ACCOUNTING FOR LABOUR
4.1 INTRODUCTION
At the end of the topic students
should be able to;
Ø
Distinguish between direct and indirect labor
Ø
Recording of labour
Ø
Remuneration systems
Ø
Incentive schemes
Labor is the cost related to a use
of human resources employed by the business.
The cost considered is Remuneration and fringe benefits;
Ø
Remuneration
refers to that which is regularly paid including basic wages, overtime, various
allowances and bonus.
Ø
Fringe
benefits are those which are not paid regularly including subsistence
allowances, training costs and medical allowances.
4.2 DIRECT AND INDIRECT LABOUR COSTS
Ø
Direct
labor cost: Cost of employees who are directly involved in the production
process e.g. wages of machine operators.
Ø
Indirect
labor cost: labor cost of all employees in the factory who are not directly
involved in the production process and not economically feasible to trace labor
cost to specific unit. e.g. wages of supervisors and Storekeepers
4.3 METHODS OF REMUNERATION
There are two main categories of
remuneration methods;
Ø
Time based method
Ø
Output or performance related methods
4.3.1 TIME
BASED METHOD
This is the method of remuneration
based on the time spent by an employee on the work. There are three main types
of time based method:
Ø
Flat time rates
Ø
High day rate
Ø
Measured day rate
a) Flat Time Rate
Ø
This is the basic system where employees are
paid for the number of hours worked at a basic rate per hour.
Ø
If employees work beyond the normal working
hours they are paid at higher rate (overtime premium).
Ø
Remuneration=
Hours worked x rate per hour
Advantages:
Ø
Simplicity
Ø
Encourages quality Weaknesses:
Ø
Danger of creation of slacks in order to spend
more time and get overtime premium
Ø
Demoralize hard working employees
Ø
Requires close supervision
b) High Day Rate Method
Ø
Incentive for high performance is provided by
paying a higher rate than the basic pay rate.
Ø
Demands high standards of performance and
special interest and effort in the work. Ø Overtime
work is not encouraged.
Ø
High wages attracts good workers
Ø
Promotes efficiency
Ø
Simple to understand
Ø
Requires close supervision
Ø
May cause other employers to raise rates to
attracts good workers, the benefits may not be realized.
c) Measured Day Rate
Ø Agreed levels of wages are paid for a specified level of
performance and wages cannot go below a certain level.
Ø Where output standards based on detailed work- studies and
negotiations and agreement between employer and employees.
4.3.2 OUTPUT
OR PERFORMANCE RELATED METHOD
Payment is related to output. Some
of the methods are related to individual workers and others relate to groups of
employees. Under output related methods we have;
Ø
Straight piecework method
Ø
Differential piece rate
Ü 75-100
Proportional Scheme
Ø
Output is easily measurable and is contributed
by a group of workers.
Ø
Dangers:
When original targets are not met or when earnings are not effected.
Ø
NOTE:
Under all time based remuneration methods employer;
Ü
Bear loss arising on employees’ inefficiency.
Ü
Benefit from gains arising from the employee’s
improved efficiency.
a) Straight Piecework Method
Ø
Payment is based on the number of units
produced
Pay
rate per unit is given by: Number of units x piecework rate per unit
Ø
This method is accompanied by guaranteed time
rates per day to safeguard earnings of employees in situations where
non-production is unavoidable.
Advantages:
Ø
Increase of productivity
Ø
Less supervision is required if quality is not
an important Ø Employees are satisfied; labor turnover
is low.
Disadvantages:
Ø
Establishment of output standards and piece
rates is time consuming and difficult. Requires work study techniques.
Ø
Quality may decrease
Ø
Close supervision and quality control are
imperative
Ø
Incentive effect declines at higher levels of
output because a flat piece rate is used.
b) Differential Piece Rate Ø 75-100 Proportional
Scheme
Ø
This method is designed to eliminate the last
disadvantage of the straight piecework scheme by providing incentive at higher
levels of output.
