Labour is another important element of cost and for overall cost control and cost reduction, of labour cost is of paramount importance. However, for control and reduction of labour cost, it is essential to compute the labour cost in a scientific manner and hence there should be proper systems of systems and processes and documentation, which will help computation of labour cost in a scientific manner.
Attention should also be paid to the productivity aspect. Low productivity results in higher labour cost per unit while higher productivity will reduce the labour cost per unit.
A. Classification of labour cost: The labour cost is classified into direct cost and indirect cost. Direct labour cost is the cost that can be identified with a product unit. It can also be described as cost of all labour incurred for altering the construction, composition or condition of the product.
Indirect labour cost is the cost, which cannot be identified with a product unit. It represents the amount of wages which is paid to the workers who are not directly engaged on the production but it includes wages paid to the workers and assistants working in departments like purchasing, store keeping, time office, maintenance, and other service and production departments. In other words, indirect wages are the wages paid to the workers who facilitate the production rather than actually engaged in production.
Direct labour cost is variable in nature and can be controlled by strictly adhering to the norms and standards set by the management. Indirect labour cost can be controlled by establishing labour budgets and comparing the actual indirect labour cost with the budgeted labour cost.
B. Production Planning: Effective control over the labour cost can be achieved through proper production planning. Production planning includes activities like planning, scheduling, routing, machine loading, product and process engineering, work study etc. With the help of work study, time and motion study can be conducted which will help in fixation of standard time for a particular job. A comparison between the standard time and actual time is constantly made to find out the difference between the two.
C. Labour Budget: A labour budget can be prepared which will set the target for the labour cost which will again facilitate comparison between the budgeted labour cost and the actual labour cost.
D. Labour Standards: Standards can be set for labour cost against which the actual labour cost can be
compared. Standard labour cost is the cost, which should have been incurred for producing a particular
quantity of production. While fixing the standard labour cost, use of time and motion study is made to
fix up the standard time that should be taken for the actual production.
E. Labour Performance Report: There should be a system of periodic labour efficiency and utilization reports. These reports will give an idea about the efficiency and productivity of the labour.
F. Incentive Schemes: Improving the labour productivity is one of the important ways to reduce the labour cost per unit. Productivity can be improved by motivating the workers. Offering monetary and nonmonetary incentives can help to improve the productivity substantially. However, there should be a periodic review of the incentive schemes and therefore incentive schemes report should be prepared at periodic intervals.
G. Labour Cost Accounting: There should be a proper cost accounting system, which will identify the direct and indirect labour cost. Similarly the cost accounting department should be able to generate and maintain records for time keeping, time booking, idle and overtime, impact of incentive schemes, per unit of labour, cost due to labour turnover and other relevant records.
The following departments play a crucial role in doing these above-said jobs.
Departments involved in labour cost control and reduction
I. Personnel Department
II. Time Keeping
III. Work Study
IV. Payroll and
V. Cost Accounting
Activities performed in these departments are as under:-
I. Personnel Department: Responsible for various activities like recruitment, training, transfer, termination, implementation of incentive schemes and maintaining records regarding the labour force. Actually the labour cost control starts from the recruitment of labour force.
Recruitment should be done at right time and there is a right man for the right job.
After the recruitment of worker, his detailed personal record is prepared which includes details regarding his date of joining, previous experience if any, family history, educational qualifications and so on. His other details like department, scale of pay, clock number, various deductions to be made etc. are informed to the pay roll department for arranging his payment. The personnel department prepares a Personal Record Card for each employee. In this card the entire information about the employee is given.
Personnel department also performs other important functions like maintenance of statutory records required under various labour laws, recording of absenteeism, labour turnover, disciplinary action etc.
The format of Labour Requisition and Personal Card is given on the next page.
Labour Turnover: Labour turnover, which is also called as ‘attrition’ can be defined as, a change in the labour force as compared to the total labour force. Labour turnover should not be very high as it will result into double loss to the organisation, the first one is that an experienced employee will be lost and secondly new person who is replacing the old one, may not have same qualifications and experience and till he is accustomed to the new job, his productivity is bound to be low. Similarly suitable training will have to be given to him in order to acquaint him with the environment, which will also result in additional expenditure.
If labour turnover is reduced to zero, it will indicate that the employees do not have any opportunity outside and hence they are surviving.
Measurement of Labour Turnover: The following methods are available for measurement of the labour turnover.
