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					Cost Accounting

  An Introduction

• Cost is a measurement, in monetary terms, of
  the amount of resources used for the purpose of
  production of goods or rendering services.
• Cost is the amount of actual or notional
  expenditure relating to a product, job, service,
  process or activity.
• Cost is often used as a generic term to describe
  various types of costs.
• Costing is the technique and process of
  ascertaining costs.
• Cost Accounting is the process of accounting from the
  point at which expenditure is incurred or committed to
  the establishment of its ultimate relationship with cost
  centers and cost units. It includes:
   – Collecting, classifying, recording, allocating and analyzing costs
   – Preparation of periodical statements and reports for ascertaining
     and controlling costs
   – Application of cost control methods
   – Ascertainment of profitability of activities carried out or planned.
• Cost Accounting is the processing and evaluation of
  monetary and non-monetary data to provide information
  for internal planning, control of business operations,
  managerial decisions and special analysis.
• Cost Accountancy is the application of costing and cost
  accounting principles, methods and techniques to the
  science, art and practice of cost control and the
  ascertainment of profitability. It includes the presentation
  of information derived there from for the purpose of
  managerial decision making.
• Objectives of Cost Accounting
   –   To ascertain cost
   –   To control cost
   –   To provide information for decision making
   –   To determine selling price
   –   To ascertain costing profit
          Advantages of Cost Accounting
• Helps in ascertainment of cost
• Helps in control of cost
• Helps in decision making (make or buy, retain or replace, continue
  or shut down, accept or reject orders, etc)
• Helps in fixing selling prices
• Helps in inventory control
• Helps in cost reduction
• Helps in measurement of efficiency
• Helps in preparation of budgets
• Helps in identifying unprofitable activities
• Helps in identifying material losses
• Helps in identifying idle time, idle capacity
• Helps in improving productivity
• Helps in cost comparison
             Essentials of a Good System
•   Suitability – to the nature of business
•   Tailor made system – to meet requirements of the business
•   Simplicity – easy to understand and simple to operate
•   Economical – to install and operate
•   Flexibility – to adapt to the changing business needs
•   Accuracy – must provide accurate information
•   Promptness – of information
•   Support of staff – must have staff co-operation and participation
•   Cost control – must ensure cost control in various fields
•   Clearly defined Cost Centers – least ambiguity
•   Detail – give relevant details but avoid unnecessary detail
                         Cost Concepts
• Cost Unit – Is a unit of product, service or time in terms of which
  costs are ascertained or expressed. It is a unit of measurement.
• Responsibility Centers – is the unit or function of an organization
  under the control of a manager who has direct responsibility for its
  performance. E.g. Cost Center, Revenue Center, Profit Center,
  Contribution Center, Investment Center.
• Cost Center – Is a location, person or item of equipment for which
  costs may be ascertained and used for the purposes of cost control.
• Types of Cost Centers:
   –   Personal Cost Center – person or group of persons
   –   Impersonal Cost Center – location or equipment
   –   Production Cost Center – where actual production takes place
   –   Service Cost Center – departments which render service to other cost
• Cost Object – any product, service, process or activity for which a
  separate measurement of cost is required.
        Financial & Cost Accounting
No.   Basis               Financial Accounting                Cost Accounting
                          Financial     performance     and
1.    Objective                                               Ascertain cost and cost control
                          Shows overall costs and profit /    Shows details for each product,
2.    Costs and profits
                          loss                                process, job, contract, etc
                                                              Emphasis      on    control    and
3.    Control / Report    Emphasis on reporting
4.    Decision making     Limited use                         Designed for decision making
5.    Responsibility      Does not fix responsibility         Can effectively fix responsibility
6.    Time frame          Focus on historical data            Focus on present and future
                          General reports like P&L
                                                              Can generate special reports
7.    Type of reports     Account, Balance Sheet, Cash
                                                              and analysis
                          Flow Statement
                                                              Voluntary,    except   for    some
8.    Legal need          Statutory requirement
                                                              Records internal and external
9.    Transactions        Records external transactions
10.   Reader              Everybody                           Internal management
11.   Formats             Standard, as per law                Tailor made
12.   Access              Everybody, except for some          Very limited access
13.   Unit of value       Monetary                            Monetary and physical
                    Methods of Costing
No.   Costing Method       Meaning                            Application
                           A job, product, batch, contract,
                                                              Engineering, Construction, Ship
1.    Job Costing          service or any specific order is
                                                              Building, Pharmaceuticals, etc
                           treated as a cost unit.
                           For specific orders, contract or
      Contract Costing                                        Construction, Engineering, etc
                                                              Garments,   Pharmaceuticals,
      Batch Costing        Production is done in batches.     Components,  Toys,   Tyres,
                                                              Tubes, etc
                           Products subject to a process;
