Lesson 4: Accounting for Labour

Learning Outcomes of the Lesson

Explain the meaning of remuneration
Calculate the total remuneration
Identify the various methods of remuneration
Identify the advantages and disadvantages of each of the
remuneration methods
Describe the steps in a typical wage procedure

4.1 Introduction

Any firm except volunteer organizations has to pay for the services
rendered by the people who have been employed. Human resources
are involved to achieve the targets of the organization for which they
are paid. Payments for employment usually happen on monthly basis.
Nevertheless, different pay systems may be adopted by organization
depending of on the situation pay system adopted by the organization.
This lesson how the pay for labour is determined, calculated, paid and
accounted for.

4.2 Documents involved in payroll system

It is difficult to list down a permanent list of documents used in payroll

system of any organization. Depending on the organization’s control
system and information need it has to decide on the structure and
content of such documents involved. Proper documentation of labour

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used and payments made help management to calculate the employee
related costs. Some of the documents used are explained in the
following sections.

4.2.1 Employee record card:

When an employee is recruited by a firm, an employee record card
(Personal file) is opened. This record shows full personal details of the
employee, particulars of previous employment, medical status, and
salary composition and other relevant particulars. This document is
updated regularly and when necessary

4.2.2 Clock card:

Clock card is used to record time of work performed by an employee
by recording the arrival and departure time of each employee. The
arrival is generally marked as “in” and the departure is marked as
“out” time. This can either be used as a manual record or electronic
record with the help of technology. The information gather from the
clock card is used to determine salaries and other benefits entitled to
the employee and to control over the time spent by the employee. A
separate car is maintained for each employee and usually kept in a
track in alphabetical order or serial order.

4.2.3 Time sheets:

Time sheets are also used to record working time of employees to see
how an employee has spent the time during the work. This can either
be prepared daily or weekly. Sometime these sheets are prepared by
firms, in addition to the clock cards. Therefore the information

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contained in this sheet can be used for the same purposes as in the
case of Clock card.

4.2.4 Job cards or Job ticket:

Job cards are used for single job or batch containing the names of the
employees who have been assigned and involved in the particular
production. Once the job is done, the job card provides the information
such as the time taken by each employee, total time spent on the job
etc.

4.2.5 Payroll / Wages sheet

A payroll or wage sheet is prepared showing each employee’s name

and gross salary, and various deductions from the gross earnings for a
particular period. Basically payroll is prepared monthly basis unless it
is required to be prepared and pay salaries at any other time intervals.
The information contained in Time cards or clock cards are used to
prepare the payroll General specimen of a payroll is given bellow.

Deductions
Overtime hours

Overtime pay
Total wages
Total hours

House rent

Name of Net
Bonus pay

Gross pay

recovery

employee pay
worked

P.A.Y.E
Others
E.P.F

Loan
Rate

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4.2.6 Pay Slip

When the net salary or wages are paid to each employee, a pay slip is
prepared. The pay slip shows the details of how the gross pay is
consisted of and what deductions have been made from the gross
earnings of the employee. So that the net pay of the employee is the
excess of gross pay over the total deductions. Normally a copy of the
pay slip is kept at the firm to acknowledge the receipt of the salary or
wage and the original is given to the employee for his records. A
typical pay slip is shown below.

Name of the employee:

Department:
Designation:
Salary scale:
Basic salary
Overtime payments
Rent allowance
Bonus payment
Other allowances
GROSS PAY

Deductions:
EPF contribution
Loan recovery
Subscription to welfare
society
TOTAL DEDUCTIONS
NET PAY

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4.3 Remuneration Methods

The term remuneration is used to mean the entire financial benefits

that an employee entitled to receive from a firm. There could be
different remuneration methods for different employees by different
firms. However, a remuneration methods generally consists of the
followings.
1. Time – based systems
2. Piece work system
3. Bonus scheme
Irrespective of the remuneration method, each employee is
entitled to various benefits in addition to the basic earnings from
salary and the following equation shows how remuneration
forms.

Remuneration = Basic earnings as Salary + Overtime payment

+ commission + Bonus etc + other allowances
and entitlements

4.3.1 Time – Based system

The salary is determined based on the time worked rather than the
units produced. Payment may be based upon the hourly, the daily, or
the weekly rate or at a fixed salary rate. There are two ways of
computing the payment under this system.

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4.3.1.1 Basic system:

Total payment = Hours worked x basic time rate

Eg: Basic time rate = Rs.12/hour

Hours worked = 50 hrs Gross pay = Rs. 12 x 50 = Rs.600

This system is very suitable when work is done in a situation where it

is difficult to measure the units produced, such as administrative
functions when the quality of output is extremely important, such as
repairing machinery. Therefore, this system of payment is not related
to output.