Additions Method: Under this method, number of employees added during a particular period is taken into consideration for computing the labour turnover.
of employees left during the period is taken into consideration.
consideration. The number of employees replaced is taken into consideration for computing the
labour turnover.
Avoidable Causes: These causes include the following.
• Dissatisfaction with the job
• Dissatisfaction with the working hours
• Dissatisfaction with the working environment
• Relationship with colleagues
• Relationship with the superiors like supervisors
• Dissatisfaction with monetary and non monetary incentives
• Other reasons such as lack of facilities like insurance, absence of promotion chances, lack of proper training etc.
Unavoidable Causes: These causes include the following.
• Personal betterment
• Retirement
• Death
• Illness or accident
• Change in locality
• Termination
• Marriage
• National service
• Other reasons like lack of residential facilities, family commitments, attitude etc.
Cost of Labour Turnover: For an organisation, labour turnover results into a cost. If labour turnover is
very high, it will result in high cost and hence efforts should be made to prevent the same. The costs of
the labour turnover can be grouped into the following categories, preventive and replacement.
Preventive Costs: It is said that preventions is always better than cure. It is always better to prevent the labour turnover rather than taking action after it has taken place. The costs incurred for preventing the labour turnover are known as preventive costs. These costs are as follows.
Cost of personnel administration which includes expenditure incurred in maintaining good relationships between the management and the workers.
Cost of medical services incurred for improvement in medical facilities and also for motivatingthe employees.
Expenditure incurred on welfare measures like sports facilities, transport, housing, cultural activities, canteens etc.
Certain schemes like pension, gratuity schemes and other post retirement benefits.
Replacement Costs: These costs are incurred for removing the effect of the labour turnover and include the following costs.
Cost of recruitment and training of new workers
Loss of output due to delay in recruiting new workers
Loss due to inefficiency of new workers.
Cost of increased spoilage
Cost of tool and machine breakage.
Replacement costs arising on account of:- | |
fault of a particular department, | such replacement costs may be charged directly to that department |
If the labour turnover is due to shortsighted policy of the management | Treat as an overhead item and is apportioned to departments on the basis of number of persons engaged in each department |
Time Keeping: This department maintains record of each worker’s time in and time out during regular working period and reporting the time of each worker for each department, operation or production order. Thus this department is responsible for recording the attendance time of each worker accurately.
à Time keeping is a statutory requirement also and therefore accurate recording of time should be ensured. The important role of time keeping from the point of view of labour costing and control can be summarized as given below:-
1) It shows the total number of hours worked by each workman and so the calculation of his wages becomes possible. This is applicable where the workers are paid wages as per the time rate.
2) Time keeping promotes punctuality and discipline amongst the workers.
3) helping in computation of certain dues based on continuity of service:- Certain benefits like pension, gratuity, leave with pay, provident fund, promotion, and salary scale are linked with the continuity of service. Attendance records in this regard, can be helpful in computation of these benefits.
4) Useful in overhead apportionment and absorption, which may be made on the basis of labour hours.
5) Useful for further analysis like for fixation of standard time and finding out idle time as well as the efficiency of labour.
Methods of time keeping :
Time Recording Clocks or Clock Cards:
· This is mechanized method of time recording.
· Each worker punches the card given to him when he comes in and goes out. The time and date is automatically recorded in the card.
· Each week a new card is prepared and given to the worker so that weekly calculation of wages will be possible. If wages are paid on monthly basis, a new card may be given in each month. Due to advancement of technology, giving a new card each month is also not required as the same card continued till the worker either leaves the service or retires from the service
· only limitation of this method, is that though the time in and time out are recorded, the records do not show the productive time of the worker, For showing the productive time, separate records showing time booking are to be prepared. The time booking records can also be combined with time keeping records so that there is no need to keep dual records.
2. Disc Method:
· A disc, which bears the identification number of each worker, is given to each one.
· When the worker comes in, he picks up his disc from the tray kept near the gate of the factory and drops in the box or hooks it on a board against his number. Same procedure is followed at the time of leaving the factory. The box is removed at starting time, and the time keeper becomes aware of late arrivals by requiring the workers concerned to report him before starting.
· The time keeper will record in an Attendance Register any late arrivals and workers leaving early. He will also enter about the absentees in the register on daily basis.
· Limitation of this method is that there is a possibility of marking the attendance of a worker by his friend i.e. by a proxy.
· Secondly if the number of workers is large, there will be a delay in recording time due to manual operation of this system.
