B Com Exam > B Com Videos > Cost Accounting > Incentive Schemes III - Labour Cost, Cost Accounting
Incentive Schemes III - Labour Cost, Cost Accounting Video Lecture | Cost Accounting - B Com
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106 videos|173 docs|18 tests
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FAQs on Incentive Schemes III - Labour Cost, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What is labour cost in the context of incentive schemes? |  |
Ans. Labour cost refers to the expenses incurred by a company in relation to its employees' wages, salaries, benefits, and other associated costs. In the context of incentive schemes, labour cost is an important factor to consider as it directly impacts the financial feasibility and effectiveness of such schemes. By understanding the labour cost, companies can design incentive schemes that align with their budget and financial goals.
| 2. How are labour costs calculated in cost accounting? | |
Ans. In cost accounting, labour costs are calculated by considering various components such as direct wages, indirect wages, payroll taxes, employee benefits, and overhead costs. Direct wages are the actual wages paid to employees for their productive work, while indirect wages include additional payments like overtime, bonuses, or commissions. Payroll taxes include contributions made by the employer towards social security, unemployment insurance, and other government-mandated programs. Employee benefits cover expenses related to health insurance, retirement plans, and other perks. Overhead costs are the indirect costs associated with maintaining the workforce, such as training, recruitment, and employee facilities.
| 3. How do incentive schemes impact labour costs? | |
Ans. Incentive schemes can have a direct impact on labour costs. Depending on the design of the scheme, it can either increase or decrease the overall labour cost for a company. For example, if an incentive scheme rewards employees based on their productivity levels, it can motivate them to work more efficiently and potentially reduce labour costs by increasing output without increasing the number of hours worked. On the other hand, if an incentive scheme provides significant bonuses or commissions, it may increase labour costs as employees earn more through incentives.
| 4. What are some common types of incentive schemes used to manage labour costs? | |
Ans. There are several common types of incentive schemes used to manage labour costs:
1. Piece-rate incentive: Employees are paid based on the number of units they produce or tasks they complete. This scheme encourages productivity and can help control labour costs by directly linking pay to output.
2. Bonus incentive: Employees receive additional payments, usually in the form of a bonus, for achieving specific targets or goals. This can motivate employees to work towards improving performance and reducing labour costs.
3. Profit-sharing incentive: Employees receive a share of the company's profits based on their contribution to its success. This scheme aligns employees' interests with the financial performance of the company, promoting cost-conscious behavior.
4. Gainsharing incentive: Employees receive a portion of the cost savings achieved through their suggestions or efforts. This scheme encourages employees to identify and implement cost-saving measures, leading to reduced labour costs.
5. Team-based incentive: Employees are rewarded based on the overall performance of their team or department. This scheme promotes collaboration and can help manage labour costs by encouraging teamwork and shared responsibility.
| 5. How can companies ensure the effectiveness of incentive schemes in managing labour costs? | |
Ans. To ensure the effectiveness of incentive schemes in managing labour costs, companies can consider the following:
1. Align incentives with company goals: Incentive schemes should be designed in a way that supports the company's objectives, including cost management. By aligning incentives with desired outcomes, companies can motivate employees to work towards reducing labour costs.
2. Regularly review and adjust incentive schemes: Companies should regularly review the performance and impact of their incentive schemes. If a scheme is not effectively managing labour costs or achieving desired outcomes, adjustments should be made to improve its effectiveness.
3. Provide clear and transparent communication: Employees need to understand how the incentive scheme works and how it relates to labour costs. Clear and transparent communication about the scheme's goals, criteria, and potential rewards will help employees align their efforts with cost management objectives.
4. Monitor and measure performance: It is crucial to monitor and measure the performance of employees and the overall impact of the incentive scheme on labour costs. This allows companies to identify any issues or areas for improvement and make necessary adjustments.
5. Continuously train and develop employees: Providing training and development opportunities to employees can enhance their skills and efficiency, leading to improved performance and better cost management. Companies should invest in improving their employees' capabilities to maximize the effectiveness of incentive schemes in managing labour costs.