                                                              Paper, Chemicals,       Textiles,
2.    Process Costing      output of one process becomes
                                                              Sugar, etc
                           input for the next process.
      Operation            Type of operations performed is
                                                              Engineering, Textiles, etc
      Costing              monitored.
                           Single     product,    process
                           involved or where product is
      Unit Costing                                            Cement, Steel, etc
                           uniform,    continuous     and
                                                              Transport, Railways,     Hotels,
      Service Costing      For service operations
                                                              Hospitals, etc.
                           Application of two or more
      Multiple        or
                           costing    methods. Involves
      Composite                                               Vehicles, Consumer Goods, etc
                           manufacturing and assembly
                       Costing Techniques
No.   Costing Technique    Description
                           Charging variable costs to operations, processes or products
1.    Marginal Costing     and writing off all fixed costs against profits in the period in
                           which they arise.
                           Charging all direct costs to operations, processes or products
2.    Direct Costing       and writing off all indirect costs against profits in the period in
                           which they arise.
                           Charging all variable costs and fixed production overheads to
                           operations, processes or products and writing off selling,
3.    Absorption Costing
                           distribution and administration overheads against profits in the
                           period in which they arise.
                           Using the same costing principles and / or practices by a
                           number of firms in the same industry. Helps in inter-firm
4.    Uniform Costing
                           comparison, price fixation, cost control / reduction and seeking
                           government tax relief / protection.
                           System which involves fixation of cost standards, ascertain
5.    Standard Costing     variances of actual cost with standard cost, variance analysis
                           and presentation for corrective action and decision making.
                           System which involves establishment of budgets, comparison
6.    Budgetary Control
                           of actual with budget, variance analysis and corrective action.
7.    Historical Costing   Actual cost ascertained after it has been incurred.
                    Cost Treatment
• Cost Ascertainment is the process of determining actual
  costs after they have been incurred.
• Cost Estimation is the process of determining future
  costs in advance before production starts, on the basis
  of actual past cost adjusted for anticipated future
• Cost Allocation is the process of charging the full amount
  of an individual item or cost directly to the cost center for
  which the item of cost was incurred.
• Cost Apportionment is the process of charging the
  proportion of common items of cost to two or more cost
  centers on some equitable basis.
• Cost Absorption is charging cost from cost centers to
  products or services by means of a pre-determined
  absorption rate.
                     Cost Classification
Classification           Meaning                                     Example
By Nature or Element
                         Which can be directly allocated to a        Basic    raw    material,
Direct Material Cost
                         product, job or process                     primary packing material
                         Which cannot be directly allocated to a     Stores,    consumables,
Indirect Material Cost
                         product, job or process                     some low value items
                         Labour directly engaged for a specific
Direct Labour Cost                                                   Shop floor labour
                         job, contract or work order.
                         Labour not directly engaged for a
Indirect Labour Cost                                                 Staff departments
                         specific job, contract or work order.
                                                                     Processing       charges,
                         All direct costs other than materials
Direct Expenses                                                      machine hire charges,
                         and labour costs.
                                                                     excise duty, etc
                                                                     Rent, repairs, telephones,
                         All indirect costs other than indirect
Indirect Expenses                                                    electricity, utility costs,
                         materials and indirect labour costs.
                                                                     insurance, depreciation
                         Sum of indirect material, indirect labour
Factory Overheads
                         and indirect expenses for the factory.
Administration           Sum of indirect material, indirect labour
Overheads                and indirect expenses for the office.
                         Sum of indirect material, indirect labour
Selling Overheads
                         and indirect expenses for selling.
Distribution             Sum of indirect material, indirect labour
Overheads                and indirect expenses for distribution.
                    Cost Classification
Classification        Meaning                                  Example
By Function
                      Sum of direct material, direct labour,
Production Cost
                      direct expenses and factory overheads.
                      Cost of the Admin Department for the
Administrative Cost
                      management of the organization.
                      Cost for seeking to create and
Selling Cost
                      stimulate demand and secure orders.
                      Costs for making the packed product
