ACCOUNTING FOR LABOUR

COST

Learning objectives
After studying this chapter students will be able to understand:
1. Computation of labour wages cost under:
▪ Time based methods
▪ Unit based methods
2. Journal entries to record wages cost with distribution into direct wages cost and indirect
wages cost.
3. Computation of labour wages cost with learning effect
 CHAPTER 5: ACCOUNTING FOR LABOUR
COST
LO 1: Computation of labour wages cost
1.1) Methods to pay wages cost
There are two main methods to compute and pay the wages cost of production (factory) workers
who are actively engaged in manufacturing of product.
a) Time based method: Under time-based method, workers are entitled per hour wages so
wages cost is determined on the basis of hours paid and per hour rate.
b) Unit based method (Piece rate systems): Under this system, workers are entitled per unit
wages so the wages cost is determined on the basis of units produced and per unit rate.
1.2) Computation of time-based wages cost
1.2.1) – Terms
Sr. Terms Description
No.
(i) Normal Normal working time refers to the total time of shifts operational in a
working time factory.
For example, company operates a single shift of 8 hours in a day so
normal working hours per day will be 8 hours and for 30 days it will be
240 hours. In contrast to it, if company operates in 2 shifts then normal
working hours per day will be 16 hours.
(ii) Actual hours Actual hours paid refers to the total time for which wages of factory
paid workers is paid whether that total time is productive or non-
productive.
(iii) Actual hours Actual hours worked refer to the total time consumed by workers on
worked manufacturing of products. It is also known as productive hours from
total actual hours paid.
(iv) Idle time Idle time refers to non-productive hours due to unavoidable reasons
like machine breakdown, electricity breakdown, and shortage of
material. Workers are entitled to basic pay in idle time but products
are not produced.
Idle time = Actual hours paid – Actual hours worked
(v) Overtime Actual hours worked on production over and above normal working
hours are considered as overtime hours. In this time, workers are paid
higher rate as compared to normal wages rate.
Overtime hours = Actual hours worked – Normal working hours
(vi) Standard Standard hours for actual production refer to the total time allowed to
hours workers for actual units produced.
Standard hours = Time allowed per unit x Actual units produced
(vii) Efficiency If actual hours worked is less than standard hours, then workers are
deemed to be efficient and entitled to efficiency bonus for time saved.
Time saved = Standard hours – Actual hours worked
(viii) Efficiency Efficiency ratio is the relationship between standard hours and actual
Ratio hours worked.
Efficiency Ratio = Standard hours ÷ Actual hours worked x 100
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COST
1.2.2) – Formulas of time-based wages cost

Sr. Elements Description

No. of wages
(i) Basic pay Basic pay is normally paid for actual hours attended by the workers in
factory. It is computed as follows:
Basic pay
= Total actual hours x Basic wages rate per hour

(ii) Overtime During overtime hours, companies pay basic pay as well as overtime
premium premium to motivate employees.
Overtime premium
= Overtime hours x Premium % x Normal wages rate per
hour Where
Overtime hours Hours
Actual hours worked for production x
Less: Normal working hours (x)
= Overtime hours x
(iii) Efficiency If workers are efficient in production then companies pay efficiency
Bonus bonus for time saved.
Efficiency bonus
= Time saved x Bonus % x Normal wages rate per
hour Where
Time Saved Hours
Standard hours for actual production x
Less: Actual hours worked for production (x)
= Time saved x
(iv) Total Total payroll (wages) cost is the sum of basic pay, overtime premium and
payroll efficiency bonus.
cost
Total wages cost
= Basic pay + Overtime premium + Efficiency bonus
(v) Effective Effective hourly rate is the total wages cost per hour that company will
hourly have bear.
rate
Effective wages rate per hour
= Total wages cost ÷ Total actual hours paid
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COST

1.2.3) Format for computation of time-based wages cost

Total payroll cost/Gross wages cost/Gross earnings of worker Rs.
Basic pay:
(Total actual hours x basic wages rate per hour) x
Add: Overtime premium
(Overtime hours x Premium % x basic wages rate per hour) x
Add: Efficiency bonus
(Time saved x Bonus % x basic wages rate per hour) x
= Total gross wages cost x

Labour cost per unit (Total gross wages cost ÷ Actual units produced) x

Effectively hourly wages rate (Total gross wages cost ÷ Total actual hours) x
1.2.4) Employee Bonus (Incentive Schemes)
Employee bonus can be paid in any one of the following methods:
a) Fixed amount of bonus
An individual may be given a fixed bonus i.e. a bonus of a fixed amount in a fixed form (e.g.
cash, share options, shares) by their employer. This will not necessarily mean that it is an
unconditional or guaranteed bonus but, if the conditions are met, then it should be clear
what they are getting.
b) Bonus as a fixed % of basic pay
c) Efficiency bonus due to time saved
(i) 100% bonus plan of individual
▪ Bonus cost = Individual time saved x 100% bonus rate x normal rate per hour
(ii) 100% bonus plan of group
▪ Bonus cost = group time saved x 100% bonus rate x normal rate per hour
(iii) Halsey premium plan
▪ Bonus cost = Time saved x 50% bonus rate x normal rate per hour
(iv) Rowan premium plan
▪ Bonus cost = Time saved x (Actual time ÷ Time allowed) x normal rate per hour
Example 1
• Normal working hours = 48 hours per week
• Actual hours = 60 hours per week
• Basic wages rate = Rs. 50 per hour
• Standard time per unit = 9 minutes
Overtime is paid at time and a half. Bonus is paid @ 75% of normal wages rate. Units
produces = 500 units.
Required: Total gross wages cost for the week.
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Example 2 COST
A company operates a factory which employs 40 workers throughout the four-week period. Each
employee is paid at a basic rate of Rs. 4.00 per hour for a 38-hour week. Total hours paid for the workers
in the four-week period are 6,528 and 188 hours are registered as idle from total hours paid.
Employee deductions are 30% of gross wages. 3,500 units are produced in four-week period. Standard
time per unit was 2 hours. Workers are entitled group bonus equal to 45% of time saved. Overtime, is
paid at a premium of 35% in excess of normal wages rate.
Required: Calculate gross wages cost, amount of deductions, net wages cost and gross wages cost per unit.
Example 3
Azhar (Pvt.) Limited produces printed circuits for electronics industry. The company has recently introduced
100% bonus plan with standard production set at 50 units. The Company employs 11 production workers
who work on 8 hours shift for five days in a week. Basic wages rate of Rs. 30 per hour is paid and factory
overheads is applied at the rate of Rs. 50 per direct labour hour.
Production for the first week under 100% bonus plan is:
Monday 4,000 units
Tuesday 4,500 units
Wednesday 4,600 units
Thursday 4,400 units
Friday 4,100 units
Required: Prepare a schedule showing:
i) Daily earnings of employees under 100% bonus plan.
ii) Labour cost per unit for the whole week.
iii) Conversion cost per unit for the whole week.
Example 4
A company deals in two products i.e., product A and product B. 189 units of product A would be produced
by Mr. Kashif and 204 units of product B would be produced by Ali during the week.
Each worker is paid basic wages rate of Rs. 27 per hour and normal working week is 42 hours. Overtime hours
are paid at a time plus one-third. Standard time per unit is 20 minutes for product A and 15 minutes for
product B respectively. Bonus is paid at the rate of 50% of time saved.
Mr. Kasif produced 189 units of product A within 45 hours, Mr. Ali produced 204 units of product B within
39 hours and 3 hours of Ali were registered as idle time due to machine breakdown.
Due to defective material, 6 units of product A and 4 units of B found defective and company plans to sell as
scrap.
Required:
(i) Calculate gross wages cost of Mr. Kashif and Mr. Ali separately.
(ii) Calculate gross wages cost per good unit made.

