Unit-III

Labour Cost

Q1) Define Labour Cost. (8 marks)

A1) Labor is an important element of production. It is a human resource and participates in the process of production. Wages paid for labor are an important cost item. Labor costs need to distinguish between direct and indirect labor. Direct labor costs can be directly identified and billed by product or job, but overhead costs are less identifiable and are included in overhead costs that may be assigned to different products or departments on appropriate criteria. Labor costing has three main purposes.

1. Determining labor costs in terms of product or service costs

2. Report labor costs for planning and management

3. Report labor costs for decision making.

Labor cost is the total of wages, benefits, and payroll taxes paid to and for all employees. It’s divided into two categories: direct and indirect labor costs.

Direct labor costs are the wages paid to the employees that produce products or services. Indirect labor costs are costs that facilitate that production. The wage of a worker who maintains production equipment is a good example of an indirect labor cost.

How Much Does Labor Cost

Labor cost varies among industries. But it has some similarities that help businesses figure out how much labor costs.

Here’s what you have to factor in when calculating labor cost:

1. Wages
2. Payroll taxes
3. Overtime
4. Bonuses
5. Health care
6. Sick days
7. Vacation days
8. Insurance
9. Benefits
10. Meals
11. Supplies
12. Training
13. Public transportation stipends

Think about your expenses for everything listed above and you’ll get closer to figuring out how much labor costs.

Average Labor Cost

On average, labor costs make up about 68% of an employee’s annual wages. That’s why you can get a decent estimate of an employee’s labor cost by multiplying their total salary by .68. Employee benefits often account for almost 30% of overall labor costs.

But, strangely, restaurants are different.

Restaurant Labor Cost

Restaurant labor cost is one of the primary expenses in running a restaurant, along with overhead expenses. The amount a restaurant spends on labor affects many things. One of the most important is their prime cost, which is a metric ownership and investors look at to gauge a restaurant’s financial health.

Restaurant labor cost is hard to keep low and it ain’t going down. 60% of respondents to a 7Shifts survey of restaurant managers said their labor costs went up in 2019. And with the rising cost of living and an increase in minimum wage for tipped employees on the horizon? Labor costs for 2021 and beyond are slated to increase.

That means restaurant and bar manager duties, going forward, will always contend with rising labor costs. And using historical sales data from a bar management software like BinWise is how companies use forecasting data to cut labor hours (and costs).

Average Labor Cost for Restaurant

Restaurant labor cost is typically 30 to 35% of a restaurant’s total revenue. And most restaurants shoot for 20 to 30% labor cost. It’s not easy getting to your goal labor cost.

The remaining operating costs of a restaurant are food cost (which include your beverage program) and rent/overhead.

Is Labor a Fixed Cost?

Oh, you wish it was that easy. But labor can be a fixed cost or a variable cost. 

Fixed costs do not vary in relation to sales. Think business insurance or rent. Variable costs do vary in relation to sales. Think food costs, liquor cost, or COGS.

Fixed labor costs are, then, the labor you will pay no matter how much revenue you drive. Your cleaning crew, complete with periodic restaurant hood cleaning and everything else. The skeleton crew you need to open the place up. Etcetera. 

Variable labor costs are the extra servers you need for a busy Friday dinner shift. Or the extra line cook you need because of that big private party.

How to Calculate Labor Cost: Labor Cost Formula

There are two primary ways of calculating labor cost. You can do it as a percentage of sales or as a percentage of total operating cost.

Labor Cost Percentage Formula

Here’s the labor cost percentage formula for calculating labor cost as a percentage of sales:

Labor Cost Percentage = (Total Labor Cost / Total Sales) x 100

And here’s the labor cost percentage formula for calculating labor cost as a percentage of total operating costs:

Labor Cost Percentage = (Total Labor Cost / Total Operating Costs) x 100

Now let’s look into how to use the formulas.

How to Calculate Labor Cost Percentage of Sales

To calculate labor cost as a percentage of sales, first tally up your restaurant’s total labor cost. This is all the money spent on direct and indirect labor costs over whatever period of time you’re measuring.

Next, pull your restaurant’s total revenue from your POS or restaurant or bar inventory software. This is your bottom line. All your pre-tax and pre-deduction earnings. 

Divide the labor cost by the annual revenue and multiply by 100. This number will be your restaurant’s labor cost percentage of sales.

Imagine a restaurant with an annual labor cost of $84,000. Now let’s say total sales revenue for the year was $800,000.

Labor cost percentage = (84000 / 800000) x 100

Labor cost percentage = 10.5

10.5% of total sales? Wow, that’s pretty low.

How to Calculate Labor Cost Percentage of Total Operating Cost

You can also calculate labor cost percentage of total operating costs.

First, you’ll determine your restaurant’s labor cost, just as before. 

Then figure out your total operating costs. This includes revenue, but takes into account all food costs, beverage costs, rent, overhead, and marketing.

Divide labor cost by total operating cost and multiply by 100. This number is your restaurant’s labor cost percentage of total operating costs.