Ø
This scheme sets a standard performance at 100
but bonus starts when 75 is reached. Ø The bonus is 331/3% of the job rate
Ø
For performance below 100 and varies in direct
proportion for performance above 100.
Ø
There is no theoretical limit to the bonus that
may be earned by employee.
4.4 PREMIUM BONUS SCHEME
4.4.1 INDIVIDUAL
BONUS SCHEME
Premium bonus scheme combine piece
rate and time rate methods
Ø
Employer and employee share gains or losses in
labor efficiency Premium paid to employee depends on the difference between
actual hours and standard time allowed.
Ø
Under this system, when employee fails to
complete a job within time allowed, he is paid based on time rate.
Ø
There are three premium bonus scheme;
¡
Halsey scheme;
¡
Halsey-Weir scheme; and
¡
Rowan scheme
Halsey and Halsey- Weir schemes
Ø A
worker is paid fixed percentage of time saved as bonus. In Halsey this percentage
is 50% and in Halsey-Weir the percentage is 33 1/3 %. Ø Time
saved = time allowed – time taken
Example:
Time
allowed 40 hrs
Time
used 30 hrs
Rate
per hour 5,000/=
Required:
Total earnings by using;
a.
Halsey- Weir scheme
b.
Halsey scheme.
Rowan scheme
Ø
This scheme pays bonus as in the Halsey- Weir
scheme except that the bonus is not fixed.
Ø
The percentage bonus is variable calculated as;
%
bonus =Time saved x 100
Time allowed
Ø
The percentage calculated is then applied to
gross wage i.e. time taken x hourly rate Ø Example;
From the following data calculate
total earnings of employee using Rowan Scheme.
Time allowed to complete job
|
40 hrs
|
Time taken
|
30 hrs
|
Rate of pay per hour (Tshs.)
|
5,000/=
|
4.4.2 GROUP
INCENTIVE SCHEMES
These are incentive schemes which
are applicable to employees working as a team [where individual efforts can not
be measure]. These are also applicable where a worker cannot increase his
output without the cooperation of his fellow worker. Group is likely appropriate where:
ü
Production is based on a group
ü
Production is integrated and all efforts are
directed towards the same end. ü It is difficult to
measure the performance of individual.
Advantages of Group incentive scheme
ü
A strong loyalty exists within the group which
should result in reduced absenteeism and increased output.
ü
The scheme can apply to all workers both direct
and indirect
ü
Wages calculation are usually straight forward
ü
Less time is spent on individual wage
negotiation as there should be overall agreement for the factory or group.
Disadvantages of Group incentive schemes
ü
Efficient and inefficient employees are paid the
same.
ü
Problem may arise when apportioning savings over
large numbers of employees.
ü
There may be a delay in payment of the bonus. ü There is no individual incentive.
Conditions for an Effective Incentive scheme
ü
Its objectives should be clearly stated and
within reach of employees reasonable effort.
ü
The rules and conditions of the scheme should be
easy to understand and not prone to misinterpretation.
ü
It must win the full acceptance of everyone
concerned including of course, Trade unions
ü
It should be seen to be fair to employees and
employers.
ü
The bonus should ideally be paid soon after the
extra effort has been made by the employees.
4.5 WAGES PROCEDURE
The main purposes of establishing
wages procedures in the organization are the following;
Ø
Calculate the wages earned by each employee in
terms of employment and numbers of hours worked.
Ø
Fulfill legal requirements like deductions of
income tax and NSSF.
Ø
Take into account other deductions like Pension
contributions and repayment of loan.
Ø
Provide adequate information to Cashier to
enable him/her to pay the amounts due to workers.
Ø
Complete the accounting records regarding the
wages paid.
Ø
Ensure the proper use of amounts deducted for
various reasons.
