Employee Cost and Direct Expenses: formula sheet

Key formulas

Total employee cost

Employee cost = Basic pay + Allowances + Bonus + Employer's statutory contributions + Fringe benefits + Overtime premium (as applicable)

Use this as a checklist. Include only items that are actually paid or payable by the employer for the period.

Direct vs indirect rule

Direct employee cost = cost traceable to a cost unit; Indirect employee cost = all the rest (to overheads)

Prime cost includes direct employee cost. Indirect employee cost goes to factory, office or selling overheads based on the department.

Gross wages to net wages

Net wages payable = Gross wages − Employee's PF − ESI − Income tax deducted − Other recoveries

Employee's deductions are not extra cost to the employer. They are liabilities paid to others, so cost is based on gross wages plus employer's contributions.

Payroll control principle

Segregation of duties: Attendance recording ≠ Wage calculation ≠ Approval ≠ Disbursement

Write this in answers on control. Each function should be handled by different people or departments.

Time keeping vs time booking reconciliation

Time keeping hours (attendance) = Time booked on jobs + Idle time

Any difference needs investigation. It may be unrecorded idle time or a booking error.

Gross wages

Gross wages = Basic wages + Dearness allowance + Other allowances + Overtime premium + Incentive/bonus

Components depend on the question. Include only what is stated.

Net wages payable

Net wages = Gross wages − Employee deductions (PF, ESI, TDS, advances, recoveries)

Employer contributions are not deducted from the employee. They are an extra cost to the employer.

Wages control entry

Wages Control A/c Dr. (gross wages, plus employer contributions if stated) to Bank/Cash (net wages paid) and the deduction payables (employee PF, ESI, TDS, advances recovered). If employer PF/ESI is given, the employer's share is also credited to the PF/ESI payable accounts.

Wages Control is then cleared by crediting it when direct labour is charged to Work-in-Progress (Dr.) and indirect labour is charged to Overhead Control (Dr.). Its balance should be nil once all wages are analysed.

Time rate wages

Earnings = Hours worked × Rate per hour

Paid even if output is low. Overtime or idle time is treated separately.

Piece rate wages

Earnings = Units produced × Rate per unit

Often with a guaranteed minimum time wage. Pay only for good units if the question says rejects are not paid.

Time saved

Time saved = Time allowed − Time taken

Starting point for Halsey and Rowan. If it is zero or negative, there is no bonus.

Halsey premium plan

Earnings = (Time taken × Rate) + 50% × (Time saved × Rate)

The bonus share is 50% unless the question gives another share (such as 30% or 33⅓%). The worker gets a fixed share of the time saved.

Rowan plan

Earnings = (Time taken × Rate) + (Time saved ÷ Time allowed) × (Time taken × Rate)

Bonus is a fraction (time saved ÷ time allowed) of time wages, so it is always less than time wages. The bonus amount is maximum when time taken is half of time allowed (T = A ÷ 2). It falls if the worker saves more time than that, and it also falls as time taken moves closer to time allowed.

Efficiency

Efficiency % = Actual output ÷ Standard output × 100

Equivalent in time terms: Standard time for actual output ÷ Actual time taken × 100.

Taylor differential piece rate

Below standard: 80% of piece rate × all units. At or above standard: 120% of piece rate × all units

The 80% and 120% are commonly used in exam questions. Use the percentages given. The higher rate applies to all units, not only the excess.

Merrick multiple piece rate

Up to 83⅓% efficiency: ordinary piece rate. Above 83⅓% up to 100%: 110% of piece rate. Above 100%: 120% of piece rate

Three bands. The rate for the band applies to all units produced.

Emerson efficiency plan

Below 66⅔% efficiency: time rate only. From 66⅔% to 100%: graded bonus, rising to 20% of time wages at 100%. Above 100%: 20% plus 1% for every 1% above 100%

Bonus is on time wages. Use the graded table in the question for the middle band.

Gantt task and bonus plan

Below standard output: guaranteed time wage. At or above standard output: high piece rate (120% of the ordinary piece rate) on all output, with the rate set so that earnings at standard output equal 120% of time wages

Check the version and percentages stated in the question.

Separation method

Labour turnover rate = Number of separations during the period ÷ Average number of workers during the period × 100

Counts only workers who left. In the standard separation method, separations include all workers who leave, whether by resignation, discharge, retirement or death.

Replacement method

Labour turnover rate = Number of replacements during the period ÷ Average number of workers during the period × 100

Counts only workers who joined in place of those who left. New posts created by expansion are not replacements.

Flux method

Labour turnover rate = (Number of separations + Number of accessions) ÷ Average number of workers during the period × 100

Accessions are all new joiners, replacements and additions. This is the fullest measure; it takes both exits and entries.

Average number of workers

Average workers = (Opening number + Closing number) ÷ 2

Use this when the question gives opening and closing strength, unless a better average is given.

Flux rate in terms of separation and accession rates

Flux rate = Separation rate + Accession rate (separation rate = separations ÷ average workers × 100; accession rate = accessions ÷ average workers × 100)

Accessions include both replacements and additions. If accessions equal separations, flux rate = 2 × separation rate.

Cost of labour turnover

Cost of labour turnover = Preventive costs + Replacement costs

Preventive costs include personnel administration, medical services and welfare. Replacement costs include recruitment, training, lower output, extra scrap and breakage, and lost production. Show the two components separately, then add them.

Idle time cost

Idle time cost = Idle hours × Wage rate per hour

Use the rate the worker is paid for idle hours. Under time rate it is the normal hourly rate.

Normal idle time treatment

Normal idle time cost → Factory overheads (absorbed in production)

Debit Factory Overhead Control A/c, credit Wage Control A/c.

