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Term Paper on
Costing and Control of
Course Code-314
Course Name- Cost Accounting-I

Prepared By:
Md.Ruhul- Amin
Session 2014-15
Department of AIS
Comilla University.

Costing and Control of Labor (Other Methods)


Taylors Differential Piece Rate System

Merrick Differential Piece Rate System

Gantt Task Bonus Plan

Emerson Efficiency Bonus Plan

Premium or Bonus Plans

The Halsey Scheme

The Halsey-Weir Scheme

Rowan Scheme

Barth Scheme

Accelerating Premium Plan

Overtime and Fringe Benefits

Labor Turnover and Control



First of all I would like to express our gratefulness and harmony to the almighty, the supreme
authority of the Universe. Without whom we would be nothing. Next to him I would like to
express my appreciation to my beloved parents whose continuous inspiration encouraged me to
make a right move in our life. At the very beginning we express our sincere gratitude to my
respective course teacher, who provided me all out, helps, support and guideline in presenting
this term paper. Without his inspiration and advice it could be very difficult for me to present this
term paper. Without his excellent supervision and suggestion it would not be possible for me to
prepare the term paper in an appropriate manner.

I would like to thank all officials of books and websites for their co-operation, support and love.

Finally we thank to those persons who remained behind the certain but helped us in any way to
prepare the term paper.

Taylors Differential Piece Rate System
Taylor is regarded as father of scientific management and he has recommended a system of
differential piece rate. According to him, there are only two classes of workers, efficient and
inefficient. He suggests that while efficient workers should be encouraged to the maximum
possible extent, the inefficient workers should be penalized. In order to do this, he has suggested
two rates for the two classes of workers. Thus according to Taylor, if the workers are efficient,
they should be paid @ 120% of the normal piece rate and if they are inefficient, they should be
paid @ 80% of the normal piece rate. For measuring efficiency, each worker will be given a
standard production quantity to be produced in the time allowed for the same and the actual
production produced should be compared with the same. If a worker exceeds the standard, he
will be regarded as efficient while if he fails to do so, he will be regarded as inefficient.
The positive and negative points of this system are as follows.
There is a very strong incentive to the workers, which helps to achieve higher
Due to the incentive, best workers are attracted to the company.
This method is quite simple and hence easy to understand.
Slow workers and beginners are penalized severely. Similarly workers get penalized for
reasons beyond their control, e.g. medical reasons, accidents etc. Therefore it is said that
there is no human element in this system.
In an anxiety to produce more, quality may be neglected in order to achieve higher
quantity of production.
The main features of this incentive plan are as follows:
Day wages are not guaranteed, i.e. it does not assure any minimum amount of wages to
A standard time for each job is set very carefully after time and motion studies.
Two piece rates are set for each job- the lower rate and the higher rate.

Merrick Differential Piece Rate System
Merricks system is modification of Taylors system and is comparatively less harsh on the
workers. The scale of remunerations is as follows.

Production Rates of Payment

Up to 83% Normal piece rate
83% to 100% 110% of ordinary piece rate
Above 100% 120% of ordinary piece rate
As mentioned earlier, this method is less harsh on the workers as compared to Taylors system.
It is particularly useful to beginners and also offers an incentive that has potential of higher

Gantt Task Bonus Plan

In this method, there is a combination of time rate, bonus and piece rate plan. The remuneration
is computed as shown below.

Production Payment
Production below standard Guaranteed time rate
Production at standard Bonus of 20% [normally] of time rate
Production above standard High piece rate for the entire output

This method assures minimum wages even too less efficient workers and hence is a preferred
method of payment of wages. It also offers reasonably good incentive to efficient workers.
However, the main limitation is that the method is complicated to understand by the workers and
hence may create confusion amongst them.

Emerson Efficiency Bonus Plan

Under this plan when the efficiency of the worker reaches 67% he gets bonus at the given rate.
The rate of bonus increases gradually from 67% to 100% efficiency. Above 100% bonus will be
at 20% of the basic rate plus 1% for each 1% increase in efficiency.

