UNIT 2
UNIT 2
SYNOPSIS:
- Materials control OR Inventory control - Selective control , ABC analysis
- Methods of pricing issues - LIFO, FIFO, Weighted average ( including problems)
- labour: control of labour cost - time keeping, time booking, idle time
- Methods of remuneration
- labour incentives schemes
Material control aims at eliminating and
minimizing all kinds of wastes and losses while the materials are being
purchased, stored, handled, issued/ consumed. A number of techniques are used
in planning, procuring, and holding stages of material which help in exercising
and effecting material cost control.
- Selective control
Selective Inventory Control
is an essential part of Materials Management. Selective inventory control is
emphasized on variations in methods of control from item to item based on a
selective basis. We can not apply uniform control since it’s expensive and gives
diffused effect. For this purpose, we can use some criterion such as lead time,
consumption, criticality, cost of the items, procurement difficulties etc. The
following classification can be used for the selective treatment of various
types of materials.
Classification of
Inventory Control
Below are the type and
techniques used in Inventory control system.
|
No. |
Classification |
Full-Form |
Criterion Employed |
|
1 |
ABC Analysis |
Always Better Control |
Usage Value (i.e. Consumption per
period x price per unit) |
|
2 |
VED Analysis |
Vital Essential Desirable |
Loss of Production or Criticality
of the item |
|
3 |
HML Analysis |
High Medium Low |
Unit Price i.e. does not take
consumption into account |
|
4 |
SDE Analysis |
Scarce Difficult Easy |
Procurement Difficulties |
|
5 |
GOLF Analysis |
Government Ordinary Local Foreign |
Source of procurement |
|
6 |
SOS Analysis |
Seasonal Off Seasonal |
Seasonality |
|
7 |
FSN Analysis |
Fast Slow Non Moving |
Issues from stores |
|
8 |
XYZ Analysis |
|
Inventory Investment |
- ABC Analysis:
This system exercises discriminating control over
different items of inventory on the basis of the investment involved. Usually,
the items are classified into three categories according to their relative
importance, namely, their value and frequency of replenishment during a period.
(i) ‘A’
Category: This category of items consists
of only a small percentage i.e., about 10% of the total items handled by the
stores but require heavy investment about 70% of inventory value, because of
their high prices or heavy requirement or both. Items under this category can
be controlled effectively by using a regular system that ensures neither
over-stocking nor a shortage of materials for production. Such a system plans
its total material requirements by making budgets. The stocks of materials are
controlled by fixing certain levels like maximum level, minimum level, and
re-order level.
(ii)
‘B’ Category: This category of items is
relatively less important; they may be 20% of the total items of material
handled by stores. The percentage of investment required is about 20% of the
total investment in inventories. In the case of these items, as the sum
involved is moderate, the same degree of control as applied in the ‘A’ category
of items is not warranted. The orders for the items, belonging to this category
may be placed after reviewing their situation periodically.
(iii) ‘C’ Category: This category of items does not require much
investment; it may be about 10% of the total inventory value but they are
nearly 70% of the total items handled by the store. For this category of items,
there is no need of exercising constant control. Orders for items in this group
may be placed either after six months or once a year, after ascertaining
consumption requirements. In this case, the objective is to economies on
ordering and handling costs.
Materials issued from stores should be priced at the value at which they are carried in stock. But there can be a situation where the material may have been purchased at different times and at different prices with varying discounts, taxes etc. Because of this, the problem arises as to how the material issues to production are to be valued. There are several methods for tackling this situation. The cost accountant should select the proper method based on the following factors:
1. The frequency of purchases, price fluctuations and their range.
2. The frequency of issue of materials, relative quantity etc.
3. Nature of cost accounting system.
4. The nature of business and the type of production process.
5. Management policy relating to the valuation of closing stock.
Several methods of pricing material
issues have evolved in an attempt to satisfactorily answer the problem. These
methods may be grouped and explained as follows:
First-in First-out (FIFO) method: It is a method of
pricing the issues of materials, in the order in which they are purchased. In
other words, the materials are issued in the order in which they arrive in the
store or the items longest in stock are issued first. Thus each issue of
material only recovers the purchase price which does not reflect the current
market price. This method is considered suitable in times of falling prices
because the material cost charged to production will be high while the replacement
cost of materials will be low. But, in the case of rising prices, if this
method is adopted, the charge of production will be low as compared to the
replacement cost of materials. Consequently, it would be difficult to purchase
the same volume of material (as in the current period) in future without having
additional capital resources.
Advantages
• It is simple to understand and easy to operate.
• Material cost charged to production represents the actual cost with
which the cost of production should have been charged.
• In the case of falling prices, the use of this method gives
better results.
• Closing stock of material will be represented very closely at the current market price
Disadvantages
• If the prices fluctuate frequently, this method may lead to a clerical
error.
