48

Unit – III
LABOUR

Labour represents human contribution to production and is second

important element of cost

Definition:

Direct Labour is that ―which can be identified with and alloca to cost
centres or cost unit‖. I.C.M A., London.

―Direct Labour is all labour expended in altering the construction,

composition or condition of the product‖. - Wheldon

Indirect labour is of general character and cannot be conveniently

identified with a particular cost unit. It helps and facilitates production
indirectly. Examples are foreman, supervisor, cleaner, inspector; clerk, etc.

Types of Labour: 1) Direct Labour 2) Indirect Labour.

1) Direct Labour: Direct Labour is that, "Which can be identified with

and allocated to cost centres or cost units. Thus Direct labour is engaged in
converting rawmaterials into finished goods, (e.g) machine operator, shoe-
maker, tailor.

2) Indirect labour: are those labour which cannot be conveniently

identified with a particular cost unit. (e.g) supervisor, foreman, peon, clerk, etc.

Distinguish between Direct and Indirect labour:

Direct labour is that labour which can be conveniently identified or

attributed wholly to a particular job, product or process. Thus direct labour
includes all labour expended in converting raw materials into finished goods.

Indirect labour is one which is of a general character and cannot be

conveniently identified with a particular job, product or process.

Examples of Indirect Labour

1. Labour employed in Service Departments like Power House, Internal

Transport Service, Gate and Security.
 2. Labour employed on maintenance work.
3. Storekeeping workers and other such personnel.

Organisation of Labour Department

There are mainly five departments in an organisation dealing with labour:

1. Personnel Department
2. Time Recording Department.
3. Payroll Department
4. Engineering Department and
5. Cost Accounting Department
1. Personnel Department: it plays a very important role as it is primarily
concerned with the proper selection and training of workers and placing
them to jobs for which they are best suited. This department is a service
department and renders only advisory functions.

2. Time Recording Department: The recording of time put in by a worker

is required for two purposes, (i.e) for time keeping and time booking.
 Time keeping is the recording of time for the purpose of attendance
and wage calculations.
 Time booking is the recording of die time for purposes of cost
analysis and apportionment of labour costs over various jobs.

3. Payroll Department: The important functions of this department in

controlling and accounting for labour costs may be listed as follows:
a) To compute the wage and to prepare the payroll for each
department
b) To compute the payroll deductions.
c) To disburse salary and wage payments.

4. Engineering Departments: This department helps in maintaining control

over working conditions and production methods for each job,
department. It performs the following functions.
a) Preparation of plans and specifications for each job.
b) Safe and efficient working conditions.
c) Preparation of time and motion studies of labour.
d) Making job analysis and setting piece rates.
 5. Cost Accounting Department: This department is responsible for the
accumulation and classification of all cost data of which labour, is one of
the elements. This department is responsible for analysing the payroll in
order to render, routine and special labour cost reports revealing the
amount of normal and abnormal idle time, direct and indirect labour,
overtime and variances from budgeted labour costs. These reports inform
management of the effectiveness of labour policies and permit necessary
action to be taken to retain proper control of labour costs.

Problem:1 Labour Cost per man per day of 8 hours

From the following particulars ascertain Labour cost per day of 8 hours
Basic Pay - Rs. 200 per month
Leave Pay-5%
Employer Contribution to provident fund 8% of (a) and (b)
Employer's contribution to E.S.I. -2.5% of (a) and (b)
Pro rate amenities Rs. 17.95 per head per month
Working hours in a month-200hours.

Solution:

Statement of Labour Cost per man per day of 8 hours

Particulars Per month Rs. Per day 8 hours

Basic pay 200
Leave pay 200x5 / 100 10
Employer‘s contribution to P.F. 8% of 16.80
(a) and (b) 210x 8 / 100
Employer's contribution to E.S.I. - 5.25
2.5% of of (a) and (b) 210 x 2 ½ / 100
Amenities 17.95
Total labour cost per man of 200 hours 250 10
of one month
Total labour cost per man of 8 hours = 250 x 8 / 200 = Rs. 10

Problem:

From the following particulars given below, Calculate Labour

cost per man per day of 8 hours:

Basic SalaryRs.5perday

Dearness Allowance 20 paise per every point over 100 cost of living index for
the workers. Current Cost of Living index is 800 points.

Leave Salary 5% of (1) and .(2)

Employer's contribution to P.F. 8% of (1) and (2)

Employer's contribution to State Insurance 5% of (1), (2) and (3)

Number of working days in a month 25 days.

Solution: Statement of Labour Cost per man per day of 8 hours :

Per day of
8 hours: (Rs.)
Basic salary 5.00
D.A. 20 paise per every point over 100 cost of having index for 5.60
a month of 25 days Per day=700 points x 20/100x1/25
(800 points-100 points=700 points)
Leave Salary 5% of (1) and (2) (5+5.60=10.60 x 5/100) 0.53
Employer's Contribution to P J?. 8% of (1) and (2) 0.85
(10.60x8/100)
Employer's Contribution to state * Insurance of 5% of (1), (2) 0.56
and (3) (5+5.60+ 0.53= 11.13x5/100)
Labour Cost per man per day of 8 hours 12.54

Time keeping

Time keeping Department is to keep a record of each worker entering and

leaving time in the factory.lt is considered important to record the time, of
workers entering arid leaving the factory. It is the recording of each worker's
time of coming in and going out of the factory for the prurpose of attendance
and wage calculations.

The objects of time-keeping :

1. To mark attendance of each worker to satisfy legal requirements.

 2. To prepare wage sheets.
3. To maintain discipline in the factory.
4. To ascertain the labour cost chargeable to jobs.
5. To control labour cost.
6. To have a correct record of attendance for meeting statutory
requirements.
7. Overhead distribution, if it is based on wages or labour hours.

Methods of Time-keeping:

The methods of time-keeping can be broadly classified into two categories:

(a) Manual methods and (b) Mechanical methods.

a) Manual Methods: There are two manual methods. These are:

Attendance Register or Muster Roll: This is the oldest method of time

keeping. This register may be kept in time office ot with the foreman
in the department Attendence may be marked by the time-keeper or the
foreman. Under this method a register is maintained for worker‘s attendance.
This method is very simple and cheap to operate. But it can be used in very,
small factories. Records may not be accurate. Chances of disputes and mistakes
will arise.