Distribution Cost     ready for dispatch to recovery of
                      material for recycling, if any.
                      Costs for developing new or improved
Research Cost
                      product / application.
Pre-Production Cost   Cost of trial run or production.
By Relation to Cost Center
                      Sum of direct material, direct labour
Direct Cost           and direct expenses of the Cost
                      Sum of indirect material, indirect labour
                                                                This cost is apportioned
Indirect Cost         and indirect expenses of the Cost
                                                                to the Cost Center.
                      Center. Also called as Overhead Cost.
                    Cost Classification
Classification           Meaning                                  Example
By Variability / Behaviour
                         Costs that do not vary with the volume
Fixed Cost                                                      Rent, insurance, salary
                         of production.
                         Costs that vary directly with the volume All direct costs, variable
Variable Cost
                         of production.                           overheads
                      Costs where one part remains fixed in
Semi-Variable / Semi-
                      a given range and the other part varies Telephones, electricity
Fixed Cost
                      with volume of production.
By Controllability
                         Costs that can be influenced by a
Controllable Cost                                              Direct costs
                         decision maker at a particular level.
                         Costs that cannot be influenced by a All costs can ultimately be
Uncontrollable Cost
                         decision maker at that particular level. controlled at the top.
By Normality
                         Cost that is normally incurred at a level
Normal Cost                                                        Cost as per standard
                         of operation.
                         Cost that is not normal at the level of Abnormal loss, abnormal
Abnormal Cost
                         operation.                              idle time
                  Cost Classification
Classification        Meaning                                   Example
By Inventory
Product Cost          Cost that is absorbed to value of stock   Manufacturing costs
Period Cost           Cost that are expensed out.               Fixed costs
                      Costs incurred for generating revenue.
Expired Cost                                                 COGS, admin expenses
                      Expensed cost.
                      Unexpired cost, capitalized cost,
                                                           Fixed assets, prepaid
Deferred Cost         deferred revenue expenditure – would
                                                           expenses, R&D expenses
                      provide benefits in future periods.
By Time
                      Actual cost ascertained after it has
Historical Cost
                      been incurred.
                      Future cost ascertained in advance –
Pre-determined Cost
                      could be standard or estimated cost
                      What the cost should be - based on
                                                               Standard material      and
Standard Cost         engineering specifications and efficient
                                                               labour costs
                      operating conditions
                      What the cost will be - estimated on the
                                                               Projection for actual
Estimated Cost        basis of past experience adjusted for
                                                               material cost for next year
                      anticipated changes.
                     Cost Classification
Classification         Meaning                                    Example
By Decision Making
                       Cost that is relevant for making the
Relevant Costs
                       underlying decision.
                       Cost that is not relevant for making the
Irrelevant Costs
                       underlying decision.
                       Historical or past cost already incurred
Sunk Costs
                       and cannot be changed.
                       Fixed costs to be incurred even when
Shut-Down Costs
                       the plant is shut down.
Out of Pocket Costs    Costs that involve cash outlay.
                       The value of sacrifice made in
Opportunity Costs
                       accepting an alternate course of action.
                       Notional costs that do not have a cash     Rent of own premises,
Imputed Costs
                       outlay, are similar to opportunity cost.   interest on own capital
                       Increase or decrease in cost due to
Differential Costs     change in activity level. Also called
                       incremental cost.
                       Total variable cost attributable to one
Marginal Cost          unit of product. Incremental cost of
                       making one unit of product.
Replacement Cost       Current cost of an identical asset.
                       Cost of converting raw material into a
Conversion Cost
                       finished product.
                       Costs that are committed and have to
Committed Costs
                       be incurred.
Discretionary Costs    Costs that can be avoided.
                           Cost Audit
• Cost Audit is the verification of cost accounts and a check on the
  adherence to the Cost Accounting plan. It comprises of verification
  of the cost records and ensuring that they adhere to the principles of
  cost accounting.
• Purpose of Cost Audit are protective (examine undue wastage /
  losses to reflect realistic cost of production) and constructive
  (provide information for management decision making).
• Items excluded from Cost Accounts – items of financial nature like
  Other Income, Finance Costs, Financial Accounting adjustments
  and appropriations. These include profit on sale of fixed assets /
  investments, interest income / expense, dividend / rent income,
  preliminary expenses written off, tax, cash discount, provision for
  doubtful debts, etc.
                            Cost Components