3. Attendance Records:
· simplest and the oldest method of marking attendance of workers.
· In this method, every worker signs in an attendance register against his name. Leaves taken by workers as well as late reporting is marked on the attendance register itself.
· The main limitation of this system is that in case there is large number of workers, there may be large queues for signing the muster.
· Similarly there is little control over marking the attendance time and hence there may be irregularities in time recording.
Time Booking: The method, which supplies the information regarding the productive time of the workers., is known as ‘Time Booking Methods’ and it records the time spent by a worker in each job, process or operation is known as ‘Time Booking’.
The objects of time booking are as follows.
i. This helps in finding out the idle time and control the same.
ii. To determine the quantity and value of work done.
iii. To determine earnings like wages and bonus, which depend on the time taken by a worker in performing job or jobs in a factory.
iv. To determine the efficiency of workers.
II.III Time Booking Methods : The following methods are used for time booking.
1) Daily Time Sheet: In this method, each worker records the time spent by him on the work during the day, for which a sheet is provided to each worker. The time is recorded daily and hence accuracy is maintained. However, the main limitation of this method is lot of paper work is involved as daily sheets are maintained on daily basis by each worker.
2) Weekly Time Sheets: The only difference between the daily time sheet and weekly time sheet is that these time sheets are maintained on weekly basis. This means that each worker prepares these sheets weekly rather than daily. This helps in reducing the paper work to a great extent.
The only care to be taken is that since the information is filled up on daily basis, there may be inaccuracies and hence filling the information should be done on daily basis only.
3) Job Ticket: Job tickets are given to all workers where time for commencing the job is recorded as well as the time when the job is completed, it help to ascertain the time taken for each job.
4) Labour Cost Card: This card is meant for a job, which involves several operations or stages of completion. Instead of giving one card to each worker, only one card is passed on to all workers and time taken on the job is recorded by each one of them. This card shows the aggregate labour cost of the job or the product.
5) Time and Job Card: This card is a combined record, which shows both, the time taken for completion of the job as well as the attendance time. Therefore there is no need to keep separate record of both, time taken and attendance time.
Work Study:
Method Study: Method Study is done to improve the methods of production and to achieve the most efficient use of the resources like, manpower, machines and materials.
Method Study has the following stages.
A. Method Study is generally conducted for the jobs, which involve complex operations as well as costly operations. Hence the first step is to select jobs, which are having complexity of operations.
B. There should be a detailed of related aspect of the selected job. Information about the job like, purpose, location, sequence, relationship with other work, methods of working, operators, requirement of skilled workers, facilities required etc. should be collected.
C. The crucial step is that after studying the relevant aspects of the job, there should be development of the improved method of doing the job. An improved method of job might change the location and sequence of the work, methods of production and the layout for the job. The improved method will result in more efficiency, more simplicity and effectiveness and job will be done in a better manner.
D. The developed method should be applied in doing the job.
E. For any new method, a follow up is always required. For Method Study also a constant follow up is necessary to ensure that the method selected is implemented properly. Thus Method Study ensures efficient use of resources by reducing unnecessary work and helps to achieve highest production.
Work Measurement: The Work Measurement aims at determining the effective time required to perform a job. The ineffective, wasteful or avoidable time is separated from effective required time to complete the work. The effective time so established in work measurement can be used for the following purposes.
A. Incentive wage schemes which require data about the time allowed and time taken for a particular job.
B. Improving utilization of men, machines and materials.
C. Assisting in production control
D. Assist in setting labour standards
E. Cost control and reduction.
The following stages are involved in work measurement.
A. Selection of work
B. Measuring the actual time taken in the work done
C. Making comparison between the standard time and the actual time.
Job Evaluation:
Ø Job[c1] evaluation is a technique of analysis and assessment of jobs to determine their relative value within the firm. It aims at providing a rational and equitable basis for differential salaries and wages for different classes of workers.
Ø Job evaluation has the following objectives.
_ It helps in developing a systematic and rational wage structure as well as job structure.
_ Job evaluation aims at removing the controversies and disputes relating to salary between the employers and employees. Thus the employees and also the employer remain satisfied.
_ Another important objective of job evaluation is to bring fairness and stability in the wage and salary structure so as to ensure full cooperation of workers in implementing various policies of the employers.
_ Job evaluation discloses characteristics and conditions relating to different jobs. This is very useful at the time of recruiting of workers as only suitable workers can be recruited.
