Hello and welcome to this short presentation on ACCA F2 - Accounting for Labour. My name
is Andrew Mower and I am a tutor at Kaplan Financial here in London. We're going to cover
five things today, first of all we're going to look at direct and indirect labour and
how we account for each. Then we're going to move on to different ways of paying our
staff, we're then going to look at labour turnover, some labour rations and then finally
we're going to look at how to answer an exam question. We're going to use a really difficult
question that the examiner set and work through that together so hopefully that helps make
it a lot clearer for you. So first of all we're going to look and direct and indirect
labour and what the differences are. So direct labour is made up of your basic pay so that
is the labour that has gone in to directly making your products and that then is made
into your prime cost along with your direct expenses and your direct materials and they
then go into your work in progress commonly known as WIP. On the other hand we've got
our indirect labour and this is made up of things like your sick pay, idle time so if
you've got a machine that's broken and your staff can't work that is called idle time,
you've got your bonuses in there as well so any bonuses that you pay your staff during
the period and also any overtime premium so that little extra bit that you need to pay
your staff if they've worked overtime. So say for example you usually get £10 an hour
and then if you work overtime you get time and a half which is 50% extra that extra £5
you're getting for overtime is included as indirect labour unless that is if your customer
has specifically requested that you work that overtime. Now these indirect labour costs
then go into your production overheads so they make up your production overheads. Next
up we're going to have a look at different ways of paying our staff so first of all we'll
look at time-based payments so this is what you're probably used to maybe staff getting
paid per hour and then getting a slight bit of overtime if necessary or maybe an annual
salary or a weekly wage. So that is the more time they work the more they get paid. On
the other hand you can also use these output related systems which are linked to how much
our staff are producing so they get paid per item produced, there are a number of ways
you can pay your staff in this manner. So the first way is called straight peace work,
this is literally the more you produce the more you get paid so if you produce zero products
in the period you won't get paid anything. Now I recently went on holiday to Crete last
year and we were in Lidl a few friends and me were in Lidl and the cashier lady I think
her name was Matilda she was scanning items so quickly that we couldn't actually get them
in the bags quickly enough so there were four of us there having to try and catch things
in the bags and get them into the trolley as quickly as possible. We thought why is
Matilda scanning these items so quickly and then we found out later that in Lidl in Crete
you actually get paid per item scanned so the more things that Matilda scans the more
money she'll make so the next person that come along we hadn't even finished packing
her bags and she was already launching their eggs into our shopping bags so that is being
paid per item produced or per item scanned in Matilda's case. However it might be a little
bit unfair if it was a very quiet day out in Crete and Matilda didn't get any customers
in Lidl so you can also incorporate this idea of piecework with a minimum guaranteed daily
wage so maybe she'll get a minimum of twenty-five Euros per day and then say over four thousand
items scanned she'll then get paid per item scanned as well. So she's not going to go
home with nothing but still there's a bit of motivation for her to scan as quickly as
she possibly can. Another way of paying our staff depending on the output that they produce
is called Differential piecework, now maybe for the first thousand items you produce you'll
get paid one cent per item, for the second thousand you might get two cents per item
and from then on you may get four cents per item just as an example so the more you produce
in the day the more you are going to get paid so it provides a nice motivation for your
staff to produce things as quickly as they possibly can. So there different ways of paying
our staff we're now going to look at Labour Turnover which is how often our staff are
turned over how often they are getting replaced within our business so the way to calculate
this is to take the numbers of leavers in the period that require replacement so if
they have been made redundant and staff members have been reduced we don't need to consider
them, it's only staff that require replacement divided by your average number of staff for
that period and to calculate your average number of staff for the period you just take
your staff at the start of the year and your staff at the end of the year, add them together
and divide them by two to get your average number of staff for that period, multiplied
by one hundred and then we get this percentage labour turnover. So as an example if 300 hundred
people have left our business in the year and require replacement and we've got 2,200
staff at the start of the year and then 1,800 at the end of the year if we take the average
of the start and then end that come to 2000 staff on average during the period and 300
staff have left so what we do is we do 300 divide by 2000 multiplied by 100 will give
us a labour turnover of 15% which incidentally is about the average for the U.K so 15% is
about the average, it varies from industry to industry so things like retail and catering
you tend to see a bit of a higher turnover whereas education and accounting so the professions
that we're in hopefully you'll see a slightly lower labour turnover which hopefully is good
news for you guys. Next up we're going to look at labour rations the different ways
we can analyse how our staff are working. The first ratio we are going to look at is
labour efficiency and to calculate your efficiency what we need to do is take our standard hours
for actual output, now these standard hours are how long it should take our staff to produce
their output so if they have produced 1000 items and we predict it should take two hours
per item that is going to be 2000 standard hours so how many hours will we expect them
to take to produce the output they actually have. We then divide that by the actual hours
they have worked and then multiple it by 100 so if they've been efficient that number will
be above 100% because they've taken less time than we had anticipated. The second ratio
we can consider is labour capacity which is our actual hours worked divided by our budgeted
hours worked. So this is also known as utilisation so how many hours we have budgeted for our
staff and how many they have actually worked. So if they are utilised over 100% that means
they're working really hard and working longer than we had initially anticipated. The third
ratio is known as your labour production volume which is essentially an activity ratio looking
at how hard we want our staff to work so it’s how long we expect them to take for the actual
output which is their standard hours again this time divided by the budgeted hours so
it’s how long they should take divided by how long we have budgeted for them and again
you multiply that by 100 to get your percentage. So there the three main labour ratios that
you're going to need to know for your F2 exam. What we're going to do now is look at this
past exam question that came up in the June 2009 sitting. Now the examiner said that not
many students get this question right so we're going to work through it together today and
hopefully make it a little bit simpler and easier to understand. So then if a question
comes up in a similar nature in the future you guys will know exactly how to answer it.
So the question reads 'Budgeted production in a factory for the next period is 4,800
units. Each unit requires five hours to make. Labour is paid $10 per hour. Idle time represents
20% of the total labour time' and they want us to work out what the budgeted total labour
cost is for the next period. So that's the question, now we're going to look at how to
go about answering that question. We know that we've got 4,800 units and they're going
to take five hours per unit so therefore we are budgeting 24,000 hours in total to make
these units. However that is without any idle time and we still need to pay our staff for
their idle time, it’s not their fault if they’re in the production line and something
goes wrong with a machine or they're waiting for someone else to complete a task before
they can carry on so we need to still pay our staff for that idle time. So we need therefore
to think about those 24,000 hours and how we can gross those up to include that idle
time. So we're told that idle time represents 20% of the total labour time which means these
24,000 hours are only 80% of the time that our staff have actually worked so in order
to get our total number of hours what we need to do is we need to take our 24,000 hours,
divide them by 0.8 so divide them by 80% to gross them up to our total labour hours worked
so if you do that calculation that then comes out as 30,000 total hours. It then says in
the question that we're paying our staff $10 per hour so we do 30,000 hours multiplied
$10 gives you $300,000 which is answer D. Now a lot of students didn't get answer D
for a variety of reasons, we'll look at some of those reasons now, the common mistakes
that you need to avoid if you see a similar question in the future. So a lot of students
multiplied rather than divided by 0.8 which would give you answer A. So the examiner doesn't
just pick random answers out in the A B C & D, the other answers are being calculated
so that if you do make a mistake the option is still there so you need to be careful of
that. So A is multiplying rather than dividing by 0.8 so we've just seen why we need to divide
and not multiply and answer B doesn't include any idle time so all they've done is taken
$240,000 which is incorrect because we haven't included any idle time and the most common
answer was actually answer C so the students who had picked answer C have got the idea
of needing to scale up the number of hours worked but instead of dividing by 0.8 they've
actually multiplied by 1.2. Now that isn’t the same thing so you just need to be careful
of that. I'll give you an example here if you take 100 and divide it by 0.8 you get
125 whereas if you take 2100 and multiple it by 1.2 obviously you get 120 so these are
different things and you just need to be careful that you're doing that the right way round.
So hopefully that's made that question a little bit clearer and if you see that in the future
you know how to tackle it. You can also consider this type of question in budgeting questions
with materials so if material wastage is 20% then to get our overall materials that we
need to use again we need to divide by 0.8 to scale it up. Similarly if wastage is 30%
or if idle time is 30% we need to divide by 0.7. If its 10% we need to divide by 0.9 so
hopefully that's a bit clearer and you get the idea of how to tackle those questions.
So just to wrap up we have now looked at direct and indirect labour and how we can account
for each of those, we've looked at different ways of paying our staff both time related
and output related, we've looked at labour turnover and how to calculate labour turnover
using our equation, we've looked at the three different labour ratios and what each of those
means and how to calculate them and finally we've tackled a past exam question so that
hopefully you guys now know how to answer the labour questions. All that's left for
me to say is best of luck with your F2 exam.