• Since each issue of material to production is related to a
specific purchase price, the costs charged to the same job are likely to show a
variation from period to period.
• In the case of rising prices, the real profits of the concern are
low, while the profits in the books will appear high. This may lead to the
inability of the firm to meet the materials purchase demand at the current
market price
(ii) Last-in-First-out (LIFO) method:
It is a method of pricing the issues of materials on
the basis of the assumption that the items of the last batch (lot) purchased
are the first to be issued. Therefore, under this method, the prices of the
last batch (lot) is used for pricing the issues, until it is exhausted, and so
on. If however, the quantity of the issue is more than the quantity of the
latest lot, then the earlier (lot) and its price will also be taken into
consideration. During an inflationary period or period of rising prices, the
use of LIFO would help to ensure that the cost of production determined on the
above basis is approximately the current one. This method is also useful
especially when there is a feeling that due to the use of FIFO or average
methods, the profits shown and tax paid are too high.
Advantages
• The cost of materials issued will be either nearer to and or will
reflect the current market price. Thus, the cost of goods produced will be
related to the trend of the market price of materials. Such a trend in the
price of materials enables the matching of the cost of production with current
sales revenues.
• The use of the method during the period of rising prices does not
reflect undue high profit in the income statement as it was under the
first-in-first-out or average method. In fact, the profit shown here is
relatively lower because the cost of production takes into account the rising
trend in material prices.
• In the case of falling prices profit tends to rise due to lower
material costs, yet the finished products appear to be more competitive and are
at market price.
• Over a period, the use of LIFO helps to iron out the fluctuations in
profits
• In the period of inflation LIFO will tend to show the correct profit
and thus avoid paying undue taxes to some extent.
Under this method, the issue price is calculated by dividing the sum of products of price and quantity by the total number of quantities.
Advantages
• It Smoothens the price
fluctuations, if at all it is there, due to material purchases.
• Issue prices need not be calculated for each issue unless a new lot of materials is received.
Disadvantages
• Material cost does not represent
the actual cost price and therefore, a different profit or loss will arise out
of such a pricing method.
• It may be difficult to
compute since every time a lot is received, it would require a re-computation
of issue prices.
3Q) Labour- control of labour cost ( Time keeping, Time booking, Idle time)
EMPLOYEE (LABOUR) COST
CONTROL Employee costs are
associated with human beings. To control employee costs one has to understand
human behavior. Employee cost control means control over the cost incurred by
employees. Control over employee costs does not imply control over the size of
the wage bill; it also does not imply that the wages of each employee should be
kept as low as possible.
The aim should be to keep the wages per unit
of output as low as possible. This can only be achieved by giving employees
appropriate compensation to encourage efficiency so that optimum output can be
achieved in an effective manner.
A well-motivated team of employees can
bring about wonders. Each concern should, therefore, constantly strive to raise
the productivity of employees. The efforts for the control of employee costs
should begin from the very beginning. There has to be a concerted effort by all
the concerned departments.
Accounting for labour cost: The main points which need consideration for controlling employee costs are the following:
1. Timekeeping
2. Time booking
3. Idle time
1. Timekeeping: Timekeeping is the recording of each worker's time of coming in and going out of the factory for the purpose of attendance and determination of wage payable to each worker.
Methods of
Time-keeping: There are various
methods of time-keeping, which may be categorized into manual and mechanical
methods. The choice of a particular method depends upon the requirements and
policy of an entity; but whichever method is followed, it should make a correct
record of the time by incurring the minimum possible expenditure and it should
minimise the risk of fraudulent payments of wages. The examples of timekeeping
methods are as follows:
1. Manual Methods
(a) Attendance
Register method- Under this method,
an attendance register is kept to record the arrival and departure times of an
employee. This method is simple and expensive and is suitable for small organisations.
However, this method may lead to the dishonest practice of time manipulation by
way of recording the wrong time and back date entries in collusion with the
timekeeper.
(b) Metal Disc/ Token method- This method of time recording is very old and
is almost obsolete in practice. Under this method, each employee is allotted a
metal disc or a token with a hole bearing his identification number. The token
is kept or handed to the timekeeper who records the token number in his
register. Like the attendance register method, this method also has some
disadvantages like errors in recording, proxy attendance etc.
2. Mechanical/
Automated Methods
(a) Punch Card Attendance- Under this method, each employee is provided
with a card for marking attendance. A punch card contains data related to the
employee in digital form. In the punch card attendance system, an employee
needs to either insert or wave his card to a card reader which then ensures
whether the correct person is logging in and/or out. This system does not
require to employ of any timekeeper and minimises the risk of recording errors
and time manipulation.