Abnormal idle time treatment

Abnormal idle time cost → Costing Profit and Loss A/c

Debit Costing P&L A/c, credit Wage Control A/c. Not charged to products.

Overtime premium

Overtime premium = Overtime hours × Normal rate × (Premium factor − 1)

For double rate, premium is 100% of the normal rate. For 1.5 times, it is 50%.

Overtime treatment by cause

General pressure → Overheads; Customer request or specific job → That job; Abnormal cause → Costing P&L A/c

Normal-rate part of overtime hours is always direct wages of the work done.

Piece rate overtime

Overtime premium = Overtime hours × Normal hourly rate × premium %

Under piece rate, compare earnings with time-rate earnings for premium. Follow the data given in the question.

Efficiency ratio

Efficiency ratio = Standard hours for actual output ÷ Actual hours worked × 100

Above 100% means workers took less time than standard.

Capacity utilisation ratio

Capacity utilisation ratio = Actual hours worked ÷ Budgeted hours × 100

Shows how much of the planned hours were actually worked.

Activity ratio

Activity ratio = Standard hours for actual output ÷ Budgeted hours × 100

Compares actual output, in standard hours, with the budgeted output.

Link between the three

Activity ratio = Efficiency ratio × Capacity utilisation ratio ÷ 100

Use it to find a missing ratio. In decimals: Activity = Efficiency × Capacity utilisation.

Labour productivity

Productivity = Output ÷ Labour input (hours, workers or labour cost)

Choose the input the question names. State the unit in your answer.

Standard time

Standard time = Basic (normal) time + Allowances

Basic time = Observed time × Rating ÷ 100. Allowances cover fatigue, personal needs and delays.

Prime cost

Prime cost = Direct material + Direct labour + Direct expenses

Traceable direct expenses are included in prime cost; if there are none, show nil. Also called chargeable expenses.

Royalty on production

Royalty = Units produced × Royalty rate per unit

Production-linked royalty is a direct expense. Where royalty is on sales, it is a selling overhead.

Hire charges for a specific job

Direct hire cost = Hire rate × Period of hire for the job

Direct only if the equipment is hired for that job. Otherwise treat as production overhead.

Direct expenses per unit

Direct expenses per unit = Total direct expenses ÷ Units produced

Use only when asked for a per-unit figure. A lump-sum job expense is divided by units in that job.

Classification rule

Traceable to a cost unit → direct; common to many units → indirect (overhead)

Apply this test to every expense in the question before placing it in the cost sheet.

Quick revision

• Direct employee cost is traceable to a product or job; indirect employee cost goes to overheads.
• Time rate earnings = hours worked × rate per hour.
• Straight piece rate earnings = units produced × rate per unit.
• Taylor's differential piece rate pays a higher rate above standard output and a lower rate below it.
• Halsey plan: bonus is a fixed percentage of time saved, usually 50%.
• Rowan plan: bonus = time saved ÷ time allowed × time taken × rate.
• Separation rate = number of separations ÷ average workers × 100.
• Replacement rate = number of replacements ÷ average workers × 100.
• Flux rate = (separations + accessions) ÷ average workers × 100.
• Normal idle time is absorbed in production overheads; abnormal idle time is charged to the costing profit and loss account.
• Overtime premium is normally charged to overheads. It is charged to the job if the customer asked for the rush work. If it arises from abnormal causes (for example a fire or a management failure), it is charged to the costing profit and loss account.
• Direct expenses are costs other than materials and labour that are traceable to a specific job, such as hire of special equipment for it.

Common mistakes

• Adding employee's PF deduction to the employer's cost again Fix: Gross wages already include the employee's share. Only the employer's contribution is an added cost.
• Treating all employee cost as direct Fix: Test traceability. Supervisors, store staff and maintenance staff wages are indirect and go to overheads.
• Treating time keeping and time booking as the same thing. Fix: Time keeping is attendance for wages. Time booking is job-wise allocation for costing.
• Forgetting idle time when reconciling hours. Fix: Always use: attendance hours = booked hours + idle time.
• Using hours saved as hours allowed in the Rowan formula. Fix: Remember the fraction is time saved ÷ time allowed. Then multiply by time wages (time taken × rate).
• Applying the Taylor or Merrick higher rate only to the extra units above standard. Fix: In these piece-rate plans the band rate applies to all units produced. Say so in your working.
• Dividing by opening workers instead of average workers. Fix: Always compute (opening + closing) ÷ 2 first, unless the question gives another average.
• Counting new posts as replacements. Fix: Only workers who fill vacancies caused by separations are replacements. Extra posts from expansion are additions, which count only in the flux method.
• Treating the full overtime wage as premium. Fix: Only the extra over the normal rate is premium. At double rate, half of the overtime pay is normal wages and half is premium.
• Charging abnormal idle time to the product. Fix: Send abnormal idle time cost to Costing Profit and Loss A/c, as it is a loss not a cost of production.

Exam tips

• For MCQs, first decide whether the item is employer cost or an employee deduction. Many wrong options trap you here.
• In theory answers, list components in a short pointwise form: wages, salaries, allowances, bonus, contributions, fringe benefits.
• For control questions, structure the answer along the payroll cycle. It looks organised and covers more points.
• In numericals, show gross pay, additions, and total on separate lines so partial marks are safe.
• Do not copy textbook lists blindly. Pick the controls that fit the case given in the question.
• Theory questions often ask for the difference between time keeping and time booking. Use a point-wise comparison with at least four headings.
• For payroll questions, show the gross-to-net working clearly. Step marks are given for each component.
• Always cross-check that job cost plus idle cost equals gross wages.