No.   Cost Component            Description
                                Direct Material Cost + Direct Labour Cost + Direct Expenses
1.    Prime Cost                (Direct Material Cost = Opg. Stock of RM + Net Purchase Cost
                                – Clg. Stock of RM)
      Works   or      Factory   Prime Cost + Factory Overheads + Opg. Stock of WIP – Clg.
      Cost                      Stock of WIP
      Cost of Production
3.    or Cost of Goods          Factory Cost + Admin Overheads
4.    Cost of Goods Sold        Cost of Production + Opg. Stock of FG – Clg. Stock of FG
5.    Cost of Sales             Cost of Goods Sold + Selling & Distribution Overheads
                                 Costing P&L Account
No.   Particulars                                     Amount   Per Unit

      Direct Material Cost
      = Opening Stock of Materials
      + Purchases
A     + Expenses on Purchases                                  (on number of units produced)
      - Purchase Returns
      - Closing Stock of Materials
      - Value of Normal Scrap of Direct Materials

      Direct Labour Cost
      = Direct Labour Cost Paid
B                                                              (on number of units produced)
      + Outstanding / Payable
      - Prepaid

C     Direct Expenses                                          (on number of units produced)

D     Prime Cost = (A + B + C)                                 (on number of units produced)

      Works / Factory Overheads
      = Factory Overheads Paid
E     - Value of Normal Scrap of Indirect Materials            (on number of units produced)
      + Opening Stock of WIP
      - Closing Stock of WIP

F     Works or Factory Cost = (D + E)                          (on number of units produced)
                                Costing P&L Account
No.   Particulars                        Amount   Per Unit

G     Office and Admin Expenses                   (on number of units produced)

H     Cost of Goods Produced = (F + G)            (on number of units produced)

      FG Stock Adjustment
I     + Opening Stock of FG
      - Closing Stock of FG

J     Cost of Goods Sold = (H + I)                (on number of units sold)

K     Selling & Distribution Expenses             (on number of units sold)

L     Cost of Sales = (J + K)                     (on number of units sold)

M     Profit                                      (on number of units sold)

N     Sales = (L + M)                             (on number of units sold)
Material Cost

                  Material Cost
• Material Cost can be Direct and Indirect
• Direct Materials are those which can be
  identified with and directly allocated to the
  product, job or process.
• Includes basic material and primary packing
• Indirect Materials are those which cannot be
  easily identified with and directly allocated to the
  product, job or process.
• Includes stores, consumables, small value
                 Direct Material Cost

• The total direct material cost includes:
   – Purchase price
   – Customs Duty, Excise Duty, VAT, CST, Octroi
   – Inward freight
   – Insurance
   – Directly attributable expenses like packing expenses,
     inspection, storage, delivery, etc
   – (Less) Volume or Trade Discounts
   – Rebates, Duty Drawback, MODVAT, Subsidies, etc
   – (Less) Cost of containers recovered on return
        Objectives of Material Control