Token or Disc Method: Under this system, every worker is allotted a disc or
token bearing his identification number. All such discs are hung on a board at
the entrance of the factory. As and when a worker enters, he removes his disc
from the board and puts it into the box or hangs it on another board which is
specially kept for this purpose.

After the expiry of the time, the first box is removed and replaced by
another for late comers. Alternatively, workers coming late may be required to
report at the time office so that the exact time of their arrival can be noted. After
the factory gates are closed, the, time clerk marks the attendance in register on
the basis of tokens in the boxes. The absentees are indicated by the missing
tokens in the box.

This system is improvement on the attendance register method. It is

difficult to check one worker inserting two discs into the box, one of himself
and the other of his friend. It involves a large amount of clerical work and there
is a possibility of mistakes.

Mechanical Methods: It is classified into three.

i. Time Clock Method: Under the mechanical methods, time clocks are used
to record the worker's attendance. In this system the attendance is recorded
on a clock card. When a worker enters the gate, he picks up his card from
the "out" rack, inserts it into the clock and the time is stamped at the
relevant space. He takes his card out and keeps it in the "In" rack. This
process is reversed when he goes out of the factory.

Thus every worker is allotted a card which bears the worker's

identification number. These cards are kept in racks lying outside the factory
gate. There are usually two racks denoting 'out' and 'in' racks. The cards left
in the 'Out' racks indicate absent workers.

Advantages:

1. It provides for correct recording of attendance.

2. Changes of false and fraudulent entries are reduced.
3. Work in connection with the preparation of wage sheets becomes is very
easy.
4. The clocks produce a definite record.

ii. Dial Tune Recorders:

This consists of a mechanism with a dial having a number of holes
about the circumference. When a worker enters the factory, he presses the
dial arm into a hole which denotes his particular number and die time is
recorded automatically on an attendance form placed inside.

This attendance sheet forms a part of the payroll and there is no-need
of copying out the record. But this method has the following defects

a) The time of worker's arrival and departure are widely separated on the
paper, making the calculation of worker's total time cumbersome.

b) The capacity of this machine is very much limited as the number of

holes is only about 150.
iii. Key Recorder System: This is a mechanism with a number of keys, each
key bearing the number of a worker. When a worker enters the factory, he
inserts his particular key in the key-hole and gives a turn, the ticket number
and the clock time are recorded on a sheet of paper.

Time Booking:

It is a process of recording the time spent by a worker on differ jobs carried

out by. In during his period of stay m the factory,

The objects of time booking:

1. To ascertain die cost of work done.

2. To ensure that time for which worker has been paid is properly
utilised.
3. To provide a basis for the appointment of over-heads, and
4. To ascertain the idle time so as to control it.

Time booking may be done manually or mechanically depending, upon

the size of the organisation. Large organisations, use time recording clocks for
recording time on each job.

Methods of Time Booking

There are five methods of Time booking. They are

1. Daily Time Sheet System: This is a daily record of the work done by a
worker, showing the jobs on which he worked and the time spent against
each. One sheet is allotted to each worker and a daily record is made therein.
This can be used in small organisations where the number of workers as
well as the number of jobs are very much limited.
2. Weekly Time Sheet: This is similar to Daily Time sheet. The difference is
that instead of recording the work done for a day only, record of time for all
jobs is done weekly. Here Weekly Time Sheets are kept. The weekly time
sheet gives a consolidation of the total hours worked during the week and
this total can be checked against the total shown in the clock cards. This
methods is useful-where there are a few jobs in a week.
3. Job cards: This card is prepared for each job. This card is allotted to each
worker whenever a worker takes up a particular job. Worker enters this card
the time of starting the job as well as tune of finishing the job.
4. Time and Job Card: This system provides a card which consists of two
sections, one to be filled up as a job and the other as a time card. This card
records the attendance time and the time spent on different jobs on the same
form. It consists of two sections - one for recording attendance and the other
for recording the work time. Thus, tins records both the attendance time and
work time of a worker on the same sheet.
5. Labour Cost Card: This is a type of circulating job card it meant to record
the time taken on the job by all the workers employed on it Instead of
allotting one card to each worker, the same card is passed round and the
time taken by each worker on that job is recorded on it Thus, this card gives
the total labour cost of a job.
6. Piece-Work Card: Where workers are paid on piece rate system, piece-
work card is used. Such a card is maintained for each job separately.
7. Wages Abstract: This is a summary prepared weekly or monthly, showing
the amount of time spent by a worker on different jobs. This shows an
analysis of wages paid during a period of time on different jobs.

The Wages Abstract is a medium of allocation of labour cost to different

jobs. It provides a basis for writing job ledger.

Write short notes on: (a) Out workers, (b) Casual workers

a) Out workers: Out workers are those workers who work outside the
factory on behalf of the company.
b) Casual Workers: These are temporary workers who are appointed on
daily basis in order to meet increase in production or to replace the
absentee workers. These are known as casual workers. Such workers are
known as casual workers as they are not regular workers of the
organisation.

Overtime Wages

Work done beyond the normal working hours is known as overtime work.
According to the Indian Factories Act, no worker should be allowed to work for
more than 9 hours a day or 48 hours a week. Suppose a worker works for more
than 9 hours in a day or more than 48 hours in a week he has to be paid for his
overtime at double the normal rate of wages. Overtime work involves extra cost
as it has to paid at double of pauses of idle time

Treatment of Overtime Costs.

1. If overtime is required to make up any shortfall in production or for

meeting urgent orders, the overtime premium should be treated as
overhead cost of the department concerned.
2. When the customer agrees to bear the entire charge of overtime due to
urgency of work, it should be charged direct to the job or work order
concerned.
3. Where overtime is worked due to seasonal nature, it should be treated as
general overhead.
4. Overtime worked on account of abnormal conditions like floods, earth
quakes, etc., should be transferred to Costing Profit and Loss Account.
5. Overtime work is work done beyond normal working hours. The
Factories Act provides for payments of overtime wages at double the
norms rate wages.