(b) Bio-Metric
Attendance system- Under the bio-metric
attendance system attendance is marked by recognizing an employee on the basis
of physical and behavioural traits. An employee’s unique identity like
fingerprint, face and retina image etc. is kept in a database which is matched
at the time of marking of attendance before the attendance device for this
purpose. Bio-metric attendance system includes fingerprint recognition system,
face recognition system, Time and attendance tracking technology etc. This
system reduces the risk of time manipulation and proxy attendance. However, it
may not be suitable for small organisations due to the cost associated with
set-up and maintenance.
2. Time booking: Time booking refers to a method wherein each activity of an
employee is recorded. This data recorded is further used to measure the time
spent on a particular job for costing, measurement of efficiency, fixation of
responsibility etc.
Payroll Procedure:
The steps included
in this process are as under:
1. Attendance and Time
details: A detailed sheet of
the number of days or hours worked by each employee (in case of time-based
payment) and units or percentage of work (in case of piece rate) as reflected
by the timekeeping methods are sent to the payroll department by the
timekeeping department. Further, the payroll department with the help of time
booking records calculates any further incentives such as overtime pay, and
bonuses to be paid to the employees.
2. List of
employees and other details:
A list of employees on a roll and the rate at which they will be paid is sent
by the personnel/ HR department. The payroll department should ensure that no
unauthorised or bogus employee is paid.
3. Computation of wages and other incentives: The payroll department based on the details
provided by the timekeeping department and personnel department calculates
wages/ salary to be paid to the employees. The payroll department prepares to
pay slips for all employees authorized by the personnel department and forwards
the same to the cost/ accounting department for further deductions and payment.
4. Payment to
the employees: The cost/
accounting department deduct all statutory deduction such as employee
contribution to provident fund and employee state insurance (ESI) scheme, TDS
on salary etc. After all deductions wages/ salary is paid to the
employees.
5. Deposit of all
statutory liabilities: All statutory
deductions made from wages/ salary of the employees along with employer’s
contributions such as provident fund and employee state insurance scheme are
paid to the respective statutory bodies.
3. Idle time: The time during which no production is
carried-out because the worker remains idle but is paid. In other words, it is
the difference between the time paid and the time booked. Idle time can be
normal or abnormal. The time for which employees are paid includes holidays,
paid leaves, allowable rest or off time etc.
Normal idle time: It is the time which cannot be avoided or
reduced in the normal course of business.
Causes
1. The time lost between
the factory gate and the place of work,
2. The interval between
one job and another,
3. setting up a
time for the machine,
4. Normal rest
time, break for lunch etc.
Treatment
It is treated as a
part of the cost of production. Thus, in the case of direct workers, an
allowance for normal idle time is considered a set of standard hours or
standard rates. In the case of indirect workers, normal idle time is considered
for the computation of the overhead rate.
Abnormal idle time: Apart from normal idle time, there may be
factors which give rise to abnormal idle time.
Causes
1. Idle time may also
arise due to abnormal factors like a lack of coordination
2. Power failure,
Breakdown of machines
3. Non-availability of
raw materials, strikes, lockouts, poor supervision, fire, flood etc.
4. The causes for
abnormal idle time should be further analysed into controllable and
uncontrollable.
i) Controllable
abnormal idle time refers to that time which could have been put to productive
use had the management been more alert and efficient. All such time which could
have been avoided is controllable idle time.
ii) Uncontrollable
abnormal idle time refers to time lost due to abnormal causes, over which
management does not have any control e.g., breakdown of machines, flood etc.
may be characterised as uncontrollable idle time
Treatment
The abnormal idle time
cost is not included as a part of the production cost and is shown as a
separate item in the Costing Profit and Loss Account. The cost of abnormal idle
time should be further categorised into controllable and uncontrollable. For
each category, the break-up of cost due to various factors should be separately
shown. This would help the management in fixing responsibility for controlling
idle time. Management should aim at eliminating controllable idle time and on a
long-term basis reducing even the normal idle time. This would require a
detailed analysis of the causes leading to such idle time.
4Q)** MEASURMENT OF LABOUR TURNOVER
Labour turnover is the ratio
of the number of workers leaving the factory during a given period to the
average number of workers in employment during the same period.
Measurement of turnover is
an important problem for determining the numbers of people to be recruited at a
particular point of time. Its knowledge assists the management in a number of
ways.
Labour turnover is
measured by the following methods:-
1. Separation Rate Method
2. Replacement Method
3. Flux Rate Method.
The
measurement of turnover is an important problem for determining the numbers of
people to be recruited at a particular point of time. Its knowledge assists the
management in a number of ways. It may be measured by any of the following
methods. The choice of a particular method will depend on whether emphasis is
given on labour separations, replacements or both.
1. Separation Rate Method:
This is the most commonly
used method.