• Avoid under stocking or shortages
• Avoid over stocking and obsolescence
• Ensure proper quality from reliable sources
• Explore alternate sources and reduce cost
• Reduce total cost of materials,           including
  ordering and carrying costs
• Avoid wastages and losses in storage and use
• Maintain proper inventory records
• Provide information for decision making
       Requirements for Material Control
•   Proper co-ordination
•   Proper purchase system
•   Proper storage system
•   Proper issue system
•   Perpetual inventory system
•   Continuous stock taking system
•   Budgetary control system
•   Proper documentation
•   Proper accounting system
•   Proper reporting system
                 Documents for Materials
• Purchase of Materials
   –   Bill of Materials (BoM)
   –   Purchase Requisition
   –   Supplier Selection
   –   Purchase Order
   –   Goods Received Note
   –   Inspection Note
   –   Return of Rejected Material
   –   Bill Passing
   –   Making Payment to Supplier
• Issue of Materials
   –   Bin Card
   –   Stores Ledger
   –   Material Requisition
   –   Material Return Note
   –   Material Transfer Note
                          Material Losses
•   Waste – portion of raw material lost during processing or storage, having no
    recovery value
•   Arises due to shrinkage, evaporation, chemical reaction, etc
•   Scrap – incidental residue manufacturing operations usually of small
    amount and low value recoverable without further processing
•   Arises due to processing of material, defective or broken parts and
    obsolescence / abortion of development projects
•   Defective Work – work that has some imperfections which can be rectified
    by additional material or processing
•   Arises due to improper product design, bad raw material, poor
    workmanship, inadequate supervision, improper material handling, defective
    machinery or improper training
•   Spoiled Work – work that cannot be reconditioned or brought to standard
    and must be sold as scrap or “seconds”
•   Arises due to improper product design, improper machinery or process
    used, improper material quality or untrained operators
•   Normal Loss is charged to the particular job or as production overheads
•   Abnormal Loss is charged to Costing Profit & Loss Account
              Controlling Material Loss
•   Proper product design
•   Proper selection of manufacturing process
•   Proper selection of machinery & equipment
•   Proper process control
•   Proper storage and material handling
•   Trained manpower
•   Proper record keeping
•   Proper control system having scientific standards
•   Proper reporting system
•   Defined accountability
•   Corrective action
                   Materials Issue Pricing
• Cost Price Methods
   –   FIFO (First In First Out)
   –   LIFO (Last In First Out)
   –   HIFO (Highest In First Out)
   –   Base Stock Price
• Average Price Methods
   –   Simple Average
   –   Weighted Average
   –   Periodic Simple / Weighted Average
   –   Moving Simple / Weighted Average
• Notional Price Methods
   – Standard Price
   – Inflated Price
   – Replacement or Market Price
• Weighted Average and FIFO Methods are used in Accounting
                          Inventory Control
•   Inventory is tangible property or assets held
     – for sale in the ordinary course of business or
     – in the process of production for sale or
     – for consumption in the production of goods or services for sale including
       maintenance supplies and consumables other than machinery spares
•   Inventory comprises of raw materials, stores & spares, work-in-process and
    finished goods
•   Inventory control includes planning, organizing and controlling purchase and
    storage to ensure availability in terms of quantity, quality, timeliness at least
•   Monitoring level of inventory with respect to production and sales
•   Releasing material in a systematic manner to ensure quality at least cost
    and reduce wastage / obsolescence
•   Analyze inventory levels and suggest optimal and alternate uses of material
    including value engineering
•   Ensure physical stock taking to avoid pilferage
•   Provide information for inventory valuation
       Techniques of Inventory Control
• ABC Analysis
• Economic Order Quantity (EOQ)
• Stock Levels – minimum, maximum, reorder level,
  reorder quantity
• Inventory Turnover Ratio
• Slow and Non-Moving Items
• Purchase, Storage and Issue Procedure
• Two Bin System
• Perpetual Inventory Records and Continuous Stock
• Budgetary System