Control of overtime:

1. All overtime work should be duly authorised by higher officials.

2. Overtime cost should be recorded separately and shown against the
department incurring it. It will help in proper planning in future.
3. If overtime is due to limited capacity of plant, new plant may be installed.

Idle time

Give reasons for idle time, How do you treat idle time in cost accounting.

Meaning of Idle time: Idle time is that time for which wages are paid but no
production is obtained. Idle time may be defined as that time for
which are paid but no production is obtained. This is the time which cannot be
attributed directly to any productive work. Idle time may represent loss of time
of labour, machines of equipments due to lack of material, breakdown of
machinery, failure of power supply, etc.

Causes of idle time:

 a) Productive Causes.
b) Administrative causes
c) Economic causes

I. Productive causes: The productive causes may further be classified

as follows:
1. Idle time due to machine break down.
2. Power failures.
3. Workers waiting for raw materials and tools.
4. Workers waiting for work.
5. Workers waiting for instructions.

In all the above cases, idle time can be controlled by proper planning in
advance.

II. Administrative causes: Idle time is frequency caused by administrative

decisions. Sometimes administrative decisions are also responsible for idle
time. For example, in case of a surplus capacity of plant and machinery,
management may decide not to work fully and there may be some idle time.
Therefore, such idle time arises out of abnormal situations, and it cannot be
helped.
III. Economic causes: Idle time, may arise due to sever competition or seasonal
nature of industries. Idle time may arise due to seasonal nature of industries.
For example, in the case of woollen goods, ice-cream industry, production
cannot be evenly distributed throughout the whole year. It is not possible to
employ a number of workers in the busy season and to leave them during
slack season.

Treatment of Idle Time Cost

Normal Idle Time Abnormal Idle time

Normal Idle Time: It refers to that loss of time which is generally unavoidable
and is incidental to production.

For example:
 a. Time taken from the factory gate to the department where worker is
engaged and the reverse journey at the end of the day.
b. Time which elapses between completion of one job and commencement
of the next.
c. Time spent in machine maintenance.
d. Tea breaks (if any), personal needs, etc.

Thus, normal idle time is of such a nature that it cannot be avoided and its cost
is an expense which the employer must bear.

Treatment of Normal Idle Time:

a) It is directly charged to factory overhead account.

b) Wage rate may be inflated so as to make allowance for normal loss of
labour time.

Abnormal Idle Time: This type of idle time arises due to inefficeient of
management bad luck or reasons beyond control.

Examples: Strikes and lockouts, major breakdown of machinery, fire, flood,

power failure delay in material supply, etc. Measurement of Labour Turnover
here are three different methods of measurement of labour turnover

Treatment of Abnormal Idle Time: Cost of abnormal idle time should be

collected separately and written off to costing profit & loss Account. It cannot
be regarded as a cost of production.

Control of Idle Time: For control purpose, idle time should be divided into
three categories:

i. Idle time controllable by foremen, e.g., waiting for instructions,

waiting for tools, faulty tool setting, interrupted flow of work, etc.
ii. Idle time beyond the control of foreman but controllable from the
standpoint of factory, e.g, shortage of raw material, power failure.
iii. Idle time essentially beyond control, e.g., unforeseen accidents,
shortage of work due to economic conditions, failure of power supply,
work stoppage due to strike, etc.
The different causes which lead to idle time should be properly analysed and
responsibility should be fixed on appropriate persons to control it.

Labour Turnover

What do you understand by Labour Turnover? How is it measured? What are

the causes? What are the remedial steps you would suggest to minimise its
occurrence?

Labour Turnover: It is rate of displacement of labour employed in an

organisation. It is a normal feature in every business organisation that some
workers leave their jobs and some new workers take their place. This mobility
or change in the labour force is known as labour turnover, labour turnover may
be defined as the number of workers left during the period in relation to the
average number of workers on the roll during the period. In the other words,

MEASUREMENT OF LABOUR TURNOVER

There are three different methods of measurement of labour turnover:

i. Separation Rate Method: This is the most commonly used method.

Under this method, measurement is made by dividing the total number of
separations during a period by the average number of workers on the roll
during the period.

Labour Turnover = No. of workers left during a period / Average No. of

workers in the period x 100

Average number of workers is calculated as under:

No. of workers in the beginning of period + Number at the end / 2

Multiplying the labour turnover formula by 100; gives the rate in percentage.
The period for which labour turnover rate is calculated may be one month, six
months, one year period.

Replacement Rate Method: This method calculates labour turnover rate by

taking into consideration only the number of workers joined.

Formula:
Labour Turnover = No. of replacement in a period / Averge number of
workers in the period X 100

While calculating the number of replacements, new workers recruited because

of expansion should not be taken into account

Flux Rate Method: This method takes into consideration both the number of
workers left as well as number of new workers who have joined .

Formula:

Labour Turnover = No. of workers left + No.of workers replaced / Average

No. of workers x 100

This method is a combination of method 1 and method 2

CAUSES OF LABOUR TURNOVER

The causes of high labour turnover may be classified in two categories:

(i) Avoidable; and

(ii) Unavoidable

Avoidable Causes:

1. Redundancy due to seasonal fluctuations, contraction m the market lack

of proper planning.
2. Low wages and allowances
3. Unsatisfactory working conditions.
4. Disputes between rival trade unions.
5. Dissatisfaction with the job.
6. Lack of facilities like transport, medical, accommodation, etc.
7. Strained relationship with supervisors or fellow workers.

Unavoidable Causes:

1. Change of service for personal betterment, ,

2. Retirement due to old age and ill health,
3. Death,
4. Discharge on disciplinary grounds on continents long absence,
 5. Marriage or pregnancy.

Effect of High Labour Turnover

Effects of Labour Turnover will increase cost of production. There are two
types of Cost. (i) Preventive cost (ii) Replacement cost

I. Preventive Costs: Preventive costs refer to all those expenses and

costs which are incurred by a firm to keep the labour force contented so
that excessive labour turnover may be prevented The major items of
preventive costs are:
1. Personal administration.
2. Cost of medical services.
3. Cost of welfare activities and schemes.
4. Pension and or provident fund schemes.