Text Transcript from Video
now when we are talking about the
results our time saved or if our
incentive scheme is based on the time
saved by the employees what we'll be
doing or what we actually mean is that
we will have a specific time given to
the employees to do a certain amount of
tasks like to produce 20 units we'll be
giving them 20 hours okay so we'll have
I'm allowed 20 hours and units to
produce 20 units now what at the end of
the day or at the end of the period by
20 hours we counted the unit and it
comes up that they have produced 22
units now what has happened if we may
hear the standard time required to
produce one unit it is 20 hours divided
by 20 units equals 1 hour per unit right
but they are produced 22 units in the
same 20 hours so what they have done
they have saved 2 hours ok now how can
we calculate this time or how can we do
this you know once we have the standard
time then we are going to calculate
standard time required to produce actual
output well in that case it will be 22
units multiplied by 1 hour to produce 1
unit that is 22 hours but how much time
they have actually taken time allowed
was 22 hours and time taken equals 20
hours ok so 22 minus 20 gives you 2
hours
so effectively employees have saved you
two hours of work and now you can invest
these two hours somewhere else okay
because of the increased production but
hold on a second if employees are being
paid on hourly basis right and they are
saving two hours okay and if they are
not getting anything out of it
they will not be motivated to do any
tasks above the required amount of work
here they will only be producing 20
units for you but if they know that
because of increased production they
will be saving time of the entity or the
company or organization they will be
getting something out of it they will
increase their production so what you
have to do is you have to introduce an
incentive scheme that for any amount of
time saved because of increased
production they will be paid extra
otherwise what motivation do they have
to produce more for you so that's what
I'm saying that in order to have them
motivated to increase their efficiency
you need to give them sub benefits and
that's where your incentive schemes are
going to help you okay but hold on let's
continue our discussion and let us
understand that how introducing the
incentive scheme in this case will help
us okay if you have any questions so far
you can ask me
let's understand that if we are paying
employees at five per hour $5.00 per
hour
okay at the moment that means the actual
efficiency at the moment is 100% that is
they are using every time they have to
produce the unit at 100% efficiency or
it can be less than that okay but
according to our example here I am
assuming that they are having 100%
efficiency going on and by 100%
efficiency I mean that they will be
utilizing all of the time allowed that
is all 20 hours they will be producing
they will not be wasting anything but
let's understand that
what if our efficiency decreases that
what will be the effect in case of
hundred one percent efficiency twenty
hours work will be done but just in case
if our efficiency drops to 80 percent
then what would be happening that for 20
hours they will be present but only 80
percent of this time which is 16 hours
work will be done and because of that
they will be producing only 16 units
okay because each
unit requires one hour right so we see
that if our efficiency decreases our
production is also going to decrease
okay all right now what we want we what
we want is we want to increase the
efficiency so that we can have more
production and this will push our labor
cost per unit down it will reduce our
per unit labor cost okay all right let's
take an example now in this question
what we'll be doing is we'll be
calculating the grunt cost that we are
paying to labor and current
profitability that means the profit that
we are earning on current labor cost
basis and what will be the profit
situation if we introduce an incentive
scheme will it be increasing our profits
or decreasing our profits but remember
because remember our benefits must
increase more than the expenses that we
are going to pay to labor okay
so let's calculate I will calculate the
the profitability in the current
situation and then we'll be calculating
the profitability and the incentive
scheme at the moment we have 10
employees working 30 hours okay and
they're working only 70%
the time okay and also each employee is
employee hold on okay let's uh oops can
click the actual time work before then
calculating the effective time actual
time work this total time
- idle time okay
now total time is 30 hours each employee
number of employees are 10 this gives us
300 okay and each employee is idle for
one hour that comes up 30 so actually
they are working for how many hours to
70 hours okay and out of this to 70
hours they are effectively working only
70 percent of the time which is how much
is my calculator
189 hours
right now if each unit is taking one
hour and how many years are we producing
well number of English produced can be
calculated as 189 divided by 1 gives us
and then then 89 years okay right
189 units produced and if we are selling
it for 15 dollars then how much is the
revenue is 2835 okay now how much are we
paying for employees well
how many hours they are working they're
working for 300 hours and for each other
we are paying and five dollars so it
comes up 1,500 wage you know we are
paying them
idle time as well and also for the
inefficient okay so according to this
our current profit is 1335 alright this
is what we are learning considering
there is no other cost that we have to
detect out of revenue okay right so I
was saying that with a 30 hours idle
time and 70 percent efficiency you are
earning a profit of 1035 now what I want
you to do is calculate the profitability
if we introduce an incentive scheme okay
take 10 minutes so we're going to take
more than that calculate it enough that
we'll be discussing it on the whiteboard
okay now let's calculate the
profitability under the proposed
incentive scheme as for we have to
conclude actual time worked which is 300
and as supervisor is convincing us that
there will be no idle time so hole 300
