Labour
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Dr. Joseph Anbarasu
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12/18/2008
LABOUR 1. Why should the labour cost be controlled? The second major element of cost in manufacturing concerns is labour cost. Workers contribute to the concerns through their time and energy. This needs adequate compensation to them. The compensation is known as ‘wages’. Labour consists of a lot different individuals with a different mental and physical capacity. Proper control of labour is, therefore, one of the important tasks of the management.
2. What is the purpose of time keeping? The objective of time keeping is to provide information for the 1. Preparation of pay rolls 2. Ascertainment of labour cost per unit of product 3. Allocation of overhead cost based on wages 4. Fulfillment of statutory requirements 5. Control of labour cost 6. Determination of productivity of labour in the factory and 7. Promotion of punctuality and order among the workers.
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3. Explain the components of good control of labour cost. Proper control over labour cost involves the following: a. Proper system for recruitment, selection, training and placement of workers to jobs b. Right methods of wage payment c. Right and healthy working conditions; and d. Innovative methods of assuring efficient labour performance 4. Describe the two forms of labour cost. Direct Labour Cost: Direct labour refers to labour engaged directly in the production of a product. Direct labour cost is the cost of all labour expended in converting raw materials into manufactured articles. Such direct costs of labour can easily be identified and allocated to cost units. It varies directly with the volume of output. It can easily ascertained and controlled because of its close proximity to the output. Wages paid to direct labour are known as ‘direct labour cost’. It forms part of prime cost. Indirect Labour Cost: It is the remuneration paid to those workers, who are not directly engaged in converting raw materials into finished products. Such costs cannot be conveniently identified with a particular product. Supervisors, inspectors, work auditors, instructors, watchmen are examples of indirect workers. Indirect labour cost is included in overheads. 5. What do you mean by time keeping? Time Keeping:
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Time keeping is a system of recording the time of arrival and departure of workers. Arrival time and departure times of workers are recorded for attendance purpose and for calculation of wages. It is based on this record that their total entitlement for work under time rate system is determined. The process of time keeping is to maintain an accurate record of time of every worker when he comes in and goes out of the factory. Regular time and overtime are based on this record. 6. Bring out the various methods of recording the attendance of workers or time keeping. There are three methods of time keeping of workers. i)
Handwritten Method: Attendance of each worker is recorded in the register maintained for timekeeping. The register consists of number of columns for each worker. Entries in the arrival and departure columns are made by the foreman. Literate workers generally sign against their entries to avoid dispute later. The method is simple and cheap. The possibilities of fake attendance or fraudulent marking of attendance may not be ruled out under this method.
ii)
Token or disc Method: An identification number or token number is allotted to each worker. The number is suitably painted or engraved on a round metal token with a hole in it. All such tokens are hung up in a serial order on a board at the factory gate. At the time of arrival, the worker collects his token from the board and drops in a box kept for the purpose at the factory gate. After 10 or 15 minutes of the normal time, the box is removed by the timekeeper. Those arrived late have to hand over their tokens personally at the time office so that exact time of their arrival can be noted. Based on the tokens dropped in the box, entries regarding attendance of workers are made in the Time Book. The time book is passed on to the wage section for payroll accounting. This method is no foolproof as a worker may try to get his absentee friends marked present by dropping their tokens in the box.
iii)
Time recording clocks: This is a mechanical method of recording attendance. It proves to be useful when the number of workers is large. The time of arrival and departure of a worker is recorded with the help of clock recorders. Each worker has a clock card, which bears his identification number. These cards are kept in a rack in a serial order. When workers report for duties, they take out their cards from rack one, get them punched by the Time Recording Clock maintained at the factory gate, and place them in rack two. When they leave, they again get their cards punched with time of departure and put them back in rack one. The method is quick, safe, scientific, reliable and accurate method of time keeping.
7. Is time keeping significant? Give reasons. Yes, time keeping is a significant aspect. The following are the reasons for time keeping.
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i) ii) iii) iv) v) vi) vii)
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It ensures discipline among workers It is an in-built system of ensuring punctuality of workers It boosts morale of personnel It is an effective method of data collection for statistical purpose It helps in checking idle time and increases output by sticking on to production schedule It assists computation of labour cost per unit It ensures a productive environment in the undertakings
8. What do you mean by time booking? Apart from recording worker’s time of arrival and departure, it is necessary to record the particulars of work done by workers and time spent on each job or process. Recording of worker’s time spent on different jobs is known as time booking. In other words, time booking is a method of recording time devoted by a worker on a job, order or process. 9. What are the objectives of time booking? The objectives of time booking are as follows: a. It ensures that the time spent by the worker in the factory has been properly utilised b. It ascertains the labour cost of work done c. It provides a basis for allocation of overheads d. It identifies the idle time so as to control it e. It checks wastage of time by the worker after he enters the factory 10. Describe various methods of time booking. The following are the common methods of time booking Job Cards: Job tickets/cards are generally used for recording the time spent on each job order. A card is prepared for each job. Then it is allotted to the worker who takes up that particular job. The worker makes an entry in this card the time of starting as well as finishing the job. The worker submits his work along with his job card after the completion of his job work. He is issued another job card for the next job. Therefore, only one job card is issued to a worker at a time. Such job cards serve the purpose of authorising the worker to carry out the job mentioned therein. Figure 3.1 shows a model job card. Figure 3.1 Job Card/Ticket JOB CARD Worker's No------
Job No--------
Worker's Name------
Date------
Department----------
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Machine No---------
Starting Time--------
Operation No------
Finishing Time--------
Time Allowed-----------
Hours Taken-------
Job Description
Hours
Workman------------
Rate (Rs)
Amount (Rs.)