Premium or Bonus Plans

The incentive wages are given in the form of 'premium' or 'bonus' calculated on the basis of
efficiency of workers, time saved or increased production.

(a) Individual bonus systems:

1) Halsey Premium plan

2) Halsey-Weir Premium plan

3) Rowan system

4) Barth variable sharing plan

5) Emerson efficiency bonus

6) Bedaux point premium system

7) Accelerating premium plan etc.

(b) Group Bonus Systems:

1) Budgeted Expenses Bonus

2) Cost Efficiency Bonus

3) Pristman System

4) Towne Profit Sharing Plan:

5) Waste Reduction Bonus

6) Rucker Plan

7) Scanlon Plan etc.

The Halsey Scheme

The Halsey Premium Bonus Plan is known as Halsey Scheme. This system is also known as
Split Bonus Plan or Fifty- fifty Plan. The plan was introduced in 1891 by F.A. Halsey, an
American Engineer. In the plan, the task (standard) time, is decided on the basis of past
experience, and scientific studies are set.

It is a simple combination of time and piece rate systems. A worker is paid a guaranteed base
rate and is rewarded when his performance exceeds standard.

Under this plan, a standard time is fixed for the performance of each job, and the worker is paid
the agreed rate per hour for the time spent thereon plus a fixed percentage (may be 50%) of the
time, he saved on the standard.

The total wages payable is calculated as under: = (Hourly rate X Time taken) + (50% X Time
saved X Hourly rate)

As a result of increased productivity, conversion cost per unit falls. This is because fixed
overhead gets distributed over larger volume of output. Thus, the firm finds it possible to reward
workers directly in proportion to production.

The Halsey-Weir Scheme

Here the worker gets a bonus of 30% of the time saved, against 50% in the Halsey Plan, Except
for this point; Halsey Plan and Halsey Weir Scheme are similar.

Rowan Scheme

This scheme was introduced in the year 1901 by David Rowan of Glasgow. The guidelines of
Halsey Plan have been followed. It is similar to that of

Halsey Plan except in regard to the determination of bonus calculation. Under this plan, the
bonus is that proportion of the wages of the time taken which the time saved bears to the
standard time allowed.

A standard time is established in respect of each job or process. There is a guaranteed base rate.
A bonus is paid on the basis of time saved computed as a proportion of the time taken which the
time saved bears to the standard time.

The total wages payable is calculated as under: = (hourly rate x time taken) + (time saved x
time taken) x hourly rate time allowed

Barth Scheme

Under this plan, wages are not guaranteed. This system is suitable to beginners and learners. The
earning is computed by multiplying the rate per hour by the geometric mean of standard hours
and actual hours worked.

Total Earnings = Rate per hour / Standard hours Actual hours worked.

Accelerating Premium Plan

Under this premium plan, bonus increases at a faster and faster rate as output increases. The plan
offers a higher incentive to the workers. The efficiency is determined on the basis of time saved
or increased output. The plan is complex one.

The system of wage payment is of two types-time rate system and piece rate system. In the plan
of incentive wage payment, both time and piece rate blended together.

Under the time rate system, the worker is not benefitted for the time saved. Under piece rate
system, the cost per unit falls, even though labour cost remains constant. This is due to savings in
fixed overhead expenses, since the cost of overhead is distributed over all the units.

The purpose of this scheme is to overcome the limitation of both the systems and combine the
advantage of both the systems. In order to increase production through encouragement the

benefits are shared by the employer and the employee. Before the introduction of incentive plan,
the following factors may be taken into consideration:

1. It must be simple and understandable to workers.

2. It must be fair to both employer and employee.

3. The standard should be fixed by time and motion study.

4. Standards once fixed may not be altered.

5. The cost of operating the scheme should be minimum.

6. The work must be repetitive by nature.

7. The workers should not raise objections.

8. The system must be permanent; once introduced should not be discontinued.

9. The system should also benefit the indirect workers.

10. It must reduce labour turnover.

A satisfied employee will give his best service and thus production will be increased, on the
other hand, a dissatisfied employee will not give his service beneficially to the firm, thus
production will be decreased. When the worker is dissatisfied because of insufficient incentives,
he may go away whenever better opportunity arises elsewhere.