1.3) – Computation of unit-based wages cost 1.3.1)

Straight (Flat) piece Rate system
Straight Piece Rate System is a type of wage system which is known as payment by result. In this method of
giving wages, wage is offered based on employees output (efficiency of the worker) rather than the time
involved in doing the work i.e. here the employees are paid based on the quantity of work that they
perform.

1.3.2) Straight piece Rate system with Guaranteed wages

 CHAPTER 5: ACCOUNTING FOR LABOUR
Under this method the employee is paid an agreed amount for each COST
unit of output completed or for each task
carried out. Output units per hour may also be an agreed upon number that is referred to as “standard hour
produced”. It is also normal under piecework scheme that the employees get a guaranteed minimum wage
regardless of the number of units produced. This safeguards them from loss of earnings when the production
is low and is not on account of their own fault.
Higher of
i) Unit based wages = Units produced x Wages rate per unit
ii) Guaranteed wages
1.3.3) Differential piece Rate system with guaranteed wages
Taylor's differential piece-rate system posits that the worker who exceeds the standard output within the
stipulated time must be paid a high rate for high production. On the other hand, the worker is paid a low rate
if he fails to reach the level of output within the standard time.

Example 5
During the first week of May, Mr. Ahsan produced 300 units. He receives guaranteed wages for 48 hours
week at the rate of Rs. 4 per hour. Standard time to produce one unit is 15 minutes.
Required: Calculate gross wages cost according to:
i. Straight piece rate system of Rs. 1 per unit
ii. Straight piece rate system of Rs. 1.2 per unit with guaranteed wages

Example 6
Alpha limited provided following data for ascertaining the wages cost of workers, Rashid, Wasim and
Junaid. Company has a policy to pay normal hourly wages of Rs. 500 per hour or Rs. 5 per unit with
standard production rate of 100 units per hour. Workers are entitled under following plan:
▪ Efficiency up to 83.33% Normal piece rate
▪ Efficiency above 83.33 % to 100% 110% of normal piece rate
▪ Efficiency above 100% 120% of normal piece rate
Mr. Rashid, Mr. Wasim and Mr. Junaid produced 680 units, 1,000 units and 480 units respectively in 8
hours a day.
Required: Calculate total gross wages cost of Mr. Rashid, Mr. Wasim and Mr. Junaid for a day.
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

LO 2: Computation of labour wages cost

2.1) Direct and indirect labour cost

Manufacturing
Organisation

Production Sales Admin.

(Factory) Dept. Dept.

Support Indirect Indirect

Production
Workers Labour Labour
Staff
cost cost

Indirect Labour Indirect

Direct Labour
Labour
cost cost
cost

Sr. Worker type Direct labour cost Indirect labour costs

No.
1 Indirect workers All wages payments to indirect employees
in factory in factory
2 Direct workers in ▪ Basic pay of ▪ Overtime premium for overtime hours
factory normal time ▪ Bonus cost
▪ Basic pay of ▪ Leaves with pay
overtime hours ▪ All allowances
Time spent away from production such as
• training of junior workers,
• cleaning of machines,
• repair of machines
• set up of machines
3 Sales Department All wages payments of sales and
Staff distribution staff
4 Administration All wages payments of managerial staff,
staff accountants, auditors etc.
✓ Direct labour cost of factory employees would be charged to WIP inventory account
✓ Indirect labour cost of factory employees would be debited to FOH account
✓ Indirect labour cost of sales staff would be debited to selling expense and admin staff would
be debited to admin expense.

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2.2) Journal entries

Following journal entries are recorded related to wages cost of workers:

Debit Credit
Date Particulars
(Rs.) (Rs.)
(i) Advance wages x
To Cash Account x
(Wages paid in advance)
(ii) Wages expense x
To Advance wages x
To Income tax payable x
To provident fund payable x
To Wages payable (balancing fig) x
(Recording of gross wages with deductions)
(iii) Wages payable X
To Cash Account x
(Wages paid to worker)
(iv) WIP inventory account x
FOH Account x
Selling expense x
Admin expense x
To wages expense x
(Distribution of gross wages recorded)
(v) FOH account
Selling expense x
Administration expense
To Provident fund payable x
(Employer’s contribution to provident fund)
LO 3: Labour wages cost (with learning effect)
3.1) Learning Curve effect
When a new product or task is started by worker, initially his/her performance remains relatively low
due to lack of experience but when worker performs same task repetitively then the learning
phenomenon takes place and time per unit reduces.
Learning curve effect has main impact on labour wages cost and some other costs (which are dependent
upon labour hours).
3.2) Assumptions of learning curve effect
(i) The amount of time required to complete a unit of a product or a given task will decrease
every time the task is undertaken.
(ii) The unit time will decrease at a decreasing rate, and
(iii) The time reductions will have a predictable pattern.

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 CHAPTER 3: ACCOUNTING FOR LABOUR COST

3.3) Total wages cost of labour

a) Without learning Curve effect
Wages cost = (Time per unit x Unit produced) x Wages rate per unit
b) With learning Curve effect
Wages cost = (Cumulative average time per unit x Units produced) x Wage rate per hour
Cumulative Average time per unit (Y)
Y = [Link]
where
Y = Cumulative average time per unit
a = Time of first unit
x = Cumulative output (Units)
b = index of learning (Log Learning rate ÷ Log 2)
Example 7
The time to make a first Chair is 24 hours. It has been established that in the chair manufacturing
industry, a 95% learning curve applies? You are required to complete following table:
Total Units Cumulative Average time per unit Cumulative total time of
Cumulative (Y = [Link]) All units
(x) (Average time per unit x Units)
1
First 2 units
First 4 units
First 8 units
Example 8
The time to assemble first Car is 60 hours. It has been established that in the car industry, a 90%
learning curve applies? You are required to complete following table:
Cumulative Cumulative Average time per unit Cumulative total time of
Units (Y = [Link]) All units
(x) (Average time per unit x Units)
1
First 5 units
First 20 units
First 30 units
Example 9
The time to construct first house is 800 hours. It has been established that in the construction industry,
a 95% learning curve applies? You are required to calculate time of:
▪ 5th house
▪ 7th house
▪ 12th house
▪ 18th house
Example 10
X Ltd. received an order to supply high quality 80 office chairs. The time to manufacture first office chair
is 20 hours with 85% learning curve application. Learning will apply up to first 30 chairs thereafter
learning will stop and time of 30th chair will be applicable to remaining all chairs. Wages rate is Rs. 25
per hour.
Required: Calculate total wages cost with learning effect?

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 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Example 11
Y Ltd. received an order to manufacture and supply 5,000 units that will be produced in batches of 500
each. Time to manufacture first batch is 12,000 hours with learning rate of 95%. Learning will apply up
to first 7 batches and thereafter learning will stop. Time of 7 th batch will be applicable to remaining all
batches. Y Ltd. pays wages of Rs. 30 per hour.
Required: Calculate total wages cost of order with learning effect?

Example 12
ZLtd. received an order to manufacture 15,000 units which will be produced in batches of 1,000 each.
Time to manufacture first batch is 2,000 hours with learning rate of 95%. Learning will apply up to first
5 batches and thereafter learning will stop. Time of 5th batch will be applicable to remaining all batches.
Other related information is as follows:
▪ Labour wages rate is Rs. 30 per hour.
▪ Each unit would require material of 5 Kgs and supplier charges price at Rs. 20 per hour
▪ Variable production overheads rate is Rs. 10 per labour hour
Required: Calculate total variable production cost of order with learning effect?
Example 13
Time of first unit = 20 hours Time of 2nd Unit = 16 hours
Required: Calculate learning rate?

