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Management Accounting - accounting for labour - YouTube
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hello and welcome to this short
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presentation on ACCA f2 accounting for
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labor my name's Andrew MOA
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and I am a tutor at Kaplan financial
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here in London okay we're going to cover
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five things today first of all we're
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going to look at direct and indirect
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labor and how we account for each then
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we're going to move on to different ways
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of paying our staff we're then going to
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look at labor turnover and some labor
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ratios and finally we're going to look
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at how to answer the exam question I'm
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gonna use a really difficult question
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that the examiner set and work through
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that together so hopefully that makes it
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a lot clearer for you so first of all
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we're going to look at direct and
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indirect labor and what the differences
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are so direct labor is made up of your
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basic pay so that is the labor that's
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gone into directly making your products
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and that then is made into your prime
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cost along with your direct expenses and
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your direct materials and they then go
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into your work in Prois commonly known
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as whip on the other hand we've got our
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indirect labor and this is made up of
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things like your sick pay idle time so
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if you've got a machine that's broken
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and your staff can't work that is called
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idle time you've got your bonuses in
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there as well any bonuses your pastes
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off in the period and also any overtime
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premium so that little extra bit that
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you need to pay your staff if they've
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worked overtime so say for example you
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usually get 10 pounds an hour and then
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if you work overtime you get time and a
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half which is 50% extra that extra five
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pounds are getting for overtime is
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included as indirect labor unless that
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is that your customer has specifically
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requested that you work that overtime
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now these indirect labor costs then go
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into your production overheads so they
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make up your production overheads next
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up we're going to look at different ways
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of paying our stuff so first of all we
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look at time based payments so this is
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what you're probably you're used to so
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maybe staff getting paid per hour and
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then getting a slight bit full of
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overtime if necessary or maybe an annual
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salary or weekly wage so that is the
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more time they work the more they get
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paid on the other hand you can also use
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these output related systems which are
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linked to how much are
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staff are producing so they get paid per
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item produced and their number of ways
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that's you can pay your staff in this
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manner so the first way is called
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straight piece work and this is
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literally the more you produce the more
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you get paid so if you produce zero
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products in the period you won't get
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paid anything
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now I recently went on holiday to Crete
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last year and we were in Lidl a few
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friends and me were in Lidl and the
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cashier lady I think her name was
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Matilda she was scanning items so
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quickly that we couldn't actually get
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them in the bags quickly enough so there
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are four of us they're having to try and
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catch things in the bags and get them
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into the trolley as quickly as possible
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and we we thought why is my is Matilda
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scanning these items so quickly and then
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we found out later that in Lidl in Crete
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you actually get paid per item scanned
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so the more things that Matilda scans
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the more money she'll make so the next
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person would then come along we hadn't
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even felt finished packing our bags and
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she was already launching their eggs
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into it into our shopping bags so that
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is being paid per item produced or per
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item scanned in Matilda's case however
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it might be a little bit unfair if it
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was a very quiet day in our in Crete and
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Matilda didn't get any customers in Lidl
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so you can also incorporate this idea of
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piece work with a minimum minimum
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guaranteed daily wage so maybe she'll
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get a minimum of 25 euros per day and
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then say over 4,000 items scanned she'll
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again and get paid per item scanned as
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well so she's not gonna hook go home
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with nothing but still there's a bit of
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motivation for her to scan as quickly as
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she possibly can another way of paying
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our staff depending on the output they
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produce it's called differential piece
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work now maybe for the first thousand
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items you produce you'll get paid one
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cent per item for the second thousand
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you might get two cents per item and
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then from then on you may get four cents
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per item just an example so the more you
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produce in the day the more you're going
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to get paid so it provides a nice
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motivation for your staff to produce
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things as quickly as they possibly can
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so there are different ways of paying
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our staff we're now going to look at
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labor turnover which is how often our
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staff are turnover how often they're
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getting replaced within our business
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way to calculate this is to take the
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number of levers in the period that
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require replacement that have been made
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redundant and then the star firms have
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been reduced we don't need to consider
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them it's only staff that require
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replacement divided by your average
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number of staff for that period and to
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calculate your average number of star
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for the period you just take your start
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your staff at the start of the year and
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your staff at the end of the year add
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them together and divide them by two to
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get a verage number of staff for that
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period times out by a hundred and then
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we get this percentage labour turnover
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so as an example if 300 people have left
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our business in the year and require
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replacement and we've got 2200 staff at
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the end of the start of this all right
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and then 1800 at the end of the year if
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we take the average of this start in the
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nth that comes to 2,000 staff we've had
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on average during the period and 300
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staff have left so what we do is we do
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300 divided by 2,000 times per hundred
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will give us a labor turnover of 15%
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which incidentally is about the average
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for the UK so 15% is about the average
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it varies from industry to industry so
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things like retail and catering you tend
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to see a bit of a higher labor turnover
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whereas education and accounting so the
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professions that we're in hopefully
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you'll see a slightly lower labor
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turnover which hopefully is good news
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for you guys
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okay next up we're going to look at
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Labor ratios and different ways that we
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can analyze how our staff are working
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the first ratio we can look at is labor