4.6 RECORDING OF LABOUR
§
The personnel department is responsible for
recruitment of employees and maintenance of proper records with respect to
employees.
§
The department prepares personnel record card or
file. This card or file is used to keep personal details of employees such as:
Ø
Full name and qualifications
Ø Position
and type of work Ø Starting date (date
of engagement) Ø Starting salary, etc.
§
Four records are important for recording
attendance time and records for operations showing time taken and output
produced.
§
These four records are: Ø Clock
cards
Ø
Time sheets
Ø
Job cards or job tickets
Ø
Piecework tickets
4.6.1 CLOCK
CARD
Ø
Are used to record time spent by workers at
their work place.
Ø
Is maintained for each employee and a time
recording clock is kept at the entrance. Ø Each
card is required to show the time of entry and departure for the employee.
Ø
Costing department must reconcile these cards
with other time records maintained. Ø Clock
cards are common in the factory, not normally used in office work.
4.6.2 TIME
SHEETS
Ø
Are records which are filled by the employee
.Showing how he/she spent time during a period
Ø
The purpose is to know how much time an employee
spent on a particular job.
Ø
Time sheets are the basis for determining labor
costs chargeable to jobs.
Ø
To ensure accuracy time sheets should be
countersigned by supervisor and must be reconciled with clock cards.
Ø
May be used for payroll, client billing, and
increasingly for project costing, estimation, tracking and management.
4.6.3 JOB
CARDS OR JOB TICKETS
Ø
Is a ticket given to an employee containing
instructions to perform a job
Ø
When employee completes his part of work on the
job he signs the ticket and forward to supervisor for signature.
Ø
The ticket indicates time the employee spent on
the job.
Ø
Job card contains entries for numerous employees
on a single job.
4.6.4 PIECEWORK
TICKETS
Ø
Are maintained for each operation and are used
to show the quantity of items produced.
Ø
A job will have a number of operations or stages
of processing.
Ø
The cards are used in calculation of employees’
wages. Ø Danger:
Inflate quantity at the expense of quality.
Ø
Should be signed by the supervisor and / or the
quality inspector.
4.7 PAYROLL
It's a fact of business–if a
company has employees, it has to account for payroll and fringe benefits.
In this context of payroll accounting we will introduce
payroll, fringe benefits, and the payroll-related accounts that a typical
company will report on its income statement and balance sheet.
Payroll and benefits include items such as:
• salaries
• wages
• bonuses
& commissions to employees
• overtime
pay
• payroll
taxes and costs o Income
tax
o Social
Security Contribution(LAPF,PSPF,GEPF,NSSF,PPF
etc) o Health
Insurance(NHIF,AAR etc)
o Trade
Union Contributions
(RAAWU,TUGHE,CWT,TALGWU,TUICO,FIBUCA,TRAWU
etc) o Skills Development
Levy
• employer
paid benefits o holidays o vacations o sick days
o insurance
(health, dental, vision, life, disability)
o retirement
plans o profit-sharing
plans
• Other
deductions according to employees directions
o Saving
Plans( eg WADU) o Loan Deductions
o Internal
Contribution deductions
Salaries, Wages, & Overtime Pay
In this section of payroll
accounting we focus on the gross amounts earned by the employees of a company.
Salaries
Salaries are usually associated
with "white-collar" workers such as office employees, managers,
professionals, and executives. Salaried employees are often paid semi-monthly
(e.g., on the 15th and last day of the month) or bi-weekly (e.g., every other
Friday) and their salaries are often stated as a gross annual amount, such as
"Tshs.48, 000,000 per year." The "gross" amount refers to
the pay an employee would receive before withholdings are made for such things
as taxes, contributions to various institutions, and savings plans.
Since salaried employees earn a
specified annual amount, it is likely that their gross pay for each pay period
is the same recurring amount. For example, if a manager's salary is Tshs.