II. Replacement Costs: Replacement costs include all such losses, wastage
arising because of the inexperienced new labour farce replacing the
existing ones as well as die cost of recruitment and training of the new
workers. It includes the following elements:
a. Loss of output due to sometime taken in obtaining new labour,
b. Loss of output and quality due to inefficiency of new labour,
c. Employment department expenses,
d. Cost of training of new workers,
e. Cost of tool and machine breakages,
f. Cost of scrap and defective work, and
g. Cost of accidents.

Reduction of Labour Turnover: Labour turnover rate may be reduced

by taking preventive remedial measures and by removing avoidable
causes. The various steps are given below

1. A satisfactory wage system.

2. Improving working conditions.
3. Strengthening the welfare measures.
4. A satisfactory policy for transfers and promotions,
5. Labour participation in management.
6. Efficient and impartial personnel administration.
 7. A sound personnel policy for recruitment induction and training of labour
8. A satisfactory level of amenities add welfare measures like canteen
facilities, medical services, recreation etc.
9. A satisfactory security scheme like family pension, provident fund,
accident compensation, etc.
10.A satisfactory policy for transfers and promotions.
11.Labour participation m management and joint consultation scheme.

Time & Motion Study

What do you understand by Time and Motion Study?

Time study aims at determining the proper speed of movements made by the
workers and motion study aims at eliminating unnecessary movements.

Time study: It may be defined as "the art of observing and recording the time
required to do each detailed element of an industrial operation" Its main object
is to determine the standard time required to carry out a job most efficiently.

Motion Study: This study deals with one aspect of methods study, i.e., to
eliminate unnecessary movements of men and material. "Motion study is the
science of eliminating wastefulness resulting from using unnecessary, ill-
directed and inefficient motions". It is a detailed study and analysis of die
movements of an operation in performing an operation for the purpose of
eliminating unnecessary and useless motions:

Write notes on the following: (a) Job Evaluation and (b) Merit Rating

I. Job evaluation: Job evaluation may be defined as the rating of various

jobs according to the responsibility and skill required from them. The
basic object of job evaluation is to ascertain the relative worth of each job
through an objective evaluation so that relative remuneration can be fixed
for different jobs.
II. Merit Rating: Merit rating is a systematic evaluation of the personality
and performance of each employee by his supervisors or some other
labour qualified persons. It is a system by which the performance of an
employee is objectively evaluated and compared with that of others in his
work group.
Methods of Wage Payment

There are mainly three methods of labour remuneration:

a) Time Rate System

b) Piece Rate System
c) Incentive Schemes.

If a worker may be paid on the basis of time mat he spends on his job is known
as Time Rate. If he may be paid on the basis of quantity of work done by him is
known as piece rate.

Time Rate System: This is the oldest of the wage payment systems. In this
system time is made the basis of payment. Labour is paid for the time worked
irrespective of the volume of production during that time. The formula for
calculating wages under this system is:

Time Rate (T.R) = Hours worked x Rate per hour

Payment may be based upon the hour, the day or the week, or it may be at
the fixed salary rate.

Wages = Time spent x Rate per hour (T x R)

E.g.: Mr. X is paid at the rate of Rs. 10 per hour. During the month he spends
200 hours. Calculate Mr. X earnings.

Earnings=200 hours x Rs. 10 per hour = Rs. 2000 per month.

Types of Time Rates :

a) Times Rates at Ordinary Levels: In this system, time is made the basis of
payment irrespective of quantity of work done by a worker payment is made at
a rate on attendance by hour, week or a month.

Formula:

Time Rate = hours worked x Rate per hour

Time Rate at High Levels: Under this system, the worker is paid at a wages
which is substantially higher than the rate prevailing in that area or industry.
Graduated Time Rates: This system provides for variation in the wage
according to changes in the cost of living index. The rates are to be adjusted
periodically according to index.

Advantages:

1. The workers are assured of minimum wages which gives them a sense of
security.
2. The calculation of the amount of wages is simplified.
3. Workers avoid over-speeding arid thus cause less daniage to equipment.
4. Quality of work produced this method does not give weight to the
volume of work done.
5. Trade unions generally oppose tins mode of payment.

Drawback:

1. It does not distinguish between efficient and inefficient workers.

2. There is no incentive to work more.
3. From costing point of view, it creates difficulties in the calculation of
labour cost per unit as the output is quite fluctuating.
4. It needs extra provision for supervision so that workers do not waste their
same.

Piece Rate System: Under this system a worker is paid a fixed amount per unit
produced irrespective of the time taken. A rate per unit of output is fixed and
wages are calculated as follows:

Piece rate = No. of units produced x Rate per unit (N x R)

Earnings = No. of Units produced x Rate per unit (N x R)

Example: Mr. X is paid at the Rate of Rs. 4 per unit He produced 500 unit
during the month. Calculate his total earnings?

Earnings = 500 Units x Rs. 4 per unit=Rs. 2000 per month.

Advantages:

1. It distinguishes between efficient and inefficient workers.

2. It provides a strong incentive because remuneration is in direct ratio to
the worker‘s effort.
3. Costing is simplified because the exact cost of labour per unit is known in
advance.
 4. Strict supervision is not necessary.

Drawbacks:

1. Workers try to produce maximum quantity to increase, their wages. In the

process quality of products is ignored.
2. Minimum amount of wages is not guaranteed.
3. High speed has injurious effect on the health of workers and also on
equipment and machinery.
4. Trade unions generally oppose this mode of payment.
5. It involves maintenance of larger records tor payroll.

TYPES OF PIECE RATES

i. Straight Piece Rates: This system makes quantity of work as the basis
wage payment. A fixed sum per unit of output is given to a worker
irrespective of the time taken by him.

The formula is:

Piece Rate = Units produced x Rate per unit (N x R)

ii. Piece Rates with guaranteed day rate: In this system, some minimum
wage is guaranteed to a worker and if his wage at piece rates, by chance,
con out to be less than the guaranteed minimum wage, he shall get the
minim wage and not the piece wage.

iii. Differential Piece Rates: Under this system, rates of wages vary at
different levels of output. As the output increases, the rate also increases.
The crease in rates may be proportionate to the increase in output or
proportion a more or less than that. The object of this system is to reward
the efficient workers and at the same time to encourage the less efficient
to attain standards. Taylor, Merrick, Gantt task and Bonus and Emerson
efficiency plan are used this system of payment.

iv. Bonus System and Incentive Schemes

 The bonus system may take either of two forms - Individual Bonus
System or Group Bonus System.

