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Author's profile photo Selvakumar Natarajan

Calculation of Incentive through cost object

Incentive pay has the potential to increase worker productivity if properly designed and maintained.

Wage incentive plans may be of two types :

(1) Individual Incentive Plans and

  (2) Group Incentive Plans.

In our discussion let us take the group incentive plan.


Here for convenience, let us take each cost center as a group.    Each cost center will have its own plan
cost / budget.


LABOUR COST VARIANCE  = Target costs for labour – Actual Costs for labour

TARGET COSTS   = target labour activity qty * activity price   ( mainatained in KP26 tras. )

ACTUAL COSTS   = labour activty booked * activity price      (mainatained in KP26 trans )

Regarding the labour Cost variance calculation,

Assume the price is the same –  defined  in KP26 for both plan and actual.

So its only the labour hours that contribute to the variance.

Variance = ( Planned labour hrs – Actual Labour Hrs ) * price from KP26


Now let us create a GL account in the Chart of Accounts  say

Incentive to employees ( GL A/C.560001)

If the variance is positive it is favourable and a portion of that may be transferred to the above account  560001.     Then this account can be reposted to
employee wise in the subsidiary book ( employee vendor subisidary book )

By avoiding a cost element for this account this will not reflect in the cost center.

The portion of variance to  be transferred to the incentive account should be decided by the management accordingly.

By transferring this  positive variance to incentive account , the incentive calculation can be atomized by the system itself.

I foresee some difficulties may arise in deciding the planning data which may not be workable in cost centers.   Usually all the cost center may not have
plan data.  I invite the experts comments to improve this idea workable in proper way.    

Best regards      


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