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efficiency and now to calculate your
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efficiency what we need to do is take
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our standard hours for actual output now
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these standard hours are how long it
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should take our staff to produce the
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output so if they've produced a thousand
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items and we predict it should take two
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hours per item
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that is going to be 2,000 standard hours
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so how many hours we expect them to take
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to produce the output they actually have
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we then divide that by the actual hours
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they have worked and then times it by
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100 so if they've been efficient that
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number will be above 100 percent because
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they've taken less time than we had
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anticipated the second ratio we can
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consider is labor capacity which is our
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actual
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worked / our budgeted hours worked so
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this is also known as utilization so how
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many hours we budgeted for our staff and
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how many they have actually worked so if
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they are utilized over a hundred percent
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that means they're working really hard
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and working longer than we had initially
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anticipated the third ratio is known as
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your labor production volume which is
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essentially an activity ratio looking at
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how hard we want our staff to work so
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it's how long we expect them to take for
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the actual output which is their
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standard hours again this time divided
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by the budgeted hours so how long they
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should take divided by how long we have
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budgeted for them and again times up by
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a hundred to get your percentage so
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they're the three main labor ratios
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you're going to need to know for your f2
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exam we're going to do now is look at
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this past exam question that came up in
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2009 sitting now the examiner said that
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not many students got this question
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right so we're going to work through it
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together
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today and hopefully make it a little bit
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simpler and easier to understand so then
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if a question comes up in a similar
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nature in the future
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you guys are know exactly how to answer
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it so the question reads budgeted
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production in a factory for the next
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period is 4800 units each unit requires
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five hours to make labor is paid $10 per
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hour an idle time when we talked about
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idle time earlier represents 20% of the
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total labor time and they want us to
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work out what the budgeted total labor
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cost is for the next period so that's
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the question now we're going to look at
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how to go about answering that question
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we know that we've got 4,800 units and
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they're going to take five hours per
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unit so therefore we are budgeting
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24,000 hours in total to make these
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units however that is without any idle
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time and we still need to pay our staff
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for their idle time it's not their fault
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if they're in the production line and
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something goes wrong in a machine or
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they're waiting for someone else to
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complete a task before they can carry on
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so we need to still pay our staff for
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that idle time so we need therefore to
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think about those 24,000 hours and how
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we can gross those up to include that
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idle time
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so we're told that idle time represents
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20% of the total labor time which means
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these twenty four thousand hours are
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only 80 percent of the time that our
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staff have actually worked so in order
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to get our total number of hours what we
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need to do is we need to take our twenty
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four thousand hours divided them by
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naught point eight so divide them by 80
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percent - gross them up to our total
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labor hours worked so if you do that
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calculation that then comes out as
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thirty thousand total hours it then says
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in a question that we're paying our
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staff ten dollars per hour so we do
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thirty thousand hours times ten dollars
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gives you three hundred thousand dollars
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which is answer D now lot of students
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didn't get answer D for a variety of
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reasons we'll look at some of those
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reasons now so common mistakes that you
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need to avoid if you see a similar
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question in the future so a lot of
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students multiplied rather than divided
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by nor point eight which would give you
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answer a so the examiner doesn't just
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pick random answers out in the in the
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ABC and D the other answers have been
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calculated so that if you do make a
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mistake the option is still there so you
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need to be careful of that so a is
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multiplying rather than dividing by not
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point eight so we've just seen one we
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need to divide not multiply answer B
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doesn't include any idle time so all
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they've done it's taken two hundred and
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forty thousand dollars which is which is
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incorrect because we haven't included
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any idle time and the most common answer
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was actually answer C so the student
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said there who have picked answer C have
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got the idea of needing to scale up the
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number of hours worked but instead of
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dividing by not point eight they've
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actually multiplied by 1 point two now
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that isn't the same thing so you need to
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just be careful with that I've just
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given you example here if you take a
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hundred and divide it by not point eight
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you get 125 whereas if you take 100 and
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multiply it by one point two obviously
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you get 120 so these are different
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things and you should need to be careful
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that you're doing that all the wrong way
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around
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so hopefully that's made that question a
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little bit clearer and if you see that
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in the future you'll know how to tackle
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it you can also consider this question
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in this type of question in budgeting
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questions with materials
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so if material wastage is 20% then to
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get our overall
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materials that we need to use again we
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need to divide by not 0.8 to scale it up
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and similarly if wastage is 30%
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or if out of times 30% we need to divide
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by not 0.7 if it's 10% would need to
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divide by 0.9 so hopefully that's a bit
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clearer and you get the idea of how to
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tackle those questions okay so just to
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wrap up we have now looked at direct and
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indirect labor and how we can account
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for each of those we've looked at
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different ways of paying us off both
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time related and output related we've
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looked at labor turnover and how to
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calculate labour turnover using our
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equation we've looked at the three
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different labor ratios and what each of
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those means and how to calculate them
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and finally we've tackled a past exam
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question so that hopefully you guys now
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know how to answer the labor questions
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all that's left me to say is best of
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luck with your f2 exam
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