Piece Rate

• This when a payment is made to a worker for each unit that the worker has produced
• Workers wages depend on the quantity they have produced
• It does not consider the time spent by workers in producing each unit
• Piece rate system is the method of remunerating the workers according to the number of unit produced or job completed.
• It  pays wages at a fixed piece rate for each unit of output produced
• The wages payable to the employee are calculated using the formula:
• \text{Wages} = \text{Output x Piece Rate}
• The formula can also be expressed as:
• \text{Wages} = \text{Units produced x Piece Rate}

Advantages

• It encourages workers to increase output
• Encourages greater effort and faster working
• Reduces idle time
• Gives incentives to workers to find faster means of accomplishing given tasks/jobs
• It makes costing easier as the labour production cost per unit is known in advance
• Makes financial planning easier
• It requires less supervision thus reducing the cost of supervision
• Reduces fixed cost per unit due to higher output

Disadvantages

• Emphasises quantity over quality
• It is difficult/impossible to calculate when workers do not have a measurable output e.g. teachers and security guards
• It is not suitable where workers have no control over the pace of production e.g. on the assembly line a fast worker may be held back by his/her slower colleagues
• Increases quality inspection costs
• Might result in products of different standards being produced by various workers
• Can adversely/negatively affect worker’s health

To access more topics go to the O Level Business Notes page.