                   ABC Analysis
•   A: 70% value, 10% items
•   B: 20% value, 20% items
•   C: 10% value, 70% items
•   Ensures control on high value items
•   Saves time and cost of monitoring
•   Reduces total investment in inventory
•   Facilitates faster decision making
•   Better utilization of resources
•   Better physical control of stock
       Economic Order Quantity (EOQ)
• Level at which the ordering and carrying costs are
  minimum. At EOQ, the ordering and carrying costs are
• Ordering Cost includes costs for placing an order,
  transportation, receiving goods and inspecting goods
• Ordering Cost reduces with order size
• Carrying Cost includes costs for storage space, handling
  materials, insurance, obsolescence and personnel.
• Carrying Cost increases with order size
• Dependent on periodicity and annual material
• EOQ determines quantity to be ordered at a given time
                       EOQ Technique
• Assumes prior knowledge of annual usage, constant usage rate,
  constant ordering cost, constant carrying cost and zero lead /
  delivery time
• EOQ can be determined by graphical, tabular or formula method
• Find the level at which total of ordering and carrying cost is least or
  ordering cost equals carrying cost
• EOQ = √(2AO / C) where A = Annual Consumption, O = Ordering
  Cost per order and C = Carrying Cost per order
• EOQ = √(2AO/IP) where I = Inventory or Stock Holding Cost (as %
  of average stock value) and P = Price per unit
• Economic Order Frequency (in days) = 365 / (Number of orders per
• Total annual ordering and carrying cost at EOQ = √(2AOC)
                  Stock Levels
• Maximum Stock Level is the maximum stock
  level that can be held in store.
• It avoids cost of over-stocking such as costs for
  storage, investment, insurance and risk of
• Dependent on reorder level, reorder quantity,
  rate of consumption, reorder period, availability
  of funds and storage space, cost of storage,
  insurance, obsolescence, price fluctuation, etc
• Formula: Maximum Level = Reorder Level +
  Reorder Quantity – (Minimum Consumption x
  Minimum Reorder Period)
                   Stock Levels
• Minimum Stock Level is the level below which the stock
  should not be allowed to fall
• Dependent on reorder level, rate of consumption and
  reorder period
• Formula: Minimum Level = Reorder Level – (Normal
  Consumption x Reorder Period)
• Reorder Level is the level of stock at which fresh
  replenishment order should be placed
• Dependent on consumption rate, reorder period and
  minimum level
• Formula: Reorder Level = Maximum Consumption x
  Maximum Reorder Period OR Minimum Level + (Normal
  Consumption x Reorder Period)
                     Stock Levels
• Average Stock Level = Minimum Level + ½ Reorder
  Quantity OR (Minimum Level + Maximum Level) / 2
• Danger Level is the level at which only emergency
  material issue is done (normal material issue is stopped)
• It is a level at which urgent ordering action is required
• If Danger Level is below Minimum Level, urgent
  corrective action is required
• If Danger Level is above Minimum Level, it calls for
  preventive action
• Dependent on rate of consumption and reorder period
• Formula: Normal Consumption Rate x Maximum
  Reorder Period for emergency purchases
             Inventory Turnover Ratio
• Indicates the speed with which inventory is consumed
• A high ratio indicates fast moving stock, low ratio
  indicates slow moving stock
• Inventory Turnover Ratio = Materials Consumed /
  Average Stock Held expressed in “times”
• Materials Consumed = Opening Stock + Purchases –
  Closing Stock
• Average Stock = ½ (Opening Stock + Closing Stock)
• Days of Inventory = 365 / Inventory Turnover Ratio
• Can be computed for stock categories to determine fast
  moving, slow moving, dormant or obsolete stock
• Ideal level is determined with reference to level of other
  firms or the industry average
                 Other Techniques
• Two Bin System – Bin has two parts, the smaller one for
  reorder stock level and the other for the remaining
• Issues are made from the larger bin, fresh order placed
  when it become empty, material used from smaller bin till
  replacement received and filled
• Periodic Inventory System – Physical stock taking done
  periodically, requiring shut down
• Records then physically reconciled
• Perpetual Inventory System – Records updated at every
  receipt and issue
• Done using bin cards and stores ledger
• Continuous stock taking done by random checks of the
  bin cards and stores ledger
Labour Cost