48,000,000 per year and salaries are paid semi-monthly, the manager's gross pay
will be Tshs. 2,000,000 for each of the 24 pay periods.
Wages
Wages are often associated with
production employees (sometimes referred to as "bluecollar" workers),
non-managers, and other employees whose pay is dependent on hours worked. The
pay for these employees is generally stated as a gross, hourly rate, such as
"Tshs. 13.52 per hour." Again, the "gross" amount refers to
the pay an employee would receive before withholdings are made for such things
as taxes, contributions, and savings plans.
Employees receiving wages are often
paid weekly or biweekly. To determine the gross wages earned during a work
period, the employer multiplies each employee's hourly rate times the number of
work hours recorded for the employee during the work period. Due to the extra
time needed to make calculations for each employee, hourly-paid employees
typically receive their paychecks approximately five days after the work period
has ended.
Bonuses & Commissions Paid to Employees
Throughout our explanation, bonuses
paid to employees and sales commissions paid to employees will be considered to
be part of salaries.
Overtime Pay
Overtime refers to time worked in
excess of 40 hours per week (for the case of Tanzania government employees).
Whether or not employees are paid for overtime depends on each employee's job
responsibilities and rate of pay—some employees are exempt from overtime
pay and some are not. For example,
executives are considered to be "exempt"; their employers are not
required to pay them for their overtime hours because (1) their compensation is
high, and (2) they can control their work hours. Executives do not need state
or federal wage and hour laws to protect them from company abuse.
Payroll Withholdings: Taxes & Benefits Paid by Employees
This section of payroll accounting
focuses on the amounts withheld from employees' gross pay
The Tanzania income tax system—as
well as most state income tax systems—requires employers to withhold payroll
taxes from their employees' gross salaries and wages. The withholding of taxes
and other deductions from employees' salary affects the employer in several
ways: (1) it reduces the cash amount paid to employees, (2) it creates a
current liability for the employer, and (3) it requires the employer to remit
the withheld taxes to the Tanzania Revenue Authority by specific deadlines.
Failure to remit payroll taxes in a timely manner results in interest and
penalties levied on the employer; flagrant violations trigger more severe
consequences.
Payroll withholdings include:
1.
Employee portion of Social Security contribution
2.
Employee portion of Health Insurance
3.
Income tax
4.
Court-ordered withholdings
5.
Other withholdings
1. Employee portion of Social Security tax
A key component of payroll
accounting is the Social Security Contribution.
Social Security Contribution is withheld from an employee's salary or wages
and is matched by a contribution from the employer. In other words, the
employer is responsible for remitting to the Social Security Funds the amount
of Social Security Contribution withheld from each employee. According to the
prevailing law the total contribution of employer and employee should not be
below 20 percent of gross pay of employee. There could be variations on the
contribution from employee and employer but should make 20 per cent in total at
the end
.
2. Employee portion of Health Insurance
Health Insurance is also withheld from an employee's salary or
wages and is matched by a contribution from the employer. In other words, the
employer is responsible for remitting to Health Insurance funds amount of
Medical Insurance withheld from each employee. As a result, Medical Insurance
is both an employee withholding and an employer expense
3. Income tax
Another part of payroll accounting
involves the employees' income tax known as
Pay as You Earn (PAYE) and is made progressively. An employer is
required to withhold the federal income tax that an employee is expected to owe
based on salaries or wages.
The amount withheld for PAYE is
based on the employee's salary or wages as well as personal information that
the employee is required to provide the employer on TRA form including marital
status and the number of dependents claimed as exemptions. In cases where an
employee is paid low wages and/or has a large number of personal exemptions, it
may not be necessary for the employer to withhold any income tax. The person
earning minimum wage is not subjected to PAYE
Amounts withheld from employees for
federal income taxes are reported on the employer's balance sheet as a current
liability. When the employer remits the amounts to the federal government, the
current liability is reduced.