4.3.1.2 High day rate system:

Under this scheme of payment, higher rate than the basic rate is paid
in return for a high level of productivity. Firms will be able to attract
high grade employees.

4.3.2 Piece work system

Under this system, an employee is paid a fixed rate per unit produced
regardless of the time taken. Some examples for piece work system
are given bellow. :

I. Straight piece rate

II. Piece rate with a guaranteed minimum
III. Differential Piece rates

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4.3.2.1 Straight Piece rate
A flat rate is paid for every unit produced regardless of number of
units produced. This system of payment can be applied only where the
work is of a sufficiently repetitive nature.

Piece rate = Rs. 2 per unit

Units produced = 200
Payment = Rs. 2 x 200 = Rs. 400

4.3.2.2 Piece rate with guaranteed minimum

This provides employees that they will earn a reasonable wages even if
they fail to achieve certain levels of output. Under this system, the
employee receives the straight piece rate for the number of units
produced, provided that his total payment is greater than his earnings
on a time rate basis.
Example:
Rate per unit = Rs. 6.00
Guaranteed time rate = Rs. 15.00 per hour
Hours worked in a week = 40
Therefore the guaranteed pay is Rs. 600

Units produced Piece rate Gross Pay

80 480 600
90 540 600
100 600 600
110 660 660
120 720 720
130 780 780

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Hence the guaranteed minimum weekly pay of Rs. 600 will be paid
even when the employee units produce less than100 units. On the
other hand, the employee will receive more than the minimum
guaranteed amount of Rs. 600 when the production level exceeds 100
units.

4.3.2.3 Differential Piece Rate

Different rates are paid depending upon the units produced.

Example:
Units produced in a day
01- 100 units = Rs. 4.00/unit
101- 124 units =Rs. 6.00/unit
125- 150 units =Rs. 8.00/unit
Or
Standard rate = Rs. 6.00
Less than the standard = 80% of standard rate
Above the standard = 120 % of the standard rate

Example:
Standard rate per unit = Rs. 6.00
Standard output = 2 units per hour
Less than the standard = 80 % of standard rate
Above the standard = 120 % of the standard rate

Required:
Find the gross pay for the following outputs produced in a 40 hours
week.

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Solution:

Output for a 40 hours Rate per unit Gross wages

week (Rs.) (Rs.)
40 80% of 6 = 4.80 40 x 4.80 = 192
60 80% of 6 = 4.80 60 x 4.80 = 288
80 (Standard units Standard rate = 80 x 6.00 = 480
expected) 6.00
100 120% of 6 =7.20 100 x 7.20 = 720
120 120% of 6 = 7.20 120 x 7.20 = 864

4.4 Incentive Schemes:

Incentive is paid based on the time saved over the approved time. If
the time taken for a job exceeds the time allowed for it, no bonus is
paid. In this case, that employee is entitled to receive payment for the
hours actually worked.

If any employees do their work less than the time allowed, they are
entitled to receive bonus based on the time saved if the firm has
introduced such a pay system. Time saved is generally calculated as
follows:

Time saved (TS) = Time allowed (TA) – Time Taken (TT)

Numbers of bonus methods are available to calculate the bonus

payments.
Some of the traditional bonus schemes are as follows:

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 Halsey Bonus Scheme
Halsey – Weir Scheme
Rowan Bonus Scheme
Bath Bonus Scheme

Equations to calculate bonus payments:

Halsey Bonus Scheme:

Bonus = 50% of the Time Saved x Standard Rate per hour

Halsey – Weir Scheme:

Bonus = 30% of the Time Saved x Standard Rate per hour

Rowan Bonus Scheme:

TimeSavedxTimeTaken
Bonus = x Standard Rate per hour
TimeAllowe d

Bath Bonus Scheme:

Bonus = {√Actual hours x Standard hours} x Standard Rate per hour

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Example:

The following information is given for three employees, Anil, Daya and
Kajey.

Time allowed Time taken

Name (Hrs) (Hrs)
Anil 20 20
Daya 20 18
Kajey 20 16
Standard rate per hour is Rs. 100.

Required:
Find the gross pay for the above three employees using the above four
bonus schemes.

Solution:

Time saved (Hrs):

Anil 20 – 20 = 0 (No bonus payment for Anil).
Daya 20 – 18 = 2
Kajey 20 – 16 = 4

Under Halsey method, the gross pay for each employee will be as
follows:
Anil = 20 hrs x Rs. 100 = Rs. 2000
Daya = (20 hrs x Rs. 100) + (50% x 2 x Rs.100) = Rs. 2,100
Kajey = (20 hrs x Rs. 100) + (50% x 4 x Rs. 100) = Rs.2,200

Under Halsey - Weir method, the gross pay for each employee will be
as follows:
Anil = 20 hrs x Rs. 100 = Rs. 2000
Daya = (20 hrs x Rs. 100) + (30% x 2 x Rs.100) = Rs. 2,060
Kajey = (20 hrs x Rs. 100) + (30% x 4 x Rs. 100) = Rs. 2,120