• Essential factor of production
• A human resource that participates in the
  process of production
• Two Categories – Direct & Indirect Labour
• Labour Cost controlled by:
  –   Personnel Department
  –   Engineering / Work Study Department
  –   Time Keeping Department
  –   Payroll Department
  –   Cost Accounting Department
              Labour Cost Control
•   Manpower requirement assessment
•   Time and Motion Study
•   Job Evaluation and Merit Rating
•   Labour Productivity
•   Wage Systems
•   Incentive Systems
•   Time Keeping and Time Booking
•   Labour Turnover
•   Casual and contract workers
                  Time Keeping
•   Statutory attendance record
•   Maintain discipline and punctuality
•   Payroll preparation
•   Ascertain Overtime
•   Ascertain Idle Time
•   Ascertain Labour Cost
•   Provide basis for apportionment
•   Control Labour Cost
•   Maintained using Attendance Register / Muster,
    Token / Disc Method and Time Clocks / Clock
                 Time Booking

• Records time spent by each worker on various
  jobs / orders / processes
• Methods:
• Daily Time Sheet
• Weekly Time Sheet
• Job Card or Job Ticket
• Time and Job Card
• Labour Cost Card / Circulating Job Card
• Piece Work Card
                  Labour Turnover
• Rate of change in the composition of labour force due to
  retirement, resignation or retrenchment
• Defined as the number of workers left or replaced or
  both in relation to the average number of workers
• Turnover due to personal, avoidable and unavoidable
• Cost of Labour Turnover consists of Preventive Cost and
  Replacement Cost
• Preventive Cost – personnel administration, medical &
  health care, welfare measures, wage & retirement
• Replacement Cost – personnel department expenses,
  training of new workers, initial inefficiency, initial
  breakages and defectives, time lag in recruitment,
        Labour Turnover Measurement
• Measurement by Separation Rate Method, Replacement
  Rate Method, Flux Method
• Separation Rate Method: Number of Separations /
  Average Number of Workers x 100
• Replacement Rate Method: Number of Replacements
  (not normal additions) / Average Number of Workers x
• Flux Method: (Number of Separations + Replacements)
  / Average Number of Workers x 100
  (Number of Separations + Accessions i.e. all
  Recruitments) / Average Number of Workers x 100
                 Types of Labour Cost
• Overtime Cost:
   – Customer requested, charged to specific job
   – For increased production, charged to total production
   – Abnormal overtime, charged to Costing P&L Account
• Idle Time:
   – Normal Idle Time, charged to the product
   – Abnormal Idle Time, charged to Costing P&L Account
• Casual Workers, charged to specific job or as production
  overhead based on work done
• Out-Workers (who do the work in their premises)
  normally supply based on piece rate
• Outside Workers (outdoor duty) should be monitored to
  ensure adequate time booking
              Types of Labour Cost
• Attendance Bonus are part of wages and treated
• Shift Premium, charged same as Overtime Cost
• Fringe Benefits are part of wages and treated
• Apprentice Wages, charged as production overhead
• Holiday / Vacation Pay, charged as overhead or
  accounted in an inflated rate
• Leave with pay, accounted in an inflated rate
• Employer’s contribution to employee insurance, charged
  as production overhead
              Incentive Wage Plans
• Premium Bonus Plan - Halsey Plan, Halsey Weir Plan,
  Rowan Plan, Barth Plan
• Differential Piece Work - Taylor System, Merrick System
• Combination of Time and Piece Work - Emerson’s
  Efficiency Plan, Gantt Task and Bonus Plan, Points
  Scheme (Bedeaux Plan, Haynes Plan), Accelerated
  Premium Plan
• Group Incentive Plans – Priestman’s Production Bonus,
  Rucker Plan, Scalon Plan, Towne Gain Sharing Plan,
  Budgeted Expenses Bonus
• Incentives for Indirect Workers
• Profit Sharing
• Co-Partnership
              Premium Bonus Plans
• Halsey Plan: standard time fixed for each work,