Let’s use the total labor cost figure of $7,000 per month. And let’s say total operating costs are $12,000 per month.

Labor cost percentage = (7000 / 12000) x 100

Labor cost percentage = 58.3

58.3% of total operating costs? Wow, that’s pretty high.

Labor Cost Calculator

We dug through the internet to find the three most faithful labor cost calculators out there. 

Peep these:

Omni Calculator

TSheets

The above calculators are useful in calculating your total labor cost itself. But what if you need to calculate labor cost as a percentage of sales or operating costs? Just use the formulas above and the calculator on your computer. You should also invest in good accounting software to keep track going forward.

Q2) What is Labor management? (5 marks)

A2)  Labor costs are an important part of total production costs. Therefore, labor costs and labor costs need to be managed effectively. Various departments contribute to the efficient use of the workforce and the proper management of costs. The HR department needs to provide an efficient workforce. The engineering department maintains control over the working conditions and production methods of each job and department or process by creating plans and specifications. The time management department keeps an accurate record of the time each employee spends. Payroll preparation from the clock card, job or time ticker, or timesheet is done by the payroll department. The costing department is responsible for accumulating and classifying all data for which labor costs are one of the most important items.

Personnel costs represent human contribution. Labor costs are inherently sensitive. The reason is that labor costs are entirely based on human behavior, labor behavior. To manage labor costs, it is necessary to manage labor behavior. Therefore, managers need to study human behavior, labor performance, time and movement studies, labor turnover, and labor approaches to manage labor costs.

The workforce cannot be saved for future reference. It is very similar to the perishable nature of the material. Some materials are of poor quality and may not be used for manufacturing purposes. Such materials are wasted. Similarly, once the workforce is lost, it cannot be recovered and cannot be used effectively in the next few days.

If the work is kept idle, management will have to pay compensation or wages for such idle time. Therefore, management suffered two losses. They are lost working hours and lost money. Therefore, management is very enthusiastic about managing labor costs.

Classification of labor costs

Labor costs can be categorized as follows.

1. Direct labor costs

Direct labor costs are part of salary or wages and can be identified and billed by a single unit price of production.

Characteristics of direct labor costs:

Direct labor costs have the following characteristics.

1. It has a direct relationship to the product, process, or cost unit.
2. It can be measured quantitatively.
3. A sufficient amount of material.

2. Indirect labor costs

Even if it occurs directly, it cannot be identified in the production of goods or services. These costs are incurred at the production site. Some cost centers may serve production departments or production activities. These cost centers are responsible for purchasing, engineering, and time management.

3. Manageable labor costs

Labor costs can be managed by managers during production and even when there is no production. Standard hours and hourly rates are fixed and workers can be required to complete a job or order within such time. That way, labor costs can be reduced to some extent.

4. Uncontrollable labor costs

Labor costs that management cannot easily control. Jobs and orders can be completed by a group of workers. The efficiency of such labor groups is inherently different. Workers can maximize their efficiency according to the general environment of the product location. If so, costs cannot be controlled by management.

Q3) How do we calculate Labour Cost? (5 marks)

A3) Techniques for managing labor costs can be effectively used by coordinating the activities of various labor-related departments.

(A) Human Resources Department

(B) Engineering and Operations Research Division

(C) Timekeeping department

(D) Payroll department and

(E) Cost accounting department.

(A) Human Resources Department:

The Board of Directors has policies regarding recruitment, training, placement, transfer and promotion of employees. The Human Resources Manager of the Human Resources Department must implement these policies. The main functions of this department are recruitment, training, and placement of workers in the right jobs.

The Human Resources department recruits workers when it receives employee placement requests from various departments

B) Engineering and Operations Research Division:

Preface:

This department is working to improve working conditions by carrying out the following activities.

(1) Conduct work studies such as method study, exercise study, and time study for each operation.

(2) Maintain the necessary safety standards.

(3) Perform job analysis and job evaluation.

(4) Prepare the specifications and time schedule for each job.

(5) Devise an appropriate wage system and

(6) Implementation of research and experimental work.

The engineering department is basically responsible for work content, standard time, work performance, and so on. These are achieved by performing detailed work studies, including method studies, motion studies, and time studies.

(C) Time management department:

This department is concerned with maintaining worker attendance and working hours. Attendance time is recorded for wage calculation, and job time or time reservations are spent on each department, job, operation, and process to calculate labor costs for each department, job, and each process and operation. It will be considered to calculate the time taken

(D) Payroll Preparation:

A department salary or wage table is created based on the time card. A full-fledged payroll shows total wages, various deductions, and net wages. Payroll is the basis for checking wages and posting entries to various management accounts. Payroll details depend on your organization's requirements.

(E) Cost accounting department:

The department is responsible for ensuring the correct production costs. Cost verification includes classification, collection, and calculation of output labor costs. In most organizations, cost department representatives

Posted to the manufacturing department to accumulate and categorize costs. The cost calculator oversees the work of the representative and uses the information contained in the timecard and payroll to find the labor costs of manufacturing by manufacturing department, operations, manufacturing instructions, and so on.