Example 14
Time of First unit = 24 hours Total time of 4 units = 77.76 hours
Required: Calculate learning rate?

4) – Decision Making for revised wages plan

Normally a company plans to revise its wages plan in order to:

• motivate workers
• increase efficiency of the workers;
• reduce cost of wages and other related costs.
Company has to decide whether revised plan should be implemented or not. Therefore, following three
steps are used:
Step 1 – Computation of wages and other related costs under present situation
Step 2 – Computation of wages and other related costs under proposed situations
Step 3 – Select the proposal where total cost is minimum.

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 CHAPTER 3: ACCOUNTING FOR LABOUR COST
PAST PAPER QUESTIONS
COMPUTATION OF LABOUR WAGES COST

Question 1 ICAP COST ACCOUNTING – D10 – SPRING 2003 – Q2

(a) Following is the labour data of a company for a given week:
Days Units Hours
Monday 270 8
Tuesday 210 8
Wednesday 300 8
Thursday 240 8
Friday 260 8
Required: You are required to prepare a schedule showing weekly earning, hourly rate, and the labour
cost per unit assuming a 100% bonus plan with a base wage of Rs. 6/- per hour and a standard
production rate of 30 units per hour. (06)
(b) What are the requirements for an incentive plan to be successful? (03)
Question 2 ICAP COST ACCOUNTING – D10 – AUTUMN 2003 – Q4
Following data pertains to a worker of a manufacturing industry:
Actual production 400 units
Working hours in a week 48 hours
Guaranteed rate per hour Rs.10
Estimated time to produce one unit 8 minutes
As an incentive the management has agreed to increase the time 20%
allowed per unit by
Required: Calculate the gross wages of the worker according to:
a) Piece work with a guaranteed weekly wage
b) Under Rowan premium bonus
c) Under Halsey premium bonus 50% to worker (09)
Question 3 ICAP COST ACCOUNTING – D10 –AUTUMN 2005 – Q3
A factory manufactures three components A, B and C.
During a week, the following was recorded:
Labour Number of Rate per hour Individual hours
grades employees Rs. worked
I 6 40 40
II 18 32 42
III 4 28 40
IV 1 16 44

Actual output and standard times are given below:

Component Output Standard minutes
per component
A 444 30
B 900 54
C 480 66

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 CHAPTER 3: ACCOUNTING FOR LABOUR COST
The normal working week is of 38 hours. Overtime is paid at a premium of 50% of the normal hourly
rate.
A group incentive scheme is in operation and a bonus is paid based on the time saved. The rate of
bonus payment is 75% of normal hourly rate. The time saved is allocated to each labour grade in
proportion to the number of hours worked by each group.
Required: Calculate the total payroll showing the basic pay, overtime premium and bonus pay for
each grade of labour. (12)
Question 4 ICAP COST ACCOUNTING – D10 –AUTUMN 2006 – Q5
Mid-way Services Limited received an urgent order for installation of 4 machines in a textile mill.
Immediately after receiving the order, the company deputed four engineers on the job. Each engineer
was responsible for installation of one machine. The standard time to complete this job was 50 hours.
It is the policy of the company to pay its engineers on job to job basis. The minimum amount the
company pays is based on standard hours. The payment is made at the rate of Rs. 100 per hour.
In order to speed up the installation work, the company offered the engineers ‘Time Saving Bonus’
(TSB) under which they would be entitled for the following incentives:
Percentages of time saved to time allowed TSB
0% to 10% 10% of time saved x hourly rate
11% to 20% 20% of time saved x hourly rate
20% to 30% 30% of time saved x hourly rate

In addition to the agreed amount, the customer has agreed to pay the company Rs. 150 for every hour
saved on installation of each machine.
The jobs were completed successfully and the time spent by each engineer is as follows:
Engineers A B C D
Hours spent 41 36 46 50
Required:
a) Calculate the total earning of each engineer and their earning per hour. (08)
b) Compute the net additional revenue earned by the company. (03)

Question 5 ICAP COST ACCOUNTING – D10 – SPRING 2008 – Q5

Ishaq Limited manufactures plastic bottles for pharmaceutical companies. It has recently introduced a
100% weekly group bonus plan with a guaranteed wage of Rs. 150 per hour. Standard production per
hour is 50 bottles. Each worker is supposed to work 8 hours a day from Monday to Friday and 5 hours
on Saturday. Presently, there are 20 workers who are entitled for this plan. Production for the first week
under the 100% bonus plan was:
Days Mon Tue Wed Thu Fri Sat
No. of bottles 8,700 7,350 9,750 7,500 8,950 4,550
Most of the workers have raised objection on the company’s bonus plan. They are of the view that
bonus calculation should be based on daily production instead of weekly production. The management
of the company has asked you to determine the impact of such a change.

Required: Prepare statements showing labour cost per unit under each of the two options. Give reasons
for the differences, if any. (10)

Question 6 ICAP COST ACCOUNTING – D10 –SPRING 2009 – Q2

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 CHAPTER 3: ACCOUNTING FOR LABOUR COST
The following information pertains to a week’s work for three employees of a company:
Employees L M N
Total hours worked 60 65 70
Hours of indirect work (included in total hours) 20 10 5
Basic hourly wage rate (Rs.) 60 80 50
Output in units 192 175 150
Time allowed per unit (hours) 0.25 0.4 0.60
Bonus is paid @ 60% of basic wage rate for all time saved. The normal working week is 45 hours. The
first five hours of overtime are paid at basic rate plus 40% and the rest at basic rate plus 60%.
Required: You are required to calculate the following for each employee.
a) Basic wages including overtime.
b) Amount of bonus earned and gross wages.
c) Direct wages per unit, when overtime is worked:
▪ due to labour shortage.
▪ Specifically, at the customer’s request, to expedite delivery. (15)
Question 7 ICAP COST ACCOUNTING – D10 –AUTUMN 2011 – Q2(b)
Mr. Lark works as a machinist on a machine running 54 hours a week. Following information pertains
to his last week’s work on the machine:
Total hours worked 51 hours
Overtime (included in total hours worked) 4 hours
Idle time due to machine break down 3 hours
Basic hourly wage rate 25

The overtime is paid at basic rate plus 45%.

Required: Calculate the total wages paid to Mr. Lark allocating it between direct and indirect labour.
Also give reasons for such allocation. (05)

Question 8 ICAP COST ACCOUNTING – D10 –AUTUMN 2012 – Q2

Jadeed Limited (JL) operates a multiple piece rate plan at its factory as follows:
i. Basic piece rate of Rs. 3 per piece is paid up to 80% efficiency;
ii. 120% basic piece rate where efficiency is more than 80% but less than or equal to 100%;
iii. 130% basic piece rate for above 100% efficiency.
The workers are eligible for a “Guaranteed Day Rate “which is equal to 70% efficiency.
Required:
Compute the labour cost per piece at 10% intervals between 60% and 130% efficiency, assuming that
at 100% efficiency 80 pieces are produced per day. (10)

Question 9 ICAP COST ACCOUNTING – D10 – SPRING 2014 – Q3

(a) The following information relates to a week’s work for three employees:
Employees
A B C
Output (units) 160 276 68
Time allowed (hours per unit) 0.5 0.25 0.75
Basic hourly wage rate (Rupees) 80 100 70
Hours worked as direct labour 48 54 30
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Hours worked as indirect labour -- -- 12
The normal working week is 42 hours. For the first six hours, overtime is paid at 50% above the normal
rate. Any further overtime is paid at double the normal rate. Bonus is paid at three-fifth of the normal
rate for the hours saved.

