Group bonus plan

Cost/Management Accounting notes

There are certain jobs or operations which require to be done collectively by a group of workers, for example, continuous production work flows in a sequence or in assembly work of computers, radio, televisions, etc. A team of workers is engaged in various operations and as such it becomes necessary to introduce bonus schemes for collective efficiency of the group as a whole and the intention is to create a collective interest in the work. In this case, the bonus is shared among the members. The proportionate share may depend on a number of factors, for example, the level of employee in management structure, the department in which the employee falls, his current salary e.t.c..
Characteristics of an effective bonus scheme
(i) Efficiency in production: when the volume of production is so important, the bonus incentive scheme should reward higher producers i.e. should be based on output achieved.

(ii) Effect on workers: the scheme should be designed to motivate the employees. It should be simple and understood by those of average intelligence.

(iii) Both the employer and the employees should share the gains in labour efficiency. This will motivate the employees to be more efficient since they benefit from the gains made.

(iv) The method of calculating the bonus should be known and acceptable to the

(v) The standard hours set should be achievable and realistic. When the standards are
high then the employees will not achieve them and the bonus will not be earned
Benefits associated with group bonus schemes include
 It encourages cooperation and teamwork among workers since each member in the
group has an interest in the work.

 It reduces absenteeism since an absent worker is found to reduce the group earnings and the group may dislike him

 The approach reduces supervision time and cost, thus it is administratively much

 It greatly reduces the number of rates to be negotiated.

 It may encourage flexible working arrangements within the group.
But it suffers the following setbacks
 It may not provide a strong incentive to the individual workers, as it is group based.

 Less hardworking group members are similarly rewarded as the very hardworking ones: this may cause demotivation in the group.

 It is hard to determine each group members’ fair share of the bonus.
Co-ownership incentive scheme (Profit Sharing Schemes)
Profit-sharing scheme is where a proportion of company profits is allocated to employees either in the form of cash or in company stock. The actual proportion of company profits to be allocated is normally calculated by a formula which is known in advance. This converts employees from mere salary seekers to individuals who are part of the organization.

Their purpose is to enable employees to benefit from the success of their employer in a tax- efficient way and, at the same time, encourage them to participate in their success. Approved profit-sharing schemes facilitate the allocation of company shares rather than the distribution of company profits in the form of cash. To receive the tax advantages, a profit-sharing scheme

must be set up under trust and approved by the Revenue. The trust receives a proportion of the company’s profits, which it uses to buy shares for allocation to individual employees.

Employees must agree to leave their shares in the scheme for at least two years (unless they leave due to injury, redundancy or retirement). If they leave for any other reason, they must leave their shares in the scheme until they have been held for two years. If shares are sold within five years, income tax is payable on a percentage of their value or on the proceeds of the sale (whichever is the smaller). Shares which are held for more than five years and then sold are not liable for any income tax.
Departments involved in the accumulation of labour costs
Labour costs are accumulated by various departments.

(i) Personnel department

It is responsible for engagement, discharge and transfer of employees, classification and method of remuneration. It determines which employee to hire, the amount of remuneration based on the negotiation and to which branch or department the hired employee shall work.

(ii) Production planning department

It is responsible for scheduling work and issuing job orders to the production department. It schedules the work as it comes based on a number of factors such as urgency of the assignment and availability of resources: materials, time and /or others.

(iii) Time keeping department

It is responsible for recording the attendance time and job time i.e. time spent by each worker in a factory and time spent by each worker on each job.

The documents used are

(1) clock card: it is a document on which is recorded the starting and finishing time of an employee for the ascertainment of total actual attendance time.

(2) job card; it records time spent on a job

(3) time sheet; It is a record of how a person’s time has been spent daily or weekly. Time sheets on which the employee enters all particulars himself are commonly issued to indirect workers e.g. maintenance staff

(iv) Wages department

It is responsible for preparing the payroll and the payment of wages. The routine will require analysis of clock cards and check of overtime authorization, calculation of bonus, compilation of gross earning, calculations of deductions, and preparation of pay details for each employee showing net wages.

To arrive at the net amount of wages, a range of deductions are made from gross earnings. Some of the deductions are statutory or obligatory in nature while others are voluntary. In Kenya, Statutory deductions are pay as you earn (PAYE) tax, pensions, and employees, national insurance contributions. The employer is obliged to deduct and submit the deductions to the relevant parastatal bodies to which they act as agents. Examples of such bodies include Kenya Revenue Authority (KRA) to whom PAYE tax deducted is remitted, National Hospital Insurance Fund to whom the national insurance contributions deducted are submitted.

Voluntary deductions include items such as trade union subscription, charity deductions and contributions to saving schemes.

(v) The cost accounting department

It is responsible for the accumulation and classification of all costs. It will identify the direct and indirect costs and identify the direct costs with specific jobs, process or product to which they are charged.
Control of labour costs
Most of the firms aim at maximizing profits by minimizing costs, while optimizing on the revenues received. Labour costs being a significant expense in the books of account must be controlled in order to ensure that no over payments are made and that only authorized payments are effected.

For effective control, the following techniques should be applied

(i) Production planning
The preparation of a production planning schedule well in advance with a supporting schedule of man hour requirements should result in the most efficient use of the man power available. Idle time should be reduced as much as possible and if possible avoided entirely. The scheme should also enable the management to predict long term labour requirements.

(ii) Labour budget and use of labour standards
A standard of expected performance is required for various reasons.

(1) to make production schedule and labour budgets,
(2) to measure productivity by comparing actual time against an expected time and taking control action if necessary. Without a labour standard, productivity cannot

be measured or controlled and greater productivity is the only realistic way of reducing labour costs

(iii) Labour performance reports

This should provide a periodic stimulus for controlled action. It is from the report that management is able to identify where the weaknesses were and take appropriate action. In other words, control action is very effective where regular feedbacks are provided.

(iv) Wages incentive schemes

Employees’ productivity can be increased in various ways. One of the major ways that the employees can be motivated to be more productive and more efficient is through introduction of successful wages incentive schemes. These schemes reward both the company and employees for raising productivity.

(v) Identification of direct labour

The cost accounting system must be able to identify direct labour cost with a product, job or process. Cost control may then be applied by the manager responsible for the product, job or process.
>>> Illustration
All of a company’s skilled labour, which is paid at Shs800 per hour, is fully employed in manufacturing a product to which the following data refer:

The company is evaluating a contract, which requires 90 skilled labour hours to complete. No other supplies of skilled labour are available.
Calculate the relevant skilled labour cost for the contract.
Each unit of the product being manufactured currently takes 2.5 hours

Therefore, relevant labour cost shall be the sum of the labour cost on ordinary hours at Shs800
and the foregone contribution from the product currently being manufactured.

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