Cambrige AS and A Level Accounting Notes (9706): Costing for labour: Remuneration methods

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  • Now that we have examined the basics of labour within organisations
  • It is time to look at remuneration methods
  • There are three basic remuneration methods:
    1. Piece Rate
    2. Time Rate
    3. Bonus Scheme
  • Remuneration methods are simply schemes used to compensate workers
  • For each method you are supposed to know the definition, characteristics and calculations involved

Piece Work/ Piece Rate remuneration method

  • Under this method workers are paid according to the output they produce
  • Payment is in proportion to output i.e. the more the workers produce the more they earn
  • This is an example of performance related pay
  • The method is meant to motivate workers to produce more
  • This is an especially ideal method for paying Direct Labour employees i.e. employees involved in the actual production process
  • Usually a piece rate remuneration method pays a fixed rate per each unit produced
  • In some cases however the rate might be increased when output exceeds a certain level
  • There are thus two types of piece rate systems:
    1. Straight piecework systems the same rate per unit is paid no matter how many units are produced
    2. Differential piecework systems-this system is the most widely used, it involves different piece rates for different levels of production
  • \text{Total wages = (units produced x rate of pay per unit)}
  • For example Bob is a carpenter for United Furnishers and earns $50 for every dining room table and four chair set he makes
  • How much will he earn in the month of July if he makes 50 of these?
  • \text{50×50}
  • $2 500
  • The piece rate cannot be used in cases where employees have no control over their output
  • Or in cases where output is not measurable for example supervisors

Time related systems/ Time Rate

  • This is one of the most popular forms of remuneration
  • Under time rate workers are paid according to time (usually measured in hours) worked
  • A fixed rate is paid for each hour (unit of time) worked
  • Employees are paid a basic rate per hour, day, week or month
  • Unlike piece rate systems time rate systems do not really motivate workers to improve productivity (units produced) as a result it is often necessary to closely supervise them
  • The time rate system thus results in the business paying for idle labour i.e. hours during which workers do not work
  • This is often unavoidable for example during times when the machines are down for repairs there would be idle time as workers wait for the machines to come back up
  • Usually workers have to work for a stipulated number of hours in accordance with labour laws of each country/state
  • Any hours worked beyond this are called overtime
  • This leads two rates at which time rate workers can be compensated:
  • All work conducted by workers during a normal day is paid at the usual/normal rate
  • All work done during overtime is usually paid at an overtime rate
  • The amount due to each employee can be found using the formula:
  • \text{Total wages = ( }{H}_{w}\text{x}{R}_{n})+({H}_{o}\text{x}{R}_{0})
  • Hw total hours worked
  • Rn-basic rate of pay per hour
  • Ho-overtime hours worked
  • Ro– overtime premium rate
  • For example Tsitsi works as preschool teacher and earns $8/per hour during normal hours and $12 per hour during overtime
  • In the month of October she worked 160 normal time hours plus 40 overtime hours which occurred during educational trips with the pre-schoolers
  • How much did she get paid for the amount of October?
  • \text{(160 x 8)+(40 x 12)}
  • $1 760

Bonus schemes

  • These are various compensation method meant to spur workers to achieve and exceed targets
  • Bonus schemes vary extensively but they all have one thing in common
  • A worker is paid a standard wage according to set criteria but receives additional payment if set targets are achieved and/or exceeded
  • Bonus schemes are also known as incentive schemes
  • Once example of a bonus schemes are the premium bonus plans
  • Under these schemes employers and employees agree on standard time to complete a given task
  • Workers are paid a basic time rate plus receive additional payment if they complete the task in less time than the standard time
  • This is known as time saved i.e. when Time taken to complete the task is less than standard time:
  • \text{Time saved = Standard Time-Time taken}
  • Obviously when time taken is more than standard time no bonus/incentive is paid
  • Examples of premium bonus plans include Halsey and Rowan schemes
  • Halsey-the employee receives 50% of the time saved i.e.
  • \text{Bonus = }\dfrac{\text{Standard Time-Time Taken}}{\text{2}}\text{Time Rate}
  • For example:
  • Robert works in a factory where he makes chairs, he is supposed to complete making a chair every 2 hours
  • Robert is paid $5 for each hour he works
  • For the month of January Robert makes 100 chairs in 150 hours
  • How much wages will he earn for that month?
  • First there is the basic pay plus his Bonus
  • \text{Basic Pay = 150 x 5}
  • $750
  • The Bonus
  • \text{Bonus = }\dfrac{\text{200-150}}{\text{2}}\text{50-0}
  • $125
  • So in January Robert earned $875 in wages i.e. (750+125)
  • With Rowan  the proportion paid to the employee is based on the ratio of time taken to standard time
  • \text{Bonus = }\dfrac{\text{Time Taken}}{\text{Standard Time}}\text{Time Rate x Time Saved }
  • Using the above example Robert would earn:
  • $750 basic pay plus
  • \text{Bonus = }\dfrac{\text{150}}{\text{200}}\text{5 x 50 }
  • $187.50
  • So Robert would earn $987.50
  • Measure day workis another incentive payment method
  • Here the time allowed (standard time to finish a given task) is based on the employee’s performance
  • If the employee improves his performance s/he is paid an agreed higher time rate
  • For example if Robert took 2 hours to complete a chair he can enter an agreement with his employers where he is paid at a rate of say $7/hour instead of the usual $5/hour if he completes each chair in under 2 hours
  • The reality is there are many incentive schemes out there if you encounter one that is not shown herein the exam just use your mathematical skills and come up with a formula to calculate the bonus

NB

  • Labour laws often require that employees earn a certain minimum wage
  • To comply with this most businesses pay their employees a fixed minimum wage and use the above methods to motivate employees
  • For example: Basic Fixed Pay+Time Rate or Basic Fixed Pay+Piece Rate

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