PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS

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Cost & Management Accounting (MGT-402)

LESSON # 13

PIECE RATE BASE PREMIUM PLANS

Piece Rate Wages

Under this method of remuneration a worker is paid on the basis of production and not lime taken

by him to perform the work. This is one of the simplest and most commonly used of all incentive

schemes. The rate is expressed in terms of certain sum of money for every unit produced, e.g. Rs 2

per unit. The formula is:

Units produced x Rate per unit.

Suppose a worker is paid Rs. 0.50 per unit and he produces 18 units in 7 hours. His total wages

would be: 18 x Rs. 0.50 = Rs. 9.

However, a well regulated piece rate system has a guaranteed minimum wage.

Advantages of piece rate or piece work system:

1. There is a direct connection between effort and reward. Efficient workers are paid

according to their performance and hence a sense of competition is created among

workers.

2. Since there is a direct incentive to work there is always a tendency on the part of worker to

produce more by adopting correct procedure and techniques of production.

3. The increased volume of production results in decreased cost of production specially

overhead cost per unit.

4. Since the cost per unit is fixed computation of labor costs of production in advance is

possible.

5. Under this system every worker assumes the responsibility of his time and output so there

is considerable scope of reduction in managerial cost.

6. Since the payment is linked with results the idle time costs are reduced to minimum.

There are certain disadvantages of piece rate system:

1. At the initial stage, setting of piece rates or standard hours involves lot of difficulties and a

considerable amount of expenditure has to be incurred- It is difficult to establish fair

standard- If high standard or rates arc established, it is very difficult to reduce them

subsequently.

2. Quality of work is another casualty of this system. Since the payment is made on the basis

of output, every worker tempts to produce more and more irrespective of quality of

product. This results in production of substandard items, high rate of rejection and

ultimately increased cost of production per unit.

3. For the maintenance of quality of standards a rigid system of supervision and inspection is

necessary.

4. The workers tend to work for longer hours in temptation to earn more- This leads to

excessive fatigue, ill-health and risk of accident.

5. There is always danger to the flow of production and regularity of minimum wage to the

workers. For some time a worker works with great zeal and enthusiasm to earn more and

then absents himself from work or comes late. In all these cases not only the flow of

production is adversely affected but also there is no certainly of regular payment of wages

to the worker.

6. This system is unsuitable where the quality of work is given the lop preference.

7. Under this system a uniform rate is paid regardless of quality and quantity of work. There is

no special incentive for exceptionally good workmanship and expertise, likewise, no

particular penalty is imposed for producing less or substandard goods.

Cost & Management Accounting (MGT-402)

8. The system does not provide security of minimum payment of wages to the worker. Hence

it is opposed by the trade unions on the ground that frequently workers are laid off or

their remuneration is reduced due to lack of work or inefficiency of management.

These drawbacks are associated with the straight piece rate method, A well regulated piece rate

system, with a guaranteed minimum wage rate of compensation is much superior over the time

rate system. An improved version of straight piece rate is piece rate with guaranteed day rate.

Under this system a worker receives the straight piece rate for the number of pieces he produces,

provided that his total remuneration is more than his earnings on a time rate basis. If the piece rate

earnings fall below the minimum level of his earnings then he is paid on the time rate basis. (per

hour/per day).

Suitability of Piece Rate System

Piece rate system also known as 'payment by results' can be suitably applied under the following

conditions:

(i) The amount of work can be precisely measured and standardised.

{ii) The work is of repetitive nature.

(iii) If the productivity is closely related to skill and efforts.

(iv) The unit cost can be easily determined and controlled.

(v) If it is possible to fix a fair and acceptable piece rate.

(vi) Where lime cards are maintained for ensuring, regularity and punctuality of workers and

uninterrupted flow of production.

(vii) If there is no fear of unwarranted rate cutting by the management and the management

realizes the significance of the system.

