LABOUR COST ..Methods of Remuneration

LABOUR COST Methods of Remuneration (systems of wage payment) There are two basic methods of labour remuneration:

a) Time Rate System; and (b) Piece Rate System Time Rate System

Under the time rate system, workers are paid according to the time for which they work. Payment may be on hourly basis, daily basis or monthly basis. In this system, no consideration is given to the quantity or quality of work done. When payment is made on hourly basis, total wages payable are calculated as follows:

Wages = No. of hours worked x Rate per hour Piece Rate System

Wages under this system are paid according to the quantity of work done. A rate is fixed per unit of production and wages are calculated by the following formula:

Wages = Rate per unit x No. of units produced.

 Incentive Plans Both time rate system and piece rate system have their merits and demerits. Incentive plans attempt to combine the good points of both the systems. The primary purpose of an incentive plan is to induce a worker to produce more to earn a higher wage. Naturally, producing more in the same period of time should result in higher pay for the worker. Because of greater number of units produced, it should also result in lower cost per unit for fixed factory cost and also for labor cost.

 Various Incentive Plans Following is the list of many incentive plans being practiced by various organizations. (i) Straight Piece Rate Method (ii) Flat Time Rate Method (iii) Co-partnership (iv) Guaranteed Day Work (v) Taylor Differential Piece Rate Method (vi) Different Time Rates (vii) Rowan Premium Bonus Plan (Variable Sharing Plan) (viii) Halsey Premium Bonus Plan (Halsey Plan and Halsey-Weir Plan) (ix) Group Incentive Schemes (x) Standard Hour Plan (xi) Merrick Multiple Piece Rate (xii) Gantt Task Bonus Wage System (xiii) Bedaux Point System (xiv) Emerson Plan (xv) Barth Premium System (xvi) Accelerating Premium Bonus

We will discuss some of the above mentioned incentive plans in detail.

 1) Straight Piece Rate Method : The method rewards employees based on their output. A fixed rate of wage is paid for each unit produced, or number of operations completed or job completed. The wages payable is calculated by multiplying the number of pieces produced by the wage rate. There is generally a guaranteed hourly rate for workers who are unable to attain the standard in order to pay the minimum ‘day wages’.

 2) Flat Time Rate Method:  This method is used for paying remuneration to employees based on their attendance. A fixed rate of wage is paid hourly, or daily, or weekly on the basis of time spent on the shop floor (i.e. production department) in production. The wages payable is calculated by multiplying the hours/days spent in production by the hourly/daily wage rate.

 3) Halsey Premium Bonus Plan (Halsey Plan and Halsey-Weir Plan):  This plan was introduced by F A Halsey in 1891. It is a simple combination of time and piece rate systems. A worker is paid a guaranteed base rate and is rewarded when his performance exceeds standard. A standard time is established in respect of each job or unit. Bonus is paid on the basis of 50% of time saved.
The total wages payable is calculated as under: = (Hourly rate X Time taken) + (50% X Time saved X Hourly rate)
As a result of increased productivity, conversion cost per unit falls. This is because fixed overhead gets distributed over larger volume of output. Thus, the firm finds it possible to reward workers directly in proportion to production. In the case of Halsey Weir plan, the percentage used is 30 instead of 50.

 4) Rowan Premium Bonus Plan (Variable Sharing plan):  A standard time is established in respect of each job or process. There is a guaranteed base rate. A bonus is paid on the basis of time saved computed as a proportion of the time taken which the time saved bears to the standard time. The total wages payable is calculated as under: =(hourly rate x time taken) + ( time saved x time taken) x hourly rate time allowed

 5) Taylor Differential Piece Rate Method:  This system was introduced by F. W. Taylor, the father of Scientific Management. The main features of this incentive plan are as follows: a. Day wages are not guaranteed, i.e. it does not assure any minimum amount of wages to workers. b. A standard time for each job is set very carefully after time and motion studies. c. Two piece rates are set for each job- the lower rate and the higher rate. The lower piece rate is payable where a worker takes a longer time than the standard time to complete the work. Higher rate is payable when a worker completes the work within the standard time. In other words, lower piece rate is payable to inefficient workers and higher piece rate is payable to efficient workers. It will be seen that there is a great difference between the wages of an efficient and an inefficient worker.

 Problem 1 You are presented with the following information by Olympia Engineering Company related to the first week of December 1999. The firm employs 5 workers at an early rate of 2. During the week, they worked for 4 days for a total period of 40 hours each and completed a job for which the standard time was 48 hours for each worker. Calculate the labour cost under the Halsey method and Rowan method of incentive plan payments.

 Problem 2 A worker is allowed 10 hours to complete a job on daily wages. He takes 6 hours to complete the job under a scheme of payment by results. His day rate is Rs. 6 per hour and piece rate is Rs. 36. The material cost of the product is Rs.40 and the overheads are charged at 150% of the total direct wages. Calculate the factory cost of the product under i) Piece work plan ii) Rowan Plan iii) Halsey plan Problem 3

From the following particulars calculate wages earned by workers A and B respectively under Taylors System: Standard time allowed 10 units per hour Normal wage rate Rs. 1 per hour Differential rates to be applied: 90% of piece rate when below standard efficiency 125% of piece rate when at or above standard production on a day of 8 hours A – 75 units B -85 units

 Answers: Problem 1 i) Rs. 440 ii) Rs.467 Problem 2 i) Rs.36 ii) Rs.50.40 iii) Rs.48 Problem 3 A- Rs.6.75 and B-Rs.10.63 Solution of Problem # 1 Hasley Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate) = (10 x 40) + (0.5 x 8 x 10) = 440 Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate Time Allowed = (10 x 40) + (8 x 40) x 10 48 = 467

 Solution of Problem # 2 Price Rate System = Rate per Unit x No. of Units produced = 6 x 6 = 36 Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate Time Allowed = (6 x 6) + (4 x 6) x 6 10 = 50.40 Hasley Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate) = (6 x 6) + (0.5 x 4 x 6) = 48 Solution of Problem # 3 Unit rate= 1/10 =0.1 Rs/ unit Below efficiency Rate = 0.10 = 0.10*0.9 = 0.09 Rs/unit. Above efficiency Rate = 0.10 = 0.10*1.25 = 0.125 Rs/unit. Worker A:- Produced unit = 75 Therefore, wage= 75*0.090 = 6.75Rs (ANS) Worker B:- Produced Unit = 85 Therefore, wage= 85*0.125 = 10.625 ~ 10.63Rs (ANS)