Required: Using the information given above, calculate the total wages earned by each employee.
(08)
(b) The following is a summary of payroll of LMN Factory Limited for the month of February 2014:
Rs.
Basic salary 420,000
Allowances 147,000
= Gross salary 567,000
Deductions:
Loan to staff (13,000)
Income tax (15,500)
Employees’ provident fund contribution (35,000)
= Net salary payable 503,500
The company is also required to pay the following:
▪ Company’s contribution to the provident fund which is equal to employees’ contribution
▪ 5% of the basic salary to a government organisation
Required: Pass journal entries to record the gross payroll cost with deductions & employer’s
contribution for the month of February 2014. (06)

Question 10 ICAP COST & MANAGEMENT ACCOUNTING – CAF8 – SPRING 2019 – Q8

Jasmine Limited (JL) manufactures various products according to customers' specifications In March
2019, JL is required to submit a tender for supply of 5,000 plastic bodies of a washing machine. In this
respect, following information has been gathered:
(i) The production would be carried out on JL’s plant at its Sialkot factory. Cost of the plant is Rs.
3,600,000. Its estimated useful life is 96,000 hours. Each plastic body (unit) would require 2
machine hours.
(ii) Production would be carried out in ten batches of 500 units each. Cost per unit for the first batch
has been estimated as under:
Rupees
Direct material 2 kg 150
Direct labour 3 labour hours 300
*Overheads (based on direct labour hours):
Variable overheads 240
Fixed overheads 360
*Overheads do not include depreciation of the plant
(iii) Direct material consumption would reduce by 5% in each subsequent batch up to the third batch
and would become constant thereafter.
(iv) Applicable learning curve effect is 95% but it will remain effective for the first six batches only. The
index of 95% learning curve is –0.074.
Required: Compute the bid amount that JL should quote to earn 30% contribution margin. (10)
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Question 11 ACCA F5 Question

Mic Co produces microphones for mobile phones and operates a standard costing system. Before
production commenced, the standard labour time per batch for its latest microphone was estimated to be
200 hours. The standard labour cost per hour is Rs. 12 and resource allocation and cost data were
therefore initially prepared on this basis.
Production of the microphone started in July and the number of batches assembled and sold each month
was as follows:
Month No of batches assembled and sold
July 1
August 1
September 2
October 4
November 8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production, a
learning effect of 88% was observed, although this finished at the end of October. The learning formula is
shown on the formula sheet and at the 88% learning rate the value of b is –0·1844245.
Required: Calculate monthly labour cost for producing microphones for each of the first five months from
July to November.
LABOUR DECISION MAKING

Question 12 ICAP Past Paper – Autumn 2009 (Q 6)

Toy Limited is engaged in the production of a single product. On the basis of past history, the management
has estimated the cost of production per unit, as follows:
Rs.
Rupees Raw material – 5 kg @ Rs. 40 per kg 200
Labour – 10 hours @ Rs. 25 per hour 250
Variable overheads – 60% of direct labour 150
600
The annual production requirement is 100,000 units.
The management has been deeply concerned with the performance of its labour as it has been witnessing
various inefficiencies. The industrial relations department has recently carried out a study under the
guidance of a consultant. It has put forward a plan whereby the company’s wage policy is to be revised as
under:
• Rate of wages would be increased by 12%.
• Workers who perform their tasks in less than the estimated time of 10 hours per unit would be
given a premium of Rs. 18 per hour saved.
The consultant is of the view that the following efficiencies can be brought about by introducing the above
change:
(i) Raw material input per unit includes wastage of 7%. It would reduce to 3% .
(ii) 70% of the workers would work more efficiently and improve their efficiency by 20%.
(iii) Overheads will be reduced to 55% of the revised cost of direct labour (including premium).
(iv) The quality of production will improve and the rate of rejection will be reduced from 4% to 3%.
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Rejected units are sold for Rs. 150 each.
Required: Determine whether it would be beneficial for the company to adopt the wage plan recommended
by the industrial relations department. (14)

Question 13 ICAP Past Paper – Spring 2022 – Q 3

Question 14 ICAP Past Paper – Spring 2011 (Q 3)

 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Question 15 ICAP Past Paper – Autumn 2022 (Q 3)

 CHAPTER 3: ACCOUNTING FOR LABOUR COST

SOLUTIONS
Question 11 ICAP MANAGEMENT ACCOUNTING – SUMMER 2016 – Q2
Example 1

Rs.
Basic pay
Basic pay of actual hours (60 hours x Rs. 50 per hour) 3,000
Add: Overtime premium
(12 hours x Rs. 50 per hour) x ½ 300
Add: Bonus cost
(15 hours x Rs. 50 per hour x 75%) 562.5
= Gross wages 3,862.5

(W1) Overtime
Overtime = Actual hours – Normal Working hours
= 60 hours – 48 hours = 12 hours
(W2) Time saved
Time saved = (Total time allowed – Total Actual time)
= [(9 minutes ÷ 60 minutes) x 500 units] – 60 hours
= 75 hours 60 hours = 15 hours
Example 2
Rs.
Basic pay
Basic pay of normal time (6,080 hours x Rs. 4.00 per hour) 24,320
Basic pay of Idle time (188 hours x Rs. 4 per hours) 752
Basic pay of overtime time (260 hours x Rs. 4 per hours) 1,040
26,112
Add: Overtime premium
Overtime premium (260 hours x Rs. 4 per hour x 35%) 364

Add: Bonus cost

Bonus cost (660 hours x Rs. 4 per hour x 45%) 1,188
= Gross wages 27,664
Deductions
Deductions (Rs. 27,664 x 30%) 8,299

Net wages cost (Rs. 27,664 – Rs. 8,299) 19,365

Gross wages cost per unit (Rs.. 27,664 ÷ 3,500 units) 7.904

(W1) Time Saved

Time saved = Total Time Allowed – Total actual time (used for production)
Time saved = (2 hours x 3,500 unit) – (6,528 hours – 188 hours)
Time saved =660 hours
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Example 3
(i) Daily earnings of employees
Mon. Tue Wed. Thu. Fri.
Basic pay
Actual hours 8 8 8 8 8
x No. of workers 11 11 11 11 11
= Total Actual hours 88 88 88 88 88
x Basic Rate per hour (Rs.) 30 30 30 30 30
= Basic pay 2,640 2,640 2,640 2,640 2,640

Bonus cost
Time saved (W1) 0 2 4 0 0
x Bonus Rate (%) 100% 100% 100% 100% 100%
x Basic rate per hour (Rs.) 30 30 30 30 30
0 60 120 0 0
= Gross wages cost 2,640 2,700 2,760 2,640 2,640

(W1) Time Saved

Mon. Tue Wed. Thu. Fri.