  guarantees hourly wages for actual time taken, bonus of
  50% paid if time saved
  Earnings = Time Rate Wages + Bonus
  = Actual Time Taken x Time Rate + 50% (Time Saved x
  Time Rate)
• Halsey – Weir Plan: same as Halsey Plan except bonus
  is 33⅓% compared to 50% in Halsey Plan
• Rowan Plan: same as Halsey Plan except bonus is a
  proportion – (Time Saved / Time Allowed) x Actual Time
  Taken x Time Rate
• Barth Plan: Designed for trainees, beginners and slow
  workers. Earnings = Time Rate x √(Standard Hours x
  Time Taken)
       Differential Piece Rate System
• Lower and higher production rates are defined
• Taylor’s System:
  – Production < standard output: Earnings are 80% of
  – Production = or > standard output: Earnings are
    120% of normal
• Merrick’s System:
  – Production < 83% of standard output: Earnings are
    100% of normal rate
  – Production > 83% and < 100% of standard output:
    Earnings are 110% of normal rate
  – Production > 100% of standard output: Earnings are
    120% of normal rate
               Combination Plans
• Emerson’s Efficiency System:
  – Up to 66⅔% efficiency, nil bonus
  – More than 66⅔% and < 100% efficiency, bonus on
   step basis (32 bonus steps defined)
  – More than 100% efficiency, bonus @ 20% of basic
   wages + additional bonus @ 1% for each 1%
   increase in efficiency
Gantt Task and Bonus System:
  – Less than standard output, no bonus
  – At standard output, 120% of time rate
  – More than standard output, 120% of piece rate
                 Combination Plans
• Bedeaux System or Points Scheme:
  – Points awarded for each unit of production
  – Up to standard time, no bonus
  – If time saved, bonus of time saved is given 75% to worker and
    25% to foreman
• Haynes System
  – Job expressed in standard man-minutes
  – For repetitive work, time saved is shared between worker and
    foreman in 5:1 ratio
  – For non-repetitive work, time saved is shared between worker,
    employer and foreman in 5:4:1 ratio
• Accelerated Premium System
  – Bonus rate increases with output
             Group Incentive Plans
• Priestman’s Production Bonus:
  – Bonus paid in proportion to production in excess of
    standard output per week
• Rucker Plan
  – Also known as Cost Saving Sharing Plan
  – Bonus = fixed proportion of value added (sales –
    purchased materials & services)
  – ⅔ of the monthly bonus is paid out, balance
    transferred to reserve fund
• Scalon Plan
  – Similar to Rucker Plan except that bonus is linked to
    ratio of direct labour cost to sales value
           Group Incentive Plans

• Towne Gain Sharing Plan
  – Bonus calculated as 50% of direct labour
    hours saved
• Budgeted Expenses Bonus
  – Bonus determined as a fixed percentage of
    savings in actual expenses over the budgeted
        Incentives for Indirect Workers

• For expense and service cost centers
• Creates goodwill,       fosters    teamwork    and
  increases efficiency
• Measuring or relating indirect work to production
  is difficult
• Establish standards       for     measurable   and
  repetitive activities
• Generally clubbed under group incentive plans
• Two Types: Monetary & Non-Monetary
               Profit Sharing

• Based on overall business prosperity and
  is over and above other benefits
• Types: Cash Plan, Deferred Credit Plan,
  Combined Plan
• Minimum bonus for eligible workers
  determined under Payment of Bonus Act
• Discretionary bonus for all determined by
  the management
• Paid on a flat percentage or on slab rates
Direct Expenses


• Cost of designs, drawings, technology, royalty,
  patent fees, tools, jigs, fixtures for the job
• Special services for layout, machining, testing
  related to the job
• Fees paid to architect, consultant, surveyor,
  insurance, freight, hire charges for special tools
  or equipment related to the job, sub-contracting
• Generally considered as direct overhead and
  then allocated to the job or product

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