Forman------------
Cost Clerk----------
Daily Time Sheet: Daily time sheet is a daily record of the nature of work done by an individual worker. It also includes the time spent on each job by him. Entry may be made by either the worker himself or officials of the time office. The time sheet will be sent to the foreman everyday for his signature. Then it will be forwarded to the cost office. This is a simple method of recording work time. Daily Time Sheets (also known as time cards) include details relating to Name of the worker Work Order Number Description of Work Quantity Produced Time of starting and finishing the job Total hours consumed on the job Rate of Wages per hour, and Amount of wages
Weekly Time Sheet: The procedure adopted for time booking on time sheets is the same as for daily time sheets. However, the weekly time sheet gives particulars of work done and the time spent on each job for a full week. The difficulty of consolidation is overcome and the total hours spent during the work can be compared and reconciled with the attendance time for the same week.
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Figure 3.2 Daily Time Sheet
DAILY TIME SHEET Name: Cost Centre Job Order No.
Work Done
Clock No Date Time
On
Worker's Signature
Hours
Off
Ordinary
Standard Hours
Rate
Cost
Overtime
Foreman's Signature
Cost Office
11. What is the role of payroll department in an undertaking? The payroll accounting is maintained by each organisation with the help of payroll department. The payroll department has an important task of computation of wages payable to workers. The important functions of payroll department in the accounting and control of labour costs may be listed as follows: a. b. c. d. e.
It It It It It
records hours worked and wages earned by different workers. makes payroll deduction. determines the net amount due. maintains a permanent earning records of every worker. provides the treasurer’s office with necessary records to make payments.
12. What do you mean by wage sheet or payroll sheet? Explain the purpose for which it is prepared. Wage Sheet: The main task of payroll department is to prepare payroll sheet. It is commonly known as wage sheet. It is a consolidated statement showing the gross wages, deductions and net wages payable to workers. Time or clock cards are the basis for the preparation of wage sheets. Departmental wages sheets are summarised in a master wage sheet, which forms the basis for the preparation of the payroll voucher entry in the general ledger in cost control accounts. Purpose of Payroll Accounting: Payroll accounting based on payroll sheet helps an undertaking in a) providing relevant data for cost control;
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b) determining the net amount of wages; c) understanding the wage commitment in a week or a month of different departments; d) minimizing the occurrence of errors and frauds in wage payments; and e) Preparing pay slips for each worker. 13. Describe about idle time. Idle time represents time lost by time workers. When workers are paid based on time, there may be some difference between the time paid for and the time actually spent on production. The difference is known as ‘idle time’. Idle time refers to the time for which they are paid but no production is obtained. This is a wastage, which needs some effective control. Idle time is categorised into two. They are (a) normal idle time due to unavoidable factors and (b) abnormal idle time caused by avoidable factors. 14. Give major causes of idle time with examples. Idle time may occur due to the following reasons: a) Administrative Cause: Idle time is sometimes arising out of administrative decisions. There exists surplus capacity of plant and machinery in some undertakings due to management decisions. This will lead to idle time. During the period of depression, the management may abandon some products from the product line temporarily. The regular workers are not sent out during these period. This is because the management is not willing to lose well-trained workers. Such idle time arises out of abnormal situations, which is generally not controllable. b) Productive Cause: Idle time is arising out of many productive causes. Machine breakdown, power failures, waiting for tools or raw materials, delay due to work order and delay due to instructions are some causes brought under the category. Idle time arising out of productive causes is usually controllable by proper planning, strict supervision and proper maintenance of plant and machinery. c) Economic Cause: Fall in the demand for your product is one of the major economic reasons, which gives rise to idle time. This may be due to severe competition or seasonal character of your product. In such cases, it is not possible to get rid of workers during slack period. Such surplus labour force is usually utilized for doing some other jobs and if such complimentary jobs cannot be found, there will be some idle time, which is beyond control. 15. How would you treat the idle time in cost accounting? Normal Idle Time: This is wastage of labour time. Normal idle time cannot be totally avoided. Therefore, it is borne by the employer. For example, an employee takes time to reach from the entrance gate to the shop floor, where he works. The cost of normal idle time may be treated in two ways. They are as follows:
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a. It is generally charged to factory overhead. Idle time is classified according to causes and each type of idle time. It is allotted a separate standing order number. This will to an effective control. b. Wage rate may be inflated. It is because to make allowance for normal loss of labour time. Example 3.1 The production time of a worker is only 7 hours during an 8 hours day. What is the inflated wage rate if he is paid Rs.10 per hour? The inflated wage rate is Rs. (8/7) X Rs.10 = Rs.11.43
Abnormal Idle Time: Abnormal idle time arises due to reasons in no way connected with usual routine manufacture and for which management must pay. For example, time lost due to strikes and lockouts, time lost in waiting for raw material etc. Poor planning, inefficient executions are some reasons for occurrence of abnormal idle time. It is generally adjusted through the costing profit and loss account. 16. Explain the term ‘overtime’. What are the disadvantages of overtime? Overtime: It refers to a work done by an employee beyond normal working hours. The Factories Act lays down the rules for normal working hour. Any employee working for more than 9 hours per day or more than 48 hours per week is entitled to overtime payment. The Factories Act prescribes that the normal wage rate is to be doubled to compensate the overtime work. Therefore, the overtime work is a costly affair, which should be avoided. Disadvantages of having overtime work: (a) (b) (c) (d) (e) (f)
It leads to excessive labour cost Diminishing labour efficiency gives rise to deteriorating labour productivity It has a bad effect on the health of workers Excessive use of plant and machinery gives rise to high wear and tear There will be escalation of factory overhead. e.g., lighting etc. Widespread discontent among workers due to uneven distribution of overtime is another demerit.