Time allowed per unit (1/50) 0.02 0.02 0.02 0.02 0.02
x Units produced 4,000 4,500 4,600 4,400 4,100
= Total time allowed 80 90 92 88 82
Less: Total Actual time (88) (88) (88) (88) (88)
= Time Saved 0 2 4 0 0

(ii) Labour cost per unit

Labour cost per unit = Rs. 13,380 ÷ 21,600 units = Rs. 0.62 per unit

(iii) Conversion cost per unit

Rs.
Labour cost per unit 0.62
FOH cost per unit
(Rs. 50 per hour x 440 hours) = Rs. 22,000 Total FOH ÷ 21,600 units 1.02
1.64
Example 4
Kashif Ali
(Rs.) (Rs.)
Basic pay
Basic pay of actual hours: (45 hours x Rs. 27), (42 hours x Rs. 27) 1,215 1,134
Overtime premium
(3 hours x Rs. 27 x 1 ÷ 3), (0 hours x Rs. 27 x 1 ÷ 3) 27 -
Bonus cost
(18 hours x Rs. 27 x 50%), (12 hours x Rs. 27 x 50%) 243 162

Gross wages 1,485 1,296

= Gross wages per unit (Rs. 1,485 ÷ 183 units), (Rs. 1,296 ÷ 200 units) 8.11 6.48
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

(W1) Time saved

Kashif Ali
Total standard time Hours Hours
(189 units x 20 minutes ÷ 60 minutes) 63
(204 units x 15 minutes ÷ 60 minutes) 51
Less: Actual time (45) (39)
18 12
Example 5
i) Straight price rate system.
Gross wage cost = Units produced x Wages rate per unit
Gross wages cost = 300 units x Rs. 1.00 per unit = Rs. 300
ii) Straight price rate with guaranteed wages of 48 hours.
a) Units based wages: Gross wages cost = 300 units x Rs. 1.20 = Rs. 300
b) Guaranteed time-based wages: Gross wages = 48 hours x Rs. 4.00 per hour = Rs. 192
Higher of (a) or (b) will be paid

Example 6
Rashid Wasim Junaid
Time allowed per unit (1/100) 0.01 0.01 0.01
x Units produced 680 1,000 480
= Total time allowed 6.8 10 4.8
Total actual time ÷8 ÷8 ÷8
= Efficiency Ratio (Time allowed/Actual time) 85% 125% 60%

Piece rate (% of normal rate) 110% 125% 100%

Normal rate per unit Rs. 5 Rs. 5 Rs. 5
x Units produced 680 1,000 480
= Gross wages cost (Rs.) 3,740 6,250 2,400

Example 7
Total Units Cumulative Average time per Cumulative total time of Incremental time
Cumulative unit All units hours
(x) (Y = [Link]) (Average time per unit x Units)
A b C=Axb
1 24 hours 24 hours x 1 unit 24
First 2 units 24 x 2 -0.0740 = 22.8 hours p.u 22.80 x 2 units =45.60 hour 45.60- 24 = 21.60
First 4 units 24 x 4 -0.0740
= 21.66 hours p.u 21.66 x 4 units = 86.6 hours 86.6 – 45.6 = 41.0
First 8 units 24 x 8 -0.0740
= 20.577 hours p.u 20.577 x 8 units = 164.6 hours 164.6 – 86.6 = 78
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Example 8
b = log r ÷ log 2
= log 0.9 ÷ log 2 = -0.152
Total Units Cumulative Average time Cumulative total time of Incremental
Cumulative per unit All units time hours
(x) (Y = [Link]) (Average time per unit x Units)
1 60 hours
1st 5 units 60 x 5-0.152 = 58.55 hours 5 x 58.55 hours = 292.75 hours
1st 20 units 60 x 20-0.152 = 38.5350 hours 20 x 58.55 hours = 761.0 hours
1st 30 units 60 x 30-0.152 = 35.7790 hours 30 x 58.55 hours = 1,073.37 hours

Example 9
a)
Total Units Cumulative Average time per Cumulative total time Incremental time
Cumulative unit of All units (hours) hours
(x) (Y = [Link])
4 houses 800 x 4 -0.074
= 722.0006 2,888.0024
5 houses 800 x 5 -0.074
= 722.0006 3,550.882 3550.882 - 2,888.0024
= 662.8792

b)
Total Units Cumulative Average time per Cumulative total time Incremental time
Cumulative unit of All units (hours) hours
(x) (Y = [Link]) (Average time per unit x
Units)
-0.074
6 houses 800 x 6 = 700.6591 4,204
7 houses 800 x 7 -0.074
= 692.712 4,849 4,849 – 4,204 = 645

c)
Total Units Cumulative Average time per Cumulative total time Incremental time
Cumulative unit of All units (hours) hours
(x) (Y = [Link]) (Average time per unit x
Units)
11 houses 800 x 11 -0.074
= 669.9261 7,369.18
12 houses 800 x 12 -0.074
= 665.6264 7,987.51 7,987.51 – 7,369.18
= 618.32

d)
Total Units Cumulative Average time per Cumulative total time Incremental time
Cumulative unit of All units (hours) hours
(x) (Y = [Link])
17 houses 800 x 17 -0.074
= 648.6893 11,027.72
18 houses 800 x 18 -0.074
= 645.9513 11,627.12 11,627.12 – 11,027.72
= 599.40

Example 10
a = 20 hours
x = 80 units
b = log 0.85 ÷ log 2 = - 0.2345
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Total Units Cumulative Average Cumulative total time Incremental time

Cumulative time per unit of All units (hours) hours
(x) (Y = [Link])
29 chairs 20 x 29 -0.2345
= 9.0802 263.3258
30 chairs 20 x 30 -0.2345
= 9.0083 270.249 270.249 – 263.3258
= 6.9232

Hours
First 30 chairs 270.249
Next 50chairs @ 6.9232 hours 346.16
Total time of 80 chairs 616.65

Wages cost = 616.65 hours x Rs. 25 per hour Rs. 15,416.25

Example 11
a = 12,000 hours
b = log 0.95 ÷ log 2 = -0.0740
Total Units Cumulative Average time Cumulative total Incremental time
Cumulative per batch time of All units hours
(x) (Y = [Link]) (hours)
6 batches 12,000 x 6 -0.074 = 10,509.89 63,059.34
7 batches 12,000 x 6 -0.074 = 10,390.68 72,734.76 72,734.76 – 63059.64
= 9,675.42

Total time
Hours
First t batches 72,734.76
Add: Next 3 batches @ 9,675.42 hours 29,026.26
Total time 101,761.02

Total wages
Rs.
Wages cost = 101,761.02 hours x Rs. 30 per hour = 3,052,830.6
Example 12
Variable production cost of 15,000 units (15 batches)
Rs. 000
Direct material cost
(5kg per unit x Rs. 20 per kg) x 1,000 units x 15 batches 1,500.00
Add: Direct labour cost (W1) 763.48
Add: Variable FOH cost 254.49
Total variable production cost 2,517.97
(W1)
Total Units Cumulative Average time per Cumulative total time Incremental time
Cumulative batch of All units (hours) hours
(x) (Y = [Link]) (Average time per unit x
Units)
4 batches 2,000 x 4 -0.074
= 1,805 7,220
5 batches 2,000 x 5 -0.074
= 1,775.44 8,877.2 8,877.2 – 7,220 = 1.6

Total time
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Hours
First 5 batches 8,877.2
Add: Next 10 batches @ 1,657.2 hours 16,572
Total time 25,449.2

