LABOUR REMUNERATION

This refers to payment to workers engaged directly as compensation to their services time
used to cover the total monetary earnings to employees ie. Ways and other payments labour
cost constitutes cost of purchasing hours & employees’ service rendered to the organization.
Characteristics of a satisfactory labour remuneration system.
By deciding on the particular system of wages payment to be adopted the following factors
should be taken into account.
1. The system should produce the best quality & quantity of work i.e. it should help
reduce substandard output.
2. It should be satisfactory to the employees and employers as rewards will be related to
effort.
3. It should be clearly defined & simple ie the employee should be able to compute his
wage on his own.
4. The scheme should guarantee a minimum wage for each employee.
5. No maximum limit should be set on individual earnings.
6. Earnings should not be affected by factors beyond employees control eg shortage of
materials, power blackouts etc.
7. It should reduce labour turnover and absenteeism.
8. It should be flexible so that changes may be introduced where necessary.
9. The scheme should be capable of operation without excessive paperwork.
10. The system adopted should be in line with legal requirement and union agreements.
Methods of labour remunerations.
They are of 2 main categories:
1. Time based systems
2. Pieces/ output based systems.
Time based system.
The employees are paid based on the time taken on the job without reference to output
attained. Though pay is not related to output it doesn’t mean that output and performance are
not important. What usually happens is strict supervision is highly exercised to reduce idle
time.

In this system we have the following:

 a) Flat time rate
This is where the hourly rate is predetermined and wages are paid at a flat rate considering
the number of hours worked.
Generally;
Earning= time taken x rate/ hour.
(b) High day rates.
The employer offers a higher rate to employees as compared to the market. The time rate is
fixed at a higher level than the existing market rates. This is to provide an incentive by paying
well above normal basic rate in exchange for average performance from employee & to
discourage labour turnover.
(C) Fluctuating day rate- Wages are paid at time rates which change with change in the cost
of living. The rates are not fixed and they are adjusted periodically with the change in the
index.
2. PIECES BASED METHOD.
The employee is paid a fixed amount per unit of output produced without reference to the
time taken. The rate of payment is usually fixed in advance per unit of output. In this method,
to safeguard against substandard output, penalties are levied on any output which is below
standard.

The following are the methods under pieces based:

(a) Straight piece work.
The employee is paid per unit for a product or job completed without reference to time taken.
Each job or product is treated individually and is paid at a constant rate irrespective of the
numbers produced.
Formula:
Earnings = output x rate per unit of output.
(b) Graduated/ differential pieces system.
Employees are paid at different rates at different levels of output. This is to provide a strong
incentive to reach higher levels of output. Unlike straight piece work which pays at a constant
amount, this system recognizes effort applied to produce more units and rewards the effort.
A lower rate is payable when the worker is not able to attain standard. Output and a higher
rate for those whose output is above std.
Output Rate
0-100 Shs. 2/unit
101-150 Shs. 3/unit
150- 200 Shs. 4/ unit
(c) Pieces work with guaranteed minimum pay.
The employer guarantees a certain minimum pay to employees if piecework falls below the
normal rate. This is to safeguard the employee against factors such as delay, shortage of
materials and power blackouts which affects the employee’s output levels. The employees is
guaranteed that minimum pay if his earning fall below the minimum.
Incentive schemes.
Workers do not put extra and consistent effort if they are not rewarded for the same.
Incentives are inducements which motivate employees to put extra effort in their work and
they will be rewarded in a direct proportion to effort or work accomplished. Under such plans
the employee produces more and he gets more to earn a higher wage and at the same time to
reduce the unit cost of production. Naturally producing more in the same period of time
results in a higher pay but lowers the cost per unit of labour and factory overheads.
There are various plans that can be adopted and they are grouped into:
1. Individual/ premium incentive (bonus) schemes.
2. Group bonus schemes.
3. Incentive schemes for indirect workers.
1. Premium Bonus Scheme.
-is based on the principle that financial advantage arising out of efficiency of employees is
shared between employer and employee in an agreed proportion. A bonus is paid to the
employee in recognition of his efforts and increased efficiency.
Some common schemes include:
(a) Halsey 50% bonus scheme (50-50) bonus scheme
(b) Halsey-weir 331/3 bonus scheme
(c) Rowan bonus scheme.
In these schemes workers are paid normal rates for time taken on a job ie, they earn time
wages. Each job will have its time allowed and if the employee takes less time, he saves on
time given and he should get a bonus on that time saved as an incentive ie bonuses are paid
on time saved as a result of effort or efficiency.
Bonus= agreed proportion x time saved x rate/ hour.
Time saved= time allowed- time taken.
Illustration
Time allowed on job number KDF 1080 is 98 hours. The rate of payment per hour is Sh. 100.
Oliver twist takes 80 hours to complete the job. Compute earnings due to him under the
following schemes:-
(a) Halsey 50% bonus scheme (50-50) bonus scheme
(b) Halsey-weir 331/3 bonus scheme
(c) Rowan bonus scheme.