17. Explain the treatment of overtime with examples The treatment of overtime cost in cost accounting depends upon the circumstances necessitating overtime work. Additional payment for overtime should be charged as follows: Nature of Overtime 1. Due to customer’s request to complete a job with in a specified period
Charged to JOB directly
2. Due to general pressure of work
GENERAL OVERHEAD
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3. Due to delayed schedule 4. Due to loss of time for unavoidable reasons 5. Due to seasonal rush and peak load
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DEPARTMENT COSTING PROFIT AND LOSS ACCOUNT PRIME COST
18. Describe the term ‘Labour Turnover’. How is it measured? It is a common thing that workers in an undertaking leave the employment and new workers join in place of those leaving. The change in work force is known as labour turnover.
Labour turnover is defined as the rate of change in the composition of the labour force in the organisation.
Though labour turnover is a normal process, the frequent changes in the composition of labour affect the continuity as well as the productivity of the organisation. Labour turnover can be measured by two methods. a. Separation method: This method takes into account only those workers who have left during a particular period. The formula is: No. of workers left during a period Labour Turnover Rate =
X 100 Average no. of workers during the period
b. Replacement method: This method considers only those workers who join in place of those who have left. Its formula is: No. of workers replaced during a period Labour Turnover Rate =
X 100 Average no. of workers during the period
If new workers are engaged for expansion programme or any other such purpose, they are not considered for this composition. c. Flux method: This method shows the total change in the composition of labour force due to separation and additions of workers. The formula is: This method considers only those workers who join in place of those who have left. Its formula is: No. of workers left + No. of workers replaced Labour Turnover Rate =
X 100 Average no. of workers during the period
Megaton Co. has following information:
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Example 3.2
Number of Number of Number of Number of Number of
Rupees 1000 1200 70 20 80
workers on 1 Jan 2001 workers on 31 Dec 2001 workers resigned workers discharged replacement
Calculate labour turnover Solution 3.2
Average Number of workers Number of workers left 1. Separation Rate 2. Replacement Rate 3. Flux Rate 19. What are the causes of labour turnover?
Formula (1000+1200)/2 = (70+20) = (90/1100)/100 = (80/1100)/100 = ((90+80)/1100)/100=
1100 90 8.18% 7.27% 15.45%
Factors that cause labour turnover may be grouped into two categories: a. Avoidable Causes: This includes i) ii) iii) iv) v) vi)
low wages and allowances Unhappy relations with co-workers and supervisors Unsatisfactory working conditions Trade union rivalry Lack of medical facilities, transport facilities and so on Inadequate job security and retirement benefits
b. Unavoidable Causes: i) ii) iii) iv) v) vi)
Personal dislike for job or environment Death or retirement Illness or accident Domestic disputes Discharge on disciplinary grounds Marriage.
20. What are the effects of labour turnover? A high rate of labour turnover means the workers often leave. They do not stay for long. Old workers generally possess more experience than new workers possess. Replacement of workers, therefore, declines the overall efficiency. The gap between the old and the new labour often brings down both quality and quantity of output. Undue labour turnover gives rise to an additional cost to the organisation. These additional costs may be broadly classified into two broad categories – (I) preventive, and (ii) Replacement costs. (a) Preventive Costs:
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The costs, which are incurred to keep the work force satisfied, are known as preventive costs. These include cost of personnel management, cost of welfare activities and services, cost of medical services, pension schemes, extra bonus and other perquisites. (b) Replacement Costs: These costs include all such losses and wastage arising because of the inexperienced new labour force replacing the existing experienced group. These include cost of recruitment of new employees, cost of training new workers, loss of output, loss due to inefficiency of new workers, cost of accidents and cost of scrap and defective work of new workers. 21. How do you control labour turnover? Labour turnover is expensive. It should be minimised because it results in increased cost of production. Some of the steps are to be initiated by the management to minimize labour turnover. They are as follows: a. Institute a proper system to redress the grievances of employees b. Create congenial atmosphere in the factory c. Provide adequate welfare facilities to the workers d. Improve workers’ morale e. Ensure workers’ participation in management f. Introduce a suitable policy of promotion and transfers and g. Evolve a sound system of recruitment and training. 22. Describe the requisites of a good system of labour remuneration. The term ‘remuneration’ refers to the total monetary earnings of employees. It includes wages according to time or piece basis and other financial incentives. There are various methods of remunerating labour. Each method has its merits and demerits. However, a good method of wage payment should (a) produce the best quality and quantity of work (b) be satisfactory to both employer and employee (c) be clearly defined and intelligible to workers (d) be easy and simple (e) guarantee a minimum wage for the time devoted by the worker (f) ensure compensation to workers in case of power failure, machine break-down for which he is not responsible (g) reduce labour turnover and absenteeism (h) be flexible (i) avoid disparity of pay in similar level of operation 23. Explain and evaluate the time wage system? Wages are based on the amount of time spent by worker inside the factory. He may be paid on hourly basis, daily basis or monthly basis. Calculation of wages under this method of remuneration takes into account a. the time for which the workers are engaged on the job and b. the rate per unit of time fixed for payment. Example 3.3 A worker gets Rs. 15 per hour. He works for 8 hours per day. He has
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been present for duties on 25 days during the month. What is his wage for the month? Solution: His wage based on Time Rate will be: Rs.15X8X25=Rs.3000/Advantages of Time Rate System: (a) (b) (c) (d) (e) (f)
It offers a fixed minimum wage It ensures simple calculation It makes a stable and secure return to the workers It ensures quality, care and efficiency It promotes a sense of equality and unity among the workers It is an economical system in respect of wage administration, material use, plant operation and quality control. Disadvantages of Time method of wage payment: (a) (b) (c) (d)
It ignores the individual quality and quantity of output It reduces personal initiative to work faster It treats both efficient and inefficient workers at par It increases the cost of labour per unit because of the tendency to consume more time in finishing a job (e) It needs a close supervision to ensure continuity of operation
24. Explain and evaluate piece wage system A worker is paid a fixed amount per unit produced without any regard to the time taken under the piece rate system. The rate of payment under this method is related to the quantity of work done i.e., per unit of output, per article, per job or per commodity. The total units produced or manufactured by the worker during a period form the basis of computation of his wages for the period. Example 3.4 The rate of labour per chair is Rs. 80/- The worker has completed 20 chairs during a week. What is the wage of the worker? Solution: His wage based on piece rate will be: Rs. 80 X 20 = Rs.1600
Advantages of Piece Wage System: (a) The method provides a strong incentive because the remuneration is in direct proportion to the worker’s effort. (b) It simplifies costing because labour cost per unit is easily known in advance (c) The overhead per unit is reduced because of high production. (d) The piece rates are fixed after a careful time and motion study. Therefore, the system contributes a sound basis for production control. (e) Workers are self-motivated to maximise their income. Therefore, strict supervision is not required (f) The method is simple and is easily understood by the workers. Disadvantages of Piece Wage System: (a) It ignores quality of products in an effort to maximize output.