When there is no chance of promotion, one may not take initiative to improve him. But when
there is a good system of promotion policies on the basis of better performance, naturally one
will work hard to come up.

Even today the problem of promotion of workers depends upon the will and pleasure of the
management. If favoritism is shown in promotion, it will nurture jealousy, discontentment, etc. It

is the duty of the personnel department to see that the right person is awarded suitably in order to
cultivate goodwill among the workers.

When one does a job satisfactorily taking less time, he should be remunerated suitably in
addition to the salary. Incentives are an encouragement for better work or greater effort in
production. The extra payment of remuneration may be in the proportion of additional output or
time saved.


What Is Payroll?
The term payroll generally refers to the process of identifying employees, calculating the pay
and payroll taxes, recording the payroll transactions, making the payments, and completing
required federal and state payroll tax forms. The diagram on the next page shows you an
overview of the process.
Legal Rules
Payroll is unique from other basic accounting topics because payroll involves many federal (and
state) payroll tax and income tax withholding laws, and pay rate calculation rules. Each of these
legal rules imposes different requirements. So, to understand the payroll process, you will find
yourself learning more than just how to properly analyze and record transactions. You will also
learn about payroll laws and what is required to comply with these laws. Because each state has
its own payroll laws, we focus on federal payroll requirements.

Calculation of Payroll:

To calculate a payroll means to make a calculation for a specific time period of total employee
expense and then to determine the payments required.
Total Expense The total employee expense includes three basic elements:
Gross pay expense
Payroll taxes expense
Benefits expense

Payment Allocation: As each expense is calculated, the allocation of the payment for that
expense is determined. The most detailed part of the payment calculation is determining how
much of the gross pay will be withheld from the employee and then paid to various government
taxing authorities and other third parties. Additionally, the payments required for other payroll
taxes and benefits are calculated.
Not Part of Payroll
Remember that independent contractors are not employees and therefore are not part of the
payroll calculation. Payments to independent contractors are recorded as separate categories of
operating expenses.

Idle Time

Treatment of idle time:

Idle time means the amount of time the workers remain idle in a normal working day. The idle
time is usually caused by a sudden fault in machine or equipment, power failure, lack of orders
for the product, inefficient work scheduling, defective materials and shortage of raw materials
etc. The cost associated with idle time is treated as indirect labor cost and should, therefore, be
included in manufacturing overhead cost. For example, the normal weekly working hours of a
worker are 48 and he is paid @ $8 per hour. If he remains idle for 6 hours due to power failure,

then the cost of 42 hours would be treated as direct labor cost and the cost of 6 hours (idle time)
would be treated as indirect labor cost and included in manufacturing overhead cost.

Overtime and Fringe Benefits

Overtime Benefits:

Overtime benefit is the amount that is paid, for the overtime worked, in excess of the normal
wage rate. Overtime benefits are treated as indirect labor cost and included in manufacturing
overhead cost. For example, a worker normally works for 48 hours per week @$8 per hours. In
a particular week, if he works for 52 hours and company pays him $12 for every hour worked in
excess of 48 hours. Here $48 is the overtime benefit.

Fringe Benefits:

Basic wages, computed according to any of the methods or systems of wage payment, constitute
direct monetary compensation for services rendered by workers. Besides these wages, there are a
number of indirect forms of compensation in terms of money, paid to workers. These additional
monetary benefits are known as fringe benefits or supplementary wages. These benefits are not
related to labor productivity. They are pair either because of their imposition by appropriate
legislative measure, or because of collective bargaining.