Suggested Solution:
(a) Halsey 50% bonus scheme
Earnings= time wages + bonus
Time wages=time taken x rate/hour.
Bonus is paid at the rate of 50% of the time saved on the job.
Earnings = 80x100+50%x (98-80) x 100
800+900
Shs. 8900
(b) Halsey weir 331/3 % bonus scheme.
Bonus is paid at the rate of 331/3 % of the time saved
Earnings = 80x100+33 1/3% x 100 (98-80)
8000+600
Shs. 8600
c) Rowan bonus scheme.
Bonus is computed at a proportion of time wages. The proportion will be time saved to the
time allowed on the job.
Bonus = Time saved x Time wages
Time allowed.
Earnings = (80x100) + (98-80) x 80x100
98
= 8000 + 1470
= 9480 Shs.
2. Group bonus scheme.
Where common individual skills are not applicable group bonus scheme may be applied. The
scheme is appropriate where production or work is done by a group eg. In mining and
construction industry.
In this case, production is integrated and all efforts are dedicated towards the same end by a
group of persons working together. Individual schemes will not be applicable as it will be
hard to measure the performance of individual employees in a group. The bonus will be paid
to the group and it will be shared equitably by the members of the group. It can be shared
using wages level or time taken by each employee on the job.
NB: If rejected output will not be part of bonus computation, then do not include them when
computing time allowed.

3.PROFIT SHARING & CO-PARTNERSHIP

In these schemes the employees are allowed to share the capital of the business and receive
part of the profit that accrues the company.
There is a payment of a proportion of profit to employees every year. Under profit sharing
scheme employees receive payment in terms of share scheme employees receives payment in
terms of share of profit as an incentive in addition to their regular pay. The share of profit is
given cash and it will be related to the salaries or wage level of individual employees is left as
an investment in the company ie. It is not paid as cash. It is converted to capital of the
business. The incentive is given as shares of the company and therefore the employees
became co-owner or partners and therefore they have share holding of the business. In both
schemes employees share in the property of the business.

LABOUR RELATED COSTS.

LABOUR TURNOVER
-refers to the change in the composition of the workforce in the organization. It is the rate of
change in the composition of labour force during the period. It is a common feature in most
enterprise where workers leave employment and new workers join. Costs are incurred each
and every time an employee leaves the organization and therefore labour turnover has a direct
effect on labour costs. For cost control purposes, labour turnover must be appropriately
measured and turnover reports should be prepared regularly to be given to management
giving a breakdown of the causes as to why the employees left. This will help minimize
turnover as causes will be addressed
Causes of labour turnover
Causes can be classified into two main categories.
(i) Avoidable causes
(ii) Unavoidable causes.
i) Avoidable Causes
These are causes that the organization can be able to prevent or avoid. They are causes within
the controls of the organization.
They are:
- Poor remuneration
- Poor working conditions.
- Unhappy relationship with co-workers and supervisors eg discrimination
- Trade union problems.
- Lack of welfare facilities
- Inadequate job security and retirement benefits.
- Lack of promotional opportunities.

(ii) Unavoidable Causes.

These are causes that the organization cannot control or avoid. No controls can be effected on
these causes. They are:
- Death
- Insanity/incapacitation
- Imprisonment
- Marriage.
- Pregnancy and leaving on personal grounds.
- Personal dislike for job.
- Domestic disputes, separation and divorce.
- Resignation
- Change of career
- Further studies.
TREATMENT OF OVERTIME.
Overtime pay represents payments to employees for hours worked beyond the normal time
set. It consists of two elements.
i) The normal amount of wages paid for the actual hours worked.
ii) Overtime premium ie. The additional amount paid o overtime.