Methods of Job Evaluation:
(1)àPoint Ranking Method: In this method each job is analyzed in terms of various job factors or characteristics. The characteristics are skills required, efforts involved, working conditions, hazards, responsibility and so on. Each job factor is given weightage or points depending upon its value for the job. For example, for certain jobs, maximum value is assigned to experience while for some jobs, education may be the most crucial factor. Finally each job is ranked in the order of points or weights secured by them. The wage structure can be suitably designed according to the points assigned to each job. The method is quite sound in principle but difficulties may be faced in assigning the weights to each job.
(2)à Ranking Method: In this method, jobs are ranked in order of importance on the basis of skills required, experience requirements, working conditions etc. Jobs are rearranged in an order, which can be either from the lowest to the highest or in the reverse. Wage scales are determined in terms of ranks. Though this method is quite simple to operate and less costly as well as easy for understanding, it is suitable when the size of the organization is small and jobs are few and well defi ned. In a large organization, where jobs are quite complex, this method is not beneficial.
(3)àGrading Method: This method is an improvement over the ranking method. Under this method, each job is analyzed in terms of a predetermined grade and then assigned a grade or class. Grades are established after making an investigation of job factors, such as complexity in the job, supervision, responsibility, education etc.
(4) àMerit Rating: Job evaluation is the rating of the job in order to bring rationality in the wage and salary structure in the organization. On the other hand merit rating is the comparative evaluation and analysis of individual merits of the employees. The merit rating aims at evaluation and ranking the individual employees in order to plan and implement rational promotional policies in the organization. Merit rating has the following objectives.
_ To evaluate the merit of an employee for the purpose of promotion, increment, reward and other benefits.
_ To establish and develop a wage system and incentive scheme.
_ To determine the suitability of an employee for a particular job.
_ To analyze the merits or limitations of a worker and help him to develop his capability and competence for a job.
_ To examine characteristics like cooperation, quality of work done, attendance and regularity, education, skill, experience, character and integrity and initiative.
_ Thus it can be understood that merit rating is extremely useful for organizations for evaluating the employees. However the main limitations are that the rating can be subjective which will give rise to the disputes and there is a possibility that past performance of an employee may be given too much importance.
Difference Between Merit Rating and Job Evaluation: The difference between the merit rating and job evaluation is as follows.
_ Job evaluation is the assessment of the relative worth of jobs within a business enterprise and merit rating is the assessment of the employers with respect to a job.
_ Job evaluation helps in establishing a rational wage and salary structure. On the other hand, merit rating helps in fi xing fair wages for each worker in terms of his competence and performance.
_ Job evaluation brings uniformity in wages and salaries while merit rating aims at providing a fair rate of pay for different workers on the basis of their performance.
Time And Motion Study:
Ø Time study determines the time to be spent on the job. Standard time is the time that should be taken for completing a particular job under standard or normal working conditions. Thus, the motion study precedes the time study.
Ø Motion study means dividing the job into fundamental elements or basic operations of the job or process and studying them in detail to eliminate the unnecessary elements or motions. After eliminating unnecessary motions, the time that should be taken to perform these motions is decided with the help of a stop-watch. In the time so fixed, some allowance is added in the same for normal idle time, which is due to fatigue, change of job, change of tools, preventive maintenance of machines and so on. Thus standard time for a job or process is arrived at.
Ø The time and motion study aims at,
_ Eliminating unnecessary motions, thereby reducing inefficiency
_ Improving methods, procedures, techniques, and processes relating to a job.
_ Effective utilization of men, material, machines and time.
_ Improving working environment, layout and design of plant and equipment.
The following are the benefits of Time and Motion study.
_ Effective utilization of resources like men, material, machine and time.
_ Helps in assessment of labour
_ Helps in designing incentive system as many of the incentive systems are based on standard time.
_ Preparation of labour budget
_ Proper planning of production for preparation of production budget
_ Helps in improving labour productivity by designing best method for performing a job or process.
_ Improvement of work methods.
Payroll Department: The main responsibilities of this department are preparation of payroll from clock cards, job or time tickets, or time sheet. The payroll shows the amount of wages payable to each worker showing the gross wages payable, the deductions and the net wages payable.
For doing this calculation, they have to work in collabouration with the time office, personnel department, cost accounting department and with the concerned department in which the worker is working.
The functions of this department are given below:-
_ To compute the wages of the employees
_ To prepare a detailed wages sheet showing the gross wages payable, various deductions and other payroll liabilities.