Indirect monetary incentive fringe benefits are:

(a) Dearness allowance,

(b) House rent allowance,
(c) City compensatory benefits,

(d) Childrens education allowance,
(e) Night shift allowance,
(f) Holiday pay,
(g) Leave pay,
(h) Employers contribution to state insurance ,
(i) Employers contribution to provident Fund,
(j) Accident compensation, etc.

Labor Turnover and Control

Labor turnover, which is also called as attrition is a major problem in the modern times. Labor
turnover can be defined as, a change in the labor force as compared to the total labor force. Labor
turnover is prevalent in every industry, however, the proportion of the same changes from
industry to industry. For example, turnover in information technology sector is the highest today
due to ample job opportunities due to the rapid growth of this sector. Labor turnover should not
be very high as it will result into double loss to the organization, the first one is that an
experienced employee will be lost and secondly new person who is replacing the old one, may
not have same qualifications and experience and till he is accustomed to the new job, his
productivity is bound to be low. Similarly suitable training will have to be given to him in order
to acquaint him with the environment, which will also result in additional expenditure. Due to
these reasons, every organization tries to minimize the labor turnover. However, some proportion
of labor turnover is actually necessary, as it will bring in fresh ideas in the organization. If labor
turnover is reduced to zero, it will indicate that the employees do not have any opportunity
outside and hence they are surviving. Therefore some degree of labor turnover is always
Measurement of Labor Turnover:
It is essential for any organization to measure the labor turnover. This is necessary for having an
idea about the turnover in the organization and also to compare the labor turnover of the previous
period with the current one. The following methods are available for measurement of the labor
Additions Method: Under this method, number of employees added during a particular
period is taken into consideration for computing the labor turnover. The method of
computing is as follows.

Labor Turnover = Number of additions/Average number of workers during the period
Separations Method: In this method, instead of taking the number of employees added,
number of employees left during the period is taken into consideration. The method of
computation is as follows.
Labor Turnover = Number of separations/Average number of workers during the period
Replacement Method: In this method neither the additions nor the separations are taken
into consideration. The number of employees replaced is taken into consideration for
computing the labor turnover.
Labor Turnover = Number of replacements/Average number of workers during the period
Flux Method: Under this method labor turnover is computed by taking into
consideration the additions as well as separations. The turnover can also be computed by
taking replacements and separations also. Computation is done as per the following
Labor Turnover = [Number of additions + Number of separations] /Average number of
Workers during the period 100
Labor Turnover = [Number of replacements + Number of separations] /Average
number of workers during the period 100
Causes of Labor Turnover:
Computation of labor turnover and a report of the same help the management in taking action for
minimizing the labor turnover. It will also be useful if the management finds out the reasons for
the labor turnover. Broadly, causes of labor turnover can be divided into two categories,
avoidable and unavoidable.
Avoidable Causes: These causes include the following.
Dissatisfaction with the job
Dissatisfaction with the working hours
Dissatisfaction with the working environment
Relationship with colleagues
Relationship with the superiors like supervisors

Dissatisfaction with monetary and non monetary incentives
Other reasons such as lack of facilities like insurance, absence of promotion
chances, lack of proper training etc.
Unavoidable Causes: These causes include the following.
Personal betterment
Illness or accident
Change in locality
National service
Other reasons like lack of residential facilities, family commitments, attitude etc.
Cost of Labor Turnover:
For an organization, labor turnover results into a cost. If labor turnover is very high, it will result
in high cost and hence efforts should be made to prevent the same. The costs of the labor
turnover can be grouped into the following categories, preventive and replacement. These are
explained below.
Preventive Costs: It is said that preventions is always better than cure. Same thing is applicable
in case of labor turnover. It is always better to prevent the labor turnover rather than taking
action after it has taken place. The costs incurred for preventing the labor turnover are known as
preventive costs. These costs are as follows.
Cost of personnel administration which includes expenditure incurred in maintaining
good relationships between the management and the workers.
Cost of medical services incurred for improvement in medical facilities and also for
motivating the employees.
Expenditure incurred on welfare measures like sports facilities, transport, housing,
cultural activities, canteens etc.
Certain schemes like pension, gratuity schemes and other post retirement benefits.
Replacement Costs: These costs are incurred for removing the effect of the labor turnover and
include the following costs.

