ADVANCED COST ACCOUNTING
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The first element of the cost of the product is raw-material. The techniques and procedure
to be followed for controlling this important component are being discussed here.
Control Over Materials
Materials form an important part of the cost of a product and, therefore, proper, control
over material is necessary from the time orders are placed with the suppliers till they
are actually consumed in plant and office operation, or have been sold as merchandise. An
efficient system of materials control will lead to a significant reduction in production cost.
Control over materials is also necessary to assure a steady supply of each item of
material. In the absence of quantity-on-hand information regarding each item, there is
a constant danger of material being stored, in too small a quantity which may result in a
heavy loss consequent upon stopping of the whole assembly line, or in too large quantity
resulting in serious obsolescence losses.
Materials control may be defined as the systematic control over the procurement, storage
and usage of material so as to maintain an even flow of materials and avoiding at the
same time excessive investment in inventories. Thus, materials control involves efficient
functioning of the following operations:
(i) Purchasing of materials.
(ii) Receiving of materials.
(iii) Inspection of materials.
(iv) Storage of materials.
(v) Issuing of materials.
(vi) Maintenance of inventory records.
(vii) Stock audit.
To understand the systems it is necessary to know about maintenance of main inventory
Maintenance of Inventory Records
Two sets of records for materials received, issued or transferred are generally maintained.
By the storekeeper in the stores.
(b) By the costing office.
Main Record by the Storekeeper
‘Bin’ means a rack, container or space where goods are kept. The store is fitted with
serially numbered bins, each meant for a particular type of material. A card (known as
Bin in Stock card) is placed outside each bin and, whenever the materials are received
or issued a notation is made on the card. Each bin card also contains particulars regarding
maximum, minimum and ordering levels, code number, description etc., of the materials
kept in the bin The bin cards assist the storekeeper to control the stock as they provide a continuous record of stock on each bin.
Main Record by the Costing Office
The cost office maintains a stores ledger in which a separate account is opened for
each kind of materials and spare parts stocked in store. It is generally maintained in the
form of loose leaf cards because they can be removed and inserted in the ledger
conveniently. One card is allotted to each item of materials.
Entries are made from Goods Received Reports, Invoices, Materials Requisition Slips
and Materials Returned Notes. Entries made in the stores ledger are identical to those
on bin cards except that money values are also shown in the stores ledger.
Direct Labour and Direct Expenses
The second element of the cost of manufacturing a product is labour. The role of labour
in the process of production cannot be overlooked in spite of the fact that machines are
being used on a vast scale today. The efficiency of production depends upon the successful
utilisation of labour force and for that, proper accounting and control of labour are
needed. Skill of labour helps in lowering down the cost of units produced besides raising
the quantity and quality of the output.
Direct and Indirect Labour
Labour can be direct as well as indirect. Direct labour is that which can be charged to
specific cost units directly. Indirect labour is one the direct allocation of which is not
possible. If wages can be allocated to different jobs or products on a convenient basis
and are paid to workers engaged directly in the fabrication of products the wages are
direct. The wages are indirect when the workers are not directly engaged in the
manufacturing of products and the wages cannot be identified to particular jobs or
products. The examples of indirect labour are wages paid to supervisors, workmen,
chowkidars, inspectors, material handlers, time-keepers, foremen, watchmen, cleaners,
etc. The example of direct labour is wages paid to workmen put on definite jobs or
products in the factory.
Methods of Wage Payment
Labour is one of the main factors of production. The success of a concern depends
upon the efficiency of labour to a great extent. Low wages do not necessarily result in
low cost of production. Actually there should be optimum wages for remunerating labour
and any single method cannot be recommended for all business concerns. However,
there are some factors which are to be considered carefully before adopting any particular
method of labour remuneration.
Factors to be Considered
1. The wage system should be the best combination of interest of both the employer
and the employees. From the employer’s point of view, the cost of labour should
be the minimum with the maximum of qualitative output. From the workers’
angle, the wages should be fair and equitable and should be adequate reward for
the efforts put in by them. The workers should also be allowed to share the
profits of prosperity periods in the form of increased wages or bonus.