_ To maintain individual employee payroll records
_ To prepare department wise summaries of wages
_ Compilation of labour statistics for management.
_ To install and implement an effective internal check system for preventing frauds and irregularities in payment of wages.
_ To detect and prevent ghost workers.
Cost Accounting Department: It is responsible for the accumulation and classification of all cost data of which labour cost is one of the important component. The cost accounting department classifies the labour cost into direct and indirect, compares the actual labour cost with the budgeted cost, compute unit labour cost and compiles the data for further analysis of the labour cost. The data generated can be useful for various purposes including decision making by the management.
Methods of Wages Payment:
One of the important components of labour cost control is the wages system. A system of wage payment, which takes care of both, i.e. providing guarantee of minimum wages as well as offering incentive to efficient workers helps to motivate the workers to a great extent.
It should also be remembered that high wages do not necessarily mean high labour cost because it may be observed that due to high wages the productivity of workers is also high and hence the per unit cost of production is actually decreased. On the other hand, if low wages are paid, it may result in lower productivity and hence higher wages do not necessarily mean high cost.
The following are the various methods of payment of wages.
Time Rate System A] At ordinary levels. B] At high wage levels and C] Graduated time rate | Bonus Systems A] Individual Bonus for Direct Workers B] Group Bonus for Direct Workers C] Bonus for Indirect Workers |
Piece Rate A] Straight piece rate B] Piece rate with guaranteed day rates and C] Differential piece rates | Indirect Monetary Incentives A] Profit Sharing B] Co-partnerships |
Non monetary incentives like job security, social and general welfare, sports, medical facilities etc. | |
Time Rate at Ordinary Levels: Under this method, rate of payment of wages per hour is fixed and payment is made accordingly on the basis of time worked irrespective of the output produced.
However, overtime is paid as per the statutory provisions.
Ø The main benefit of this method for the workers is that they get guarantee of minimum income irrespective of the output produced by them. If a worker is not able to work due to genuine reasons like illness or physical disability, he will continue to get the wages on the basis of time taken for a particular job.
Ø This method is used in the following situation.
_ Where the work requires high skill and quality is more important than the quantity.
_ Where the output/services is not quantifiable, i.e. where the output/services cannot be measured.
_ Where the work done by one person is dependent upon other person, in other words where a individual worker has no control over the work
_ Where the speed of production is governed by time in process or speed of a machine.
_ Where the workers are learners or inexperienced.
_ Where continuous supervision is not possible.
Ø Main limitation of this method is that it does not offer any incentive to the efficient workers.
Time Rate at High Wage Levels: This system is a variation of time rate at ordinary levels in the sense that in this system, workers are paid at time rate but the rate is much higher than that is normally paid in the industry or area. In this method, the workers are paid according to the time taken and overtime is not normally allowed. This method offers a very strong incentive to workers and it can attract talented workers in the industry. However, care should be taken that productivity also increases; otherwise the cost will go on increasing.
Graduated Time Rate: Under this method payment is made at time rate, which varies according to personal qualities of the workers. The rate also changes with the official cost of living index.
Thus this method is suitable for both employer and employees.
Piece Rate Method: This method is also called as payment by results where the workers are paid as per the production achieved by them. Thus if a worker produces higher output, he can earn higher wages.
Ø The following are the variations of this method.
Straight Piece Rate: In this method, rate per unit is fixed and the worker is paid according to this rate. For example, if the rate per unit is fixed at Rs.10, and the output produced is 300 units, the remuneration to the worker will be Rs.10 X 300 units = Rs.3,000.
The benefits of this method are as follows.
The method is simple and provides a very strong incentive to the workers by linking the monetary reward directly to the results.
_ Productivity can be increased substantially if the rate of pay includes a really adequate incentive.
_ Higher productivity will result in lowering the cost per unit.
_Main limitation of this method is that if a worker is not able to work efficiently due to reasons beyond his control, he will be penalized in the form of lower wages.
Differential Piece Rates: Under these methods, the rate per standard per hour of production is increased as the output level rises. The increase in rates may be proportionate to the increase in output or proportionately more or less than that as may be decided. In other words, a worker is paid higher wages for higher productivity as an incentive. The rate per unit will be higher in this case as compared to the rate paid to a worker with lower productivity. For deciding the efficiency, comparison is made between the standard production and actual production of the worker. If the actual production is more, the worker qualifies for higher rate of wages. The differential piece rates methods will be useful when the production is of repetitive type, methods of production are standardized and the output can be identifi ed with individual workers. The following are the major systems of differential piece rate system
I] Taylor II] Merrick III] Gantt Task and Bonus
These methods are explained in the following paragraphs.
I] Taylor’s Differential Piece Rate System: Taylor is regarded as father of scientific management and he has recommended a system of differential piece rate. According to him, there are only two classes of workers, effi cient and ineffi cient. He suggests that while efficient workers should be encouraged to the maximum possible extent, the ineffi cient workers should be penalized. In order to do this, he has suggested two rates for the two classes of workers. Thus according to Taylor, if the workers are effi cient, they should be paid @ 120% of the normal piece rate and if they are inefficient, they should be paid @ 80% of the normal piece rate. For measuring efficiency, each worker will be given a standard production quantity to be produced in the time allowed for the same and the actual production produced should be compared with the same. If a worker exceeds the standard, he will be regarded as effi cient while if he fails to do so, he will be regarded
as ineffi cient.
The positive and negative points of this system are as follows.
Merits:
_ There is a very strong incentive to the workers, which helps to achieve higher productivity.
_ Due to the incentive, best workers are attracted to the company.
_ This method is quite simple and hence easy to understand.
Limitations:
_ Slow workers and beginners are penalized severely. Similarly workers get penalized for reasons beyond their control, e.g. medical reasons, accidents etc. Therefore it is said that there is no human element in this system.
_ In an anxiety to produce more, quality may be neglected in order to achieve higher quantity of production.
Illustration: From the following particulars, calculate the earnings of workers X and Y and also comment on the labour cost.
Standard time allowed: 20 units per hour
Normal time rate: Rs.30 per hour
Differential to be applied:
80% of piece rate when below standard
120% of piece rate at or above standard
In a particular day of 8 hours, X produces 140 units while Y produces 165 units
67
Solution:
Standard production per day is 20 units _ 8 hours = 160 units
Worker X produces 140 units which means he is below standard and will get wages @ 80% of the
normal piece rate.
X’s earnings:
Normal piece rate = Rs.30 per hour/20 units = Rs.1.5 per unit
80% of the normal piece rate = Rs.1.20 per unit
Earnings = Rs.1.20 _ 140 units = Rs.168
Labour cost per unit = Rs.168/140 units = Rs.1.20
Y’s Earnings: Y has produced more than the standard production of 160 units and hence he will
get wages @ 120% of normal piece rate. His earnings will be as shown below.
Normal piece rate = Rs.30 per hour/20 units = Rs.1.50 per unit
120% of normal piece rate = Rs.1.80 per unit
Earnings = Rs.1.80 _ 165 units = Rs.297
Labour cost per unit = Rs.1.80
Comment: Labour cost increases from Rs.1.20 per unit to Rs.1.80 per unit. Taylor’s system is resisted
on this ground as well as on the ground that it is very harsh on the workers.
II] Merrick Differential Piece Rate System: Merrick’s system is modifi cation of Taylor’s system and
is comparatively less harsh on the workers. The scale of remunerations is as follows.
Production Rates of Payment
Up to 83% Normal piece rate
83% to 100% 110% of ordinary piece rate
Above 100% 120% of ordinary piece rate
As mentioned earlier, this method is less harsh on the workers as compared to Taylor’s system.
It is particularly useful to beginners and also offers an incentive who have potential of higher
productivity.
III] Gantt Task Bonus Plan: In this method, there is a combination of time rate, bonus and piece rate
plan. The remuneration is computed as shown below.
Production Payment
Production below standard Guaranteed time rate
Production at standard Bonus of 20% [normally] of time rate
Production above standard High piece rate for the entire output
This method assures minimum wages even too less effi cient workers and hence is a preferred
method of payment of wages. It also offers reasonably good incentive to effi cient workers.
However, the main limitation is that the method is complicated to understand by the workers
and hence may create confusion amongst them.
Cost and Management Accounting
68
Illustration: X, Y and Z are three workers working in a manufacturing company and their output
during a particular 40 hours week was, 96, 111 and 126 units respectively. The guaranteed rate
per hour is Rs.10 per hour, low piece rate is Rs.4 per unit, high piece rate is Rs.6 per unit. High
task is 100 units per week.
Compute the total earnings and labour cost per unit under Taylor, Merrick and Gantt Task
Bonus Plan.