Indirect Monetary Incentives:

Profit Sharing Scheme: Profit sharing schemes are those where there is an
agreement between the employer and his workers whereby the employer agrees
to pay to workers, in addition to their wages, a share of profit at an agreed rate.

Co-partnership: Workers ate given the opportunity to have a share in the capital
of business and to receive the profits accruing to their share

Non - memory benefits may be given in numerous ways like medical facilities,
educational facilities, subsidised canteen, better working conditions, housing
facilities and such other welfare measures.

Discuss the principles of a good incentive scheme. What are the advantages and
disadvantages of incentives schemes?

Incentive Wage Plan: Incentive may be defined as "the stimulation of effort

and effectiveness by offering monetary inducement or enhanced facilities" An
incentive may be monetary, i.e., cash benefit, or non-monetary.

Principles of a Good Incentive Scheme:

1. The scheme should be simple and easily understandable by workers

2. The scheme should be fair, to both employer and employee.
3. The cost of operating the scheme should be reasonably low,
4. The standard of performance should be scientifically set and should be
within the reasonable reach of an average worker.
5. No limit should be put on the earnings of workers.
6. The scheme should have the approval of workers and the union.
7. The scheme bonus provide a satisfactory system of supervision and
production control.
8. The scheme must be relatively permanent.
9. Indirect workers should also be included under this scheme.
10.Workers should be properly educated.
Incentive Schemes

Under Incentive schemes, time rate and piece rate systems are combined in such
a way that workers are induced to increase their productivity. Various Incentive
plans are

1. Halsey Plan:

This plan was first introduced by F.A. Halsey, a mechanical engineer in

America, in 1891. This is a simple combination of time and piece basis of
payment. Under this plan, bonus is paid on the basis of time saved. The amount
of bonus depends upon die time saved by the worker. Where,

Time saved = standard time - Actual Time taken

A standard time is set for each job. If a worker takes the standard time to
do it or even exceeds the standard time limit, he gets normal wages calculated at
die time rate. If he completes his job in less than the standard time, he gets a
bonus equal to 50% of the value of time saved. Therefore, die total earnings of a
worker under this system are wages for the actual time spent plus a bonus equal
to 50% of the. Value of time saved.

The formula: Bonus 50% of [Time saved x Time rate]

Total earnings - Time rate x Time taken +50% [Time saved x Time rate]

Example: Time rate = Re. 1.00; Time allowed = 7 hours

Time taken = 6 hours and Time saved = I hour.

Bonus = 50% [Time saved x Time rate]

= 50% [1 hour x Re. 1.00]

= 50% [Re. 1.00]- 50 paise

Total earnings - (6 hour \ Re. 1.00 + 50 paise - Rs. 6.50.

Advantages:

1. It is easy to understand and simple to operate.

2. This plan provides a strong incentive to improve efficiency.
 3. The worker earns bonus on every job individually and the time saved by a
worker on one-job is not set off against the excess tune taken
on some other job.
4. It guarantees minimum wages according to time rate and thus provides a
sense of security to workers.
5. The benefit of time saved is equally distributed between workers and
employers.
6. It provides a strong incentive to increase production.

Disadvantages:

1. Incentive is not as strong as with piece rate system. Generally, the harder
the worker works, the lesser he gets per unit.
2. It does not give full protection to employer against wrong rate setting.
3. Workers do not welcome the sharing principle.

Problem : 1
Rate per hour =Rs.4
Time allowed for Job =40 hours
Time taken =32 hours

Solution:
Time saved =40hours-32hours = 8hours
Bonus = 50% of time saved = 8 hours =4 hours
Bonus = 50% Time saved x Rate per hour
= 4hoursxRs.4=Rs. 16
Time wages = Actual time taken x Rate per hour
= 32 hours x Rs.4 = Rs. l28
Total Earnings = Rs. 128+ Rs. 16 = Rs. 144.

Problem: 2

Calculate earnings of a worker, Under Halsey Premium Plan

Time allowed = 70 hours
Time taken = 60 hours
Rate per hour = Rs. 3
Time saved = Standard Time - Actual time
= 70 hours - 60 hours =10 hours
Bonus = 50% Time Saved x Rate per hour
= 10hours / 2 x Rs.3 =Rs. 15
Wages = Actual time x Rate per hour
 = 60 hours x Rs. 3 = Rs. 180
Total Earnings = Actual wages + Bonus = 180 + 15 = Rs. 195

2. Halsey Weir Plan: This system was introduced by G.T. Weir and is a
modified form of the original Halsey plan. The only difference between
the two is that under the Halsey Weir plan the bonus is equal to 30% of
time saved.

E.g:
Standard time = 40 hours
Actual time = 34 hours
Rate per hour = Rs.10
Calculate Halsey weir plan?

Bonus = 30% of Time saved x Rate per hour

40 – 34 hours = 6 hours x 30 / 100 x Rs.l0 = Rs. 18
Wages = 34 hours x Rs.10 = Rs. 340
Total Earnings = Rs.340 + 18 = Rs.358

3. Rowan Plan : This plan was introduced by David Rowan and is similar to
Halsey Plan, except in the calculation of the amount of bonus. Bonus is that
proportion of the wages of the time taken which the time saved bears to the
standard time. Its formula is :
Bonus = Time saved / Standard time x time taken \ Rate per hour
Total earnings = (Time taken x Rate per hour x Bonus
Suppose Time Rate = Re. 1.00 per Hour; Standard time -8 hours;
Time taken = 6 hours; Time saved = 2 hours.
% of Time saved to Standard time =2/8 - 25%
Bonus = 25% of Rs. 6 = Rs. 1.50.
Total earnings = 6 hours x Re. 1.00 + Rs. 1.50 = Rs. 7.50.