Under Rowan method, the gross pay for each employee will be as
follows:
Anil = 20 hrs x Rs. 100 = Rs. 2000
Daya = (20 hrs x Rs. 100) + {(18 x 2)/20} x Rs. 100 = Rs. 2,180
Kajey = (20 hrs x Rs. 100) + {(16 x 4)/20} x Rs. 100 = Rs. 2,320

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4.4.1 Other incentive schemes:
The above incentive schemes are applicable to individual employees.
These are suitable where

Group incentive scheme

Profit sharing

4.4 Accounting Entries for salaries & wages

For Gross Salary

Salaries & Wages A/C Dr

Salaries & Wages Control A/C Cr

(Being posting the gross pay)

For Deductions from employee gross pay (EPF, ETF, Loan

recoveries etc...)

Salaries & Wages Control A/C Dr

EPF Payable Account Cr
ETF Payable Account Cr
Loan Account Cr

(Being transferred EPF, ETF, Loan recoveries to respective

accounts)

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Net salary payment

Salaries & Wages control A/C Dr

Cash / Bank A/C Cr

(Being making the net salary paid through cash or bank account)

Example 1:
An employee working in a company received the following pay slip for
the month of July 2010.

Rs

Gross pay 75,000

Deductions:
EPF 6,000
Loan Installment 8,000 14,000
Net pay 61,000

Additional information
Employer’s Contribution:
EPF 9,000

Loan Balance at the beginning of the month 88,000

EPF has been subsequently

Required:
Make ledger entries in the appropriate ledger accounts.

Solution 1:

Salary control Account

EPF payable 6,000 Salary A/C 75,000
Loan A/C 8,000
Cash 61,000

75,000 75,000

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 Salary Account
Salary control A/c 75,000 P & Loss A/C 75,000

75,000 75,000
EPF expence Account
EPF payable A/c 9,000 P & Loss A/C 9,000

9,000 9,000

EPF Payable A/ C
Cash 15,000 Salary Control A/C 6,000
EPF A/c 9,000

15,000 15,000

Loan Account
Balance B/f 88,000 Salary control A/c 8,000

Balance 80,000
88,000 88,000
Balance C/f 80,000

Example 2:

Summary of the payroll of a company for the month of June 2010 is

given below.
Rs
Basic salary 100,000
Overtime payment 40,000
Cost of living allowance 10,000
Gross pay 150,000

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 Deductions:
EPF 10,000
Employee loan receivable 18,000
Trade union member fees 2,000 (30,000)
Net pay 120,000

Employers Contribution
EPF Rs. 15,000
Loan Balance at the beginning Rs. 3,000

Company pays monthly EPF & ETF in the following month. Monthly
salary is paid at the last day of each month. The following account
balance as at July 01, 2010 are given below:

EPF payable Rs. 30,000

ETF payable Rs. 3,600
Employee’s Loan A/C Rs. 425,000

Required:
Prepare the following accounts for the month of June 2010.
a. Salary control Account
b. ETF Payable Account
c. EPF payable Account
d. Employees Loan Account

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Solution 2:

Salary Control Account

EPF payable A/C 10,000 Salary 150,000
Loan A/c 18,000
Trade Union 2,000
Cash 120,000
150,000 150,000

EPF payable Account

Cash A/c 30,000 Balance b/f 30,000
10,000
15,000
Balance c/f 25,000
55,000 55,000
Balance b/f 25,000
ETF Payable Account
Cash 3,600 Balance b/f 3,600
ETF expenses A/c 3,000

Balance C/d 3,000

6,600 6,600
Employees Loan Account
Balance 425,000 Salary Control A/c 18,000

Balance C/f 407,000

425,000 425,000
Balance b/f 407,000

Labour turnover:

Labour turnover is the ratio of employees who leaves the firm after
joining due to various reasons. This ratio is computed by referring to
the total workforce available at the beginning of the year, at the
yearend or based on the average work force for the year. Hence it can
be computed as a percentage. Further it can be express in terms of

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absolute number of employees left the firm. Sometime, the labour
turn over can be computed as percentage of employees left the firm
against the number of employees newly joint the firm.
The meaning of the labour turnover is the intensity of employees
leaving the firm and there is no hard and fast rule as to how it should
be computed. So that it can be computed in form to show the
magnitude of employees who have left in a given period of time.

Summary:

It is the heaviest item of expenses next to materials costs in the

traditional manufacturing firms; it is very less in the firms which
use machineries very heavily due to the modern business
environment. As a result, overhead costs have taken over the
labour costs and it is a larger part in the total production costs.
However, it is essential to know how payments are made and how
accounting entries are carried out for labour costs.

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