Total wages
Rs.
Wages cost = 25,449 hours x Rs. 30 per hour 763,476
Example 13
Learning Rate
a = Time for 1st unit = 20 hours
x = Cumulative units = 2 units
y = Cumulative average time per unit = (20 hours + 16 hours) ÷ 2 = 18 hours per unit
b = log LR ÷ Log 2
LR = Learning rate = ?
Y = axb
18 = 20 x (2)b
18/20 = (2)b
0.90 = (2)b
Take log of both sides to find value of b
log 0.90 = b log 2
-0.04576 = b x 0.30103
b = -0.04576 ÷ 0.30103 = -0.15200
now expand the b
b = log LR
÷ log 2
-0.1520 = Log LR ÷ log2
log LR =0.1520 x log 2 = -0.04757
Now take anti log on both sides to find LR
LR = 0.900 = 90%
Example 14
Learning Rate
a = Time for 1st unit = 24 hours
x = Cumulative units = 4 units
y = Cumulative average time per unit = 77.76 ÷ 4 = 19.44 hours per unit
b = log LR ÷ Log 2
LR = Learning rate =?
Y = axb
19.44 = 24 x (4)b
19.44/24 = (4)b
0.81 = (4)b
Take log of both sides to find value of b
log 0.81 = b log 4
-0.09151 = b x 0.60206
b = -0.09151 ÷ 0.60206 = -0.151995
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
now expand the b
b = log LR
log 2
-0.151995 = Log LR ÷ log 2
log LR =-0.151995 x log 2 = -0.04757
Now take anti log on both sides to find LR
LR = 0.900 = 90%
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Question 1 ICAP COST ACCOUNTING – D10 – SPRING 2003 – Q2

Weekly Earnings of Worker

Rs.
Basic pay
= Total actual hours x wages rate per hour
= 8 hours x 5 days = 40 hours x Rs. 6 per hour 240.00

Efficiency Bonus payment

= Time saved x wages rate per hour x Bonus rate
= 2.67 hours (W1) x Rs. 6 per hour x 100% 16.02

Total Wages cost 256.02

Wages cost per hour = Rs. 256.02 ÷ 40 hours = Rs. 6.40 per hour
Wages cost per unit = Rs. 256.02 ÷ 1,280 units = Rs. 0.20 per unit
(W1) Time Saved
Standard production per hour = 30 units
Standard timer per unit = 1 hour ÷ 30 units =
Time saved = Total standard time for actual production – Total actual time
= (1 hour ÷ 30 units) x 1,280 units – 40 hours
= 42.67 hours – 40 hours = 2.67 hours
Question 2 ICAP COST ACCOUNTING – D10 – AUTUMN 2003 – Q4
a) Piece work with a guaranteed weekly wage
b) Units based wages: Gross wages cost = 400 units x Rs. 1.60 = Rs. 640
c) Guaranteed time-based wages: Gross wages = 48 hours x Rs. 10 per hour = Rs. 480
Higher of (a) or (b) will be paid
d) Under Rowan premium bonus
Rs.
Basic pay (48 hours x Rs. 10 per hour) 480
Time saved x wages rate x (Actual time ÷ standard time)
16 hours x Rs. 10 (48 hours ÷ 64 hours) 120
600
e) Under Halsey premium bonus 50% to worker
Rs.
Basic pay (48 hours x Rs. 10 per hour) 480
Bonus: (Time saved x wages rate x Bonus %
16 hours x Rs. 10 x 50% 80
560
(W1) Time saved
Hours
Total standard time for actual production
(400 units x 9.6 minutes ÷ 60 minutes) 64
Less: Total Actual time (48)
16
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Question 3 ICAP PAST PAPER AUTUMN 2005 – Q3

Grade I Grade II Grade III Grade IV

Basic pay
Individual actual hours 40 42 40 44
x No. of workers 6 18 4 1
= Total actual hours of group 240 756 160 44
x Basic wage rate per hour (Rs.) 40 32 28 16
= Basic pay (Rs.) (A) 9,600 24,192 4,480 704
Overtime premium
Overtime hours 12 72 8 6
x Basic wage rate per hour (Rs.) 40 32 28 16
x Premium rate (Rs.) 50% 50% 50% 50%
= Overtime premium (Rs.) (B) 240 1,152 112 48
Bonus cost
Time saved (W2) 72 226.8 48 13.2
x Basic wage rate per hour (Rs.) 40 32 28 16
x Bonus % 75% 75% 75% 75%
= Amount of Bonus ( C) 2,176 5,448 1,008 185.4
=Total payroll (A+B+C) 12,000 30,792 5,600 910.4
(W1) Overtime hours
Grade I Grade II Grade III Grade IV
Actual hours 40 42 40 44
Less: Normal working hours (38) (38) (38) (38)
= Overtime (hours) 2 4 2 6
x No. of employees 6 18 4 1
= Total overtime for group (hours) 12 72 8 6
(W2) Time saved
Hours
Total Time allowed for actual production
(30 minutes ÷ 60 minutes x 44 units) +(54 minutes ÷ 60 minutes x 900
units) + (66 minutes ÷ 60 minutes x 480 units) 1,560
Less: Total actual hours (240 hours + 756 hours + 160 hours + 44 hours) (1,200)
360 hours

Question 4 ICAP PAST PAPER AUTUMN 2006 – Q5

(i)
A (Rs.) B (Rs.) C (Rs.) D (Rs.)
Basic pay
Basic pay (50 hours x Rs. 100) 5,000 5,000 5,000 5,000
Add: Bonus (W1) 180 420 40 0
Gross wages 5,180 5,420 5,040 5,000
÷ Hours 41 36 46 50
Gross wage per hour (Rs.) 126.34 150.56 109.57 100
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

ii) Net a dditional revenue

Rs.
Additional revenue due to time saved
(Rs. 150 per hour x 27 hours) 4,050
Less: Bonus payment to engineers (Rs. 180 + Rs. 420 + Rs. 40) (640)
= Net additional revenue 3,410
(W1) Bonus
A B C D
Standard hours 50 50 50 50
Less: Actual time (41) (36) (46) (50)
= Time saved E 9 14 4 0
Bonus % F 20% 30% 10% 0
Rate (Rs.) G 100 100 100 100
= Bonus Rs. H = (E x F x G) 180 420 40 0

Question 5 ICAP PAST PAPER SPRING 2008 – Q5

Labour cost per unit
Weekly (Rs.) Daily (Rs.)
Total gross wages cost (W1) & (W2) 140,400 145,200
÷ units produced 46,800 46,800
= Labour cost per unit Rs. 3 Rs. 3.10

W1) Total weekly wages cost

Basic pay Rs.
Total actual hours x Basic wage rate per hour
(45 hours x 20 workers) x Rs. 150 per hour 135,000
Bonus cost
Time saved x Basic wage rate per hour x Bonus %
(36 hours (W1.1) x Rs. 150 x 100% 5,400
140,400

(W1.1)
Hours
Total standard time for actual production
[(1 hour ÷ 50 bottles) x 46,800 units] 936
Less: Total actual time per week (900)
Time save 36

(W2) Total Daily wages cost

Mon. Tue. Wed. Thu. Fri. Sat.
Basic pay
Total actual hours 160 160 160 160 160 100
x Basic wage rate per hour (Rs.) 150 150 150 150 150 15
Basic pay 24,000 24,000 24,000 24,000 24,000 15,000
Total Basic pay = Rs. 135,000
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Mon. Tue. Wed. Thu. Fri. Sat.