Advantages:

1. It provides a guaranteed minimum wage as well as incentive for

efficiency.
2. It provides the employer an incentive to increase production facilities as
he receives a large share in savings achieved.
3. The Rowan plan provides a better bonus than the Halsey 50% scheme.
 4. Up to 50% of the time saved, it provides a higher bonus than under
Halsey Plan. It offers protection to the employer when standard has not
been properly fixed,
5. As die bonus increases at a decreasing rate, at higher levels of efficiency,
the worker is not induced to rush through the work.

Disadvantages:

1. It is more complicated and costlier than the Halsey system.

2. It is not easily understood by workers and leads sometimes to disputes.
3. It does not provide adequate incentives beyond a certain level.
4. Where time saved is more than 50% of the standard, time, the total
earnings start decreasing.

Bonus = Time saved / Standard Time x Rate per hour x Actual time

Problem: 3
Calculate Earnings under Rowan scheme:
Standard Time = 100 hours
Time taken = 80 hours
Rate per hour = Rs.10
Bonus = time saved / standard time x Actual time x Rate per hour

= 20 hours / 100 hours x 80 hours x 10 = Rs.160

Time wage = Actual time x Rate per hour

= 80 hours x Rs. 10 = Rs.800

Total Earnings = Rs.800 +160=Rs. 960 .

Problem: 4
Calculate Halsey and Rowan Premium plan from the following data:
Time allowed = 96 hours
Time taken = 80 hours
Rate per hour = Rs. 2

Solution:
Halsey Plan:
Bonus = 50% Time saved = 96-80=16 / 2 = 8 hours
 = 8 hours x Re.2 = Rs. 16
Total Earnings = Rs. 160 (80 x 2) +16 = Rs.176.

Rowan Plan:
Bonus = 16 / 96 x 80 x 2 = Rs. 26.66
Time wages = 80x2=160
Total Earnings = 160 + 26.66=Rs. 186.66

Problem: 5

A worker takes 12 hours to complete a. job on daily wages and 9 hours on

a scheme of payment by results. His day rate is Rs. 4 per hour. The material cost
of the product is Rs. 6 and the overheads are recovered at 150% of total direct
wages. Calculate Factory cost of the product under.

a) Piece Work Plan, b) Rowan Plan, c) Halsey Plan.

Solution:

a) Wages under piece work plan:

9 hours @ Rs.4 per hour = Rs. 36
b) Wages under Rowan plan:

Bonus = 3/12 x Rs.9 x 4 = Rs.9.00

Time wages = 9 hours x 4 = Rs. 36.00

Total Earning = Rs. 45 (Rs.36 + 9)

c) Wages under Halsey plan:

Bonus = 50% 3 hours x Rate per hour

= 1 1/2 hours x 4 = Rs.6

Time wages = 9 hours x 4 = Rs. 36.00

STATEMENT OF FACTORY COST

ELEMENTS OF COST PIECE WORK PLAN ROWAN PLAN HALSEY PLAN
Material 6.00 6.00 6.00
Wages 36.00 45.00 42.00
Prime cost 42.00 51.00 48.00
Factory overhead 150% wages 54.00 67.50 63.00
Factory cost 96.00 118.50 111.00

Taylor's Differential Piece Rate System: This system was introduced by

Taylor, who was the father of Scientific Management Under this plan no time
basis wages are guaranteed, but two piece rates are fixed, low piece rate and
high piece rate . The lower rate is for those who are not able to achieve the
standard output and higher rate is for those whose output is at or above the
standard. Under this system, the standard job is established after careful time
and motion study and two piece rates are set.

The features of the scheme:

1) Day wages are not guaranteed.

2) A standard time for job established.
3) Two piece work rates are fixed. If the worker does the work in less than
the standard time, he receives the higher piece rate, whereas if he takes
longer time he receives the lower piece rate.

Suppose Standard Production =100 units per day.

Piece Rates:

1) 10 paise per unit for 100 units or more.

2) 8 paise per unit for less than 100 units.

Therefore a worker producing 100 units will get Rs.10 and one producing
110 units will get Rs. 11. On the other hand, a worker producing 90 units will
get at the lower rate of 8 paise per unit, (90 x 0.08) i.e., Rs. 7.20.

Advantages:

1) This method is simple to understand and calculation of wages is not

difficult. It also provides a strong incentive to efficient workers.
2) It is advantageous from the point of view of the employer since it helps
much in increasing production by offering higher rates to more efficient
workers.
3) It attracts efficient workers.
4) Where the overhead's are high its incidence per unit cost is reduced
because of increased production.
Disadvantages:

1) It penalises very slow or inefficient workers.

2) It does not guarantee, the minimum day wages and this insecurity affects
the morale of workers.
3) Labour cost will differ between the two levels of performance because of
two different rates.
4) It makes differences between efficient and inefficient workers and thus
creative rivalry.
5) This system is unfair to beginners who cannot attain the standard output
immediately.

Problem: 6
Standard production -200 Units per day
Low piece rate - 8 paise per unit .
High piece rate -10 paise per unit
Mr. X who produced 240 units and Y produced 190 units. Calculate their
Earnings under Taylor's Differential piece rate system?

Solution:
Standard output = 200 units per day
X Produced - 240 units he will get high piece rate.
X earnings = 240 units x 10 paise = Rs. 24
Y produced = 190 units he will get low piece rate
Y earnings = 190 units x 6 paise=Rs. 15.20

Problem: 7
Calculate earnings of worker Mithilash and Sailesh under straight piece rate
system and Taylor's Differential piece rate system from the following
particulars.
Normal rate per hour =Rs. 18.00
Standard time per unit = 10 seconds
Differentials to be applied:
80% of piece rate below standard
120% of piece rate at or above standard
Worker Mithilesh produced 2700 units per day and worker Sailesh produced
3200 units per day,
Per day = 8 hours
Solution:

Standard production 10 seconds = 1 unit

Standard production one minute 60 seconds / 10 seconds = 6 units

standard production per hour (60 minutes)

= 6 units x 60 minutes =360 units

standard production per day of 8 hours

= 360 units x 8 hours =2880 units.