Cost of recruitment and training of new workers
Loss of output due to delay in recruiting new workers
Loss due to inefficiency of new workers.
Cost of increased spoilage
Cost of tool and machine breakage.
The preventive costs should be collected under different standing order numbers and are
apportioned to different departments in proportion to the number of persons engaged in each
Replacement costs arising on account of fault of a particular department, such replacement costs
may be charged directly to that department. If however, the labor turnover is due to shortsighted
policy of the management the cost is collected as an overhead item and is apportioned to
departments on the basis of number of persons engaged in each department.

Learning Curve Theory

Learning Curve Theory is an important concept in business. In fact, it may be a management

consulting framework that can help you in very practical ways in your work. Learning Curve
Calculations are a critical part of managing an operation.

A learning curve is a graphical representation of the changing rate of learning (in the average
person) for a given activity or tool. Typically, the increase in retention of information is sharpest
after the initial attempts, and then gradually evens out, meaning that less and less new
information is retained after each repetition.

The learning curve can also represent at a glance the initial difficulty of learning something and,
to an extent, how much there is to learn after initial familiarity. For example, the Windows
program Notepad is extremely simple to learn, but offers little after this. On the other extreme is
the UNIX terminal editor vi, which is difficult to learn, but offers a wide array of features to

master after the user has figured out how to work it. It is possible for something to be easy to
learn, but difficult to master or hard to learn with little beyond this.

Concept of Learning Curve Theory:

The concept of the Learning Curve basically states that there is less and less learning as more
repetitive steps are taken. The Boston Consulting Group conducted some empirical studies and
below is the conclusions from that study:

1. The time required to perform a task decreases as the task is repeated,

2. The amount of improvement decreases as more units are produced, and
3. The rate of improvement has sufficient consistency to allow its use as a prediction tool.

Consistency in improvement has been found to exist in the form of a constant percentage
reduction in time required over successively doubled quantities of units produced. The constant
percentage by which the costs of doubled quantities decrease is called the rate of learning. The
slope of the learning curve is 100 minus the rate of learning. For example, if the hours between
doubled quantities are reduced by 20% (rate of learning), it would be described as a curve with
an 80% slope. Below is a picture of what that curve might look like:

In other words, over time, it will take less and less effort and time to produce the same amount of

The concept of the learning curve is a powerful one and is applicable to all learning
processes. Its easy to see how to apply The Learning Curve to areas such as manufacturing
where your outputs are physical products. Its more difficult to apply The Learning Curve,
however, in areas such as services or software.

For services, the easiest way to apply it is to measure the time it takes for someone to do
something. Over time the theory goes that it should take less and less time for a thing to
be accomplished.

For software, its difficult to apply the learning curve. Its not good, nor is it prudent to argue
that over time, an engineer should be able to produce more and more code. That statement
reminds me of my former professor who created an entire neural net that was effective in
predicting word-sense and he did it in just 2,000 lines of code. Something like that would have
taken me 3x more lines of code. So, the statement doesnt apply.

Specials Problems Relating to Accounting for Labor

1. Cost Accounting Problem on Wage Payment (2 Problems):

Problem 1:

Calculate total monthly remuneration of workers A, B, C and D on the basis of the

following information for the month of January 2007:

(i) Standard Production for each worker = 1,000 units

(ii) Rate of wages = 10 paisa per unit

(iii) Bonus = Rs. 5 for each 1% increase over 90% of the standard.

(iv) Dearness Allowance per month = 100% of piece wage.

The units completed by the four workers were as under:

A = 950 units, B = 900 units, C = 960 units, D = 850 units.