Treatment of normal amount of wages

They are charged to cost units produced irrespective of the conditions that led to overtime
being worked.
Treatment of overtime premium
There are two main treatments:
a) If it is normal to work overtime or if work is being done on a request to work
overtime by the customer the overtime premium should be charged to those units
produced.
b) If paid due to seasonal nature of production or as a result of temporal increase in
production, it should be charged to overheads ie it should be treated as indirect labour
cost.
Effects of labour turnover.
A certain amount of labour turnover may take place to a limited expense it may be welcomed.
This is because it creates vacancies for internal promotion and maintains motivation high for
the young and ambitions employees. New employees will bring in new and ideas and new
methods of performing duties from other organizations. Labour turnover is expensive and it
should be minimized as it increase in cost of production.
The cost of labour turnover includes:
1. Preventive costs
2. Replacement costs.

PREVENTIVE COSTS.
These are cost incurred to keep the work force happy, to satisfy and to prevent or discourage
them from leaving the organization. They include:
a) Cost of personnel management incurred in maintaining good relations between
management and employees.
b) Cost of welfare activities e.g. transport.
 c) Cost of medical service
d) Pension scheme to provide security on retirement.
e) Extra bonus and incentive to discourage employees from detecting to other
organization
Replacement Cost.
These are cost incurred in replacing an existing employee who has moved on. They are all
costs of training selection and recruitment. They include:
(a) Cost of training new employees
(b) Cost of recruitment and selection
(c) Loss of output due to time gap in obtaining new employees
(d) Loss due to inefficiency of new employees
(e) Cost of accidents due to lack of experience.
(f) Cost of scrap and defective work by new employees.
(g) Cost of tools and machine breakdown due to place handling by new employees.

Reduction/Control of labour turnover.

Labour turnover may be reduced by taking action on the avoidable causes. Turnover cannot
be fully eliminated as some turnover will always occur due to personal reasons. Therefore,
control can only be affected if we act on avoidable causes. The following steps can be taken.
a) Providing conducive working conditions
b) Having an impartial and sympathetic attitude on personnel management.
c) Introducing financial and non-financial incentive plans.
d) Providing a suitable and satisfactory wage
e) Providing promotional opportunities.
f) Encouraging labour participation in management to avoid disputes.
g) Introducing affective grievances handling procedures.
h) Strengthening the welfare measures.
IDLE TIME.
It represents the time lost by employees during production. It is the difference between the
time for which employees are paid and time they actually spend on production i.e. It is time
paid for but no production was obtained from the employees. Eg time lost when production is
interrupted by machine maintenance, breakdown, shortage of material etc.
Causes of idle time.
It may occur due to productive, administrative of economic causes.
Productive causes.
They arise from interruption of the normal flow of production activities: They are:
1. Idle time due to machine breakdown.
2. power failure
3. Time lost due to waiting for tools and raw materials.
4. Time lost when instruction and work are being given out.
These causes are related to production and they are usually controllable through proper
planning, strict supervision and proper maintenance of machinery.
Administrative causes.
They arise due to administrative decisions made. They arise out of abnormal conditions and
may not be controllable. They usually happen when conditions such as depression are in
existence. During depressions demand is low and therefore the company may decide to
maintain its existing labour force in anticipation of recovery. This will create idle time since
the employees may not be fully productive.
Economic Causes.
They arise from the prevailing economic conditions which affect the market. Market will be
affected by fall in demand due to competition or cyclic nature of our product demand which
is affected by seasons. In such a case, production may not be evenly distributed throughout
the year and it may not be possible to get work for excess employees. This is idle time.

Treatment of idle time:

For accounting purposes idle time classified as:
(a) Normal Idle Time
It is that time waste which cannot be avoided and it has to be part of labour.
e.g -Time lost between completion of a job and commencement of the other.
- Time spent in setting machines etc.
Treatment.
It is usually treated as a factory overhead ie as an indirect cost if it can be directly identified.
If not, it is treated as cost of labour since it will have been included on amounts paid to
employees.
(b) Abnormal Idle Time
-arises due to reasons not connected to the usual routine of manufacture and the employee is
attributed it. Arise due to inefficient planning, bad luck etc eg.
- Machine breakdown
 - Strikes and slowdowns
- Time lost due to waiting for tools etc
- Shortage of material.
Treatment
The amount should be written off to the costing profits and loss Account.
Control of idle time.
Idle time arising from controllable causes should be analyzed and responsibilities for them
should be set so that appropriate measures can be taken on those who are responsible. The
following steps can be taken:
1. Strict supervision should be incorporated in management.
2. Regular maintenance of machines should be done.
3. Raw materials tools and instructions should reach the employee in time to avoid time
wasting.
4. Production should be properly planned to avoid in balances in production levels.
5. Management should get complementary goods which they will produce during off
season.
FRAUD IN PAYROLL
Forms of fraud payment
- More time
- More units
- Higher rates
Dummy ghost workers