Differential Piece Rates:

There are various differential piece rate plans. The differential piece rate plans aim at maximum

production by giving an additional incentive to increase output just at the stage at which the

worker would otherwise begin to feel that further efforts was not worthwhile. These schemes are

devised in such a manner that with the increase in efficiency of a worker his wages are

automatically increased. Some of the differential schemes are:

(1) Taylor Differential Piece Rate Plan

(2) Merrick Differential Piece Rate Plan

Taylor's Differential Piece Rate Plan:

This system was originated by W.F. Taylor, the father of scientific management. It is based on the

assumption that the degree of efficiency varies from worker to worker and hence the worker must

be paid according to their degree of efficiency.

Under this system two piece rates are fixed; one lower rate applicable to worker whose

production is below standard and another higher rate and is applicable to a worker whose

production is above the standard.

The efficiency of a worker may be determined as a percentage, either:

(i) of the time allowed for a job to the actual time taken, or

(ii) of actual output to the standard output, within a specified time.

For Example;

Standard time allowed for a job

15 hours

Actual time taken for the job

20 hours.

Standard output

5 units per hr

Actual output

6 units per hr

Cost & Management Accounting (MGT-402)

Efficiency under:

(1)

15/20 x 100

= 75%

(2)

6/5 x 100

= 120%

Under this system no guaranteed time rate is given. Moreover, the difference between the two rates

is very wide. The slow worker is penalized while the efficient worker is duly rewarded.

PRACTICE QUESTION

From the following particulars, calculate the earnings of workers under straight piece basis and

Taylor's Differential Piece Rate Plan.

Standard Time per piece

20 minutes

Normal rate per hour

Rs. 0.90

In a 9 hour day;

A produces

25 units

B produces

35 units

Differential to be applied 80% of piece rate below standard. 120% of piece rate at or above

standard.

Solution:

Standard production per hour 60 min/20 min

= 3 units

Standard production per day

3units x 9 hours

= 27 units

Per Piece rate

Rs. 0.90/3 units

= Rs. 0.30

Efficiency of:

Worker "A" is less than 100%

Worker "B" is more than 100%

Wages under Straight Piece Rate Basic:

Earnings of A

No. of units X Rate per unit

25 x 0.30 = Rs. 7.50

Earnings of B

30 x 0.30 = Rs. 9.00

Wages Taylor's differential piece rate basis:

Efficiency of A

92.25%

Efficiency of B

111%

Low piece rate in case of A

=80% of Rs. 0.30

=Rs. 0.24

High piece rate in case of B

= 120% of Rs. 0.30

=Rs. 0.36

Earning of A

25 x 0.24

=Rs. 6-00

Earning of B

30 x 0.36

=Rs-10.80.

It is clear from the above results that worker with low efficiency gets less wages under Taylor's

Differential Piece Rate System as compared to straight piece rate method.

The Taylor's Differential system is very beneficial to the efficient worker and is simple to

understand and operate. However, it penalizes the inefficient workers.

Cost & Management Accounting (MGT-402)

Merrick Differential Piece Rate System:

Merrick Differential system is a slight modification of the Taylor's system and uses three rates

instead of two. Under this system the worker is not penalized even if his performance does not

exceed 80 per cent of the High Task. The three rates are as under:

Efficiency

upto 80%

Normal Piece rate applicable

upto 100%

10% above normal rate above 100%

20% above normal rate.

Under this system also day wages are not guaranteed. The following illustration makes the working

of this system clear.

PRACTICE QUESTION

From the following particulars calculate the total earnings of the three workers who are paid wages

under the Merrick Differential System.

Normal piece rate (upto 80% of High Task Output)

Rs. 5 per unit

High Task

40 units per week

Output of the workers for the week.

32 units

37 units

42 units

Also find out their wages if they are paid on the straight piece rate basis.

Solution

Efficiency level:

A. 32/40 x 100 = 80%

B. 37/40 x 100 = 92.5%

C. 42/40 x 100 = 105%

Wages of A at normal rate (since his efficiency is below standard)

=32 x Rs.5=Rs 160.

Wages of B at normal rate plus 10% above normal rate (since his efficiency is above 80% of High

Task but below 100 %.)

= 37x Rs. 5.50 = Rs. 193.50

Wages of C at normal rate plus 20% of normal rate (since his efficiency is above 100%)

= 42 x Rs.6 = Rs.252.

If Straight piece rates are paid:

Wages of A=32 x Rs.5 = Rs. 160

Wages of B=37 x Rs.5 = Rs. 185

Wages of C=42 x Rs.5 = Rs. 210

Thus it is very clear that even if the output of a worker is below standard, he is paid at normal rate

of wages. Under this scheme bonus is within the reach of every worker since it is paid just at 80

per cent of the efficiency and is step-up after 10 per cent increase in output.

GROUP BONUS SYSTEMS

It is impossible for a worker of assembly line or manufacturing concern to increase his output

without the assistance and co-operation of the entire group of workers. In such situations

companies have successfully introduced group incentive schemes.

Common characteristics of group bonus schemes

(a) A standard time is set for the completion of a job.

(b) If the time taken is greater than the time allowed, the workers in the group receive time

wages.

Cost & Management Accounting (MGT-402)

Advantages of group bonus systems

(a) Encouraging team spirit. Mutual dependence engenders mutual trust.

(b) Good group incentive plans assist in the reduction of labor turnover, accidents,

spoilage, waste and absenteeism.

performed his/her task satisfactorily. There is therefore a built-in system of inspection

and such a scheme reduces the amount of supervision necessary.

(d) High output should result as the slower workers in the group follow the example of faster

workers. The cost per unit should decrease as the fixed overhead will be spread over a

greater number of units.

Disadvantages of group bonus schemes

(a) A faster worker in the group may real dissatisfy with his earnings; this may cause dissension

within the group. In such cases he may be paid a higher rate;

Alternatively, he may be transferred.

(b) Sickness of members may cause the output of the group to suffer. For the incentive scheme to

be successful, it is necessary lo have able substitutes to cover sickness, holidays and other absences.

(d) In attempting to produce greater output, quality of the work may deteriorate and there could be

excessive material wastage.

Cost & Management Accounting (MGT-402)

Total Wages

The total wages of a worker includes among others basic pay, dearness allowance, employer's

contribution to provident fund and state insurance, and other benefits.

Some of these benefits are treated as part of direct labor costs while others are treated as indirect

labor costs.

For the purposes of charging a particular job or jobs, the wage rate is to be ascertained. For this

the total of all wages and benefits is found out and then divided by the effective hours worked.

The wages rate thus derived would be labor cost per hour and the job should be charged

accordingly. The operative part is explained with the help of the following practice question.

PRACTICE QUESTION

Q. 1

Calculate labor cost per man-day of 8 hours from the following particulars.

1. Basic Salary

Rs. 4 per day

2. Dearness Allowance

25 paisa, per every point over 100 cost of living

index for working class. Current cost of living index

is 500 points

3. Leave Salary

10% of (1) and (2)

4. Employer's contribution to

provident fund

8% of (1) (2) and (3)

5. Employer's contribution to

Pension fund

2.5% of (1) (2) and (3)

6. Labor amenities

Rs. 20 per head per month

7. Number of working

days in a month

25 days of 8 hours each.

Solution

Statement of Labor Cost (per man-day of 8 boors)

Basic Salary

4.00

Dearness Allowance

4.00

Leave Salary-10%

0.80

Employer's contribution to Provident Fund

0.70

Employer's contribution to Pension Fund

0.22

Labor amenities

0.80

Total

10.52

Q. 2

The Lemon Car Company operates two shifts. The company's day shift pay rate is Rs. 15.00 per

hour and the night shift pay rate is Rs. 15.50 for the same work (Rs.0.50 more per hour).

Pass appropriate accounting entry to record payroll of a night shift worker who works in 35 hours

in the week.

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