CMA Intermediate · Cost Accounting

Employee Costs: formula sheet

Full chapter guide

Key formulas

Total employee cost: Employee cost = Wages + Salaries + Allowances + Bonus and incentives + Employer's statutory contributions + Fringe benefits; Include only costs of the period that relate to employees' services. Exclude abnormal and non-cost items. Overtime premium is normally part of factory overhead.
Direct employee cost: Direct employee cost = Cost of employees whose time or effort is traceable to a cost unit; Charged straight to the job, product or process. Normal bonus and employer's contributions on direct workers are commonly loaded to direct cost.
Indirect employee cost: Indirect employee cost = Total employee cost − Direct employee cost; Goes to overheads: factory, administration, selling or distribution, according to function.
Gross wages: Gross wages = Basic pay + Allowances + Overtime + Bonus (if included); Net pay is lower by employee deductions such as PF and TDS, but cost to the employer is the gross amount plus employer contributions. In costing, the overtime premium part is normally treated as overhead.
Gross wages: Gross wages = Basic wages + Overtime premium + Allowances and bonus; Basic wages cover all hours paid at normal rate. Include only items payable for the period.
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.
Idle time (hours): Idle time = Hours paid (time keeping) − Hours booked on jobs (time booking); Used to reconcile the time keeping and time booking records.
Wage analysis check: Direct wages + Indirect wages = Gross wages as per payroll; The analysis of wages in cost records must agree with the payroll total.
Time rate earnings: Earnings = Hours worked × Rate per hour; Paid regardless of output. Overtime or guaranteed minimum may apply if the question says so.
Piece rate earnings: Earnings = Units produced × Rate per unit; If a minimum guaranteed wage is given, the worker gets the higher of the two.
Efficiency: Efficiency % = Actual output ÷ Standard output × 100 (or Standard time for actual output ÷ Time taken × 100); Used to pick the rate band in Taylor, Merrick, Emerson and Gantt.
Halsey premium plan: Earnings = (T × R) + 50% × (S − T) × R; S = standard time, T = time taken, R = hourly rate. The 50% share is the usual default. Use the share given in the question.
Rowan plan: Earnings = (T × R) + [(S − T) ÷ S × T × R]; Bonus = time saved ÷ standard time × time wages. Divide by standard time S, not by time taken.
Taylor differential piece rate: Below standard: 80% of piece rate on all units. At or above standard: 120% of piece rate on all units.; Applied to all units produced, not just the extra units.
Merrick multiple piece rate: Up to 83% efficiency: normal piece rate. Above 83% up to 100%: 110% of piece rate. Above 100%: 120% of piece rate.; Applied to all units. Check the band limits in the question, since textbooks differ slightly at the boundaries.
Emerson efficiency plan: Up to 66⅔% efficiency: time wages only. Above 66⅔% to 100%: bonus rises step by step, reaching 20% of time wages at 100%. Above 100%: 20% plus 1% for every 1% increase in efficiency.; Bonus is a percentage of time wages. Use the bonus table given in the question for efficiency between 66⅔% and 100%.
Gantt task and bonus plan: Below standard: guaranteed time wages. At standard: time wages plus 20% bonus. Above standard: 120% of piece rate on all output.; The 20% figure is the usual textbook value. Follow the question if it differs.
Average number of workers: (Workers at start + Workers at end) ÷ 2; Use this as the base unless the question gives a different average, such as monthly figures.
Separation method: Labour turnover rate = Number of separations during the period ÷ Average number of workers × 100; Separations include resignations, discharges, retirements and deaths.
Replacement method: Labour turnover rate = Number of replacements during the period ÷ Average number of workers × 100; Count only workers hired in place of those who left. New posts for expansion are not replacements.
Flux method: Labour turnover rate = (Separations + Accessions) ÷ Average number of workers × 100; Accessions include replacements and additions. Flux rate is normally higher than the other two.
Flux rate when all accessions are replacements: Flux rate = 2 × Replacements ÷ Average number of workers × 100; Valid only when every accession is a replacement and separations equal replacements. Then there are no new posts and headcount does not change.
Total cost of labour turnover: Total cost = Preventable cost + Unpreventable cost; also Total cost = Separation costs + Replacement costs; These are two separate ways of classifying the same total: by cause (preventable or unpreventable) and by nature (separation or replacement). Each cost item falls in one group under each classification.
Cost per replacement (illustrative measure): Cost per replacement = Total cost ÷ Number of replacements; This is not a standard prescribed formula. Use it only as an illustrative measure, when the question asks for an average cost per replacement.
Idle time cost: Idle time cost = Idle hours × Wage rate per hour; Use the rate paid to the workers who were idle. Under piece rate or guaranteed wages, the idle payment is the guaranteed amount minus what was earned.
Normal idle time: Normal idle time cost → added to cost of production (factory overheads or loaded in the effective labour rate); If it is loaded in the labour rate, the effective rate = Total wages ÷ Productive hours.
Abnormal idle time: Abnormal idle time cost → Costing Profit and Loss Account; Never charged to jobs or products.
Overtime wages with premium: Overtime pay = Overtime hours × Normal rate × (1 + premium %); At double time, the premium is 100%. At time and a half, it is 50%.
Overtime premium: Overtime premium = Overtime hours × Normal rate × Premium %; Only this part gets special treatment. The normal-rate part is direct wages.
Treatment of overtime premium: General or regular overtime → factory overheads; specific job or customer request → that job; abnormal or avoidable → Costing P&L A/c; Decide by cause. Read the question wording.
Labour productivity: Labour productivity = Output ÷ Labour hours (or number of workers); Gives units per hour or per worker. Compare across periods to see the trend.
Efficiency ratio: Efficiency % = (Standard hours for actual output ÷ Actual hours worked) × 100; Above 100% means workers took less time than the standard allowed.
Standard hours for actual output: Standard hours = Actual output × Standard time per unit; Always based on actual output, not budgeted output.
Activity ratio: Activity % = (Standard hours for actual output ÷ Budgeted hours) × 100; Shows volume of work done against plan.
Capacity ratio: Capacity % = (Actual hours worked ÷ Budgeted hours) × 100; Shows how fully the planned hours were used.
Standard time: Basic time = Observed time × Rating ÷ 100; Standard time = Basic time + allowances; Observed time is adjusted for the worker's pace, then allowances are added.

