2 Basic Methods of Labour Remuneration | Cost Accounting

There are two basic methods of labour remuneration, i.e., time rate and piece rate system of wage payment. In modern days a number of incentive plans to induce workers to work hard so as to produce more and earn more are being used.

Method # 1. Time Rate System:

Under this system of wage payment, workers are paid according to the time for which they work. Payment may be on hourly basis, daily basis, weakly basis, or monthly basis. In this system, no consideration is given to the quantity and 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

For example – if a worker is paid at the rate of Rs. 7.50 per hour, his wages for a day of 8 hours will be 7.5 × 8 = Rs. 60.

Though this is the oldest system of wage payment, yet it is commonly used these days.

Suitability:

This method of wage payment is suitable under the following type of situations:

1. Where quality of work is more important than quantity of work (i.e., high class tailoring)

2. Where output cannot be measured in quantitative terms, e.g., in the case of indirect workers like watch man, cleaners and sweepers, etc.

3. Where output is beyond the control of the worker, e.g., in process industries, where the work of a worker is dependent on the work of other workers.

4. Where work is being done on a small scale so that close supervision is possible.

5. Where the worker is a learner or an apprentice.

Advantages:

Following are the main advantages of this method:

1. Simplicity:

The system is simple and calculation of wages is easily understood by the workers.

2. Security to Workers:

Under this method, workers are assured of a certain amount of wages payable even if there is stoppage of work due to power failure, machine break-down etc. This gives a sense of security to workers.

3. Quality of Work:

As this method does not give weight to the quantity of work done, workers can concentrate on the quality of goods produced. Thus, the quality of work under this method is better.

4. Economical:

Under this method, no detailed records are required to be maintained regarding the work done by workers. This results in saving of clerical costs. Moreover, workers avoid over-speeding and causeless damage to Plant and Machinery and also materials. This also results in economy.

5. Accepted by Trade Unions:

This method is favoured by trade unions because it treats all workers alike and no distinction is made between efficient and inefficient workers.

6. Unity in Labour:

No hard line of distinction is drawn between an efficient and inefficient worker on the basis of production. This promotes a feeling of unity among the workers.

Disadvantages:

The main disadvantages of this method are:

1. Lack of Incentive:

This method of wage payment offers no positive inducement to workers to improve performance as it does not distinguish between an efficient and inefficient workers.

2. Lower Production:

As workers are paid on time basis, they tend to be slow in work. This results in lower production quantity.

3. More Supervision:

Under this method, more supervision is required, so that workers may not waste time. Appointment of additional supervisors increases supervision costs.

4. Idle Time:

Under this method of wage payment, workers waste a lot of time resulting in increasing in idle time.

5. Costing Difficulties:

From costing point of view, it creates difficulties in the calculation of labour cost per unit because the output is quite fluctuating.

6. It Makes Workers Lazy and Dull:

Due to the adoption of this method, workers become lazy and dull and try to avoid work, and thus production suffers.

Method # 2. Piece Wage System:

Under this method, workers are paid in proportion to the work done by them. The rate is fixed per unit of output, per article, per commodity, etc. The worker is paid for the total units manufactured. The system is thus is result oriented. For example, if the rate per unit is Rs. 5 and the worker manufacturers 100 units in a week, his week’s wages shall be Rs. 500 (i.e., 100 x 5).

It may be expressed in the form of the following formula:

Total earnings = Units Manufactured x Rate per unit

Suitability:

Conditions under which piece rate method of wage payment may be usefully employed are:

1. Where the output of workers can be measured.

2. Where production is standardised and repetitive in nature.

3. When the aim is continuous maximum production.

4. Where workers continue at the same job for a long period.

5. Where the standard time required to complete a job can be measured accurately.

Advantages:

Piece rate system has the following advantages:

1. Incentive to Efficient Workers:

Under this method, as remuneration is paid in proportion to the worker’s effort, the method provides a strong incentive to work move.

2. Increase in Production:

Under this method, each worker tries his best to produce more to earn higher wages. This results in increase in production.

3. Decrease in Supervision:

Under this method of wage payment, strict supervision is not required because the workers are themselves interested in maximising their earnings through the maximisation of output.

4. Equitable Wages:

This system is more equitable in comparison to time rate system because wages are paid according to the efficiency of each worker.

5. Simple and Easy:

This method is simple and easily understood by the workers.

6. Simplifies Costing:

As, under this method, wages are paid at a rate per unit, it simplifies cost ascertainment because labour cost per unit is known in advance.

7. Decreased Cost:

On account of increase in production, fixed cost per unit is reduced resulting in higher profit.

Disadvantages:

Piece rate system of wage payment suffers from the following demerits:

1. Lack of Secured Wages:

This system does not guarantee of minimum wage to a worker. If a worker is not able to complete his allotted work in a day, due to any reason, he is paid less amount of wages. Thus, under this method, earnings of workers are uncertain.

2. Inferior Quality of the Product:

Under this method, much emphasis is given on quantity of production and ignores quality of the product. In order to maximise their wages, workers try to produce more and more without caring for the quality of production.

3. Injurious to Health of Workers:

In an effort to earn more wages, workers try to work excessively with greater speed. This proves to injurious to health of workers.

4. Misuse of Equipment and Materials:

In the greed to produce more, workers cause extra wastage of material and damage plant and machinery.

5. Unsuitable in Certain Cases:

This method does not suit where work is of artistic and refined nature.

6. Difficulties in Fixing Piece Rate:

Fixing equitable piece rate is quite a difficult task and may require considerable amount of work in the form of time studies.

7. Opposed by Trade Unions:

Price rate system is generally opposed by trade unions because it creates inequality in the wages of workers. Slow and inefficient workers feel jealous of the higher of their follow workers.

Incentive Plans:

Both time rate system and piece rate system discussed above 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 wages for the workers. Because of greater number of units produced, it should also result in a lower cost per unit for fixed factory cost and also for labour cost.

Objectives of Incentive Plans:

The main objectives of incentives wage plans are:

1. To induce the workers to increase their productivity.

2. To provide additional remuneration to the workers to their efforts and efficiency.

3. To have a contented labour force, and to reduce the labour turnover.

4. To keep the morale of the workers high.

5. To have increased production from the improved productivity of the workers.

6. To have reduction in the fixed overhead cost per unit through increased production.

Suitability of the Plan:

Incentive wage plans are suitable in the following cases:

1. Those industries where proper time and motion studies can be undertaken and proper standards of time and output can be fixed.

2. Those industries where overhead charges are considerable and which can be reduced through increased production resulting from incentive schemes.

Essentials of a Good Incentive Plan:

A good incentive plan should contain certain essentials.

The essentials of a good incentive plan are:

1. For the successful implementation of an incentive plan, proper and accurate time and motion studies should be conducted and proper standards should be fixed.

2. The standard set for production should be such that any worker of normal efficiency can attain them.

3. The standards, on set, should not be changed unless there is a change in the method of production.

4. Job analysis and standardisation must be made on scientific and equitable basis.

5. Tools, equipment and machines must be maintained in efficient working condition.

6. Proper and comfortable working conditions should be provided to workers.

7. Uniform working conditions should be provided to all the workers.

8. Regular flow of materials and other supplies should be ensured.

9. Every worker should be given equal opportunity to earn.

10. The workers should be taught the proper way of doing the work.

11. The workers should not suffer on account of factors beyond their control, such as – break-down of machines, power failure, etc.

12. The incentive plan should be permanent and not temporary.

13. The plant should be flexible enough to permit changes to suit the changes in the method of work.

14. The plan should be easy for the workers to understand.

15. The workers should be properly educated about the scheme and motivated to improve their efficiency and earn more.

16. It should be economical to operate.

17. The plan should be acceptable to both employer and the employees.

18. The incentive provided should be sufficiently attractive.

19. There should be no maximum limit on the amount of earnings of the workers.

20. Indirect workers should also be included under the incentive scheme.

21. The scheme should have the approval of workers and the union.

Advantages of Incentive Plan:

Incentive wage schemes have the following advantages:

1. The workers are assured of their time rates or day rates of wages, whether they attain the standard or not.

2. In-efficiency is not penalised, as the workers are assured of their day rates of wages, whether they attain the standard or not.

3. Efficiency is rewarded, as the workers of higher efficiency are given bonus in addition to their time wages.

4. Incentive is given to workers to increase their productivity.

5. Opportunity is given to workers to increase their earnings by efficient work.

6. It keeps the labour force contented, and thereby, helps to reduce labour turnover.

7. The increase in production leads to reduction in cost per unit.

8. The gain or losses arising from the efficiency of the workers are shared by both the employer and the employees.

Disadvantages of Incentive Plan:

The incentive schemes are not without drawbacks. They suffer from several drawbacks.

Their main drawbacks are:

1. The incentive schemes cannot be gain-fully employed in concerns where the overheads are less.

2. These schemes cannot be adopted in undertakings where proper standards cannot be fixed.

3. It is difficult to calculate indirect labour under the common incentive schemes.

4. These schemes require careful determination of standard time and standard output which involves additional work and expenditure.

5. The bonus paid to workers under these schemes may not be proportionate to the improved efforts or productivity of the workers.

6. The quality of the product may suffer, because of their eagerness to save time and earn more.

7. Once an incentive scheme is introduced, it will be very difficult to withdraw that scheme later, it becomes uneconomical.