### 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
• 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

To access more topics go to the Cambridge AS/A level page

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