10 MA2 Ibrahim Hameem CIMA exam complete ACCA professional level student Diploma in Economics distinction Third year undergraduate reading for BSc Mathematics and Economics university of London ID: 778079
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Managing Cost and Finance MA2
Ibrahim Hameem(CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)
Slide2Accounting for labor costs
This chapter looks at how remuneration is calculated and accounted for, and also how certain labor-related ratios can be calculated.
ACCA - Managing Cost and Finance
Slide3Remuneration methods
Labor costs can arise from: • Basic wage or salary • Overtime premiums
•
Bonuses
•
Holiday pay
•
Sick Pay
• Payroll taxes Many countries pay wages and salaries under a ‘pay as you earn scheme’ which means that the employer deducts the employees’ income tax form the gross wage and pays that over directly to the tax authority. Only the net amount after tax is then paid to the employee.
ACCA - Managing Cost and Finance
Slide4Employee remuneration can be based on the following approaches
A constant weekly or monthly amount An amount based on hours worked plus overtime An amount based on units produced
An amount based on productivity
An initial amount plus a bonus
ACCA - Managing Cost and Finance
Slide5Question 01
Employees are paid $6/hour for a standard 40 hour week. Overtime is paid at time and one third. The employee is expected to make at least 80 units in a week, and to encourage productivity, each unit in excess of 80 will be generate an additional payment of $5 less any overtime premium that would relate to the time the additional unit would normally take. What is an employee’s wages in a week in which 90 units are made and the employee works 44 hours?$306 (40*6+5*10+(8-2)*4-2*4) = 306
ACCA - Managing Cost and Finance
Slide6The effect of changes in remuneration methods and changes in productivity on unit labor costs
To increase competitiveness, employers will try to reduce unit costs and will often attempt to do this by offering employees productivity payments. Employers need to look at the before and after costs.Illustration Current scheme: $7/hour, 40 hour week.
Overtime premium = time and a half.
Usually 400 units are produced in 50 hours
Weekly wages = 50 x $7 + 10 x $3.5 = $385
Cost per unit = $385/400 = 0.9625
ACCA - Managing Cost and Finance
Slide7The effect of changes in remuneration methods and changes in productivity on unit labor costs
Proposed scheme: rates as above, but in addition the overtime premium is paid on any hours saved. Assume that 50 units are now made in 44 hours Possible results: Hours saved = 50 – 44 = 6 Weekly wages = 44 x $7 +4 x $3.5 + 6 x $3.5 = 343
Cost per unit = 343/400 = 0.8575
ACCA - Managing Cost and Finance
Slide8Gross and net earnings
Gross pay: the total amount earned by the employee Net pay: the amount paid to the employee after the employer makes deduction for income tax and certain statutory amounts. Total labor cost to employer: employees’ gross pay plus any additional payroll taxes (and perhaps pension costs) that the employer has to bear.
ACCA - Managing Cost and Finance
Slide9Question 02
Will productivity related pay always result in better motivation and profitability for employees?No, not necessarily
ACCA - Managing Cost and Finance
Slide10Example
An employee is paid at the rate of $10/hour. Tax and other deductions amount to 25% for weekly income in excess of $100 Employer payroll taxes = 10% gross wages
If an employee works 38 hours in a week, what are the employee’s gross pay, net pay and the total amounts that have to be paid by the employer to the tax authorities?
ACCA - Managing Cost and Finance
Slide11Example
Gross wages 38 x $10 = $380 Tax and other deductions 25% x (380 – 100) = $70) Net pay $310
Payroll taxes $380 x 10% $38
Total payments by employer to tax authorities = $70 + $38 = $108
ACCA - Managing Cost and Finance
Slide12Accounting for labor costs
In addition to being paid whilst working (basic, overtime premiums, productivity bonuses, employees are often also paid when: • on holidays •
ill
•
idle (because, say of machine breakdown)
The labor costs are classified as direct or indirect depending on what caused those costs:
Direct labor costs: all hours worked x normal hourly rate
Indirect labor costs: overtime premium, idle time, sick pay, holiday pay.
ACCA - Managing Cost and Finance
Slide13Question 03
Under most systems of tax, what do employers pay to employees? A Gross wages B Gross wages less employees’ deductions less employers’ payroll tax C Gross wages less employees’ deductions
D Gross wages less employers’ payroll tax
ACCA - Managing Cost and Finance
Slide14Managing Cost and Finance MA2
Ibrahim Hameem(CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)