2 . H.J. Wheldon has rightly remarked— “Strikes and agitations have arisen where
wages schemes are complex, and not understood by the workers.” Hence, in
promoting a special method of payment care must be taken to see that it is not
only understood, but also appreciated as a reasonable one by the workers.
Workers must get a minimum wage under the system. Moreover, the system
should provide incentives for an efficient worker for arousing his interest further
in the work. Thus, human factor should be given due prominence.
4. The wage system should be easy to understand and simple to operate. Complex
calculations may arouse suspicion in the minds of illiterate labourers.
5. Flexibility in the system of wage payment is an essential factor to be considered
so that the system may be changed suitably whenever required.
The method of wage payment differs from firm to firm and industry to industry depending
upon the nature of work and circumstances prevailing within the firm or industry. The
pros and cons and field of application of the various methods of remuneration are
considered below :
I Time wage system
The system under which the payment is made to the workers according to the time for
which they work is known as Time-wage System. The time-rate is fixed before hand
and workers are remunerated for the hours of work done by them. For example, an
employee has to work for 8 hours daily in a factory, and the rate per hour fixed by the
management is Rs. 2; the total remuneration per day shall be Rs. 8 × 2 = Rs. 16. The
payment can be made according to the rate per hour, day, week, fortnight or month.
There is a guarantee given to the worker that he will get a fixed minimum for a specified
period of time. Since the method depends on time worked, no account is taken of the
quality and quantity of work done. The straight time-wage system, though is a very old
system, holds its own even today.
This method is suitable in the following cases:
(i) Where strict supervision is possible.
(ii) Where quality of output has a greater role to play quantity.
(iii) Where it is not possible to measure the work done.
Thus, the time-basis of making wage payment is best suited to those industries where
efficiency of a worker does not have an important role to play in the speed of production.
It is best suited for remunerating indirect labours like cleaners, night watchman, inspectors
1. The labour as well employer can easily understand this system, and amount of
wages to be paid can be calculated without any tedious mathematical calculations.
2. Wages are not related to the quantity and quality of the work done. Monthly, daily
and hourly rates are fixed and labourers are assured of a certain amount of
wages to be received after definite period. In case work is interrupted due to
failure of power or technical defect in machine, the labourers need not worry.
Thus, they feel a sense of security also.
3. Since wages are fixed the worker is not hasty and he uses best of his talents to
make a quality production. Thus, quality is not sacrificed for quantity
This method is economical also. Detailed records regarding the work done by
the labour are not required. This results in economy of administrative overheads.
Moreover, the workers do not try to be hasty in doing their work. This means that
they use material and plants very carefully to produce goods of the highest quality.
Care in use of material and plants effects considerable economy.
1. No distinction is made between efficient and inefficient workers. They are treated
alike and thus there is not inducement for hard work.
2. The workers become lazy and dull and try to avoid work, and thus production
3. “Delaying” is the common practice followed by workers when the time-wage
system is followed in a firm. The workers try to make the work last as long
possible so that earnings may be greater. Thus, labour cost per unit is increased.
4. There is a discontentment among the efficient workers for there efforts are not
properly regarded Moreover, the system may also lead to employer-employee
trouble since the interest of the two conflict. Employer is interested in maximum
production while the workers are interested in maximum earnings.
5. A close supervision is needed. Appointment of additional supervisors increases
cost of manufacture.
Some variants of time wage system are used sometimes to overcome the shortcoming
of straight time wage system. These are as follow:
(i) High wage plan. Under this plan a worker is paid a rate, ordinary higher than
the prevailing in the area or in the industry. It ensures higher level of performance
(ii) Differential Time Rate. In case of this plan different hourly rates are determined
for different levels of efficiency. This in fact, turns out to be differential piece
rate system discussed later in the chapter.
