• A part of prime cost

• B factory overheads

• C direct labour costs

• D administrative overheads

KL currently pays its direct production workers on a time basis at a rate of $6.50 per hour. In

an effort to improve productivity, the company is introducing a bonus based on (time

taken/time allowed) × time saved × rate per hour. The standard time allowed for a worker in

the Assembly Department to perform this particular operation once has been agreed at

37.5 minutes.

In the first week of the scheme’s operation, one employee worked for a total of 44 hours and performed 94 operations.

What are the gross wages for this employee based on a time rate of $6.50 per hour plus

the productivity bonus based on (time taken/time allowed) × time saved × rate per hour,

to 2 decimal places?

• A $214.20

• B $357.80

• C $381.88

• D $977.60

Answer explanation

How would the cost be recorded in the cost ledger if the direct labour costs in a

manufacturing company are $95,000?

• A Debit Work‐in‐progress $95,000, Credit Wages and salaries $95,000

• B Debit Wages and salaries $95,000, Credit Bank $95,000

• C Debit Wages and salaries $95,000, Credit Work‐in‐progress $95,000

• D Debit Bank $95,000, Credit Wages and salaries $95,000

How would the following labour costs be classified?

• direct, indirect, indirect, indirect, indirect, indirect, indirect

• direct, direct, indirect, indirect, direct, indirect, direct

• indirect, indirect, direct, indirect, direct, direct, indirect

Answer explanation

Budgeted production in a factory for next period is 4,800 units. Each unit requires five labour

hoursto make. Labour is paid $10 per hour. Idle time represents 20% of the total labour time.

What is the budgeted total labour cost for the next period?

Answer explanation

(4,800 units × 5 hours × $10 per hour) ÷ 0.80 = $300,000

The following statements refer to situations occurring in Process Q of an organisation which

operates a series of consecutive processes:

(i) Direct labour is working at below the agreed productivity level.

(ii) A machine breakdown has occurred.

(iii) Direct labour is waiting for work to be completed in a previous process.

Which of these situations could give rise to idle time?

• A (i) and (ii) only

• B (i) and (iii) only

• C (ii) and (iii) only

• D (i), (ii) and (iii)

A direct labour employee works a standard 37 hour week and is paid a basic rate of $15 per

hour. Overtime is paid at time and a half. In a week when 40 hours were worked and a

bonus of $20 was paid, what was the direct labour cost?

• A $555

• B $600

• C $622.50

• D $642.50

Answer explanation

40 × $15 = $600. Note that the basic element of overtime is classified as a direct cost. The

normal treatment of overtime premium is for it to be treated as an indirect cost.

194 At 1 January a company employed 5,250 employees. Due to expansion the number of

employees increased to 5,680 by 31 December. During the year 360 staff left the company

and were replaced. What was the labour turnover rate?

• A 6.3%

• B 6.6%

• C 6.9%

• D 360 staff

Answer explanation

Average employment during the year was (5,250 + 5,680)/2 = 5,465

The labour turnover rate = 360/5,465 × 100 = 6.6%

What is the labour efficiency ratio?

• A 93.75%

• B 97.3%

• C 102.5%

• D 106.7%

Answer explanation

Expected hours to make actual output/actual hours = 192/180 × 100% = 106.7%