According to this method, turnover rate is measured by dividing the usual number of separations during a period by the average number of workers on the payroll during the same period, that is,
Turnover = no.of separations in a year / Average no.of workers in the period X 100
2. Replacement Method:
This method takes into
consideration only the actual replacement of employees, irrespective of the
number of people leaving. It is to be noted that in case new workers are
employed on account of expansion of the business, they should not be included
in replacements. Thus,
Turnover = no.of replacements in a year / Average no.of workers in the period X 100
3. Flux Rate Method:
This method takes into
consideration both the number of replacements and the number of separations.
Turnover = no.of separations + no.of replacement / average no.of workers in the period X 100
It is to be noted that
turnover can neither be completely avoided nor is it desirable. However, its
rate can be kept at a considerably low level by taking such steps which improve
employee morale and create a congenial atmosphere in the organisation.
Measurement of Labour
Turnover – With Formula for Calculating Labour Turnover
Labour turnover is normally
measured as the ratio of the number of employees leaving in a particular period
to average number of employees on the payroll. It should be noted that all
employees who leave voluntarily or dismissed, must be included. The average
number of employees can be calculated simply by adding the opening number of
employees to the closing number and dividing the total by two.
The moving average technique
can also be adopted for this purpose. At the time of calculating average,
normally part-time employees are taken as ‘halves’. It means two part-time
employees will be counted as one full-time employee.
The formula for calculating
labour turnover is:
labour turn over = no.of employees leaving in the period / average no.of employees in the period X 100
The above method is called
‘Separation Method. Many organisations calculate labour turnover by taking both
leaving employees and replaced employees in the numerator. However, the
denominator remains same as previous formula.
The formula for calculating labour turnover is:
labour turn over = no.of employees leaving +no.of employees replaced in the period / average no.of employees in the period X 100
The above method is called
‘Flux Method’.
It should be appreciated
that the first formula is more logical than the 2nd one, as management is
primarily concerned with cost associated (e.g., training cost) with the leaving
of the employees.
There is another method of
calculating labour turnover which is very rarely used by the organisations.
Here, in the numerator only the number of employees replaced during the period
is only taken into consideration. However, the denominator remains same as the
previous methods.
The formula for calculating labour turnover is:
labour turnover = no.of employees replaced in the period / average no.of employees in the period X 100
The above formula is called
‘Replacement Method’.
Treatment
of Labour Turnover Cost in Cost Accounting:
In the cost ledger, a
separate account should be set up to record the cost of training. This account
will be debited with the wages of the learner during the period of training,
salary and other allowances of the instructors, the cost of materials, incidental
expenses relating to facilities provided for training.
Generally, an average cost
per worker trained is ascertained from the above account. The cost of training
is charged to different departments according to the number of employees trained
as production overhead. Many organisations are treating the training and
related cost as administrative overheads.
Remedial
Steps to Minimise Labour Turnover:
Labour turnover is
unavoidable but high labour turnover is not a good sign for any organisation.
Labour turnover affects the smooth working of the organisation. Therefore, it
is the responsibility of the management that there should be minimum labour
turnover. A study of the reasons for labour turnover will normally indicate the
steps which management should take to reduce its occurrence.
Generally, the following
steps are taken to minimise the labour turnover:
1. Exit Interview – To
ascertain the reasons for leaving the organisation, the personnel department
may arrange an exit interview for each out-going employee.
2. Job Analysis and
Evaluation – To find out suitable employee for particular job, the job
evaluation and job analysis should be undertaken before recruitment.
5Q) METHODS OF REMUNERATION
The main features of the plan are:
1. Daily wages are guaranteed
2. A standard time is set for each job/operation
3. Below 66 2/3 % efficiency, the worker is paid his hourly rate
4. Below 66 2/3% - 100 % efficiency, payments are made on the basis of step bonus rates.
5. Above 100% efficiency, an additional bonus of 1% of the hourly rate is paid for each 1% increase in efficiency.
Efficiency | Bonus (%) |
67-75 | 1 |
76-85 | 4 |
86-95 | 10 |
96-100 | 20 |
Efficiency for this purpose is calculated as follows :
1. On-time basis :
Percentage of efficiency = Time taken ÷ standard time allowed × 100
2. On a production basis:
Percentage of efficiency =Actual production ÷ standard production × 100
1. If a worker fails to reach the standard that is if he takes more time to complete the standard work. He is paid at the time rate for the time taken.
2. In case those who reach the standard that is 100% of efficiency, wages are paid at the time rate + a bonus of 20% on wages earnings.
3. Who are above the standard that is above 100% of efficiency piece wage are paid together with a bonus of 20% on wage earnings.
Suitability:
Group incentive plans are best suited for and appropriate in the following scenarios: When individual performance cannot be properly quantified.
- A group of employees all have the same sort of talent or ability.
- The accomplishment of the goal is tied to the group’s collaborative efforts.
- The goal is to incentivize indirect employees rather than direct workers.
- A group is made up of a small number of people.
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