% of work done by the workers:

A = 950/1,000 100 = 95%

B = 900/1,000 100 = 90%

C = 960/1,000 100 = 96%

D = 850/1,000 100 = 85%

Problem 2:

In a factory bonus system, bonus hours are credited to the employee in the production of time
taken which time saved bears to time allowed. Jobs carried forward from one week to another.
No overtime is worked and payment is made in full for all units worked on, including those
subsequently rejected.

From the following, you are required to calculate for each employee:

(a) The bonus hours and amount of bonus earned;

(b) Total wage cost;

(c) The wage cost of each good unit produced.


2. Cost Accounting Problems on Labour Hour Rate (3 Problems):

Problem 1:

Calcutta Engineering Co. has three production departments X, Y and Z and one service
department S.

From the following particulars calculate Labour Hour Rate of each of the departments X,
Y and Z:

There were 125 working days of 8 hours each. Services rendered by the Service Department are
to be apportioned to the production departments X 50%, Y 25%, and Z 25%.


Working Notes:

1. Labour hours worked = No. of working days hours of daily work No. of workers

X: 125 8 7 = 7,000

Y: 125 8 5 = 5,000

Z: 125 8 5 = 5,000

2. Labour hour rates = Expenses/Labour hours worked

Problem 2:

Moonlight Engineering Company has three production departments, A, B and C and one service
department S. Following are the particulars of a month of 25 working days of 8 hours each.

Calculate the labour hour rate for each of the production departments:

Service rendered by the service department to production departments A, B and C is in the ratio
of 2: 2: 1, respectively.


Working Notes:

1. Total Assets value = Rs. 5,000 + Rs. 6,000 + Rs. 6,000 + Rs. 3,000

= Rs. 20,000

... Depreciation = 12% of Rs. 20,000 = Rs. 2,400

2. Labour hours worked = No. of working days Hours of daily work No. of workers:

X: 25 8 20 = 4,000

Y: 25 8 25 = 5,000

Z: 25 8 30 6,000

Problem 3:

A machine was purchased for Rs. 55,000. It was installed in a shop over th of its floor area at
an additional cost of Rs. 5,000. The working life of the machine as also the scrap value was
estimated at 10 yrs and Rs. 5,000, respectively.

From the following details compute the Machine Hour Rate:

It is estimated that the supervisor devotes one-fourth of his time for the machine, the cost of
power is Rs. 20 per 100 units and the machine consumed 10 units per hour.

Normal working hours of the machine is estimated at 1,200 but during the year it actually
worked for 1,000 hrs.


3. Cost Accounting Problems on Incentive Schemes (2 Problems):

Problem 1:

A worker takes 12 hours to complete a work on daily wages and 8 hours on a scheme of payment
by results. The workers day rate is Rs. 6.00 per hour. The cost of material of the product is Rs.
20 and the overheads are recovered at 200% of the total wages.

Calculate the factory works cost of the product under:

(i) Rowan Plan and

(ii) Halsey Scheme.


Problem 2:

Production department of a company pays its workers standard wages @ Rs. 2.00 per hour plus a
bonus under the Rowan Premium Bonus Scheme and Dearness Allowance of Rs. 50 per week of
55 hours.

At the end of a particular week the time sheet of a worker is summarized below:

Calculate the gross wages (including bonus and D.A.) of the worker of the week.


Working Notes:

(i) Time Saved

Job No. 205 = (30 25) hours = 5 hours

Job No. 108 = (25 20) hours = 5 hours

Job No. 12 = (5 3) hours = 2 hours

8. Cost Accounting Problems on Idle Capacity Cost (1 Problem):

Illustration 4:

A manufacturing company has two production departments X and Y and three service
departments: Store, Maintenance and Time Keeping.

The departmental distribution summary showed the following expenses for June 2007:

Production Departments:



1. Intermediate Cost and Management Accounting, Paper-8 by ICA of India.

2. Linkedin.com
3. http://www.shmula.com/the-learning-curve/362/
4. http://managementstudyguide.com/what-is-learning-curve.htm
5. http://www.yourarticlelibrary.com/cost-accounting/problems-cost-accounting/top-14-