The costing department also analyses labor costs in the form of idle time and overtime. A labor cost report is also submitted to management to show the effectiveness of labor use.

Q4) What are the types of incentive wage systems? (8 marks). Explain any two:

A4)  There are the following types of incentive wage systems:

1. Halsey Premium Plan
2. Rowan Premium Plan
3. Taylor Differential Peace Rate System
4. Gantt Bonus Plan
5. Emerson Efficiency Plan
6. Bedo Point Premium
7. Merrick Differential Wage Multi-Piece Rate Plan
8. 100% bonus plan.

1. Rowan’s Premium plan is also similar to the Halsey plan, except in the calculation of the bonus. Under Rowan Plan, the standard time for the completion of a job and the rate per hour is fixed. If the time taken by the worker is more than the standard time, then he is paid according to the time rate, i.e. time taken multiplied by the rate per hour.

In case, the worker completes the work in less than the standard time; then he is entitled to a bonus along with the time wages. A bonus is the percentage of worker’s time rate. This means, the bonus/premium is calculated on the percentage of wages earned for working on a job and is not calculated for the time-saved, as in the case of Halsey Plan. This percentage is equivalent to the proportion of the time saved to the standard time.

The main features of his plan are:

(a) Workers receive remuneration based on actual time taken by them in completing the job.

(b) Workers receive a bonus for the time saved i.e., for the difference between the standard time and actual time.

(c) Bonus is calculated as a proportion of the time wages as time saved bears to the standard time.

The Rowan plan also guarantees wages on a time basis.

Rowan Plan Formula:

1) Bonus = (Time Saved/Time allowed) X Time taken X Time rate

2) Earnings = (Time taken X Time rate) + Bonus

Example

The standard time for producing 250 articles is 65 hours. The rate of wages is Rs. 2.50 per hour. The actual time taken for producing 250 articles is 55 hours. What are the earnings of the worker under the Rowan plan?

Solution

1. Bonus = (Time Saved/Time allowed) X Time taken X Time rate = (65-55/65) X 55 X Rs. 2.50 = Rs. 21.15
2. Earnings = (Time taken X Time rate) + Bonus = (55 X Rs. 2.50) + 21.15385 = Rs. 158.65
3. Effective Wage Rate per hour = Rs. 158.65/55 = Rs. 2.89

Evaluation:

The merits and demerits of the Rowan plan are similar to those of Halsey Plan. An additional advantage under the Rowan plan is that the worker is not induced to rush through the work because if the time saved is more than 50% of the standard time, the bonus will come down. However, the calculation of bonuses is complicated. You may want to do the sum, which comprises all the above models. Try to understand the example as follows first and then try to do sums found at the end of the chapters on your own.

2. Halsey Premium Plan

Definition: Under Halsey Plan, the standard time for the completion of a job is fixed and the rate per hour is then determined. If the time taken by a worker is more than the standard time, then he shall be paid according to the time rate, i.e., time taken multiplied by the rate per hour.

In Halsey plan, the time wages are guaranteed even if the output of a worker is below the standard. In case, the worker completes the works in less than the standard time, then he/she will be paid according to the actual time, i.e. time-rate plus the bonus calculated at a specified percentage of the saved time. Generally, the bonus percentage varies from 30-70 percent. The usual bonus share paid to the worker is 50% of the time saved multiplied by the rate per hour (time-rate).

This scheme can be further illustrated by the examples given below:

Standard Time: 8 hrs
Rate per Hour: Rs 2

Case (1): Time Taken = 8 hrs
Earnings = 8 x 2 = Rs 16

Case (2): Time Taken = 10 hrs
Earnings = 10 x 2 = Rs 20

Case (3): Time Taken= 6 hrs
Earnings:
Time wages = 6x 2 = Rs 12
Bonus = ½ x 2 x 2 = Rs Rs 2

Thus, in the above example, the worker’s total earnings are Rs 14 (time wages +bonus), if he has completed the work in 6 hrs, less than the standard time

Advantages of the Halsey Premium Plan:

1. It is simple to understand and relatively simple to operate.

2. It guarantees time wages to workers.

3. The wages of time saved are shared by both employers and workers, so it is helpful in reducing labour cost per unit.

4. It makes distinction between efficient and inefficient workers because it provides increasing incentive to efficient workers.

5. Fixed overhead cost per unit is reduced with increase in production.

6. The employer is able to reduce cost of production by having reduction in labour cost and fixed overhead cost per unit. Lower cost gives him incentive to provide the best possible equipment’s and working conditions.

Disadvantages of the Halsey Premium Plan:

1. Quality of the work suffers because workers are in a hurry to save more and more time to get more and more bonus.

2. Workers criticise this method on the ground that the employer gets a share of wages of the time saved.

3. Difficulties are experienced in determining standard time and hourly rate of wages which may be acceptable to workers.

Q5) Calculate the predetermined overhead costs using the direct working hours of the budget period and the overhead charges charged for production for the month from the following details. (5 marks)

A5)

The actual time in a month was 3,600 hours, so the overhead charged to    production Rs. 7,200 (that is, 3600 x Rs. 2). However, the actual overhead for the month was only Rs. 8,000.

Q6) Explain with the help of diagram the Wage analysis. (5 marks)

A6)  The wages charged for various jobs are shown on an analysis sheet called the Wage Analysis Sheet. This is suitable if your company is small and the number of jobs running is small. If you have a lot of work, as in a large company, the timesheet will pre-list the total labor costs and agree with a payroll overview.

Documents necessary in preparation of payroll

The following documents are necessary in the preparation of payroll or wages sheet.

1. Attendance Register and/or clock cards.

2. Register for normal time and overtime.

3. Leave pay, holiday pay and dearness and other allowances.

4. Piecework card.

5. Job cards are used for the calculation of bonus.

6. Records required for deduction such as Provident Fund, State Insurance Scheme and Family Pension Fund.

7. Records received from Accounts Department for fines, losses and recovery of damages.

8. Register for co-operative society due.

9. Register of Loans and Advances.

10. Record of voluntary deductions like Voluntary Provident Fund, LIC.

11. Employee’s contribution to Group Insurance Scheme.

12. Income Tax if applicable.

With the help of above details, the Accounts Department or Payroll Department prepares payroll or wages sheet. There is no specified format for the preparation of payroll or wages sheet. The format of wage sheet will differ from one organization to another.

The wage summary decisions are as follows:

The analysis sheet shows the labor costs for various jobs and the overhead costs charged as overhead costs.

Q7) What are the merits and demerits of Peace rate system? (5 marks)

A7) The piece rate system is that system of wage payment in which the workers are paid on the basis of the units of output produced. Piece rate system does not consider the time spent by the workers. Piece rate system is the method of remunerating the workers according to the number of unit produced or job completed. It is also known as payment by result or output. Piece rate system pays wages at a fixed piece rate for each unit of output produced. The total wages earned by a worker is calculated by using the following formula.

Total Wages Earned= Total units of outputs produced x Wage rate per unit of output.

OR,
Total Wages Earned= Output x Piece Rate

Advantages and disadvantages of peace rate system:

Merit

I. It pays the craftsman according to his efficiency as reflected in the amount of work found by him. It satisfies hard-working and efficient workers, as he thinks his efficiency will be fully rewarded.

Ii. Supervision costs are not that heavy. Because workers know that their wages depend on the amount of work they do, they are less likely to waste time.

Iii. Direct labor costs per unit of production are constant and constant, making it easier to calculate costs when filling out bids and quotes.

Iv. Not only will production and wages increase, but production methods will also improve. This is because workers demand defect-free materials and machines in perfect working conditions.

v. The total unit cost of production is reduced at higher output because the fixed overhead can be distributed to more units.

Demerit:

I. This system is not particularly favored by workers, although it benefits workers as well as business owners. The main reason for this is that the fixed piece rate by the employer is not scientifically based. In most cases, he determines the rate by empirical law and finds that on average workers get higher wages compared to the wages of workers doing the same job on a daily basis. Burden workers to reduce rates.

Nevertheless, the goose must be killed. Without it, the employer is extravagant in his job. Will continue to pay for, so he will curb the growing ambitions of his men. "

Ii. Workers want to work at tremendous speeds, so they generally consume more power, overuse machines, and don't try to avoid wasting materials. As a result, production costs are high and profits are low.

Iii. Workers' enthusiasm for increased production is likely to reduce the quality of their work. This zeal affects their health and can lead to reduced efficiency.

Iv. It encourages soldiers.

v. If you work too fast, your plants and machines can wear out and be replaced frequently.

Vi. Trade unions often oppose this system. Because it fosters competition among workers and puts their solidarity in labor disputes at risk.

Q8)  How do we calculate Labor turnover rate? (8 marks)

A8) Labor turnover rate:

Labor turnover can be defined as the number of workers replaced during a particular period relative to the average workforce during the period. This is the number of workers who quit their jobs during the period relative to the average workforce during the period. It is a factor that affects labor efficiency and thus labor costs. It means the rate of change in the composition of the workforce.

There are three ways to measure it:

      Turnover rate due to new hires: Workers who participate in a business to expand their business do not generate a turnover rate. Some cost activists believe that newly hired workers are responsible for changes in the composition of the workforce. The turnover rate of new workers is as follows.

      A high turnover rate is bad because it indicates that the worker will not stay long. When they go, they bring their experience with them. New workers must be engaged and trained. Aside from the cost of hiring and training new workers, their quality is expected to decline. Therefore, the turnover rate of workers is very costly for employers, but when workers take a break from work or get a job that is not suitable for them, they also lose.

      Both worker turnovers and shifts are costly, but most of the turnover costs usually occur during shifts. Separation is the cause of sales and the exchange continues.

      There is a certain amount of irreducible turnover due to illness, death, retirement, or marriage of female workers. However, research shows that actual sales are unnecessarily high in most industries.

Causes of turnover:

Some of the causes that contribute to high turnover are the disagreement between work and workers, low wages, bad working conditions, bad treatment on the part of employers, or simply the raging nature of workers. Therefore, the cause may be unavoidable.

The avoidable causes of turnover are:

(1) Redundancy due to seasonal fluctuations, material shortages, project completion, etc. The efficiency and foresight of senior management can eliminate sales from these causes.

(2) Boring work

(3) Bad working conditions

(4) Low wages

(5) Unstable employment

(6) There are few opportunities for promotion

(7) Unfair treatment

(8) Labor dispute.

The unavoidable causes are as follows:

(1) Difficulty of housing

(2) Personal improvement

(3) Domestic responsibility

(4) Illness and accident

(5) Leave the district

(6) Discharged because it was judged to be inappropriate

(7) Discharge due to disciplinary action

(8) Retirement

(9) Death.

Employers can significantly reduce worker turnover, thereby saving labor costs.

Labor turnover cost:

It is a good idea to calculate the labor turnover cost individually.

It consists of:

(A) Recruitment costs for additional men engaged due to excessive turnover.

(B) Training costs for additional men engaged. And

(C) Loss due to reduced production quantity and quality due to sales, represented by lack of recovery of hourly wages and fixed costs.

(D) Costs of lost time, wasted, scrap, defective work and tools, and machine damage due to inefficiencies of new employers.

(E) Cost of products lost due to delayed acquisition of new workforce.

(F) Frequency of accidents due to lack of experience of new employees.

Q9) Write note on Cost Accounting department. (5 marks)

A9) Cost accounting department records, classifies and present cost information for manufacturing and other activities of the organisation. It makes an analysis of cost of manufacturing, marketing and administration and provides control reports and other decision making data to all levels of management for the purpose of controlling and reducing costs.

It is, therefore, necessary that cost accounting department should have a proper coordination with other departments of the organisation. All departments should help each other so that the objective of minimum possible cost may be achieved without too many bottle-necks.

1. Cost Accounting Department and Production Department:

Cost accounting department and production department are closely related to each other. Production department is concerned with the conversion of raw materials into finished products. Cost accounting department helps in estimating the various costs involved in the manufacturing process like material cost, labour cost and other expenses involved for manufacturing a product.

As per cost estimates, production department makes timely arrangement of material, labour and other services required for the manufacturing process so that production may go on smoothly without any interruption. Cost accounting department is concerned with ascertaining, controlling and reducing cost of the manufacturing process.

The required information regarding costs relating to the manufacturing process both budgeted and actual is collected by cost accounting department from the production department and sent to the management for exercising cost control.

In a competitive world for facing competition effectively, reducing cost of production is a very important function. Both production department and cost accounting department can help each other in reducing cost of production which is the crying need of the competitive economy.

2. Cost Accounting Department and Purchases Department:

Purchase department is to ensure that right type of material is purchased at a reasonably low price at a right time from a right supplier and there is no excessive investment in materials. Continuous availability of material is to be ensured so that production may not be held up for want of materials.

In these respects cost accounting department can help purchase department by setting various levels of materials like minimum level, maximum level, reordering level, economic order quantity etc. Various types of material control suggested by the cost accounting department will be helpful in ensuring minimum possible cost of materials.

3. Cost Accounting Department and Personnel Department:

Personnel Department concerned with proper recruitment, selection, training labour turnover, time keeping, time booking, fixing of wage rate, preparation of payroll, idle time and over time works with close co-ordination of cost accounting department to get effective results of the personnel policies. Cost accounting department suggest ways and means for reducing costs relating to employees working in the organisation.

Cost accountant can recommend incentive plans for remunerating employees, which will be attractive to the employees for earning more wages and salaries and at the same time reducing labour cost per unit. In this way both departments personnel and cost accounting can be helpful in developing a contented labour force which will be willing to work for the organisation.

4. Cost Accounting Department and Finance & Accounts Department:

A close coordination is required between cost accounting department and finance and accounts department for reducing and controlling costs. Finance department is dependent upon the cost accounting department for making an estimate of funds required for production and marketing purposes. Similarly, materials and other supplies cannot be purchased at the minimum possible prices if the finance department does not provide the required finance at the time it is required.

Cost accounting department helps financial accounting department in preparing budgets. It also helps financial accounting department to make the payment of the bills by duly approving them. Past figures are provided to the cost accountant by financial accounting for making estimates for the future. Cost accounting department and financial accounting department depend on each other for reconciling profit as per cost accounts and profit as per financial accounts.

5. Cost Accounting Department and Marketing Department:

Marketing department is mainly concerned with marketing of products at competitive prices. Marketing department gets cost information from cost accounting department for fixing reasonable selling prices which may be acceptable to consumers. For considering alternative methods of mar ting, information of various types of costs involved in various methods is provided by the cost accountant to the marketing manager.

Similarly, on the basis of information provided by the marketing department, cost accounting department will suggest the cheapest and effective method of marketing a particular product.

The department is responsible for ensuring the correct production costs.

Cost verification includes classification, collection, and calculation of output labor costs. In most organizations, cost department representatives

Posted to the manufacturing department to accumulate and categorize costs. The cost calculator oversees the work of the representative and uses the information contained in the timecard and payroll to find the labor costs of manufacturing-by-manufacturing department, operations, manufacturing instructions, and so on.

The costing department also analyses labor costs in the form of idle time and overtime. A labor cost report is also submitted to management to show the effectiveness of labor use.

Wage Accounting Documents:

(1) Clock card, job card, idle time card:

These are the basic documents for calculating labor costs for jobs, departments, operations, and jobs. Adjusting the clock card and job card is essential to reveal the idle time.

(2) Ratio of wage table and deduction chart:

These documents will help you prepare for payroll.

(3) Wage analysis or wage summary:

This is a salary analysis for various control accounts. This is a summary of the wages paid per job and the wages paid during idle hours. These totals must match the total wages paid.

Q10) What is statutory compliance in HR? What is the importance of payroll statutory compliance? (8 marks)

A10) To know the exact meaning of legal compliance in human resources, we first need to understand the meaning of the words "legal" and "compliance." Legal means "related to rules and regulations," and compliance means "commitment." Legal compliance in human resources refers to the legal framework of a company used to treat employees professionally and ethically.

Failure of Indian companies to comply with central and state labor laws can lead to serious problems and stagnant growth. The following are some of the common risks of statutory compliance violations.

1) Stop working,

2) Loss of company dignity, reputation and credibility,

3) Cancellation and suspension of business license,

4) Distrust of company stakeholders and investors,

5) Imposition of fines,

6) Loss of customer loyalty,

7) Civil and criminal liability,

8) Negative impact on company productivity,

9) Criminal liability to company directors or officers,

10) Withdrawal of financial benefits,

11) Closure of the company when the case reaches extreme levels.

Legal compliance in human resources helps companies manage a tightly regulated environment and avoid the risk of non-compliance.

All labor and tax laws in India are subject to legal compliance. All Indian companies are required to enforce these laws that change at the national and state levels. If a company does not comply with these regulations, it may face legal issues such as fines, penalties and even complete closures. To avoid these risks, companies must spend sufficient resources to ensure legal compliance with human resources. Companies need to understand all Indian labor and tax laws in order to stay up to date on the changes that need to be incorporated into their organization. The rules keep evolving from time to time and the law is very dynamic.

Statutory compliance in HR refers to the legal framework within which organizations must operate while dealing with their employees.

Every country has several hundreds of federal and state labour laws that companies need to align with. This list is forever being added to.

A lot of your company’s effort and money goes into ensuring compliance to these laws which could deal with a range of issues; from the payment of minimum wages to maternity benefits or professional taxes.

Therefore, dealing with statutory compliance requires for companies to be well-versed with the various labor regulations in their country of operation.

Need for Statutory Compliance

Adhering to statutory compliances is necessary for all big and small companies in the world to keep their businesses safe from the legal trouble. A deep knowledge of statutory compliances is required to minimize the risk associated with the noncompliance of statutory requirements.

In today’s competitive and legal business world, it is very challenging for employers to manage statutory compliances without a good payroll management software. Each country has various kinds of compliance requirements. This blog discusses the statutory requirements for Indian payroll system.

There are a number of statutory requirements for Indian companies and companies have to spend a significant amount of time in their payroll management to ensure that they are compliant with the legal regulations. If companies fail to adhere to statutory compliances, they may have to face heavy penalties which are several times more than complying with legal guidelines.

The Statutory Compliances Required for Indian Payroll

The common Statutory requirements that companies have to follow for their payroll management in India are:

Statutory requirements for Minimum wages

This act provides for fixing minimum rates of wages for skilled and unskilled laborers. It not only guarantees money for bare minimum survival requirements of workers but also takes care of education, medical requirements, and some level of comfort of workers.

The Minimum Wages Act being a state subject, the statutory compliance of a centralized Payroll management is to cater for the payment of minimum wages to an organization’s workers spread out across different states. Empxtrack Payroll has the provision to map this complex requirement.

Payment of ‘Overtime’ wages to workers is also a statutory requirement as per the Factory Act & Payment of Wages Act. It affects sectors like manufacturing & construction.

TDS deduction

Each employer is responsible to deduct tax from employee income, which is referred to as Tax deducted at Source (TDS). The salary components that impact TDS deduction are HRA, Special allowance, Leave travel allowance, Children education allowance, medical allowance, Investments.

According to the latest income tax laws 2020, an employee has the leverage to choose from Old and New tax regimes. The TDS deduction depends upon the choice an employee makes.

The new tax regime reduces tax liability from an employee. The need to declare investments is eliminated and employees need not to submit investment proofs.

Statutory compliances for ESI fund and PF deduction

ESI maintained by ESIC is applicable to employees earning Rs 21,000 or less per month to provide the cash and medical benefits to them and their families.

PF is a compulsory contributory fund for the future of employees after their retirement or for their dependents in case of their early death.

Professional taxes

Professional tax or employment tax is a state-based tax. It is one of the statutory deductions from the gross income before computing the tax.

Gratuity

Gratuity is the amount given to employees by an employer when they leave the job after completing five years in service. Gratuity is calculated as Basic + DA divided by 26 * No of years of service *15.

EDLI

The EDLI (Employees’ Deposit Linked Insurance Scheme) provides assurance benefit (death insurance cover) to employees along with PF benefit. It is applicable to all employees with a basic salary below Rs 15000 per month.

The employees do not contribute anything towards EDLI. As per the latest rules, an employer is responsible to contribute 0.5% of the basic salary or a maximum of Rs. 75 per employee per month rupees. If the basic salary of an employee is above Rs 15000 per month, the maximum capping to avail the benefit is Rs 6,00,000.

The Empxtrack Payroll Software takes care of all the above given compliance requirements and statutory deductions required in India. It allows you to manage your PF and ESI preferences, manage professional tax, select the salary heads applicable to you, manage TDS through investment declarations and automatically calculate salaries after TDS deduction while processing payroll. In addition, it allows you to capture Challans and generate form 16 and form 24Q to manage all your statutory compliances with ease and efficiency.

Q11) Define Minimum Wage Act, 1948. (5 marks)

A11)  The Minimum Wage Act sets the minimum wage rate for Indian companies, where both the state and central governments determine these rates. The minimum wage rate is declared at the occupation, sector, state, and country levels. These wages can be established in any sector, profession, or region. Living expenses determine the minimum wage. The minimum wage may be set for different work classes with different or the same scheduled employment. The frequency of salary is either monthly, hourly, or daily. The state and central governments will notify prospective employers of the revision of the minimum wage rate.

There are two ways to amend or amend the minimum wage:

1) Committee method

This method is a method of changing the minimum wage after the government has set up committees and subcommittees for making recommendations and advisories.

2) Notification method

In this way, the government's proposals on people who may be affected by the change in the minimum wage are published in the official bulletin. Recommendations will be considered on the specified date.

The Government will amend or amend the minimum wage for certain prospective employment after considering the advice of all representatives and committees. The final decision will be made three months after the declaration date.

List of legal compliance documents by Staruphroolkit

1. Outline of laws and regulations
2. 1936 Wage Payment Act
3. Minimum Wage Act, 1948
4. 1965 Bonus Payment Act
5. Tax withholding (TDS)
6. Professional tax
7. Amendment of the 1961 Birth Benefit Act
8. 1976 Same Compensation Act
9. Store and Business Law
10. 1948 Employee State Insurance Act (ESIC)
11. 1972 Thanksgiving Payment Method
12. Labor Welfare Fund Act 1965
13. Labor Law Annual leave and holidays
14. Labor law compensation
15. Labor Law Fair treatment
16. Labor Law Safety and Health
17. Labor Law Labor Union

Q12) Calculate the total earnings and effective rate of earnings per hour of three operators under Rowan

System and Halsey System from the following particulars.

The standard time fixed for producing 1 dozen articles is 50 hours. The rate of wages is 1/- per hour.

The actual time taken by three are as follows: -

45 hours

B 40 hours

C 30 hours. ( 5 marks)

A1)

Computation of Total Earnings of workers under Halsey Plan

Earnings under Halsey Plan = Hours worked × Rate per hour + (50% × Time saved × Rate per hour)

Computation of Total Earnings of workers under Rowan Plan

Earnings under Rowan Plan =

Hours worked × Rate per hour + ( Time saved × Hours worked × Rate per hour)

Time allowed

Q13) A workman takes 9 hours to complete a job on daily wages and 6 hours on a scheme of payment by results. His hourly rate is 25 p. The Material cost of the product is 4 and factory overheads are recovered at 150% of the total direct wages. Calculate the factory cost of the product under following methods: -

(a) Time rate system  

(b) Halsey Plan 

(c) Rowan Plan. (5 marks)

A2)

Computation of factory cost under three systems:

Working Notes:

Q14)  A worker under the Halsey method of remuneration has a day rate of 12 per week of 48 hours, plus a cost-of-living bonus of 10 p. Per hour worked. He is given 8 hours task to perform, which he performs   in 6 hours, he is allowed 30% of the time saved as premium bonus. What would be his earnings under Halsey Plan and Rowan Plan. (8 marks)

A3)

Computation of earnings of worker under Halsey Plan:

Earnings under Halsey Plan = Hours worked × Rate per hour + (30% × Time Saved × Rate per hour)

