Accounting for Labour
Direct or Indirect Costs? ‘Type’ of worker Direct workers - directly involved in producing output
Direct Labour cost
Indirect Labour cost
•Basic Pay
•General overtime premiums •Bonus payments •Idle time •Sick pay •Time spent on indirect jobs
•Overtime Premium ‘on specific job’, ‘at customer’s request’
Indirect workers (Maintenance staff, supervisors, Canteen)
Indirect labour cost
ALL COSTS
Remuneration Methods Time Based Schemes Total Wages = (hours worked × basic pay/hour) + (overtime hrs worked × overtime premium/hour) Higher quality if workers are happy to spend longer on units to get them right; However, no incentive to improve productivity. Piecework Schemes Total Wages = Number of units completed × agreed rate per unit. •May involve a guaranteed minimum wage •May use a higher rate per unit once productivity target achieved •Higher productivity at the expense of quality? Other Schemes e.g. Flat salary and bonus Bonus Schemes individuals or groups
Labour Turnover
Labour Related Ratios
Accounting for Overheads
Absorption costing OVERHEADS Step1 : Overhead allocated or apportioned to cost centres using suitable bases Step 2 : Service cost centres reapportioned to production cost centres
Production Department A
Production Department B
A
B
Step 3 : Overheads absorbed into output
Cost Unit
Service Department C
Service Department D
Step1 :
Absorption costing
Allocation is the charging of overheads directly to specific departments where they can be identified directly with a cost centre or cost unit. Apportionment is the sharing of overheads which relate to more than one department on a fair basis.
Step 2 : Service department costs need to be reapportioned to the production departments, using a suitable basis linked to usage of the service. Step 3 : Costs within production cost centres are charged to a cost unit, using Overhead absorption rates (OAR) based on : • Labour or machine hours • % of direct labour cost
OAR = Budgeted overheads / Budgeted level of activity
Under and over absorption Overhead Absorbed • OAR × Actual activity
Actual overhead incurred
Under- or overabsorbed overhead
If Absorbed overhead > Actual overhead = over-absorbed If Absorbed overhead < Actual overhead = under-absorbed
Ledger Accounting • Debited to one of the nonproduction OH accounts
• In Production Overheads Account
• Transferred to income statement at the end of the period
Indirect Production Costs
Nonproduction Overheads
Over- or underabsorption overheads
Absorbed Production Overheads
• Debited to the work in progress or production account
Chapter 8
Marginal and Absorption Cost
Marginal costing and Contribution Sales Revenue Variable cost • Variable Production and Non-production cost
CONTRIBUTION Fixed Costs • Fixed Production and Non-production cost
PROFIT
Absorption and marginal costing ABSORPTION COSTING
MARGINAL COSTING
Valuing units
Total production cost
Marginal (variable) production cost
Valuing inventory
Opening and closing inventory Opening and closing valued at total production cost inventory valued at marginal cost
Fixed production overheads
Carried forward from one period to the next as part of the closing / opening inventory valuation. Only hit profit when units are sold.
Fixed costs charged in full against profit in the period in which they are incurred
Absorption and marginal costing ABSORPTION COSTING
MARGINAL COSTING
Adjusting for overor underabsorption
Yes – in the income statement
None needed
Impact of increase in inventory levels
Gives higher profit
Gives lower profit
Impact of decrease Gives lower profit in inventory levels
Gives higher profit
Inventory level constant
Same profit under both systems
Profit Statements Sales Revenue
Cost of sales
Sales Revenue
Cost of sales
Over/Under absorption Variable non-production costs incurred
Gross Profit Contribution Fixed costs
Net Profit / (Loss)
Variable non-production costs
Fixed non-production costs
Net Profit / (Loss)
Reconciliation MARGINAL COSTING PROFIT
Change in inventory × Fixed OAR
ASORPTION COSTING PROFIT
Absorption versus Marginal
