Employee Costs for CMA Intermediate Cost Accounting

What this chapter covers

Employee Costs: topics in the order to study them

1. 1Employee Cost: Meaning and ComponentsStart here because every later topic uses the terms direct and indirect labour and the items that make up employee cost.
2. 2Attendance and Payroll ProcedureThis shows how the cost is recorded and paid, and it is mostly theory, so it is a light step before the calculations.
3. 3Methods of Wage Payment and Incentive SchemesThis is the main numerical topic and the base for earnings, so learn it before the problem topics.
4. 4Labour TurnoverOnce you know how workers are paid, you can measure the cost of workers leaving and joining using the separation, replacement and flux (accession) methods.
5. 5Idle Time and OvertimeThese need the wage rate from earlier topics and teach you whether the cost goes to jobs or to overheads.
6. 6Labour Productivity, Efficiency and Cost ControlFinish with control measures, as they pull the whole chapter together and lead into labour variances.

How to prepare Employee Costs

1. Read the components of employee cost and make a short list of what is direct and what is indirect, with one example of each.
2. Learn the payroll flow in order: attendance record, time or job card, wage calculation, deductions, payment and accounting entry.
3. Write each wage and incentive method as a formula in your notebook, then solve at least two problems for every method, checking that earnings never fall below the guaranteed time wage where the scheme says so.
4. Practise labour turnover rates by each method, and keep the definition of each term next to the formula so you do not mix up separations, replacements and new additions.
5. Solve idle time and overtime cases by asking one question: is the cause normal or abnormal, and is it controllable? Then decide where the cost goes.
6. Finish with efficiency and productivity ratios, then attempt a past-style mixed question and a set of MCQs under time.
7. Write answers in a clear layout: formula, working, final figure with units, and a one-line comment where the question asks for interpretation.

Common mistakes in Employee Costs

• Treating all idle time as a cost of production.

  Fix: Always state the cause first. 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.

• Using the wrong formula for incentive plans, such as swapping the Halsey and Rowan bonus.

  Fix: Write each formula with its own name, solve one example per plan, and recheck by testing the case when no time is saved.

• Calculating labour turnover with the wrong denominator or the wrong method.

  Fix: Take the average number of workers as (opening + closing) ÷ 2 unless the question gives the average or states another basis, and write it as a separate line. Then apply the method asked: separation, replacement or flux (separations + accessions).

• Charging the full overtime pay to the job.

  Fix: Split overtime into normal wage and premium, and then decide the treatment based on who or what caused the overtime.

• Ignoring the guaranteed minimum time wage in piece-rate problems.

  Fix: Compare piece-rate earnings with the guaranteed time wage, and pay the higher one if the question provides such a guarantee.

• Giving only the final number in written answers.

  Fix: Show the formula, the substitution and the result for each worker or period, so you earn step marks even if one figure goes wrong.

Last-day revision: Employee Costs

• ✓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.

Employee Costs practice questions

• Which of the following is generally NOT included in the cost of labour turnover that arises from replacing a worker?
• In Taylor's differential piece rate system, the normal rate is Rs 10 per piece. Workers reaching or exceeding standard output get 120% of th…
• A factory worker of Sundaram Engineering earns basic wages of ₹30,000 and dearness allowance of ₹10,000 per month. The employer contributes …
• Which of the following is a feature of the time rate system of wage payment as compared with piece rate?
• Under the cost accounting treatment of employee cost, which of the following is the most appropriate way of recording abnormal idle time ari…
• In the payroll procedure of a manufacturing unit, which document is the primary record used to ascertain the hours a worker was present in t…
• Which of the following is an avoidable cause of labour turnover in a manufacturing concern?
• Ramesh Industries pays a worker Rs 80 per hour for a normal 40-hour week. In one week he works 46 hours. Overtime hours are paid at double t…

Employee Costs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CA IntermediateEmployee Cost and Direct Expenses