Bonus cost
Time saved hours 14 0 35 0 19 0
x Basic rate per hour 150 150 150
Bonus % 100% 100% 100%
= Bonus cost 2,100 5,250 2,850
Total Bonus cost = Rs. 10,200
(W 2.1) Daily time saved
Mon. Tue. Wed. Thu. Fri. Sat.
Time allowed per unit (hour) 0.02 0.02 0.02 0.02 0.02 0.02
x units produced 8,700 7,350 9,750 7,500 8,950 4,550
= Total allowed time 174 147 195 150 129 91
Less: Total actual time (160) (160) (160) (160) (160) (160)
= Time saved 14 0 35 19 0

Question 6 ICAP COST ACCOUNTING – D10 –SPRING 2009 – Q2

L M N
Rs.
Basic pay
Total Actual hours x Basic wages rate per hour
(60 hours x Rs. 60) (65 hours x Rs. 80) (70 hours x Rs. 50) – (A) 3,600 5,200 3,500

Overtime premium cost

First 5 hours of overtime -- 5 5
x Premium rate 40% 40%
X Basic rate per hour 80 50
= Overtime premium cost of first 5 hours (Rs.) – (B) 0 160 100

Remaining hours of overtime 5 15

x Premium rate 60% 60%
x Basic rate per hour 80 50
= Overtime premium cost of remaining hours (Rs.) – (C) 240 450

Bonus cost
Time saved 8 15 25
x Bonus rate 60% 60% 60%
x Basic rate per hour (Rs.) 60 80 50
= Bonus cost (Rs. ) – (D) 288 720 750

= Gross wages cost 3,672 6,080 4,600

÷ No. Of units produced ÷ 192 ÷ 175 ÷ 150
= Gross wages per unit 19.125 34.74 30.67
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

(W1) Overtime hours

L M N
Actual hour worked 60 65 70
Less: Hours of indirect work (20) (10) (5)
= Actual hours worked on production 40 55 65
Less: Normal working hours (45) (45) (45)
= Overtime hours 0 10 20
(W2) Time saved
A B C
Units produced 192 175 150
Time required per unit (hours) 0.25 0.4 0.7
48 70 90
Less: Actual hours worked on production (40) (55) (65)
Time saved / (Idle time) [hours] 8 15 25

Question 7 ICAP COST ACCOUNTING – D10 –AUTUMN 2011 – Q2(b)

Basic pay Rs.
Normal hours: (47 hours x Rs. 25 per hour) 1,175
Idle time (3 hours x Rs. 25) 75
Overtime (4 hours x Rs. 25) 100
1,350
Overtime Premium
(overtime hours x Rate per hour x Overtime Premium %)
(4 hours x Rs. 25 x 45%) 45
Gross wages 1,395

Question 8 ICAP COST ACCOUNTING – D10 – AUTUMN 2012 – Q2

Efficiency rate 60% 70% 80% 90% 100% 110% 120% 130%
Units 48 56 64 72 80 88 96 104
Wage rate per unit Rs. 3 Rs. 3 Rs. 3 Rs.3.6 3.6 3.9 3.9 3.9
Wages cost (Rs.) 144 168 192 259.2 288 343.2 374.4 405.6
Guaranteed wages 168 168 168 168 168 168 168 168

Higher of (a) (b) 168 168 192 259.2 288 343.2 374.4 405.6
÷ Units 48 56 64 72 80 88 96 104
Labour cost per unit 3.50 3.00 3.00 3.60 3.60 3.90 3.90 3.90

Question 9 ICAP COST ACCOUNTING – D10 – SPRING 2014 – Q3

A B C
Basic pay
Normal hours (Normal hour x Rate per hour)
(42 hours x Rs. 80), (42 hours x Rs. 80), (42 hours x Rs. 80) 3,360 4,200 2,940
Overtime (6 hours x Rs. 80), (6 hours x Rs. 100) 480 1,200
3,840 5,400 2,940
Overtime premium cost
First 6 hours: (6 hours x Rs. 80 x 50%), (6 hours x Rs. 100 x 50%) 240 300
2nd 6 hours: (6 hours x Rs. 100 x 100%) 600
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Bonus premium (W2)
(32 hours x Rs. 80 x 3/5), (15 hours x Rs. 100 x 3/5), (21 hours x Rs. 1,536 900 882
70 x 3/5)
5,616 7,200 3,822

(W1) Overtime premium hours

A B C
Actual hour worked 48 54 42
Less: Standard hours worked (42) (42) (42)
6 12 -

(W2) Time saved

A B C
Units produced 160 276 68
Time required per unit (hours) 0.5 0.25 0.75
80 69 51
Less: Actual hours worked (48) (54) (30)
Time saved (Hours) 32 15 21

B) Journal entries
Date Particular Dr. Cr.
Rs. Rs.
Salaries 420,000
Allowances 147,000
To Loans to staff 13,000
To Staff income tax payable 15,500
To provident fund payable 35,000
To Salary payable 503,500
(Payroll for the month of February 2017)
Co’s contribution to provident fund 35,000
To Provident fund payable 35,000
(Co’s contribution to provident fund for February)
Contribution to the Govt. Organization 21,000
To Account payable Govt. Organization 21,000
(Payable Govt. Organization @ 5% of basic salary)

Question 10 ICAP COST & MANAGEMENT ACCOUNTING – CAF8 – SPRING 2019 – Q8

Rs. 000
Direct material cost (W1)
(5kg per unit x Rs. 20 per kg) x 1,000 units x 15 batches 687.75
Add: Direct labour cost (W2) 1,278.06
Add: Variable FOH cost other than depreciation
(Rs. 80 per hour x 1,2870.6 hours 1,022.448
Add: Depreciation (W3) 375
= Total variable cost 3,363.258
Add: Contribution margin (30% of sales) 1,441.396
= Sale price (Bid price) 4,804.64
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Kgs
Material per unit = 2.00
1st batch (2kg per unit x 500 units) 1,000
2nd batch (1,000 kgs x 0.95) 950
3rd batch (950 kgs x 0.95) 902.5
4th – 10th batch (902.5 kgs x 7 batches) 6,317.5
Total material consumption 9,170
Rs.
Material cost = (9,170 kgs x Rs. 75 kg) 687,750

(W2)
Total Units Cumulative Average time per Cumulative total Incremental time
Cumulative batch time of All units hours
(x) (Y = [Link]) (hours)

5 batches 1,500 x 5 -0.074

= 1,331.58 6,657.9
6 batches 1,500 x 6 -0.074
= 1,313.74 7,882.44 7,882.44 – 6,657.9
= 1,224.54

Total time
Hours
First 6 batches 7,882.44
Add: Next 10 batches @ 1,657.2 hours 4,896.16
Total time 12,780.6

Total wages
Rs.
Wages cost = 12,780.6 hours x Rs. 100 per hour 1,278,060

(W3) Total Depreciation

Depreciation per hour = (Rs. 3,600,000 - Rs. 0) ÷ 96,000 machine hours
= Rs. 37.5 per machine hours
Depreciation cost = Rs. 37.5 per machine hour x 2 machine hours = Rs. 75 per unit
Total depreciation of 5,000 unit = Rs. 75 x 5,000 units = Rs. 375,000
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Question 11 ACCA F5 Question

Mon. Cumulative Cumulative Cumulative Increment Incremental time

No. of average total time No. of
batches time per batches
batch
July 1 200 200 1 200
Aug 2 176 352 1 352 – 200 = 152
Sept 4 154.88 619.52 2 619.52 – 352 =267.52
Oct 8 136.294 1090.352 4 1090.352 – 619.52 =470.832
7 139·693 977.851 8th 1090.352 – 977.851 =112.501
Total labour hours of last 8 batches in November without learning
= 112.501 x 8 = 900.008 hours
Actual labour cost for each month
Mon. Wages cost
July 200 hours x Rs. 12 = Rs. 2,400
Aug 152 hours x Rs. 12 = Rs. 1,824
Sept 267.52 hours x Rs. 12 = Rs. 3,210
Oct 470.832 hours x Rs. 12 = Rs. 5,650
Nov 900.008 hours x Rs. 12 = Rs. 10,800

Question 12 ICAP PAST PAPERS – AUTUMN 2009 (Q 6)

