A company has 120 direct labourers. Each labourer is paid 800 per 40 hour week. Owing to customer demands and timelines, Overtime is resorted to a…

CA Intermediate · Cost and Management Accounting · MTP · May 2025
A company has 120 direct labourers. Each labourer is paid 800 per 40 hour week. Owing to customer demands and timelines, Overtime is resorted to a maximum of 30 hours per week compensated at the weekly time rate with a premium of 50% over the regular wage. The current output works out to 6 units per man hour which is the standard output. The introduction of an incentive scheme could enhance productivity to 8 units per man hour. However, the incentive scheme if introduced would not have an overtime policy in place for extra hours worked. Budgeted weekly production is 38,400 units. The selling price is 22 per unit and direct costs other than labour is 16 per unit. The variable overheads is 1 per labour hour and Fixed overhead is 18,000 per week. PREPARE a statement to demonstrate the effect of shifting from an overtime policy to: (i) Halsey Incentive Scheme (ii) Rowan Incentive Scheme

Suggested Answer and Working Notes:

Statement of profitability Particulars Overtime Halsey Rowan Sales @22 8,44,800 8,44,800 8,44,800 Less: Direct costs 6,14,400 6,14,400 6,14,400 Less: Labour 1,44,000 1,12,000 1,20,000 Less: Variable Overhead 6,400 4,800 4,800 Less: Fixed Overhead 18,000 18,000 18,000 Profit 62,000 95,600 87,600 Working Notes: Overtime Policy: Projected weekly output: 38,400 unitsNo of units per man hour: 6 unitsNo of Manhours needed: 38,400 units / 6 units/hour = 6,400 hoursNo of hours available (120 labourers * 40 hours/week): 4,800 hoursOvertime needed: 6,400 hours - 4,800 hours = 1,600 hoursNormal Wages (6,400 hours * 20/hour):1,28,000Overtime premium (1,600 hours * 10/hour):16,000Total Wages:1,44,000 Halsey Incentive Scheme: No of units per man hour: 8 unitsNo of manhours needed: 38,400 units / 8 units/hour = 4,800 hoursTime saved (OT saved): 1,600 hoursHalsey Scheme Incentive = 50% of time saved × Time rate = 1,600 hours × 20per hour × 50% = 16,000Total Labour Cost = (4,800 hours * 20/hour) +16,000 = 96,000 +16,000 = 1,12,000 Rowan Scheme Incentive: Time taken = (Time taken / Time allowed) × Time saved × hourly rateTime taken = (4,800 hours / 6,400 hours) × 1,600 hours × ₹ 20/hour = 24,000Total Labour Cost = (4,800 hours * 20/hour) +24,000 = 96,000 +24,000 = 1,20,000

Topics: Employee Cost & Direct Expenses

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