Quick revision

Employee cost includes wages, salaries, allowances, bonus, employer contributions to funds and other benefits.
Direct labour can be traced to a product or job; indirect labour cannot and is charged as overhead.
Time rate wage = hours worked × rate per hour.
Straight piece rate wage = units produced × rate per unit.
Halsey plan: earnings = time taken × rate + 50% × time saved × rate.
Rowan plan: earnings = time taken × rate + (time taken ÷ time allowed) × time saved × rate.
Check both plans with the case of no time saved: the bonus is zero and earnings equal time taken × rate.
Time saved = time allowed − time taken.
The average number of workers is normally (opening + closing) ÷ 2.
Labour turnover rate (separation method) = number of separations ÷ average number of workers × 100.
Replacement method = number of workers replaced ÷ average number of workers × 100.
Flux (accession) method = (separations + accessions) ÷ average number of workers × 100.
Normal idle time is treated as production overhead and absorbed into the cost of products; abnormal idle time is charged to the Costing Profit and Loss Account.
Overtime premium is usually treated as overhead unless the overtime is caused by a specific job or customer request.
Labour efficiency = standard hours for actual output ÷ actual hours worked × 100.
In MCQs, read the unit of time and the number of workers carefully before starting any calculation.

Common mistakes

Treating all wages as direct and all salaries as indirect. Fix: Classify by traceability, not by the label. A salaried designer working on one job can be direct. A wage-earning cleaner is indirect.
Ignoring employer's contributions to PF and ESI when computing employee cost. Fix: Cost to the employer includes its own contribution. Add it to gross pay.
Treating time keeping and time booking as the same thing. Fix: Remember purpose: time keeping is for wage calculation, time booking is for job costing.
Naming the job card as a time keeping document. Fix: Time card and attendance register belong to time keeping. Job card and time sheet belong to time booking.
Dividing by time taken instead of standard time in the Rowan formula. Fix: Rowan bonus = time saved ÷ standard time × time wages. The denominator is always S.
Applying the Taylor or Merrick differential rate only to extra units above standard. Fix: These schemes apply the chosen rate to all units produced by the worker in the period.
Using the closing or opening workers as the base instead of the average. Fix: Always compute (opening + closing) ÷ 2 first, unless the question states another base.
Counting new posts as replacements in the replacement method. Fix: Replacements are only those hired in place of leavers. Extra staff for expansion appear only in the flux method.
Charging the whole overtime pay to overheads Fix: Split the pay. Hours at the normal rate stay in direct wages. Only the extra premium is treated as overheads.
Charging abnormal idle time to the job Fix: If the cause is breakdown, strike, power failure or similar, write it off to Costing P&L A/c.

Exam tips

In MCQs, read who the employee is before looking at the payment. The same payment can be direct or indirect depending on the person.
For classification questions, write a short reason beside each item. Step marks go to the reasoning.
Always start from gross pay and add employer's contributions. Never start from net pay.
Watch for abnormal items and exclude them with a note. A normal or customary ex-gratia stays in cost; an unusual one does not.
Treat overtime premium as overhead unless the question says it was at a customer's request.
Use a neat two-column statement for direct and indirect costs, with a total that agrees to the data.
Write time keeping and time booking answers as a two-column style contrast in sentences: purpose, document, user, outcome.
In department-role questions, give one line for each of personnel, time keeping, payroll and cost accounting.