SEM 6 › Business Processes & Accounting Systems › Week 09
Business Processes & Accounting Systems · Week 09

Labour Costing — Time Keeping, Remuneration, Salary Sheet, EPF & ETF

Direct vs indirect labour, time keeping and time booking, job cards, job evaluation, time rates (with overtime), piece rates and bonus schemes, the salary sheet, and Sri Lanka's EPF (12% + 8%) and ETF (3%).

ITE36221 video · 24 min📄 Labour costing session 9.pdf📄 act_of_1958.pdf (EPF Act)📄 ETF Act.pdf📄 Practice – Labour costing.pdf

1Direct vs indirect labour

Type Meaning Examples
Direct labour cost Payments to direct workers: employees directly involved in making the product. Part of the prime cost Machine operators, assemblers, tailors in a garment factory
Indirect labour cost Payments to workers not directly involved in making the product. Part of overheads (Week 10) Supervisors, storekeepers, maintenance staff, cleaners
Prime cost = direct materials + direct labour + direct expenses

2Time keeping & time booking

Time keeping records attendance (arrival and departure). Time booking records how the time was spent (on which jobs).

Method How
Manual: attendance register, disc method Workers sign in a register, or move a numbered disc/token
Mechanical: dial time records, card time records (clock cards) A machine stamps arrival and departure times
Traditional time cards Employees manually record arrival and departure on a card or register
Biometric systems Fingerprint or face recognition verifies identity at clock-in and clock-out
Access control systems Proximity or swipe cards tapped on entering or leaving

Time-booking documents:

  • daily time sheets
  • weekly time sheets
  • job tickets or job cards
Job card

A job card keeps a close check on the time an operator spends on each job during the day. It records the job code, quantity, start and end times, and processes. It's the basis for charging direct labour to jobs.

Job evaluation

Job evaluation ranks jobs to set fair pay rates. There are three methods:

  1. Grading
  2. Ranking
  3. Points value: points for (a) education or background knowledge, (b) responsibility, (c) working conditions, (d) complexity of duties

3Methods of remuneration

Time ratesPiece ratesTime + piece combinationsPremium bonus schemes

1. Time rates (day-rate system)

Wages = Hours worked × Rate per hour (plus overtime at a premium rate for hours over the basic day)
Lecture example: overtime

Basic rate Rs 200 per hour, 8 normal hours a day, overtime at 1.5×. The employee works 11 hours.

Rs
Normal hours: 200 × 8 1,600
Overtime: 200 × 1.5 × (11 − 8) 900
Total earnings for the day 2,500
Advantages Disadvantages
Simple to understand and operate Workers may not care to improve efficiency
Best when quality matters more than quantity (precision work), or when there's no basis for paying by performance Efficient workers' effort is not rewarded

2. Piece rates

Wages = Units produced × Rate per unit
Advantages Disadvantage
Encourages productivity and time efficiency; motivates workers to produce more Reduced quality: workers may focus on quantity over quality

3. Combination and 4. premium bonus schemes

Bonus schemes were introduced to compensate time-paid workers who otherwise can't earn more by working more efficiently. There are individual and group bonus schemes.

Two classic individual time-saved schemes (beyond the notes, but commonly examined):

Halsey: Earnings = (Time taken × Rate) + 50% × Time saved × Rate
Rowan: Earnings = (Time taken × Rate) + (Time taken ÷ Time allowed) × Time saved × Rate
🧪 Try it — Remuneration method comparer

4The salary sheet, EPF & ETF

Items in a salary sheet:

  • basic salary
  • fixed allowances (e.g. cost-of-living allowance)
  • overtime
  • EPF and ETF
  • other deductions, e.g. loan instalments

Employees' Provident Fund (EPF)

  • Set up under the EPF Act No. 15 of 1958 (with amendments).
EPF contributions
  • Employer: 12% of the employee's monthly earnings
  • Employee: 8% of monthly earnings (deducted from salary)
  • Monthly earnings for EPF = basic salary + fixed allowances − no-pay leave

Overtime is generally excluded from EPF earnings.

Employees' Trust Fund (ETF)

  • Set up under the ETF Act No. 46 of 1980.
  • The employer contributes 3% of the employee's total monthly earnings.
  • There's no employee deduction for ETF.

Salary sheet format

Item Employee 001
Basic salary xxx
Cost-of-living allowance xxx
Other fixed allowance xxx
Gross salary xxx
Deduction: EPF 8% (xxx)
Deduction: loan instalment (xxx)
Total deductions (xxx)
Net salary (paid to the employee) xxx
EPF 12% (employer) xxx
ETF 3% (employer) xxx
🧪 Try it — Salary sheet calculator (Sri Lanka)
Common mistakes
  • EPF and ETF are based on basic + fixed allowances, not on overtime.
  • The 12% and 3% are not deducted from the employee; they're extra employer costs.
  • The employee's 8% is deducted from the salary.
Exam focus

Expect:

  • Direct vs indirect labour
  • Time keeping vs time booking methods and documents (job card)
  • Job evaluation methods
  • Time rate calculations with overtime (the 1,600 + 900 = 2,500 example)
  • Advantages and disadvantages of time rates and piece rates
  • Why bonus schemes exist
  • Preparing a salary sheet with EPF 8% / 12% and ETF 3%

5Practice questions (course paper)

Q1: Salary sheet, Araliya Enterprises (January)

Assumption: EPF and ETF are calculated on basic salary after the no-pay deduction. Check whether your course uses basic + COLA instead.

Mahi Dewmi Kavinda Silva Total
Basic salary 50,000 80,000 45,000 90,000 265,000
Less no-pay leave — (5,000) — — (5,000)
Basic for EPF/ETF 50,000 75,000 45,000 90,000 260,000
Cost of living allowance 10,000 5,000 7,000 10,000 32,000
Marriage allowance 12,000 12,000 12,000 — 36,000
Gross salary 72,000 92,000 64,000 100,000 328,000
Employee EPF 8% (4,000) (6,000) (3,600) (7,200) (20,800)
Loan instalment (8,000) — — (15,000) (23,000)
Net pay 60,000 86,000 60,400 77,800 284,200
Employer EPF 12% 6,000 9,000 5,400 10,800 31,200
Employer ETF 3% 1,500 2,250 1,350 2,700 7,800

Total labour cost to the company = gross 328,000 + employer EPF 31,200 + ETF 7,800 = 367,000.

The EPF fund receives 20,800 + 31,200 = 52,000 (20% of the EPF base).

6Quick revision sheet

Concept Remember it as
Direct labour Makes the product; prime cost
Indirect labour Supports production; overhead
Time keeping Register, disc, clock cards, biometric, swipe cards
Time booking Daily and weekly time sheets, job cards
Job evaluation Grading, ranking, points (education, responsibility, conditions, complexity)
Time rate Hours × rate (+ OT premium); simple, quality-friendly; no efficiency reward
Piece rate Units × rate; productive; quality risk
Bonus schemes Reward time-paid workers' efficiency; individual or group
Overtime example 200 × 8 + 200 × 1.5 × 3 = 2,500
EPF Act 15 of 1958; employer 12%, employee 8%; on basic + fixed allowances − no-pay
ETF Act 46 of 1980; employer 3% only
Net pay Gross − EPF 8% − other deductions

?Self-check quiz

12 questions on this week. Answer them all, then press Check my answers. Your best and latest scores are saved and shown on the subject page.

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