LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST

<< PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS

ALLOCATION AND APPORTIONMENT OF FOH COST >>

Cost & Management Accounting (MGT-402)

LESSON # 14

LABOR TURNOVER AND LABOR EFFICIENCY RATIOS

& FACTORY OVERHEAD COST

Labor Turnover:

Labor turnover may be defined as the rate of change in the composition of the labor force of an

organisation high rate of labor turnover denotes that labor is not stable and there is frequent

change in the labor force in the organisation. The high labor turnover rate is an important

indication of high labor cost. It is therefore not desirable.

Measurement of Labor Turnover:

There are various methods for the measurement of labor turnover. The choice of method of

measurement would depend on the organisation. But, however, once a particular method is adop-

ted for it, it should be followed for quite some times, so that a clear and comparative picture is

obtained. The methods of measurement are:

(1) Separation method;

Labor turnover is measured by dividing the total number of separations (workers left

the organisation) during a period by the average number of workers on the pay roll.

Labor turnover

Number of separations in a period x 100 Average number of

workers in a period

(2) Flux method:

Labor turnover is measured by dividing the total number of separations and

replacements by the average number of workers.

Labor turnover

Number of separations + number of replacement x 100 Average number

of workers during the period.

(3) Replacement method:

Labor turnover is measured by dividing the number of replacements during a

period by the average number of workers employed in that period.

Labor turnover

Number of workers replaced during the period

Average number of workers during the period.

Average workers employed = Number of workers at the beginning of the period + Number of

workers at the end of that period divided by 2.

PRACTICE QUESTION

The personnel department of a company has supplied the following information relating to its

work force during the month of June, 2006.

Number of workers:

1st. June

1900

30 . June

2100

During the month 60 persons were discharged and 20 left the company. During the month 200

workers were engaged out of which only 40 workers were appointed against the vacancy caused by

the number of workers separated and the remaining on account of an expansion scheme of the

company.

Calculate labor turnover rate and equivalent rate under different methods.

Cost & Management Accounting (MGT-402)

Solution:

Average number of workers

1900 + 2100 = 2,000

1. Separation Method:

Labor turnover ratio

80 x 100

2,000

Equivalent annual turnover

4 x 365

48.67%

2. Flux Method:

Labor turnover

80 + 40 x 100 =

2,000

Equivalent annual turnover

6 x 365

73%

3. Replacement Method:

Labor turnover

40x 100

2,000

Equivalent annual turnover

2 x 365

24.33%

The working results of the above practice question reveals wide fluctuations among the different

annual labor turnover rates obtained by different methods of measurement.

The flux method of labor turnover denotes the total change in the composition of labor force.

While replacement method takes into account only workers appointed against the vacancy caused

due to discharge or quitting of the organisation. This method does not take into account the

workers employed under the expansion schemes of the company.

However, it must be noted that if a department is closed and workers retrenched, it would not be a

case of labor turnover.

The higher percentage of labor turnover, the higher will be the cost of recruitment and training of

new workers. A higher rate of labor turnover also reduces the efficiency since good deal of work

would be done by new inexperienced workers. The objective of management therefore should be

to keep the percentage of labor turnover at minimal. However, in any organisation a minimum rate

of labor turnover will always occur particularly due to retirement, marriages, death and personal

betterment.

Causes of Labor Turnover

Labor turnover arises because of various factors including dissatisfaction with job, low rate of

wages, unsatisfactory working conditions and non-availability of adequate basic amenities.

The causes of labor turnover may be sub-divided as:

(1) Avoidable causes, and

(2) Unavoidable causes.

100

Cost & Management Accounting (MGT-402)

(1) Avoidable Causes:

a) These include low wages rate in the present organisation and the worker may look

for higher wages elsewhere,

b) Dissatisfaction with job,

c) Bad working conditions,

d) Long and odd working hours,

e) Unsatisfactory relationship with the supervisors,

f) Bad relationship with the fellow workers,

g) Lack of adequate recreational facilities,

h) Inadequate housing, medical facilities,

i) Unfair methods of promotion and lack of promotions avenues,

j) Lack of planning and foresight on the part of management, seasonal nature of

industry, non-availability of raw materials, power, etc.

(2) Unavoidable Causes include:--

a) Personal betterment of worker,

b) Retirement and death leading to labor turnover,

c) Domestic responsibilities--to look after old parents,

d) Accident or illness rendering workers permanently incapable to work,

e) Dismissal or discharge due to insubordination, negligence, inefficiency, etc.,

f) Marriages, specially in case of women workers,

Effect of Labor Turnover

The higher rate of labor turnover results in increased cost of production. This is due to--

(i)

Increased cost of new recruitment, training,

(ii)

Interruption of production,

(iii)

Decrease in production due to inefficiency and inexperience of

newly recruited workers,

(iv)

The new workers are more accident prone and are liable to cause

more damage to machinery, tools than old employees,

(v)

Losses due to wastage, spoilage and defectives,

(vi)

Increased number of accidents causing loss of output and increase

in medical expenses and cost of repairs,

(vii) Lack of cooperation and coordination between old and new

employees resulting fall in output and increased cost of production,

LABOR EFFICIENCY AND UTILISATION

Labor is a significant cost in many organisations and it is important to continually measure the

efficiency of labor against pre-set targets.