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(b) It destroys the long-term interest and continuity of engagement in the organisation of the workers. (c) It creates dissatisfaction among workers owing to disparity in wages. (d) It needs a continuous supervision over the quality of operation. (e) It enhances wastage of materials. (f) It declines the level of labour discipline. 25. What is the main purpose of incentive plans? Incentive plans attempt to combine the good points of both the systems. The primary purpose of an incentive plan is to induce a worker to produce more to earn a higher wage and at the same time to reduce unit costs. Producing more in the same period should result in higher pay for the worker naturally. It should result in a lower cost per unit for fixed factory overhead and for labour cost. 26. What are the different methods of remunerating labour? Explain any one of them in detail. Premium Bonus Plans: Premium Bonus Plans are known as Incentive Systems of wage payment. The system of wage payment under this plan aim at inducing workers to increased efficiency and greater output. Therefore, the plan is beneficial to both employer and employee. They combine the basic ideas of time and piece rate systems with an aim to avoid the demerits of these methods. They strike a balance between the two. The main features of most incentive plans are: (a) They combine both time and piece rate systems (b) The benefit of labour productivity goes to employer under time wage system and the benefit of piece rate system goes to workers. The benefit of premium bonus plan goes to both employer and employee. (c) They link payment to production either directly or indirectly (d) Time wages are guaranteed to all workers (e) They check the speed so as to that workers neither tend to slow down nor increase their speed (f) In addition to normal time wages, they ensure a bonus based on the time saved (1) Halsey Plan: F. A. Halsey, an American Engineer, evolved a method of incentive. The method recognises individual efficiency. It advocates a bonus based on time saved. A standard time is fixed for doing a job, by time and motion study. The main features of his plan are as follows: (a) Standard time and standard work are prescribed in advance. (b) Workers are paid for the actual time they take to finish a job as per the time rate (c) If an employee completes the job less than the standard time, he is entitled to receive a bonus for the time saved. (d) A bonus equal to 50% of the wage time saved is paid to the workers as a reward to his good work (e) Workers, who fail to achieve the standard, get the time wage The rate of bonus under the Halsey Premium Plan may change according to the policies of an undertaking. It may be 1/3 of the wages of time saved in some cases.
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Evaluation: It is a simple system to operate. It is easily understood by employees. It guarantees the hourly wages to workers for the actual time. However, fixation of standard time is a difficult process. Employees, however, feel that they do not get the full benefit for the time saved under this system. Method of Computation: Total Earnings of the worker (Time Rate X Time Taken) + (1/2 X Time Saved X Time Rate) Example 3.5
The standard time for producing 250 articles is 65 hours. The rate of wages is Rs. 2.50 per hour. The actual time taken for producing 250 articles is 55 hours. What are the earnings of the worker under Halsey plan? Solution 3.5
1. Total Earnings of the worker = (Time Rate X Time Taken) + (1/2 X Time Saved X Time Rate) (Rs. 2.50 X 55 hours) + (1/2 X 10 X Rs. 2.50) =Rs. 150 2. Effective Wage rate per hour = (150/55 hours)= Rs. 2.72
(2) Halsey Weir Plan: This method is more or less similar to the Halsey plan except that in Halsey Weir plan the bonus is equal to 30% of the time saved. (3) Rowan Premium Plan: Rowan plan is also similar to Halsey plan, except in the calculation of bonus. The main features of his plan are: (a) Workers receive remuneration based on actual time taken by them in completing the job. (b) Workers receive bonus for the time saved i.e., for the difference between the standard time and actual time. (c) Bonus is calculated as a proportion of the time wages as time saved bears to the standard time. The Rowan plan also guarantees wages on time basis. Its formula is: 1. Bonus = (Time Saved/Time allowed) X Time taken X Time rate 2. Earnings = (Time taken X Time rate) + Bonus Example 3.6 The standard time for producing 250 articles is 65 hours. The rate of
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wages is Rs. 2.50 per hour. The actual time taken for producing 250 articles is 55 hours. What are the earnings of the worker under Halsey plan? Solution 3.6
1. Bonus = (Time Saved/Time allowed) X Time taken X Time rate = (65-55/65) X 55 X Rs. 2.50 = Rs. 21.15 2. Earnings = (Time taken X Time rate) + Bonus = (55 X Rs. 2.50) + 21.15385 = Rs. 158.65 3. Effective Wage Rate per hour = Rs. 158.65/55 = Rs. 2.89 Evaluation: The merits and demerits of Rowan plan are similar to those of Halsey Plan. An additional advantage under Rowan plan is that the worker is not induced to rush through the work because if time saved is more than 50% of the standard time, the bonus will come down. However, the calculation of bonus is complicated. You may want to do sum, which comprises all the above models. Try to understand the example as follows first and then try to do sums found at the end of the chapters on your own. Example 3.7 The standard time allowed to complete a job is 100 hours and the hourly rate of wage payment is Rs. 5. The actual time taken by the worker to complete the job is 80 hours. Calculate the total wages of the worker based on (a) Time Rate (b) Piece Rate (c) Halsey Plan (d) Rowan Plan Solution 3.7 1. Time Rate = 80 units X Rs. 5 = Rs. 400 2. Piece Rate = 100 units X Rs. 5 =Rs. 500 3. Halsey Plan Basic Wages = 80 units X Rs. 5 = Rs. 400 Bonus =0.5 X 20 units X Rs. 5 = Rs. 50 Total = Rs. 450 4. Rowan Plan Basic Wages = 80 units X Rs. 5 Bonus = 0.2 X 80 units X Rs. 5 Total
= Rs. 400 = Rs. 80 = Rs. 480
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Comparative Earnings per Hour Rupees Units Rupees Time Rate = Total Cost/Actual units 400 80 5.00 Piece Rate = Total Cost/Actual units 500 80 6.25 Halsey Plan = Total Cost/Actual units 450 80 5.62 Rowan Plan = Total Cost/Actual units 480 80 6.00 27. What is meant by differential piece rate system? Explain various differential rate systems. There is another dimension of thought in respect of incentive methods apart from Halsey and Rowan premium plans. The differential piece rate system seeks to overcome the disadvantage by paying at different rates for different levels of efficiency reflected in the output. This system believes in payment of wages to labour based on piece rates varying with the level of efficiency of workers. In other words, a specific level of output is fixed as the standard. The level is stated in percentage. Then, different piece rates are determined for different levels of output below and above the standard. Some of the exponents of differential piece rate system are (a) Taylor (b) Gantt (c) Emerson (d) Merrick Taylor System: The main features of the system are: (1) It rewards efficient workers by an increased piece rate beyond a certain level of output (2) It distinguishes between workers through two types of piece rates: (a) a lower rate for sub-standard performance (e.g., 80% of piece rate), and (b) a higher rate for standard and above standard performance, which is much more than time wages (e.g., 120% of piece rate) (3) It acts as an additional incentive to expert workers towards maximisation of production; and (4) It ignores any form of guaranteed day wages Evaluation: It is simple to understand. It stimulates workers to achieve high rates of production. This method attracts only the efficient workers. However, it does not guarantee minimum wages and it affects the quality of work. Example 3.7 Ascertain the wages paid to workers Somu and Balu under Taylor’s Differential Piece Rate system: Standard time allowed = 40 units per hour Simple time rate wage = Rs. 4 per hour Differential piece rates to be applied: 75% of piece rate when below standard 125% of piece rate when at and above standard The workers have produced in a day of 8 hours as follows: Somu = 240 units; Balu = 400 units. (B.Com, Madras, March 1993)
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Solution 3.7 Calculations: 1. Standard time allowed = 40 units per hour 2. Time rate = Rs. 4 per hour 3. For 40 units (per hour), the time rate is Rs. 4 per hour 4. For 1 unit, the time rate is = (4/40) = Rs. 0.10 or 10 paise 5. Low price rate = 75% of price rate = Rs. (75 X 0.10)/100 = Rs. 0.075 6. High price rate = 125% of price rate = Rs. (125 X 0.10)/100 = Rs. 0.125 7. At 40 units per hour, standard output for 8 hours = 320 units
Answer 1. Somu produces 240 units. (Less than the standard 320). Hence, he receives at the lower piece rate. Hence, Somu gets = 240 units X 0.075 = Rs. 18.00 2. Balu produces 400 units. (More than the standard 320). Hence, he receives at the higher piece rate. Hence, Balu gets = 400 units X 0.125= Rs. 50.00 Gantt Task Bonus Plan: This is a combination of time and piece wage systems. A standard time is determined for achieving a particular task by time and motion study. Workers’ efficiency is ascertained by comparing the actual performance with the standard set. A worker may fail to achieve the standard. i.e., he takes more time to complete the standard task. His efficiency is treated to be below 100%. He receives wages at time rate for the time taken. Another worker may reach the standard. His efficiency is treated in par with 100%. He earns wages at the time rate plus a bonus of 20% on wages earned. Another worker may be above the standard. His efficiency is considered to be above 100%. He receives wages at piece rate plus bonus of 20% on wages earned. Evaluation: It is simple and easily understandable. It is a good system for beginners, who are guaranteed time wages. It offers good incentive to hard work. It stimulates production since foremen are paid bonus. However, the system does not encourage efficiency if workers feel contented with guaranteed time wages. It groups employees into competing categories, which is not good for organisational growth. Example 3.8 Standard rate Standard Hours for the job Bonus Worker A completes work in Worker B completes work in Worker C completes work in
Rs. 5 per hour 8 hours 20% of standard time 10 hours 8 hours 6 hours
Compare the earnings of A, B, and C under Gantt Task Bonus Plan.
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Solution 3.8 Wages for 10 hours at Rs. 5 per hour Wages for 8 hours at Rs. 5 per hour = Rs. 40 + 20% of 8 hours = 40 + 8 Wages for 6 hours = Wages for 8 hours at Rs. 5 per hour = Rs. 40 + 20% on 8 hours Earnings of Workers per Hour A’s earnings per hour = (Rs. 50/10) = B’s earnings per hour = (Rs. 48/8) = C’s earnings per hour = (Rs. 48/6) =
Rs. 50 Rs. 48 Rs. 48
Rs. 5 Rs. 6 Rs. 8
Emerson Efficiency Plan: It is also known as Emerson Empirical Plan. This plan guarantees time wages. It also ensures an arbitrary bonus at different levels of efficiency. The following are the basic premises of Emerson plan. (a) (b) (c) (d) (e)
A standard output is determined, which is equivalent to 100% If a worker completes his job in standard time, his efficiency is equivalent to 100% If he takes double time to complete the job, his efficiency is equivalent to 50% A worker receives hourly rate of wages without any bonus up to 662/3% efficiency. A worker receives time wages, with bonus at a stated ratio of time wages, beyond 662/3% efficiency. (f) The rate of bonus increases gradually with increase in the output; the scheme contains about 32 differentiating rates at different levels of efficiency
See the two tables presented and try to understand the mechanism behind the plan STANDARD TIME (20 hours) Time taken to complete the job Level of Efficiency 20 hours 100% 16 hours 125% 40 hours 50%
Level of Efficiency 662/3% 90% 100% Above 100% 125%
Emerson Wage Plan Bonus Rate Guaranteed time 10% 20% Time Wages + 20% Bonus + Wages for Time saved Time Wages + 20% Bonus + 25% of Time saved
Look at the Example 3.9 and see how bonus and wages are calculated under the Emerson Efficiency Plan. Example 3.9 Standard Output Worker W produces Worker X produces Worker Y produces Worker Z produces
6000 3600 4800 6000 7200
units units units units units
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Estimate the bonus rate for W, X, Z and Y under Emerson Efficiency System. Solution 3.9 Worker W X Y Z
Std. Output 6,000 6,000 6,000 6,000
Output 3600 4800 6000 7200
Efficiency Level 60% 80% 100% 120%
Payment Wage at time rate Daily wage at time rate + 4% bonus Time rate for hours worked + 20% bonus Day wage + 20% Bonus + 20% for time saved
Example 3.10 An employee working under a bonus scheme saves time in a job for which the standard time is 60 hours. Calculate the rate per hour worked and wages payable to a worker, if incentive bonus of 10% on the hourly rate is payable. The standard time (viz., 100% efficiency) is achieved. A further incentive bonus of 1% on hourly rate for each 1% in excess of that 100% efficiency is payable. Assume that normal rate of payment is Rs. 5 per hour. Actual time taken is 50 hours. (B. Com., Calicut, Oct 1987) Solution 3.10 Efficiency = (Standard time/Actual time) X 100 = (60/50) X 100 =120% Normal Wage Rate ----------------------------------------------------------------Incentive Bonus For 100% efficiency, 10% on hourly rate = (5/100) X 10 = -------------------For 20% extra efficiency, 1% on hourly rate = (5/100) X 20 (for each 1% in excess of 100% = ----------------------------------------------------------------Hourly Rate Wage payable : 50 hours @ Rs. 6.50
Rs. 5.00 Rs. 0.50 Rs. 1.00 Rs. 6.50 Rs. 325.00
Merrick Differential Piece Rate System: It is also known as ‘Multiple Piece Rate Method’. The method consists of three piece rates, unlike the Taylor’s system, which has only two piece rates. It is a reformed version of Taylor’s method. The basic premises of this scheme are a. Workers get ordinary piece rate up to 83% b. He gets 110% of ordinary piece rate between 83% and 100% and c. He earns 120% of ordinary piece rate above 120% Evaluation: There is no penalty for those who perform below the standard. It is beneficial to beginners and trainees. Reward will be higher for performers. However, it does not guarantee day wages to workers. The standards set may be too high to be reached by workers of normal efficiency. Example 3.11 Estimate the remuneration to be paid to a worker under Merrick Differential Piece Rate System. Standard Production per hour
6 units
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Normal rate per hour In an 8 hour day, units produced by a worker
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Rs. 1.20 32 units
(B. Com., Madras) Solution 3.11
Standard Production per hour Normal rate per hour Piece Rate = (1.20/6) Worker’s Efficiency Standard Output = ( 6 units X 8 hours) = Actual Output = Worker’s Efficiency = (32/48) X 100 =
6 units Rs. 1.20 Re. 0.20 48 units 32 units 66.66%
Answer Less than 83%, worker receives ordinary piece rate 32 X Re. 0.20
Rs. 6.40
28. Explain the group bonus scheme. Group Bonus Scheme: Individual incentive plans become inappropriate when production depends on the collective effort of a group. For example, group effort alone is required in case of construction industries like construction of bridges and roads. It is, therefore, necessary to evolve a bonus scheme for collective efficiency. The main features of the group bonus system are: a. Bonus is given for collective efficiency in production b. Bonus is payable to a group of workers for their joint output over and above the given target c. Members of the group gets their bonus based on agreement d. Production is considered to be a team effort governing the efficiency of performance e. The aim is to create a team spirit for increased production and lower cost per unit. 29. What is work study? Explain its components. Work Study: The study of the technical aspects of production is known as Work Study. The successful implementation of incentive systems of wage payment depends on work study. Work study ensures overall improvement by saving time, eliminating the loss of material, evolving new methods of work and lowering costs. It consists of method study and work measurement. Method Study: Method study is a technique adopted by work study engineers for making detailed investigation of the way in which production process is carried on. It covers the following aspects: (a) Examination of various tasks undertaken (b) The methods used in their performance
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(c) The sequence of operations (d) Plant and equipment available and (e) The factory layout. Method study aims at determining the right and effective way of doing jobs. It leads to effective use of resources and improved method of production. Work Measurement: It is known as time study and it follows motion study. Both of these techniques taken together are known as Work Measurement. Work measurement is a technique of establishing standard times after standardisation of methods and establishment of a measure for the work contents of jobs or operation. Motion Study: Motion study is the study of the movements of workers and machines in performing the operation. Its object is to identify and eliminate unnecessary and wasteful motions by workers and machines operated by them. It aims at making effective use of human resources. Time Study: Once the improved methods of performance are ensured, it is necessary to determine the time required finishing a particular task. This involves the use of time study in which the time study engineer, with the help of a stopwatch, records the time taken by an operator, under normal conditions. The time that is thus determined is known as the standard time or time allowed for a particular job. 30. What do you mean by job evaluation? What are the main characteristics of job evaluation? Job Evaluation: Job evaluation is a technique that attempts to show the relative worth of jobs in a reasonably objective manner. It is a systematic way of appraising the worth of each job in relation to other job. The application of this technique helps in determining the ranking of various jobs in some order of importance. For example, the job of an electrician and a machine operator may appear to be quite different. If they are of the same relative worth requiring similar intelligence, skill etc., both of these jobs should be paid at the same rate. The following characteristics of jobs are taken into account in job evaluation: a. Knowledge and skill b. Physical effort and Mental effort c. Responsibility for equipment handled d. Working conditions 31. List out the uses of job evaluation The uses of job evaluation are: 1. It tells us the wage value of each job 2. It makes wage administration simple by bringing uniformity in wage rates 3. It helps in finding right person for the right job 4. It ensures good industrial relations 5. It facilitates merit rating, selection, training, fixation of incentive pay, improvement in working conditions etc 32. What are the various methods of Job Evaluation?
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a. Ranking Method: Various jobs are ranked from the highest to the lowest in the order of their importance, responsibility, skill and effort required. Each job is compared with other job and valued. The wage rate of each job is based on job evaluation. The method is simple and easy to install. However, the method is not very effect because it cannot make accurate measurement of jobs. b. Point Rating Method: This method of job evaluation is based on points system. This method involves the breaking up each important job based on the factors such as skill, effort and responsibility. They are the input factors required in the performance of different jobs. Thereafter, jobs are grouped based on the identical input factors. Jobs involving different degrees of skill and effort and varying in responsibility are assigned weights on their relative importance. The total of weights gives us the value of each job and different wage rates are fixed for different jobs on these totals. c. Grading Method: Numbers of grades of jobs are pre-determined under this method. The existing jobs in the organisation are bases for pre-determination. Then all jobs are placed under these pre-determined grades. The skill, effort and responsibility associated with the existing job are the bases for grading. If grades are predetermined and jobs are placed in these grades, the various jobs in the same grade may be treated alike for the fixation of wages. This method is simple and inexpensive. It is widely used method as it is more accurate than the ranking method. 33. What do you mean by merit rating? What are its advantages? Merit Rating: While job evaluation is concerned with evaluating a job, merit rating determines the relative worth of each worker. Merit rating is a systematic evaluation of an employees merit in terms of the requirement of the job It seeks to rate an employee’s performance on records of performance. Its aim is to help the personnel department whether a worker should be rewarded by promotion or penalised by demotion. The following are the steps in merit rating: (a) Decide the desirable qualities to be found in workers; the attributes like attendance, sincerity, ability, initiative, accuracy, willingness etc., (b) Grade the qualities to reflect the importance of each (c) Use the point system; and (d) Add the points for each worker and rank them. Advantages of merit rating: (a) It determines the fair rates of pay to employees based on their rating (b) It can be used as a fair and scientific basis for transfer, promotion or discharge of employees (c) It highlights workers’ strong points and reveals their weak points (d) It increases labour productivity (e) It improves labour relations by linking reward to merit; and
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(f) It reduces labour turnover
34. What are the limitations of merit rating? The following are the limitations of merit rating: a. It leads to subjective judgement b. Those who do the task of merit rating may be influenced by the past records of employees; and c. The incentive offered may not be strong enough to motivate the employees. Worked-out Exercises Exercises 3.1 From the following information, calculate the labour turnover rate and labour flux rate: Number of workers at the beginning of the year Number of workers at the end of the year
3800 4200
During the year, 40 workers left while 160 workers are discharged. Sixty workers are recruited during the year. Of these, 150 workers are recruited because of leaves and the rest are engaged in accordance with an expansion scheme. B. Com., Bharathidasan, April 1988 Answer 3.1 Labour turnover rate (replacement method) = (Number of replacements/Average number on rolls) X 100 = (150/4000) X 100 = 3.75% Flux Rate = ((No. of separations + No. of replacements))/Average no. in rolls) X 100 = (200 + 600/4000) X 100 = 20% Exercises 3.2 Calculate the earnings of workers A and B under straight piece rate system and Taylor’s differential piece rate system from the following particulars: Normal rate per hour = Standard time per unit =
Rs. 1.80 20 seconds
Differentials to be applied: 80% of piece rate below standards 120% of piece rate at or above standard Worker A produced 1,300 units and worker B produced 1,500 units per day of 8 hours.
Solution 3.2 Rate per hour Standard time per unit
Rs. 1.80 20 seconds
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Number of units per hour = (60 X 60)/20 = Piece rate for 180 units in an hour Piece rate for 1 unit = (1.80/18) = Low piece rate: 80% of piece rate = (80 X 0.01)/100 = High piece rate: 120% of piece rate = (120 X 0.01)/100 = Standard Output for 8 hours = (180 X 8) = Straight Piece Rate A gets for 1300 units @ Re. 0.01 B gets for 1500 units @ Re. 0.01 Taylor’s Rate: A at lower piece rate = 1300 X Rs. 0.008 = B at higher piece rate = 1500 X Rs. 0.012 =
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180 units Rs. 1.80 per hour Re. 0.01 Re. 0.008 Re. 0.012 1440 units Rs. 13 Rs. 15 Rs. 10.40 Rs. 18.00
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LABOUR 1. Why should the labour cost be controlled? The second major element of cost in manufacturing concerns is labour cost. Workers contribute to the concerns through their time and energy. This needs adequate compensation to them. The compensation is known as ‘wages’. Labour consists of a lot different individuals with a different mental and physical capacity. Proper control of labour is, therefore, one of the important tasks of the management.
2. What is the purpose of time keeping? The objective of time keeping is to provide information for the 1. Preparation of pay rolls 2. Ascertainment of labour cost per unit of product 3. Allocation of overhead cost based on wages 4. Fulfillment of statutory requirements 5. Control of labour cost 6. Determination of productivity of labour in the factory and 7. Promotion of punctuality and order among the workers.
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3. Explain the components of good control of labour cost. Proper control over labour cost involves the following: a. Proper system for recruitment, selection, training and placement of workers to jobs b. Right methods of wage payment c. Right and healthy working conditions; and d. Innovative methods of assuring efficient labour performance 4. Describe the two forms of labour cost. Direct Labour Cost: Direct labour refers to labour engaged directly in the production of a product. Direct labour cost is the cost of all labour expended in converting raw materials into manufactured articles. Such direct costs of labour can easily be identified and allocated to cost units. It varies directly with the volume of output. It can easily ascertained and controlled because of its close proximity to the output. Wages paid to direct labour are known as ‘direct labour cost’. It forms part of prime cost. Indirect Labour Cost: It is the remuneration paid to those workers, who are not directly engaged in converting raw materials into finished products. Such costs cannot be conveniently identified with a particular product. Supervisors, inspectors, work auditors, instructors, watchmen are examples of indirect workers. Indirect labour cost is included in overheads. 5. What do you mean by time keeping? Time Keeping:
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Time keeping is a system of recording the time of arrival and departure of workers. Arrival time and departure times of workers are recorded for attendance purpose and for calculation of wages. It is based on this record that their total entitlement for work under time rate system is determined. The process of time keeping is to maintain an accurate record of time of every worker when he comes in and goes out of the factory. Regular time and overtime are based on this record. 6. Bring out the various methods of recording the attendance of workers or time keeping. There are three methods of time keeping of workers. i)
Handwritten Method: Attendance of each worker is recorded in the register maintained for timekeeping. The register consists of number of columns for each worker. Entries in the arrival and departure columns are made by the foreman. Literate workers generally sign against their entries to avoid dispute later. The method is simple and cheap. The possibilities of fake attendance or fraudulent marking of attendance may not be ruled out under this method.
ii)
Token or disc Method: An identification number or token number is allotted to each worker. The number is suitably painted or engraved on a round metal token with a hole in it. All such tokens are hung up in a serial order on a board at the factory gate. At the time of arrival, the worker collects his token from the board and drops in a box kept for the purpose at the factory gate. After 10 or 15 minutes of the normal time, the box is removed by the timekeeper. Those arrived late have to hand over their tokens personally at the time office so that exact time of their arrival can be noted. Based on the tokens dropped in the box, entries regarding attendance of workers are made in the Time Book. The time book is passed on to the wage section for payroll accounting. This method is no foolproof as a worker may try to get his absentee friends marked present by dropping their tokens in the box.
iii)
Time recording clocks: This is a mechanical method of recording attendance. It proves to be useful when the number of workers is large. The time of arrival and departure of a worker is recorded with the help of clock recorders. Each worker has a clock card, which bears his identification number. These cards are kept in a rack in a serial order. When workers report for duties, they take out their cards from rack one, get them punched by the Time Recording Clock maintained at the factory gate, and place them in rack two. When they leave, they again get their cards punched with time of departure and put them back in rack one. The method is quick, safe, scientific, reliable and accurate method of time keeping.
7. Is time keeping significant? Give reasons. Yes, time keeping is a significant aspect. The following are the reasons for time keeping.
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i) ii) iii) iv) v) vi) vii)
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It ensures discipline among workers It is an in-built system of ensuring punctuality of workers It boosts morale of personnel It is an effective method of data collection for statistical purpose It helps in checking idle time and increases output by sticking on to production schedule It assists computation of labour cost per unit It ensures a productive environment in the undertakings
8. What do you mean by time booking? Apart from recording worker’s time of arrival and departure, it is necessary to record the particulars of work done by workers and time spent on each job or process. Recording of worker’s time spent on different jobs is known as time booking. In other words, time booking is a method of recording time devoted by a worker on a job, order or process. 9. What are the objectives of time booking? The objectives of time booking are as follows: a. It ensures that the time spent by the worker in the factory has been properly utilised b. It ascertains the labour cost of work done c. It provides a basis for allocation of overheads d. It identifies the idle time so as to control it e. It checks wastage of time by the worker after he enters the factory 10. Describe various methods of time booking. The following are the common methods of time booking Job Cards: Job tickets/cards are generally used for recording the time spent on each job order. A card is prepared for each job. