f2 07 Labour costs.docVIP

Chapter07 Labor costs Priority = High Exam Guidance You will be expected to illustrate different remuneration policy and incentive schemes. Their characteristics must be always in your mind. And you must be familiar with the computation of total pay of employee. You will also need to be aware of the procedures and documents required for recording labour costs. 1. Measuring labour activity 1.1 Corresponding concepts 1.1.1 Production is the quantity or volume of output produced. 1.1.2 Productivity is a measure of the efficiency with which output has been produced. It is also called efficiency ratio. Ratio 100% : efficient labour Ratio 100%: inefficient labour Example: Suppose that an employee is expected to produce 3 units in every hour that he works. The standard rate of productivity is 3 units per hour. If, during one week, the employee makes 126 units in 40 hours of work the following comments can be made. 1.1.3 Standard hour of production is a concept used in standard costing, and means the number of units that can be produced by one worker working in the standard way at the standard rate for one hour. 1.1.4 Production volume ratio Ratio 100%: worked above capacity Ratio 100%: worked below capacity 1.1.5 Capacity ratio represents how much production capacity is utilized. Relationship between the three ratios Production volume ratio = Efficiency ratio X capacity ratio Example: Rush and Fluster Co budgets to make 25,000 standard units of output(in four hours each) during a budget period of 100,000 hours. Actual output during the period was 27,000 units which took 120,000 hours to make. Required: Calculate the efficiency, capacity and production volume ratios. 1.2 How to enhance production and productivity? Production can be increased by the following ways. a) Working overtime b) Hiring extra staff c) Sub-contracting some work to an outside firm d) Managing the work force so as to achieve more output. Productivity would be improved if a production department pr