hours work will be done but effective
hours will be 85 percent of this so it
comes up equal to 255 hours now with 255
hours we will be producing all my needs
255 units okay and calculating the
revenue for this much number of years to
be 3825 okay and put the time the wage
at 5.5 which comes up 1650 so profit in
this case will be two thousand one
hundred and seventy five so it's quite
impressive that if we can achieve this
by introducing an incentive scheme and
just with the 50 cent pay rise for 1
hour that is really a good result so we
must be accepting it because it's really
fulfill so now we understand the basic
purpose of intent is email as you can
see that the profitability increases
because of the intent is him although
you might be thinking at the beginning
that with increase in the labor we are
basically going to increase the labor
cost well yes that is going to happen
but we have to look on other aspects as
well because if we can improve because
of in just increasing the labor cost we
can improve other aspects of the
business and the benefits are going to
be more than the extra burden which
we'll be taking to
reducing incentive scheme then there is
no harm in going with incentive scheme
and introducing it also we can talk
about the unit cost in here for example
here if we can go per unit cost of
labour then it was 1500 that we were
paying in total and we were producing
hundred and eighty nine units an hour
per unit cost was seven point nine three
so it's almost equal to eight dollars
per unit okay
whereas in here we were paying
1650 and we were producing 255 units and
I see that there is going to be a
dramatic decrease in the labour cost per
unit so definitely is it's coming up six
point four seven which is six point five
so one dollar fifty cents decrees for
every unit you are producing in terms of
labor that is it going to be a good
achievement if you really achieve this
much efficiency and reduction in idle
time by just increasing fifty cents per
hour for labor so that really helps us
understand that why incentive schemes
are good and why we should be going for
them and real purpose of incentive
schemes just to add up in the something
that we have just discussed the
methodology that we have that we had in
this example and that what we discussed
here was basically high data rate system
okay which is just we have just gone
through a practical example of high D
rate system and what does we do in this
scheme is that we expect that with an
increased wage rate per hour or per day
or for a particular period of time there
will be increased output and what we are
trying to achieve is we are trying to
achieve high profitability or reduction
in per unit labor cost and that's what
we have seen as well in our example that
when we increased our per hour rate of
wage then we have achieved the increased
efficiency and also decrease in idle
time and because of that we were able to
produce more units and that pushed the
labor cost per unit down to one dollar
fifty cents by one hundred fifty cents
so okay so this is high day rate system
results our time saved or if our
incentive scheme is based on the time
saved by the employees what we'll be
doing or what we actually mean is that
we will have a specific time given to
the employees to do a certain amount of
tasks like to produce 20 units we'll be
giving them 20 hours okay so we'll have
I'm allowed 20 hours and units to
produce 20 units now what at the end of
the day or at the end of the period by
20 hours we counted the unit and it
comes up that they have produced 22
units now what has happened if we may
hear the standard time required to
produce one unit it is 20 hours divided
by 20 units equals 1 hour per unit right
but they are produced 22 units in the
same 20 hours so what they have done
they have saved 2 hours ok now how can
we calculate this time or how can we do
this you know once we have the standard
time then we are going to calculate
standard time required to produce actual
output well in that case it will be 22
units multiplied by 1 hour to produce 1
unit that is 22 hours but how much time
they have actually taken time allowed
was 22 hours and time taken equals 20
hours ok so 22 minus 20 gives you 2
hours
so effectively employees have saved you
two hours of work and now you can invest
these two hours somewhere else okay
because of the increased production but
hold on a second if employees are being
paid on hourly basis right and they are
saving two hours okay and if they are
not getting anything out of it
they will not be motivated to do any
tasks above the required amount of work
here they will only be producing 20
units for you but if they know that
because of increased production they
will be saving time of the entity or the
company or organization they will be
getting something out of it they will
increase their production so what you
have to do is you have to introduce an
incentive scheme that for any amount of
time saved because of increased
production they will be paid extra
otherwise what motivation do they have
to produce more for you so that's what
I'm saying that in order to have them
motivated to increase their efficiency
you need to give them sub benefits and
that's where your incentive schemes are
going to help you okay but hold on let's
continue our discussion and let us
understand that how introducing the
incentive scheme in this case will help
us okay if you have any questions so far
you can ask me
let's understand that if we are paying
employees at five per hour $5.00 per
hour
okay at the moment that means the actual
efficiency at the moment is 100% that is
they are using every time they have to
produce the unit at 100% efficiency or
it can be less than that okay but
according to our example here I am
assuming that they are having 100%
efficiency going on and by 100%
efficiency I mean that they will be
utilizing all of the time allowed that
is all 20 hours they will be producing
they will not be wasting anything but
let's understand that
what if our efficiency decreases that
what will be the effect in case of
hundred one percent efficiency twenty
hours work will be done but just in case
if our efficiency drops to 80 percent
then what would be happening that for 20
