Question

3. Problem "Broooother & Bosss Baby," a new startup by two brothers to manufacture toys for kids, is planning to recruit workers. Preliminary forecast of demand shows that an estimated 10,000 units of toys will be sold every month. It is estimated that 0.2 labor hour will be required to produce each unit of toy but 20% of the total hours will be idle time. The company has the following alternatives to pay workers: Alternative 1: Pay the workforce using piece-work system whereby workforce will be paid $2.5 per unit for the first 7000 units produced in a month and $3 per unit thereafter. Alternative 2: Pay the workforce a basic pay of $10 per hour for up to 2100 hours a month. Any hours worked in excess of the monthly standard hours will have a pay of $15 per hour. • Requirements: (a) Calculate the budgeted total labor cost for: i. Alternative 1 [4 marks] Alternative 2 [6 marks] (b) In relation to your answer to (a)i, how much of the total cost is i. Direct labor cost? [2 marks] ii. Indirect labor cost? [2 marks] (c) Which method of remuneration do you prefer and why? [6 marks]

Answer 1

Ans:

(A)

(i) Alternative 1- Pay the workforce using piece work system whereby workers will be paid $2.5 per unit for the first 7000 units produced in a month anfd $3 per unit thereafter.

First 7000 units @ $2.5	7000 units * $2.5	$17500
Next 3000 units @ $3	3000 units * $3	$9000
Total 10000 units		$26500

Budgeted Labour Cost will be $26500

(ii) Alternative 2- Pay the workforce a basic pay of $10 per hour for up to 2100 hours a month. Any hours worked in excess of the monthly standard hours will have a pay of $15 per hour.

Hours worked = 0.2 hours * 10000 units = 2000 hours

Idle time is 20% of the total hours, therefore total hours will be 2000 hours / 0.80 = 2500 hours (2000 hours does not include idle time)

Total hours = 2500 hours

For 2100 hours @ $10 per hour	$21000
For 400 hours @ $15 per hour	$6000
Total hours 2500	$27000

Total budgeted cost will be $27000.

(B) In relation to answer to a(i)

Particulars	Calculation	Explanation	Amount ($)
Direct Labour Cost	(7000 units * $2.5) + (3000 units * $2.5)	Basic rate paid is called direct cost	$25000
Indirect Labour Cost	($3-$2.5) * 3000 units	Extra amount paid over and above the basic is called indirect cost	$1500
Total Labour cost			$26500

In relation to answer a(ii)

Particulars	Calculation	Explanation	Amount ($)
Direct Labour Cost	(2100 units * $10) + (400 units * $10)	Basic hour rate paid is called direct cost	$25000
Indirect Labour Cost	($15-$10) * 400 units	Extra amount paid over and above the basic rate and extra hour is called indirect cost	$2000
Total Labour cost			$27000

(C) The most preferable method of paying remuneration to labour is Piece Rate System as the total cost of labour is lower in that method as compared to hourly pay method. The company can save $500 (27000-$26500). The difference in amount is the result of Extra indirect cost paid in ALternative 2.