Measuring labor efficiency

To measure labor efficiency: Compare actual efficiency with predetermined targets (or budgets)

using `standard hours'.

A standard hour is the number of production units which should be achieved by an experienced

worker within a period of one hour.

We can assume that all organisations will benefit from efficient labor, thus it is important to

measure how efficient workers are and identify opportunities for improvement.

The following practice question shows the calculation of the efficiency ratio.

101

Cost & Management Accounting (MGT-402)

PRACTICE QUESTION

Standard time allowed per unit

30 minutes

Actual output in period

840 units

Actual hours worked

410

Budget hours worked

400

The efficiency ratio is calculated by the following formula:

Actual output measured in standard hours Actual hours

Actual hours

840 x ½ hours (30 minutes) = 420 hours

420 x 100 = 102.44%

210

Problem Question

Calculate the efficiency ratio from the following data.

Standard time allowed per unit

15 minutes

Actual production

900 units

Actual hours

250

Budget hours

200

FACTORY OVERHEAD COST (FOH)

Factory overhead costs are those costs incurred which cannot be identified directly to cost unit.

These are incurred in many different parts of organisation.

These include:

1. Indirect materials

2. Indirect labor and

3. Indirect costs attributable to production and the service activities associated with

manufacturing.

Marketing, general administration, research and development costs that are not associated with

manufacturing are not usually treated as overheads for this purpose.

Factory overhead costs are incurred in three main centers:

· Production centers

costs arising in production departments such as the costs of

fuel, protective clothing, depreciation and supervision.

· Service centers

the cost of operating support departments or sections

within the factory, for example, the costs of materials handling, production control, and

canteen.

· General costs centersgeneral production overhead such as factory rent/taxes, heating and

lighting and production management salaries.

The purpose of cost accounting is to provide information to the management. Management need

to know cost per unit as a basis for valuing inventory and for decision making.

FOH Cost Allocation & Apportionment

The total cost of factory overhead needs to be distributed among specific cost centers. Some items

102

Cost & Management Accounting (MGT-402)

can be allocated immediately, e.g. the salary of a cost centre supervisor or indirect materials issued

to a cost centre. Other items need to be apportioned between a number of centers, e.g. factory rent

and taxes or the factory manager's salary.

Cost Allocation

It refers to the costs that can be identified with specific cost centers.

Apportionment

It refers to the costs that cannot be identified with specific cost centre but must be divided among

the concerned department/cost centers.

Steps of Allocation & Apportionment

1. Item wise collection of FOH cost.

2. Identifying cost centre (Production & Services).

3. Allocating and apportioning general F.O.H cost to the cost centers.

4. Apportioning FOH cost of service cost centers to the production cost centers.

5. Calculation of total FOH cost for each production cost centers.

6. Determining FOH rate for each production cost center.

FOH Absorption Rate

Finally FOH absorption rate is calculated at which the cost is absorbed in the cost unit. This is also

known as overhead absorption rate (OAR) this can be calculated as under:

OAR = Estimated F.O.H cost

Base

Bases for FOH Absorption Rate

Following can be used as base to calculate overhead absorption rate:

1. Direct Labor hours

2. Machine hours

3. No. of unit produced

4. Direct labor cost

5. Prime cost

Problem Question

Apportion each of the cost given in four cost centers A, B, C, and D

Supervision

Rs. 7,525

Indirect workers

6,000

Holiday pay & national Insurance

6,200

Tolling cost

9,400

Machine Maintenance labor cost

4,500

Powers

1,944

Small tools & Supplies

1,171

Insurance of machinery

185

Insurance of building

150

Rent & rates

2,500

Depreciation of machinery

9,250

103

Cost & Management Accounting (MGT-402)

Basis of apportionment of different costs:

Total

1. Floor Space

1,800

1,500

800

900

5,000

2. Kilowatt hours

270,000

66,000

85,000

65,000

486,000

3. Cost of machine

30,000

20,000

8,000

16,000

74,000

4. Indirect workers

5. Total workers

6. Machine maintenance

3,000

2,000

3,000

1,000

9,000

hrs

7. Supervision cost

2,050

2,200

1,775

1,500

7,525

8. Tooling cost

3,500

4,300

1,000

600

9,400

9. Small tools & supplies

491

441

173

1,171

10. Machine running

30,000

36,000

19,000

8,000

93,000

hours

104

Table of Contents: