Labour costing: Bonus and incentive plan
- Payroll Accounting:
It is concerned with the maintenance of records for the amounts due to the Employee benefits include salary, wages, allowances, payments to the provident fund and E.S.I., among other things, as well as deductions from workers’ earnings. Payroll accounting necessitates the collection of data on employee attendance, leaves, pay rates, deductible amounts, and other details.
Labor Cost Accounting:
It is involved with determining the labor costs to be charged to particular tasks and overhead accounts. task cards, piece work tickets, and other documents provide information on the time spent on each task or procedure, as well as the quantity of units produced. Idle time analysis is also required for worker cost accounting.
The primary goal is to record the time spent by all employees on each task on a separate job card or time sheet and then apply the appropriate hourly rate. The labor expenses are subsequently allocated to each of these activities. Job cards, time sheets, and idle time cards are critical records for calculating manufacturing labor expenses across many tasks and overhead accounts.
Time keeping refers to recording employee attendance for salary payment purposes. It is the recording of a worker’s attendance when he enters and departs the workplace. This log is often maintained at the factory gate, and workers who enter and exit must register their time in it. Wages are paid based on attendance at the workplace.
The primary goals of timekeeping are as follows:
(a) Payroll Preparation: The payroll department prepares wage bills based on information provided by the timekeeping department.
(a) Cost computation: The Costing department uses timekeeping data to calculate labor costs for various jobs, departments, and cost centers.
The time record will give us an indication of how long the workers were in the workplace and how much they were paid. There are many techniques for keeping track of time, including handwritten records, disc or token systems, punch card systems, and so on.
With the progress of technology, computers are now employed for time recording and analysis. The person in charge of timekeeping is known as a ‘time keeper’, and his workplace is known as a ‘time office’. Time records are the essential data required to calculate salaries and pay, overtime premiums, and so forth.
Time booking records must be preserved for each project, department, procedure, contract, and cost center to accurately track labor costs. Time booking entails determining how much time a worker spends efficiently on each task, department, procedure, or contract, among other things. It is the recording of time spent on various tasks throughout the course of the workday.
It is the maintaining of a record of the specifics of work done, such as the time spent on each task, procedure, or activity. It is used to determine the amount of time spent on each work, analyze idle time, and calculate the labor cost of different occupations and goods. The time booking record is maintained in the form of time cards for each worker, which reflect the actual time spent on the job.
The goals of time booking are as follows:
(a) Determine the labor time spent on the work and idle labor hours.
(a) Determine the labour cost of different jobs and goods.
(c) Calculate the salary and bonuses due under the wage incentive program.
(d) Calculate and calculate overhead rates, as well as overhead absorption using the labour and machine hour techniques.
(e) Evaluate labor performance by comparing actual time booked to standard time.
Bonuses and Labour incentives
Incentive scheme: Type # 1. Halsey Premium Plans:
- A. Halsey, an American engineer, proposed this idea in 1891. It evaluates individual efficiency and offers a bonus based on the amount of lime saved. Under the system, a worker gets paid at the time rate for the time he actually worked, as well as a bonus if he completes the task in less time than allocated.
The incentive is calculated as a specific proportion of the time saved, often 50%. The employer shares the remaining 50% of the time saved.
To calculate total earnings, use the formula T.T. × H.R. + 50% (T.S. × H.R.), where T.T. represents time taken.
H.R. = hourly rate.
T.S. means Time Saved.
The approach has many benefits, including its simplicity and ease of understanding.
(ii) Slow workers are not punished since the time pay is guaranteed.
(iii) It creates incentives for more efficient employees.
(iv) Worker efficiency implies lower cost per unit.
(v) The advantage of saved time is shared equally by the employer and the employee.
The major drawbacks of the technique are:
(i) Many employee organisations do not prefer to distribute the benefits of time savings equitably.
(ii) The pursuit of a bonus decreases the quality of labor.
(iii) Lower quality equals greater waste, spoilage, defects, breakdowns, and higher monitoring costs.
(iv) It is not as tempting as piece rate compensation.
(v) It provides less motivation to workers than other incentive systems.
(vi) If the time rate is not correctly specified, the bonus may be larger.
Type 2 incentive scheme is the Halsey-Weir premium scheme.
Weir Ltd. of Glasgow introduced the concept in 1900. This method is similar to the Halsey method, except the employee receives a bonus of 33⅓% (typically 30%) for the time saved, while the company receives the remaining 66⅔%.
To calculate total earnings, multiply T.T. by H.R. and then add 33⅓% (T.S. x H.R.).
where T.T. means Time Taken.
H.R. = hourly rate.
T.S. means Time Saved.
Incentive Scheme: Type #3 Rowan Plan:
Grames Rowan initially proposed this design in Glasgow in 1898. Similar to the Halsey Scheme, the worker receives guaranteed time pay for the hours he really works. However, the premium is determined using a different approach.
If the worker completes the task in less time than the period allowed, his bonus equals his time earnings for that fraction of the time consumed, since the time saved is proportional to the time allotted.
The bonus is computed as follows: Total Earnings = T.T. × H.R. + (T.T. × H.R.) × T.S./T.A., where T.T. represents time taken.
H.R. = hourly rate.
T.S. means Time Saved.
T.A. means Time Allowed.
The following are the major benefits of the scheme:
(i) It incentivizes both learners and sluggish workers.
(ii) Because the premium is commensurate to the time saved, employers are protected if the rate is not correctly set.
(iii) Employers believe the Rowan Scheme is safer than the Halsey Scheme.
(iv) The scheme’s incentive is greater by up to 50% of the time saved than the Halsey Scheme.
(v) Because the incentive grows at a decreasing pace, workers are less likely to hurry through the task, resulting in less waste, etc.
(vi) Because of increased production, fixed overhead per unit will be reduced.
The primary drawbacks are:
(i) The method is difficult.
(ii) At greater levels of output, the incentive is minimal.
(iii) Employees are unwilling to share their time savings with their company.
Comparison between Halsey and Rowan Scheme:
(1) The payment for up to 50% of the saved time will be the same under both systems.
(2) Under the Rowan Scheme, bonuses increase more quickly than under the Halsey Scheme until the project is completed in half the time.
(3) However, when the time required to complete the task is less than half the usual time, the premium and total profits under the Halsey Scheme are higher than those under the Rowan Scheme.
(4) On the other hand, when the time required to complete the task exceeds half of the normal time, the bonus and total earnings under the Rowan Scheme are higher than those under the Halsey Scheme.
(5) The Halsey Scheme gives greater incentive to increase output, while the Rowan Scheme has an automated check at a specific time.
(6) The Halsey Scheme is more expensive if more than half the time is saved, but the Rowan Scheme is more expensive if less than half of the normal time is saved.
Taylor’s Differential Piece Rate System is an incentive scheme of type 4.
- W. Taylor, known as the “Father of Scientific Management,” initially established this technique. This system has no minimum guaranteed time pay.
The system has two set piece rates: a low rate for production below the norm and a higher rate for equal or greater output. Thus, this system penalizes unproductive workers while rewarding effective ones.
A worker’s efficiency may be measured as a percentage of either the time allotted for a task vs the actual time taken, or the actual output compared to the standard production within a certain time frame.
Type # 5 Incentive Scheme: Merrick Differential Piece Rate Plan, a modified version of Taylor’s System with three rates instead of two. Under this structure, day pay are not guaranteed.
The three piece rates are:
Efficiency – Piece rate applicable
Up to 83% – Normal rate
Up to 100% – 10% above normal rate
Above 100% – 20% above normal rate
The main feature of this system is that it does not penalise the workers who produce below the standard output up to 83% and the earnings increase with increased efficiency at two stages.
Incentive Scheme: Type # 6. Gantt Task and Bonus Plan:
The plan is a good combination of time-work and piecework. Under the scheme the day wages of the worker are guaranteed.
The main features of the bonus scheme are:
Output – Bonus
At 100% – 20% on the total output
Above 100% – 20% of the wages of the standard time, or High piece rate on the worker’s whole output.
This scheme protects and encourages the less efficient workers who cannot produce the standard output. It offers a good incentive to the efficient workers.
Incentive Scheme: Type # 7. Emerson’s Efficiency Plan:
This scheme is also a combination of time wage, piece rate wage and bonus plans. Under this method a standard time is set for each job, or task or volume of output is fixed as the standard. The standard efficiency is set at 66⅔ or 67%. For efficiency up to 67% the worker gets his day wage only.
If he crosses the standard task, he becomes entitled to bonus and the rate of bonus increases with the increase in efficiency. At 100% level of efficiency, the bonus becomes 20%. Again, if the efficiency exceeds 100%, bonus increases by 1% for every 1% increase of efficiency above 100%.
Incentive Scheme: Type # 8. Group Bonus Plans:
The incentive schemes explained so far are applicable to individual workers only. But, sometimes it becomes necessary to introduce Group Bonus Scheme. Under the scheme bonus is paid to the group as a whole, depending upon the performance of the group and the amount of bonus is shared by themselves equally or at an agreed proportion.
The group bonus is suitable in the following circumstances:
(a) When it is very difficult to measure the performance of individual worker, but the production through collective efforts of a group of workers can be measured.
(b) The nature of the work requires collective effort.
(c) Where it is desirable to develop a team spirit.
(d) Where both the direct and indirect workers are to be rewarded.
(e) When bonus scheme cannot be operated successfully for individual workers.
However, before introducing a group bonus scheme, following points must be considered very carefully:
(i) Well combination among the group.
(ii) The size of the group should be economic.
(iii) The group should be homogeneous.
(iv) The production of the group should be within its control.
Thus, a group bonus scheme encourages team spirit, reduces wastage, assures cooperation, lessens supervisory work and reduces overall costs.
Illustration 1:
Time allowed for a job = 5 hrs
Time taken to complete the job = 4 hrs
Rate Per hour = Rs. 1
Calculate the total earnings of a worker under the Halsey Premium Scheme.
Solution:
Total Earnings = Hours worked × Rate per hour + 50/100 × (time saved × hourly rate)
= Rs. 4 × 1 + (50/100 × 1) × 1
= Rs. (4 + 1/2) = Rs. 4.50
Illustration 2:
Time allowed for a work = 10 hrs
Time taken to complete the job = 8 hrs
Rate per hour = Rs. 2
Calculate the total earnings of a worker under the Halsey Premium Scheme.
Solution:
Total Earnings = Time Taken × Hourly Rate + 33⅓ (T.S. × H.R.)
Where T.S. = Time Saved, H.R. = Hourly Rate
Total Earnings = 8 × Rs. 2 + 33⅓/100 × 2 × Rs. 2
= Rs. 16 + Rs. ⅓ × 4 = Rs. 16 + Rs. 1.33 = Rs. 17.33
Illustration 3:
Standard time is 20 hrs, Time taken is 16 hrs, Hourly Rate is Re. 0.50
Find out total earnings under Rowan Plan.
Solution:
Total Earnings = Time Taken × Hourly Rate + (Time Taken x Hourly Rate) × Time Saved/Time Taken
Time Saved = Time Allowed – Time Taken
= (20 – 16) hrs. = 4 hrs
... Total Earnings = 16 × Re. 0.50 + (Re. 0.50 × 16) × 4 × Rs. 0.50/20
= Rs. 8 + Rs. 8 × 2/20 = Rs. (8 + 0.80)
= Rs. 8.80
A factory works 8 hours a day. The standard output is 10 units per hour and normal rate is Rs. 5 per hour. The factory has introduced the following differentials in the matter of wage payment:
80% of piece rate when below standard.
120% of piece rate when at or above standard.
Find out piece rate at below and above standard.
Solution:
Normal piece rate = Rs. 5/10 = 0.50
When below standard the piece rate will be = 0.50 × 80/100 = Re. 0.40
When above standard the piece rate will be = 120/100 × 0.5 = Re. 0.60
Standard Production:
80 units per week. No. of men working in the group = 10. Bonus for every 25% increase in production, a bonus of Rs. 10 will be shared prorata among the 10 members of the group.
Actual production during a week = 110 units.
Solution:
Increase in production over standard = (110 -80) units = 30 units
i.e. 30/80 × 100 or 37.5%
... Bonus = Rs. 10 + 12.5/25 × Rs. 10
= Rs. 10 + 5 = Rs. 15
Each member of the group, therefore, receives = Rs. 15 ÷ 10 = Rs. 1.50
Worked-out Problems:
Problem 1:
Calculate by the Halsey Premium Plan and determine on this basis the total earnings of a worker by the given data:
Standard time for work – 20 hours
Actual time – 16 hours
Rate per hour – Rs. 2
Solution:
Total Earnings = Time taken × Rate per hour + 50% (Time saved x Rate per hour).
Standard time = 20 hours
Time taken = 16 hours
... Time Saved = Standard time – Time taken i.e. 20 hours – 16 hours = 4 hours.
... Total Earnings = 16 × 2 + 50/100 (4 × 2) = 32 + 4 = Rs. 36
Total Earnings under Halsey Premium Plan = Rs. 36
Problem 2:
From the following particulars, calculate the cash required for wages in a company, during the month of January 2007:
Solution:
Problem 3:
From the following calculate the total monthly remuneration of each of three workers A, B and C:
(i) Standard production per month per worker = 1,000 units
(ii) Actual production during a month: A = 890 units, B = 720 units, C = 960 units.
(iii) Piece work rate per unit of actual production = 20 paise
(iv) Dearness wages Rs. 50 per month (fixed)
(v) House Rent allowance Rs. 20 per month (fixed)
(vi) Additional production bonus at the rate of Rs. 5 for each percentage of actual production exceeding 80% of the standard.
Solution:
Working Notes:
- Calculation of Bonus:
(i) Worker A:
Actual Production = 890 units i.e. 890/1,000 × 100 = 89% efficiency
... Bonus = (89 – 80) × Rs. 5 = Rs. 45
(ii) Worker B:
Actual Production = 720 units i.e. 720/1,000 × 100 = 72% efficiency
... Bonus = Nil
(iii) Worker C:
Actual Production = 960 units i.e. 960/1,000 × 100 = 96% efficiency
... Bonus = (96 – 80) × Rs. 5 = Rs. 80
Problem 5:
During a certain week in September 2006, a worker manufactured 240 articles. Working hours during a week are 48 hours, standard rate Rs. 5 per hour and standard time to manufacture an article is 15 minutes.
Calculate his gross wages for the week according to (a) Piece work with guaranteed weekly wages, (b) Rowan Premium Bonus Plan, (c) Halsey Premium Bonus Plan.
Solution:
(a) Under Piece work with guaranteed weekly wages:
Actual Wages = Time Taken × Rate per hour
= 48 hours × Rs. 5 = Rs. 240
Guaranteed weekly wages = Standard Time × Rate per hour
= 60 hours × Rs. 5 = Rs. 300
Therefore, actual wages is less than guaranteed wages. So the worker will receive guaranteed wages Rs. 300 for the week.
... Rate per hour = Rs. 300/48 hrs. = Rs. 6.25
Working Notes:
(i) Standard time for 240 articles = 240 × 15 minutes
= 3,600 minutes or 60 hours.
Problem 6:
From the following data ascertain the total earnings of each worker separable under (i) Halsey Scheme (50%), (ii) Rowan Scheme. Also calculate the effective hourly rate of wages of the workers under both the schemes:
Solution:
Problem 7:
From the following particulars you are required to calculate under ‘Average Wage Rate’ the labour cost chargeable to Job No. ‘A’ which was completed in 1990:
Basic Wage Rate is Rs. 2 per hour and overtime rates are:
Before or after working hours 150% of basic wage rate.
Sundays and holidays – 200% of basic wage rate.
During the year 1990 the following hours were worked:
Solution:
... Average Wage Rate = 5,70,000/2,50,000 = Rs. 2.28
Now, computation of labour cost under ‘Average Wage Rate’
Items – Job No. ‘A’
Hours Spent – 3,500
Average Wage Rate – Rs. 2.28
... Labour Cost Chargeable = 3,500 hours × Rs. 2.28 = Rs. 7,980