= (6 x 0.25) + 30/100 (8-6) x 0.25 = 1.65

(+) Cost of Living Bonus (6 x 0.1) = 0.60 Earnings under Halsey Plan              = 2.25

Computation of earnings of worker under Rowan Plan:

Earnings under Rowan Plan =

Hours worked × Rate per hour + ( Time saved × Hours worked × Rate per hour)

Time allowed

= (6 × 0.25) + (8-6 / 8) × 6 × 0.25 = 1.88

(+) Cost of Living Bonus (6 × 0.1) = 0.60

= 2.48

Earnings under Halsey Plan   = 2.25

Earnings under Rowan Plan = 2.48

Q15) In a factory guaranteed wages at the rate of 1.80 per hour are paid in a 48-hour week. By time and motion study it is estimated that to manufacture one unit of a particular product 20 minutes are taken, the time allowed is increased by 25%. During the week A produced 180 units of the product. Calculate his wages under the following methods. (8 marks)

(a) Time Rate.

(b) Piece Rate with a guaranteed weekly wage.

(c) Halsey premium Bonus.

(d) Rowan Premium Bonus.

A4)

(a) Calculation of wages under Time Rate System

Earnings under time wages = TR

= 48 × 1.8 = 86.4

(b) Calculation of wages under Piece Rate with a Guaranteed Wage Rate

Normal Time for one unit = 20 minutes (+) Relaxation allowance @ 25% = 5 minutes

Standard Time = 25 minutes No. Of pieces per hour = 60/25 pieces. Piece Rate              = Hourly Rate / No. Of pieces per hour

= 1.8 ÷ (60/25)

= 0.75

Earnings under Piece Rate = 180 x 0.75 = 135

(c) Calculation of wages under Halsey Premium Bonus

Standard time for actual production = 180 x 25 / 60 = 75 hours

Earnings under Halsey Plan =

= (48 x 1.8) + 50/100 (75-48) x 1.8

= 86.4 + 24.3 = 110.70

(d) Calculation of wages under Rowan Premium Bonus

Standard time for actual production = 180 x 25 / 60 = 75 hours Earnings under Rowan Plan = (48 x 1.8) + (75-48 / 75) x (48 x 1.8)

= 86.4 + 31.104 = 117.50

Q16) Calculate the earnings of workers A and B under Straight Piece Rate system and Taylor’s Differential

Piece Rate system from the following particulars: - Normal rate per hour - 1.80

Standard time per unit 20 seconds Differentials to be applies are:

80% of the piece rate below the standard; 120% of the piece rate at or above standard.

A produced 1,300 units per day of 8 hours & B -1,500 units per day of 8 hours. (8 marks)

A5)

Standard production in actual time = 8 x 180 = 1440 units

Earnings under Straight Piece Rate: Earnings of A = 1300 x 0.01 = 13.00 Earnings of B = 1500 x 0.01              = 15.00

Earnings under Taylor’s Differential Piece Rate:

A’s efficiency = 1300 / 1440 x 100 = 90.28%

= < 100%

A’s Earnings = 1300 x 0.01 x 80%

= 10.42

B’s efficiency = 1500 / 1440 x 100 = 104.17%

= > 100 %

B’s Earnings = 1500 x 0.01 x 120%

= 18

Q6) The following particulars apply to a particular job:

Standard production per hour - 6 units Normal rate per hour -              1.20 Mohan produced 32 units

Ram produces 42 units

Prasad produces 50 units

Calculate the wages of these workers under Merrick Differential Piece Rate System. (5 marks)

A6)

Calculation of wages of workers under Merrick Differential Piece Rate System

Q17) From the following particulars work out the earnings for the week of a worker under

(a)     Straight Piece Rate

(b)     Differential Piece Rate

(c)      Halsey Premium System

(d)     Rowan System

Number of working hours per week 48

Wages per hour — 3.75

Normal time per piece — 20 Min

Normal output per week — 120 pieces Actual output for the week              — 150 pieces

Differential piece rate — 80% of the piece rate when output is below standard and

120% above standard. ( 8 marks)

A7)

Computation of earnings for the week of a worker

(a) Piece rate = (48 x 3.75) / 120 = 1.5

Earnings under Straight Piece Rate = 150 x 1.5 = 225

(b) Efficiency = (150 / 120) x 100 = 125% (> 100%)

Earnings under Differential Piece Rate = 150 x 1.5 x 120/100

= 270

(c)    Standard time for actual production = 48 x (150 / 120)              = 60 hrs Earnings under Halsey Plan = (48 x 3.75) + 50/100(60 – 48) x 3.75

= 180 + 22.5 = 202.5

(d) Earnings under Rowan Plan = (48 x 3.75) + [(60-48 / 60) x (3.75 x 48)]

= 180 + 36 = 216

Q18) The extracts from the payroll of M/s. Maheswari Bros. Is as follows:- Number of employees at the beginning of 2015              150

“ Replaced due to resignation and discharges 20

Calculate the Labour Turnover Rate for the factory by different methods. (5 marks)

A8)