Management Accounting Part 3: Accounting for labor

we have two type of labours, direct and indirect labour. indirect labors do not produce the unit of products. like supervisors. their cost is indirect cost.

we have direct labour which work on the product unit. their payment also can be direct and indirect cost. their direct costs are, basic pay, overtime premium. however, their idle time, bonouses, sick pay are indirect cost.

Remuneration methods:

  • Time work: the rate per hour. if the client have requested us to make more work in order to achieve a specific goal, the overtime payment can be considered as direct cost, while if the request is based on the inefficiency in the job, the payment is considered to be an indirect cost. ( if it is not based on the budgeted plan)

2. Piece Work: the payment is based on the number of produced item.

there are some ratios which are important:

Idle Time= idle hours / total hours

Labour turnover ratio: it shows the number of employees who are leaving.

Labor turnover rati0=oworkers replaced/average number of employees

example: at the begining of the year we have 100, and at the end of the year, we had 70 employees. and 40 were left. what is the labor turn over ratio is:

Labor turnover ratio=workers replaced/average number of employees

workers replaced= just 10 workers are replaced

Average number of workers= (100+70)/2=85

Turnover ratio= 10/85=11.8%

Efficiency: Expected Hours of Production of a unit/ Actual hours of production of a unit

example: we have a budgeted production of 50000 units and 20000 working hours. while in action, we produced 65000 Units at 22000 hours. calculate the efficiency of the process.

in this example:

Expected hours of production of a unit= 20000/50000=0.4 Hour per unit

Actual hours of production of a unit= 22000/65000=0.3384 Hours per unit

Efficiency: Expected Hours of Production of a unit/ Actual hours of production of a unit

=0.4/0.3384=1.182

Capacity ratio:

did we get more or less hours than what we expected from the labour.

Capacity ratio= Actual hours labour/ expected hours of labour=110%

Activity ratio: Actual hour to make a unit of output/ expected hours to make a unit of out put

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ACCA Management Accounting

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Iman Najafi

Iman Najafi

An Enthusiast Equity Analyst and Independent Financial Researcher with a passion for Fundamental Analysis. I use Medium for the daily records.

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