Cost Ascertainment-Labor Costing
Cost Ascertainment for labor is the process of identifying cost incurred or paid to laborers needed for the production of a product. There are diverse logistics of handling labor cost for labor force is generally categorized in to skilled, semi-skilled and unskilled levels and again, the basis in which labor is paid varies.
First, let us define labor cost. This refers to direct wages of factory workers. Labor cost therefore entails of
- Basic pay which can either be on daily, weekly or monthly basis
- Job related costs such as holiday allowances, overtime premium and other related allowances.
NB: Compensation of workers should be strictly pegged on a particular accepted parameter such as labor hours worked or piece rate set per piece of work done.
Computation of Labor Cost
There are different methods of computing labor cost. These are;
Time rate
It is a method of computing or determining labor cost based on time taken by the laborer in doing the work. The time duration can be in terms of hourly, weekly or monthly. The rate per the time taken is usually predetermined.
Steps of determining labor cost based on time
Step one; Determine the number of time units worked. That is either, number of hours worked, or number of days, weeks or months the laborer has worked
Step two; Identify the time rate appropriate for that nature of job or work done.
Step three; compute the total labor cost amount by multiplying the rate applicable with the total time taken to do the work
NB1: That, the cost accountant need to be careful to ensure that idle labor hours are excluded in the final computation of the labor cost.
NB2: Any provisions given to consider which can result to labor cost adjustments, should be keenly considered. For example, there may be provisions for incentives for the purposes of motivating the workers which is pegged on the basic wages. Then this need to be incorporated in the final labor cost computation.
Example One
Morgan Chemical Co. ltd deals with medical care which involves manufacturing of medicine. The wage rate for its employees working in the chemical plant is $150/hour. Any extra hour worked is paid at 120% of the normal rate.
If the normal working hours is from 8:00am to 5:00pm, from Monday to Friday with one hour break for lunch, determine the total labor cost for one employee working per month which has 25 working days
SOLUTION
Step one;
Time taken between 8am to 5 pm per day is 9 hours
Total number of working days is 25
Step two;
Therefore, the total number of hours worked was;
25*9 hours=225 hours
Total labor cost per month will be 225*150/-=$33,750
Other Time Rate Related Computation Methods
-High Time Rate for overtime
Under this method, the normal working hours worked is paid using the normal time rate while for the overtime worked, the rates are higher as the name suggests.
Example two
Michigan Computer Co. ltd deals with computer repairs and consultancy. The wage rate for its employees working in the computer lab is $200/hour. Any extra hour worked is paid at 150% of the normal rate.
The normal working hours is from 8:00am to 3:00pm, from Monday to Friday with one hour break for lunch. In the month of March 2020, the employees worked the normal hours plus an overtime of four (4) days in that month.
Required;
Determine the total labor cost for one employee working per month, which has 25 working days.
SOLUTION
Step one;
Time taken between 8am to 3pm per day is 7 hours
Total number of working days is 25
Step two
Therefore, the total number of hours worked was;
25*7 hours= 175 hours
Amt.$
Total basic labor cost per month will be 175*200/-= 35,000
Add overtime cost of 4days*150% of 200= 1,200
36,200
Piece Rate
Under this approach, the labor cost is determined by the units of the products that have been produced. Therefore the issue of time taken is immaterial. The concern here is the number of pieces produced. The rate per piece is usually predetermined.
Example one
The cost of baking a brick for house construction is, $550. If the total units baked in a weeks’ time is 300 pieces, what tis the total labor cost for the work done.
SOLUTION
Total labor cost is 300*550= $165,000
Other Piece Rate Related Computation Methods
-Piece Rate with Guaranteed Time Rate
Under this methodology, the employee is guaranteed of a certain amount of salary regardless of the number of pieces he or she has produced. However, beyond a certain threshold of production, he is paid according to the number of pieces one has produced.
Example two
Excellent co ltd pays its workers guaranteed wages of $1,200 per month. In April and May of 2021, one employee produced 300 and 105 units respectively. If the cost per piece produced is $7.5, determine the total wages paid for each moth
SOLUTION
Month of April-i.e. 300 pieces produced
Total labor cost is 300*7.50= $2,250
NB: Since $2,250 is more than $1,200, then we go by the higher amount
Month of May
For 105 pieces produced by the laborer, the cost will be 105*7.5= $787.50. However, with the guaranteed formula, the laborer will be paid $1,200 which is higher.