Normal rate per hour = Rs. 18.00

Normal piece rate = Rs. 18.00 / 360 units = 0.05 piece

Low piece rate = 5 paise x 80 / 100 x 0:04 paise

High piece rate = 5 paise x 120 / 100 x 0.06 paise

Earnings of worker Mithilesh:

a) Under straight piece rate system

Number of units produced x Rate per unit

= 2700 units x 0.05 paise =Rs. 135

b) Under Taylor's Differential piece rate system

= 2700 units x 0.04 paise =Rs. 108

Merrick's Differential Piece Rate System: It is a modified version of the

Taylor's scheme and is also known Multiple Piece Rate System. Workers
producing below die standard output are not penalised by the low piece rate.
This plan lays down three rates, one for the beginner, the second for die
developing workers and the third for die highly efficient workers.

a) Upto 83% of the standard output, the workers are paid at the ordinary
piece rate i.e., the lowest of the three rates.
b) Those, whose output exceeds $3% of the standard but does not reach
100%, axe paid at 110%of the ordinary piece rate.
c) Those whose output is 100% or above, get the highest rate which is 120%
of the ordinary piece rate.
Features of the scheme:

a) Up to 83% of the standard output, workers are paid at the on piece rate.
b) 83% to 100 % of the standard output, at 110% ordinary piece rate and
c) above 100% at 120% of the ordinary rate.

The earnings increase with increased efficiency, performance above the

standard will be rewarded by more than one higher differential piece rate. This
plan is effective for high-level production.

Problem: 8

Calculate the earnings of worker. Sundar, Sankar, Mani straight piece rate
system and Merrick multiple piece rate system the following particulars:

Normal rate per hour = Rs. 18

Output per day of hours is as follows:

Worker Sundar = 380 units.

Worker Sankar = 460 units.

Worker Mani = 540 units.

Solution:

Standard output per minute = 1 unit

Standard output per hour 1 x 60 minutes = 60 units.

Standard output per day of 8 hours = 60 units x 8 hours = 480 units

Normal rate per hour = Rs. 18.00

Normal Output per hour = 60 units.

Normal piece rate = 18.00 /60 units = 0.30 paise.

Calculation of Efficiency of workers:

% of Efficiency = Actual output / Standard Output x 100

Worker Sundar output per day 380 units.

Sundar's Efficiency = 380 units/ 480 units x 100 = 79%

Worker Sankar output per day 460 units

Sankar‘s efficiency = 460 units / 480units x 100 = 96%

Worker Mani output per day 540 units

Mani‘s Efficiency = 540 units / 480 units x 100 = 112.5 %

Earnings of Worker Sundar

Under Straight piece rate system:

380 units x 0.30 paise = Rs. 114

Under Merrick Multiple system:

380 units x 0.30=Rs. 114

Worker Sankar Earnings:

Under Straight piece rate:

460 units x 0.30 = Rs. 138

Under Merrick System:

460 x 0.33paise = Rs. 151.80

Worker Mani Earnings:

Under Straight piece rate:

540 units x 0,30 = Rs. 162.

Under Merrick System:

540 units x 0.36 paise =Rs. 194.40

Emerson's Efficiency Plan: This is an American scheme which combines

guaranteed fixed day wage with a differential piece rate. This system guarantees
time wages even to those whose output is below standard. Standard output is
fixed to represent 100% efficiency. A bonus is paid to a worker whose output
exceeds 66 2/3 % of the standard output. The bonus increases gradually at a
stated rate so that at 100% efficiency bonus would rise to 20%. Beyond this,
bonus would increase at l% of basic rate for every 1% increase in output.
Features of the scheme:

A certain standard output is fixed for a worker for each job. A worker who is
able to attain two - thirds of standard output is deemed a normal worker and
gets only guaranteed time rate. A worker who goes above the two-thirds
standard, is paid, in addition to his normal wage, a bonus the rate of which
increases as the extent of the excess of the output over two-thirds standard
increases.

Advantages:

1) The system is simple to understand and easy calculation. It provides

incentives for beginners also.
2) The disparity in wages among workers under the other systems is also
reduced here.
3) It provides security to the worker as day wage is guaranteed.

Disadvantages:

The incentive is quite small to attract very different and ambitious workers.

Problem: 9

Standard Output per day of 8 hours is 32 units. Actual output of a

workers for 8 hours is 40 unite Rate per hour is Rs.8. Calculate wages payable
for worker according to the Emerson's Efficiency plan.
Level of Efficiency = Actual Output / Standard Output x 100.
= 40 units / 32 units x 100 = 125% efficiency
20% Bonus = 25% Bonus
= Rs. 64.00 3-31
Bonus is payable 45% efficiency
(i.e) upto 100% Efficiency = 20% Bonus
Above 100% Efficiency = 25% Bonus
25% [125 - 100%]
Time wages for 8 hours of
Rs.8 per hour (8x8) = Rs. 64.00
45 / 100 x 64.00 = Rs. 28.80
Total Earnings payable to worker = Rs. 92.80

Gand's Task and Bonus Plan: This plan is a combination of time rate, piece
rate and bonus. It guarantees wages according to time basis. A high standard is
set and if this standard is achieved or exceeded, payment is made at a high piece
rate. This piece rate is so fixed so as to include a bonus of 20% over the time
rate of the worker. A worker who is not able to achieve the-standard or whose
efficiency is below 100%, gets wages at time rate and is not entitled to bonus.

The main feature as of this system are:

1. It is a combination of time rate, differential piece rate and bonus.

2. Day wages are guaranteed.
3. A standard task is set, on which a bonus may be earned if completed
within the standard time.
4. The bonus is a fixed percentage on the time taken.
5. A worker who attains the standard is paid a bonus, usually of 20% on his
time rate. Where he goes above the standard he gets at a higher piece rate
oh the worker's whole output.

Thus under this system, both time and piece rates are set and normal wages
are paid at the time rate or piece rate, Whichever is higher, in addition, a bonus
is also given if the work is completed within standard time.

Advantages:

1. It is simple to understand and easy to operate.

2. It provides an incentive to the efficient worker as well as security for less
efficient by guaranteeing the time rate.
3. It is useful where the overheads are very high.
4. It encourages better supervision and planning as under this scheme,
foreman also receives bonus.