4. Court–ordered withholdings
Payroll accounting also involves
withholdings for items other than payroll taxes. For example, courts of law may
order employers to garnish (withhold
money from) an employee's salary or wages for purposes such as paying child
support or repaying debts.
The amounts withheld from employees
for court-ordered withholdings are reported on the employer's balance sheet as
a current liability. When the employer remits the amounts to the designated
parties, the liability is reduced.
Some court orders may include a
small fee to be withheld from the employee in order to reimburse the employer
for administrative expenses.
5. Other withholdings
In addition to the mandatory withholdings that an employer
makes for taxes and court orders, payroll accounting often includes amounts
that employers may be willing to withhold at the direction of its employees.
These voluntary withholdings can include such things as:
§ union
dues
§ charitable
contributions
§ insurance
premiums
Net Pay
Net pay is the
amount that remains after withholdings are deducted from an employee's gross
pay. Net pay is also referred to as "take home pay" or the amount
that an employee "clears." From the company side of the transaction,
it is the amount of cash the company will pay directly to the employees on
payday.
It should also be understood that
the employer incur some cost in relation to its employees as being benefits
granted to them as statutory requirements or internal agreement between the
employer and employees as incentive to them
Journal Entries
Since Payroll cost is like other
expenses of business, the company/factory need to establish the liability
before paying the same. This means that if the organisation is paying it
employees on weekly, half monthly or monthly basis when the salary/wages is due
it should be recognised as liability pending to payment and the following entry
needs to be raised
The following are common journal
entries in payroll:
Salaries
Expense XX,XXX
Payroll
Control XX,XXX
Payroll
Control XX,XXX
Payroll
Deductions (Various Accounts) XX,XXX
Cash
XX,XXX
Payroll
Tax Expense XX,XXX
Payroll
Taxes Payable (Various Accounts) XX,XXX
Tanzania’s applicable PAYE for the
year 2014/2015
Income Range (monthly)
|
Tax rate (PAYE)
|
Tshs
|
%
|
0 – 170,000=00
|
NIL
|
170,000=00 – 360,000=00
|
12% of the amount in
excess of Tshs.
170,000=00
|
360,000=00 – 540,000=00
|
Tshs. 22,800=00 plus 20%
of the
amount in excess of Tshs. 360,000=00
|
540,000=00 – 720,000=00
|
Tshs. 58,800=00 plus 25%
of the
amount in excess of Tshs. 540,000=00
|
720,000=00 and above
|
Tshs. 103,800=00 plus 30%
of the
|
amount in excess of Tshs.
720,000=00
Page 11
of 14
The following procedure is adopted
to prepare a payroll;
Ø
Number of hours worked are multiplied by wage
rate per hour. Overtime worked is multiplied by wage rate which is applicable
to the overtime worked.
Ø
Gross wage of each employee is recorded into
gross wages column.
Ø
The income tax payable is calculated under the
system of P.A.Y.E. This tax amount is entered in P.A.Y.E. column of payroll.
Ø
Contributions of each employee regarding the
N.S.S.F and PPF are shown in respective columns
Ø
Total deductions for each employee are shown in
separate column
Ø
Total deductions are subtracted from the gross
wages and Net wages are entered in to another column
Ø
Any advance taken by employees or loan
repayments are subtracted to find out the wages payable.
Example
MMM ltd is small firm employing
four individuals Mwenge, Ujamaa, Mwongozo and Mapinduzi.
The following records were made in
relation to the attendant of work.
Worker Total
labour hours Job ticket hours
Mwenge
232
200
Ujamaa
232
198
Mwongozo
224 220
Mapinduzi
216
202
These records are in relation to a
work four weeks [month] in which a worker is supposed to work for 6 days a week
and 8 hours a day.