hours they will be present but only 80
percent of this time which is 16 hours
work will be done and because of that
they will be producing only 16 units
okay because each
unit requires one hour right so we see
that if our efficiency decreases our
production is also going to decrease
okay all right now what we want we what
we want is we want to increase the
efficiency so that we can have more
production and this will push our labor
cost per unit down it will reduce our
per unit labor cost okay all right let's
take an example now in this question
what we'll be doing is we'll be
calculating the grunt cost that we are
paying to labor and current
profitability that means the profit that
we are earning on current labor cost
basis and what will be the profit
situation if we introduce an incentive
scheme will it be increasing our profits
or decreasing our profits but remember
because remember our benefits must
increase more than the expenses that we
are going to pay to labor okay
so let's calculate I will calculate the
the profitability in the current
situation and then we'll be calculating
the profitability and the incentive
scheme at the moment we have 10
employees working 30 hours okay and
they're working only 70%
the time okay and also each employee is
employee hold on okay let's uh oops can
click the actual time work before then
calculating the effective time actual
time work this total time
- idle time okay
now total time is 30 hours each employee
number of employees are 10 this gives us
300 okay and each employee is idle for
one hour that comes up 30 so actually
they are working for how many hours to
70 hours okay and out of this to 70
hours they are effectively working only
70 percent of the time which is how much
is my calculator
189 hours
right now if each unit is taking one
hour and how many years are we producing
well number of English produced can be
calculated as 189 divided by 1 gives us
and then then 89 years okay right
189 units produced and if we are selling
it for 15 dollars then how much is the
revenue is 2835 okay now how much are we
paying for employees well
how many hours they are working they're
working for 300 hours and for each other
we are paying and five dollars so it
comes up 1,500 wage you know we are
paying them
idle time as well and also for the
inefficient okay so according to this
our current profit is 1335 alright this
is what we are learning considering
there is no other cost that we have to
detect out of revenue okay right so I
was saying that with a 30 hours idle
time and 70 percent efficiency you are
earning a profit of 1035 now what I want
you to do is calculate the profitability
if we introduce an incentive scheme okay
take 10 minutes so we're going to take
more than that calculate it enough that
we'll be discussing it on the whiteboard
okay now let's calculate the
profitability under the proposed
incentive scheme as for we have to
conclude actual time worked which is 300
and as supervisor is convincing us that
there will be no idle time so hole 300
hours work will be done but effective
hours will be 85 percent of this so it
comes up equal to 255 hours now with 255
hours we will be producing all my needs
255 units okay and calculating the
revenue for this much number of years to
be 3825 okay and put the time the wage
at 5.5 which comes up 1650 so profit in
this case will be two thousand one
hundred and seventy five so it's quite
impressive that if we can achieve this
by introducing an incentive scheme and
just with the 50 cent pay rise for 1
hour that is really a good result so we
must be accepting it because it's really
fulfill so now we understand the basic
purpose of intent is email as you can
see that the profitability increases
because of the intent is him although
you might be thinking at the beginning
that with increase in the labor we are
basically going to increase the labor
cost well yes that is going to happen
but we have to look on other aspects as
well because if we can improve because
of in just increasing the labor cost we
can improve other aspects of the
business and the benefits are going to
be more than the extra burden which
we'll be taking to
reducing incentive scheme then there is
no harm in going with incentive scheme
and introducing it also we can talk
about the unit cost in here for example
here if we can go per unit cost of
labour then it was 1500 that we were
paying in total and we were producing
hundred and eighty nine units an hour
per unit cost was seven point nine three
so it's almost equal to eight dollars
per unit okay
whereas in here we were paying
1650 and we were producing 255 units and
I see that there is going to be a
dramatic decrease in the labour cost per
unit so definitely is it's coming up six
point four seven which is six point five
so one dollar fifty cents decrees for
every unit you are producing in terms of
labor that is it going to be a good
achievement if you really achieve this
much efficiency and reduction in idle
time by just increasing fifty cents per
hour for labor so that really helps us
understand that why incentive schemes
are good and why we should be going for
them and real purpose of incentive
schemes just to add up in the something
that we have just discussed the
methodology that we have that we had in
this example and that what we discussed
here was basically high data rate system
okay which is just we have just gone
through a practical example of high D
rate system and what does we do in this
scheme is that we expect that with an
increased wage rate per hour or per day
or for a particular period of time there
will be increased output and what we are
trying to achieve is we are trying to
achieve high profitability or reduction
in per unit labor cost and that's what
we have seen as well in our example that
when we increased our per hour rate of
wage then we have achieved the increased
efficiency and also decrease in idle
time and because of that we were able to
produce more units and that pushed the
labor cost per unit down to one dollar
fifty cents by one hundred fifty cents
so okay so this is high day rate system
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Dec 19, 2024 Last updated |
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