Intermediate: Effect of incentive scheme on company costs (a) Shown below is a summary of the previous
Question:
Intermediate: Effect of incentive scheme on company costs
(a) Shown below is a summary of the previous week's payroll data for the moulding department in Peal Public Limited Company, a company manufacturing two different types of telephone receiver.
The moulding department employs 90 direct and 20 Indirect operatives. All operatives are paid at hourly time rates;
overtime, which is regularly worked to meet budgeted production targets, is paid at time rate plus one-third. The company operates a batch costing system. using actual costs, which is fully integrated with the financial accounts.
• Note for Hong Kong students - wages are paid after deduction of tax at source.
Required:
Construct the moulding department's Wages Control Account for the previous week clearly indicating the accounts into which the corresponding entries would be posted.
(b) The works manager of Peal PLC is considering introducing a piecework incentive scheme for the direct workers in the moulding department. Work Study Services have examined the manufacturing process in the moulding department, and consider that the operation to produce Type 1 receivers should be performed under normal conditions, by one operative in 24 minutes, for a Type 2 receiver the corresponding time is 36 minutes. Unavoidable nonproductive downtime is expected to remain at approximately 20% of productive time.
Having considered the above times, the works manager suggests that direct operatives should be paid a piece rate of £1.90 for each Type 1 receiver produced, £2.85 for each Type 2 receiver produced; and non-productive downtime should be paid at £2.50 per hour.
As the accountant of Peal PLC you have been asked to appraise the above scheme. It should be assumed that the previous weeks' payroll data shown in
(a) above represents an average week in the moulding department; although the weekly volume of production and consequent wages do fluctuate around this mean figure. No further information has been provided.
Required:
(i) Examine the effect of the proposed scheme on the labour costs in the moulding department.
Any assumptions you consider necessary should be clearly stated.
(ii) BrieHy discuss any additional considerations which would need to be thoroughly examined before the feasibility of the proposed incentive scheme could be finally assessed.
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