Disadvantages: Guaranteed time rate Wage may act as a disinc for improved
production in case rate is fixed at a high level.

Bedaux Point Premium System:

This is premium bonus system in which standard tin determined by work study,
the time unit being the minute. A mi allowed time is termed as Bedaux point or
"B", sixty units make in hour's work, and the number of Bedaux points being
determined in respect of each job.

Example:
Allowed time for a job = 600 B's
No. of points earned = 720
Time rate = 1.80 per hour
Points earned = 720
Points allowed = 600
No. of points saved = 120

Time rate per minute is Re. 0.03 i.e., Rs. 1.80 / 60

Wages at time rate for 600 points = Rs. 18.00
Bonus = 75% of points saved at 3 paise per minute
= 120 x 75% x Re.0.03=Rs. 2.70
Total wages = 18.00 + 2.70=20.70.

Problem:10
Standard time required for a job is 30 hours.
Actual time taken for a job = 24 hours.
Rate per hour = Rs. 10 per hour.
Calculate worker earnings under Bedeaux point Premium plan:

Solution:

Standard time - 30 hours; one B = 1 minute

30 hours = 30 x 60 minutes = 1800 minutes

1800 B's = 1800 minutes

Actual time 24 hours

24 hours = 24 x 60 minutes = 1440 minutes

1440 B's =1440 minutes

Time saved = Standard minutes - Actual minutes

= 1800 - 1440 = 360 minutes

360 minutes = 6 hours

Bonus payable to worker 3/4 of tune saved

= 6 hours x ¾ = 4 ½ hours.

Calculation of Total Earnings:

Time wages 24 hours x Rs.10 = 240

Add: bonus 41/2 hours x Rs.10 = 45

Total Earnings = 285

Group Bonus Scheme

Bonus may be given individually to every worker or collectively to a

group of workers. When it is given collectively, it is known as group bonus
scheme. It is a scheme in which the bonus is calculated on the collective
production of a group of interdependent workers and distributed among the
individual members of the group on some agreed basis.

This system is employed in cases where the output of individual workers

cannot be measured and the ultimate production is dependent on the collective
efforts of a group of workers as a whole.

Group system of payment encourages co-operation and team work among

the workers. Supervision work is reduced.

Advantages:

1. It infuses co-operation and team-work among the workers.

2. Absenteeism is often reduced because an absent member weakens the
group and most workers do not like to let down their team
3. This system requires less clerical work.
4. Supervision work is reduced.
5. Indirect workers can also be included in the scheme.

Disadvantages:

1. This system is unfair to hard-working and efficient workers of the group

as an efficient worker is penalised for in efficiency of other members of
the group.
2. It is difficult to get workers acceptance of the scheme.
3. There may be some practical difficulties regarding fixing the amount of
incentive and how it is to be distributed to individual workers.
4. The amount paid as bonus to each member of the group is as small and
that may not prove to be an effective incentive.

ESSENTIALS OF A GOOD WAGE SYSTEM

Simplicity: The method should be simple and easy to understand by workers so

that workers so that workers can calculate their own wages.
Minimum wage: A good system should guarantee minimum wage to give
workers a sense of security.

Incentive: The scheme of payment should provide sufficient incentive to

workers to work more taking into account the quality of production.

Flexibility: The system should be flexible enough so that changes may be

introduced, if necessary.

Satisfaction: The system should be satisfactory from the point of view of both
worker and the employer.

Law labour turnover and absenteeism: A good system should reduce labour
turnover and absenteeism.

Economical: It should be economical in operation.

Approval of Trade Union: It should be acceptable to trade union.

Fringe benefits:

Fringe Benefits ( Individual Monetary benefits):

Dearness Allowance

Sick Pay

Provident Fund

Employee's State Insurance

Maternity Leave Pay

Night Shift Allowance

Holiday Pay

Gratuity; Pension

Annual Bonus

Fringe Benefits ( Group Non-Monetary):

Subsidised Conveyance
Subsidised Canteen Facilities.

Medical Care

Free Housing.

CONTROL OVER LABOUR COSTS

Labour control is primarily concerned with the proper employment and

efficient utilization of labour force. Labour cost control aims at the control of
the labour cost per unit-of production and not at the reduction of wage rates of
workmen.

1. Control over labour cost can be exercised in the fallowing manner:

2. Production Planning: Production should be so planned as to have the
maximum and rational utilization of labour. Production plarmmg consists
of the product and process engineering, programming, routing and
direction.
3. Recruitment of Efficient Workers: Proper selection and training of
workers and placing them to the jobs for which they are best suited helps
in achieving the optimum output and minimum labpur cost per unit.
4. Wage Policy: Wage plan including incentive scheme should be studied to
find out how far the remuneration paid on the basis of incentive plan
matches with increased production.
5. Setting up of Standards: With the help of work study time study and
motion study, standards are set for production operations.
6. Labour Budgets: Labour budgets are also used for control over labour
costs.
7. Labour Performance Reports: Management can also exercise control on
labour and labour cost with the help of periodical labour utilization and
labour efficiency reports.

Direct Expenses. (Chargeable Expenses)

A chargeable expense is an expense which is specifically incurred in connection

with the execution of a particular job or work order. If includes all direct
expenses other than those-of direct material and direct labour. It forms a part of
prime cost of the product.
Examples for chargeable expenses are:
1. Hire of special plant and machinery required for a. particular job product
or process.
2. Cost of patents and royalties.
3. Cost of special layout designs or drawings.
4. Experimental costs and expenditure in connection with models and pilot
schemes.
5. Fees paid to architects surveyors and other consultants in connection with
a job.
Chargeable expense is that which can be allocated directly to a cost unit. But
overhead expenses cannot be allocated to cost units. These have to be
apportioned or absorbed by cost centres or cost units.

Questions

1. What do you understand by Time-keeping & Time-booking ?

2. What is labour turnover? How is it measured? Explain causes of labour
turnover. How to control it ?
3. What is Idle time ? What are the causes of Idle time ?
4. Write short notes on (a) Halsey Plan (b) Rowan Plan (c) Taylor
differential Piece rate system.
5. Explain Group bonus system?
6. State the essentials of good incentive scheme ?

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