II Piece wage system
The payment under this system is made in proportion to the work done, no regard being
given to time taken in performing the work. The rate is fixed per unit of output, per
article, per commodity etc. The worker is paid for the total units produced or
manufactured The system is thus result or output oriented. For example. If the rate per
unit is Rs. 10 and the worker completes 10 units in a week his weeks wages shall be 10
× 10 Rs. 100 It may be expressed in the form of the following formula:
Total earning = Rate per unit = Units completed
This system takes into account the quantity of work done. However, to ensure quality
units not completed upto the mark may be rejected. Payment is made for those units
only which are accepted. The rate per unit must be fixed bearing in mind the factors
such as physical labour required, the normal time which a worker would take in completing
one unit etc. Piece-wages system may be for individual workers or for a group of
(a) Individual place work
When the wages are paid to each worker according to the rate per unit of output of rate
for each job or operation performed the piecework system is known as individual
(b) Group piece work
Group or collective piecework system is that where the workers are paid remuneration
on a group basis because they perform a particular job or operation after making
collective effort the workmen of a particular group can, afterwards, divide the earnings
in any proportion. The basis of distribution is generally their basic time earnings. This
spent on the operation hourly basic rate of wages).
1. The system recognised the merit and efficiency of workers and, therefore, can
be regarded as more equitable than the time-wage system.
2. The workers are induced to work hard with the result that production is enhanced.
This reduces the fixed overhead expenses per unit and, finally the total cost of
3. The total labour cost per unit or job is accurately ascertained if this system is
4. The workers too are benefited since they get more wages. They can finish the
work in less time and in the time saved they can make additional earnings.
1. Since the workers are paid for the quantity of units produced irrespective of the
time they have spent, they take no precaution to improve the quality of products.
Sometimes, in a hurry to finish the job earlier, they deteriorate the quality of the
2. Occasionally, the employees handle the tools and equipments very roughly and
carelessly to achieve a high output, causing thereby losses to the firm or industry.
3. The workers suffer loss if due to certain reasons, they fail to work efficiently for
a particular period. No guarantee is given for the day’s wages.
4. Speedy and excessive work, in a bid to earn more, proves injurious to the health
5. When the workers start doing the work more efficiently and the wages start
rising up and up, the employers have a tendency to exploit workers.
6. Fixing the equitable piece rate is a task of considerable difficulty.
The system requires a vigorous system of inspection of the quality of the output.
A strict vigilance should be kept to see that the workers make a proper use of
materials given to them, handle the machines properly. The system is normally
followed in coal mining, textile industries, shoe factories etc. Where the work is of a
repetitive nature and the change in the conditions of job is not frequent the system is best suited.
Factors to be considered
The following factors should be considered before introducing any incentive scheme
for workers in an organisation:
1. The incentive scheme should be beneficial to the firm. In other words, the benefits
accruing to the firm should be higher than the cost of the scheme to the firm. It
may be noted that both monetary and non-monetary benefits of the scheme have
to be considered. Non-monetary benefits e.g. increase in employee’s morale, job
satisfaction etc., should also be given due consideration.
2. The workers should be properly educated about the scheme to avoid any future
confrontation due to mis-understanding.
3. The scheme should be capable of being put into practice without much
complications. In other words the scheme should be simple to understand and
easy to operate.
4. In every incentive scheme it is presumed that the organisation has adequate
demand for the surplus production it will be in a position to make due to grant of
incentives to the workers. It is, therefore, necessary that a market study for the
organisation’s product should be undertaken before adopting any incentive scheme.
5. Standard norms for production and wage rates will have to be determined.
6. Incentive schemes should be introduced for both direct and indirect workers. In
case of direct workers, the measurement of performance does not involve any
problem. However, in case of indirect workers viz. supervisors, machine
maintenance, stores, internal transport workers, etc., there is no appropriate method
for their performance evaluation. Hence, introduction of an incentive scheme in
their case is a bit difficult. It is still essential for providing incentives to such
workers also for increasing their efficiency and promoting team spirit. Monetary
incentives to direct workers may be in the form of profit sharing or co-partnership
or co-ownership scheme, while monetary incentives for indirect workers can be
in the form of bonus to different categories of indirect workers on an appropriate
basis as discussed later in the chapter.