Solution:
_ Taylor Plan: High task is 100 units
_ Worker X: 96 units _ Rs.4 = Rs.384 [X will get the wages at low piece rate as his output is
below the high task]
_ Worker Y: 111 units _ Rs.6 = Rs.666 [Y will get the wages at high piece rate as his output is
above the high task i.e. standard]
_ Worker Z: 126 units _ Rs.6 = Rs.756 [Z will also get the wages at high piece rate as his output
is above the high task, i.e. standard]
_ Merrick Plan:
_ Worker X = High task is 100 units, actual output is 96, this means that the effi ciency level is
96%. As per Merrick Plan, wages of X will be 110% of normal piece rate which is Rs.6.60 per
unit = Rs.6.60 _ 96 = Rs.633.6
_ Worker Y = High task is 100 units, actual output is 111 units, effi ciency level is 111%. Y will
be entitled for wages @ 120% of normal piece rate i.e. @ Rs.7.20 per unit. His wages will be,
Rs.7.20 X 111 = Rs.799.2
_ Worker Z = High task is 100 units, actual output is 126 units, effi ciency level is 126%. Z will
get at higher piece rate @ Rs.7.20 per unit. His wages will be Rs.7.20 _ 126 units = Rs.907.2
_ Gantt Task and Bonus Plan:
_ Worker X = Rs.10 _ 40 hours = Rs.400 [X will get guaranteed time rate as his output is below
the high task]
_ Worker Y = Rs.6 _ 111 units = Rs.666 [High piece rate as output is above standard]
_ Worker Z = Rs.6 _ Rs.126 = Rs.756 [High piece rate as output is above standard]
C] Individual Bonus Plans: We have seen earlier that in the time rate system, the workers are paid
according to the time taken while in case of piece rate system, the output produced by the worker
decides his wages as rate per unit is fi xed rather than rate per hour. In the premium bonus plan,
the gain arising out of increased productivity is shared by both, the employer and employee.
The bonus to be paid to the workers is computed on the basis of savings in the hours, i.e. the
difference between the time allowed and time taken. The time allowed is the standard time,
which is fi xed by conducting a time and motion study by the work-study engineers. While fi xing
the standard time, due allowance is given for physical and mental fatigue as well as for normal
idle time. The actual time taken is compared with this standard time and bonus is payable to the
worker is the time taken is less than the standard time.
69
The individual bonus schemes commonly used are as follows.
I] Halsey Premium Plan
II] Halsey-Weir Premium Plan
III] Rowan Plan
IV] Barth Variable Sharing Plan
These methods are discussed below.
I] Halsey Premium Plan: This plan was introduced by F.A. Halsey, an American engineer. In this
plan, bonus is paid on the basis of time saved. Standard time is fi xed for a job and if the actual
time taken is less than the same, the worker becomes eligible for bonus. However bonus is paid
equal to wages of 50% of the time saved. A worker is assured of time wages if he takes longer
time than the allowed time. The formula for computing the total wages is as follows.
Total Earnings = H _ R + 50% [S – H] R
Where, H = Hours worked, R = Rate per hour, S = Standard time
_ Illustration: Time allowed for a job is 48 hours; a worker takes 40 hours to complete the
job. Time rate per hour is Rs.15. Compute the total earnings of the worker.
_ Solution: Total Earnings = H _ R + 50% [S – H] R
_ Total Earnings = 40 _ Rs.15 + 50% [48 – 40] Rs.15
_ Total Earnings = Rs.600 + Rs.60 = Rs.660
II] Halsey – Weir Plan: Under this method, there is only one difference as compared to the
Halsey Plan and that is instead of 50% bonus for the time saved, it is 331/3rd % of the time
saved. Accordingly the formula for this method is modifi ed as follows.
Total Earnings = H _ R + 33 1
3
% [S – H] R
H = Hours worked. R = Rate per hour. S = Standard time
III] Rowan Plan: This premium bonus plan was introduced by Mr. James Rowan. It is similar to
that of Halsey plan in respect of time saved, but bonus hours are calculated as the proportion
of the time taken which the time saved bears to the time allowed and they are paid for at time
rate. The formula for computation of total earnings is as follows.
Total Earnings = H _ R + [S – H]/S _ H _ R
Where H = Hours worked, R = Rate per hour, S = Standard time,
IV] Barth Variable Sharing Plan: In this system, the total earnings are calculated as follows:
Total Earnings = Rate per hour _ / Standard hours _ Actual hours worked
D] Group Bonus Plan: The plans described above are all individual bonus plans. Many times output
of individuals cannot be measured. Similarly, the output of individual is dependent on the
performance of the group. In such cases, rather than implementing individual bonus systems,
group bonus system is implemented. The total amount of bonus, which is determined according
to productivity, can then be shared equally or in agreed proportion between the group members.
The main objects of group bonus system are as follows.
Cost and Management Accounting
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_ Creation of team spirit.
_ Elimination of excessive waste of materials and time.
_ Recognition of group efforts.
_ Improving productivity.
The various group bonus plans are discussed below.
_ Budgeted Expenses Bonus: Under this system, bonus is based on the savings in actual total
expenditure compared with the budgeted expenditure.
_ Cost Effi ciency Bonus: In this method, standards are set for expenses like material, labour
and overheads. The actual expenditure against these standards is measured and if there is
a savings in actual expenditure as compared to the standards, a portion of such savings is
distributed as bonus amongst the workers.
_ Pristman System: In this method, production standards are set in units or points and actual
production is compared with the standards. If the actual production exceeds the standard,
the workers are paid additional wages equal to the percentage in output over standard.
Obviously no bonus is payable if actual production does not exceed the standard production.
This method is mainly used in foundries.
_ Towne Profi t Sharing Plan: In this method standards are set for costs [mainly labour cost] and
the actual cost is compared with the standards. If there is a saving in the costs, the saving
is shared by workers and supervisory staff in agreed proportion. The principle behind this
method is that if there is a saving in the cost, not only the workers but the supervisory staff
should also get the reward because the cost reduction is the joint efforts of both the types of
staff. Hence both, workers and supervisors share it.
_ Waste Reduction Bonus: This system of bonus is based on savings in the material cost. If
there is a saving in the material cost, the workers share the same in the agreed proportion.
This system is generally used in industries where cost of material is very high.
_ Rucker Plan: The amount of bonus is linked with ‘value added’ in this system. The ‘value
added’ is obtained by deducting the cost of material and services from sales value. In other
words, value added is the total of labour, overheads and profi ts. Under this plan, employees
receive a constant proportion of value added. For example, if the target ratio of labour cost
to value added is 70%, and the actual ratio comes to 68%, 2% of the actual value added is
distributed as group bonus, so that the ratio of direct labour cost to value added is maintained
at 70%. Normally instead of distributing the entire bonus, some proportion is distributed and
the remaining is transferred to reserve fund.
_ Scanlon Plan: This method is similar to the Rucker plan as discussed above except that the ratio
of labour cost to the sales is taken instead of direct labour cost to added value. Normally bonus is
paid based on average of last three years ratios. A part of the bonus may be transferred to bonus
equalization fund for future use when the workers do not get bonus under this scheme.
_ Bonus System for Indirect Workers: Indirect workers do not take part in the production
process directly but they play important role in the production process. It is diffi cult to chalkout a bonus system for indirect workers, as there is a diffi culty in measuring their output.
However it is advisable to plan a bonus system for indirect workers in order to motivate
them for better productivity. Bonus to indirect workers is paid on the basis of output of the
department, saving in time or expenditure against the budgeted, product quality, reduction
of waste and scrap and reduction of labour turnover.
_ Indirect Monetary Incentives: These methods aim at giving additional remuneration based
on the prosperity of the concern. The following schemes fall in this category.
o Profi t Sharing: In this system, the profi ts of the organization are shared by workers in agreed
proportion. The Payment of Bonus Act in India makes it mandatory to pay minimum bonus
of 8.33% of salary and maximum bonus of 20% of salary to the workers.
o Co-partnership: In this system, the workers get an opportunity to participate in the ownership
of the organization and to receive the part of share of profi ts. The employees are given
assistance to purchase shares of the company. Thus the employees get dividend and bonus
also. These schemes help to boost the morale of workers to a great extent.
Non-Monetary Incentives: These incentives are given in addition to monetary incentives for
further boosting the moral of the employees. Though these benefi ts do not result in additional
remuneration, they help to improve productivity by boosting the morale of the employees.
Some of the non-monetary incentives are as follows.
o Free education and training.
o Medical benefi ts
o Subsidized canteens
o Superannuation benefi ts like pensions, gratuity, life assurance schemes
o Sports and recreation facilities, housing facilities, long service awards.
o Job security, promotion schemes
o Benevolent funds and welfare funds.
(Ref:-Based on ICWA Study Material)
(Ref:-Based on ICWA Study Material)
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