Evaluation of proposed revised wages plan
Total cost Present plan Proposed plan
(Rs.’000) (Rs.’000)
Material cost (W2) 20,833 19,768
Labour cost (W3) 26,042 27,423
Variable overheads cost @ 60% or 55% of LC 15,625 15,083
Scrap value of rejected units @ Rs. 150 per unit (W1) (625) (464)
= Total cost (net of scrap) 61,875 61,810
Saving in cost = 61,875,000 – 61,810,000 = Rs. 65,000 (approx.)
Recommendation: Company should revise its wages plan due to saving in cost.
(W1) Rejected units of finished product
Present Proposed
% Units % Units
Good units required 96 100,000 97 100,000
Add: Rejected units 4 4,167(?) 3 3,093(?)
= Total production required 100 104,167 100 103,093
Rejected units under present plan = 100,000 units x 96/100 = 4,167 units
Rejected units under proposed plan = 100,000 units x 97/100 = 3,093 units
(W2) Material cost
Present Proposed
% Kgs % Kgs
Material used on complete unit 93 4.65 (?) 97 4.65
Add: Material loss 7 0.35 3 0.14
= Material purchased and used 100 5.00 100 4.7938(?)
 CHAPTER 3: ACCOUNTING FOR LABOUR COST

Material cost under present plan = Rs. 200 per unit x 104,167 units = Rs. 20,833,400
Material cost under proposed plan = Rs. 40 per kg x 4.7938 kgs per unit x 103,093 units
= Rs. 19,768,289
(W3) Labour cost
Labour cost under present plan = Rs. 250 per unit x 104,167 units = Rs. 26,041,750
Labour cost under proposed plan
Labour time = (8 hoursx70%x103,093 units) + (10 hours per unitx30%x103,093 units) = 886,600 hours
Time saving = 2 hours x 70% x 103,093 units = 144,330 hours

Basic pay = 886,600 hours x Rs. 25 per hour x 112% = Rs. 24,824,400
Premium for time saved = 144,330 x Rs. 18 per hour= Rs. 2597,940
Total labour cost under proposed plan = Rs. 24,824,400 + Rs. 2,597,940 = Rs. 27,422,740
Question 13 ICAP Past Paper – Spring 2022 – Q 3
Evaluating the use of substitute labour
Substitute Existing
Description Labour Labour
(Rs.) (Rs.)
Direct material cost
(Rs. 100 per Kg x 4.04 Kgs per unit) x 125,000 units 50,500,000
(Rs. 100 per Kg x 4 Kgs per unit) x 123,711 units 4,948,440
+ Direct labour cost
(Rs. 200 per hour x 1.5 labour hours per unit) x 125,000 units 37,500,000
(Rs. 214 per hour x 1.41 labour hours per unit) x 123,711 units 37,328,557
(Rs. 70 per hour 0.09 labour hours per unit) x 123,711 units 779,379
+ Variable overheads cost
(Rs. 125 per unit x 125,000 units), (Rs. 125 per unit 123,711 units) 15,625,000 15,463,875
- Scrap of rejected finished goods @ Rs. 300 per month (1,500,000) (1,113,300)
= Total Cost 102,125,000 57,406,951
Decision: Usage of substitute labour is not recommended due to higher total cost.
(W1) Production units
Substitute Existing
% Units % Units
Good units required 96% 120,000 97% 120,000
+ Rejected units 4% 5,000 3% 3,711
Total production units 100% 125,000 100% 123,711
(W2) Material usage per unit
Substitute Existing
% Kgs % Kgs
Material on each complete unit 95% 3.84 96% 3.84
+ Material loss 5% 0.20 4% 0.16
= Total material usage (input) 100% 4.04 100% 4 Kgs
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
Question 14 ICAP Past Paper – Spring 2011 (Q 3)
Evaluation of revised wages plan
Conversion cost under current wages plan Rs.’000
Basic Pay (Rs. 42 per hour x 60,000 Actual total hours) 2,520
+ Overtime Premium (10,000 hours x 75% x Rs. 42 per labour hour) 315
= Total wages cost 2,835
+ Variable overheads cost (Rs. 75 per labour hour x 60,000 hours) 4,500
= Current conversion cost 7,335

Conversion cost under option 1 Rs.’000

Basic Pay (Rs. 72 per units x 40,000 units) 2,880
+ Overtime Premium -
= Total wages cost 2,880
+ Variable overheads cost (Rs. 75 per labour hour x 50,000 hours) 3,750
= Conversion cost under option 1 6,630

Conversion cost under option 2 Rs.’000

Basic Pay (Rs. 48 per hour x 1.4 hours per unit x 40,000 units) 2,688
+ Overtime Premium
144
(10,000 hours x 40% = 4,000 hours x 75% x Rs. 48 per hour)
= Total wages cost 2,832
+ Variable overheads cost (Rs. 75 per labour hour x 54,000 hours) 4,050
= Conversion cost under option 2 6,882
Decision: Company should revise wages plan and should implement option 2.
(W1) Overtime hours
Overtime hours Hours
Total Actual hours worked 60,000
Less: Normal working hours (200 hours x 250 workers) (50,000)
= Total overtime hours 10,000
(W2) Total actual hours (TAH) under option 1
Total Standard hours for actual production
Efficiency ratio =
Total actual hours

Total standard hours (TSH)

Current: 0.65 = TSH = 39,000 hours
60,000 hours

39,000 hours
Option 1: 0.78 = Total AH = 50,000 hours
Total actual hours
 CHAPTER 3: ACCOUNTING FOR LABOUR COST
(W2) Total actual hours (TAH) under option 2
Overtime hours = Total actual hours – Normal working hours
4,000 hours = Total actual hours – 50,000 hours
Total actual horus = 50,000 + 4,000 = 54,000 hours
Question 15 ICAP Past Papers – Autumn 2022 (Q 3)
Evaluation of revised wages plan
Conversion cost under current wages plan Rs.’000
Basic Pay (Rs. 150 per hour x 3 hours per unit x 30,000 units) 13,500
+ Overtime Premium (20,000 hours x Rs. 100 per labour hour) 2,000
= Total wages cost 15,500
+ Variable overheads cost (Rs. 120 per labour hour x 90,000 hours) 10,800
= Current conversion cost 26,300
(W1) – Overtime hours under current situation
Overtime hours = Current actual hours – Normal working hours
Overtime hours = (3 hours per unit x 30,000 units) – (200 hours x 350 workers)
Overtime horus = 90,000 hours – 70,000 hours = 20,000 hours
Note: It is assumed that standard hours and actual hours per unit are same.
Conversion cost under option 1 Rs.’000
Basic Pay (Rs. 500 per units x 30,000 units) 15,000
+ Overtime Premium -
= Total wages cost 15,000
+ Variable overheads cost (Rs. 120 per labour hour x 76,500 hours) 9,180
= Conversion cost under option 1 24,180
(W2) – Actual labour hours under option 1
Actual hours = 90,000 hours x 85% = 76,500 hours
Conversion cost under option 2 Rs.’000
Basic Pay (Rs. 150 per hour x 83,700 hours) 12,555
+ Overtime Premium (13,700 hours x Rs. 100 per hour) 1,370
+ Bonus cost (30,000 units x 70%) x Rs. 50 per unit 1,050
= Total wages cost 14,975
+ Variable overheads cost (Rs. 120 per labour hour x 83,700 hours) 10,044
= Conversion cost under option 2 25,019
(W3) – Actual hours under option 2
Actual hours = (30,000 units x 30% x 3 hours) + (30,000 units x 70% x 3 hours x 90%)
Actual hours = 27,000 hours + 56,700 hours = 83,700 hours
Decision: Option 1 is preferrable because it has lowest cost.