Each worker is paid at a rate as
follows;
Mwenge
3,000 per hour
Ujamaa
2,400 per hour
Mwongozo 2,500
per hour
Mapinduzi 2,600
per hour
All workers are given house
allowance which is 20% of the basic wages and transport equal to 200,000 per
month. The law requires that each employee should contribute towards pension an
amount equal to 5% of the basic wage to which an employer has to add 15% making
a contribution to pension of every employee to be equal to 20% of the basic
wage. For simplicity let us assume that every worker is liable to pay income
tax equal to 20% of total earnings. The employer is required to pay 5% payroll
levy based on the total earnings paid to the workers. Mwongozo has taken an
advance payment of 200,000. The hours worked beyond the regular hours in the
month are regarded as overtime and overtime is paid at a rate plus overtime
premium of 50% of the basic rate.
REQUIRED;
Prepare a payroll for MMM ltd
Example
The payroll liability of the
business was journalized as follows;
DEBIT Wages 600,000
Overtime 120,000
House allowance 200,000
Pension 90,000
Payroll levy 36,800
CREDIT Commissioner of Income tax 220,800
Director of Pension
Fund 120,000
Net pay 706,000
Required
A.
Pass journal entry to record payment for the payroll
liability
B.
If the basic rate per
hour is 1,000 determine;
I.
The overtime hours if the overtime was paid at a
premium of 50% of the basic wages
II.
Total hours recorded on the clock card if all wages
related basic workers III. The income tax rate if all earnings of
workers are taxed
IV. The
rate of pension contribution by the employee based on the basic wages earned by
employee.
4.8 ANALYSIS OF LABOUR
COST
Ø
Costing section uses job cards, time sheets and
payroll to analyze wages paid in order to: Determine costs to be charged to
various Cost objects e.g. jobs, departments, etc.
Ø
Direct labor cost: is charged to jobs by
debiting Work in progress account and crediting wages control.
Ø
Indirect labor cost: Is included as part of
factory overhead cost and absorbed by units of production through the overhead
absorbed rate. (Debiting factory overhead crediting wages control account.)
4.8.1 IDLE
TIME
¡
Refers to lapse of time where employees are
unable to perform their work.
¡
Causes of Idle time:
Ø
Authorized breaks during the work day
Ø
Machines breakdowns
Ø
Power cutoff
Ø
Shortage of materials
Ø
Negligence
¡
The cost of idle time is spread over all jobs
worked during the period. ¡ Idle time cost is
treated as part of factory overhead costs.
Example:
A factory employs four individuals
A, B, C and D. Worker A is supervisor for other workers. Therefore, A is not
direct worker. The particulars of the workers labour hours for the week just
ended and respective rates as follows;
WORKER TOTAL HOURS WORKED RATE PER HOUR JOB TICKET HOUR
A
56
300 NIL
B
50
240 40
C
56
210 42
D
54
200
48
Required;
I.
Compute the gross pay of the workers
II.
Analyze labour hours into direct and idle time hours.
III.
Analyze gross pay into direct
and indirect cost.
4.8.2 FRINGE
BENEFIT
Ø
Fringe benefits are labor related costs paid by
the company such as medical expenses and other benefits.
Ø
Some companies treat fringe benefits as indirect
labor and therefore include them as part of factory overhead costs.
Ø
Other companies treat fringe benefits relating
to direct labor as direct labor costs and those relating to indirect labor as
factory overhead.
4.8.3 OVERTIME
PAYMENT
Ø
Are made when employees work beyond their
regular working hours.
Ø
Overtime is important to cater for increase in
demand during peak periods or where rush orders are received.
Ø
During such situations the company may hire
casual labor or where specialized skills are required the overtime become
important.
Ø
Overtime is paid at higher rate compared to
normal rate.
Ø
Overtime premium is classified as Indirect labor
and treated as factory overheads.
Ø
Justification:
Each job had an equal chance of being worked during overtime.
Ø
However, if overtime is undertaken at the
request of the customer, it becomes a direct cost related to that job or
customer’s order.
0 comments:
Post a Comment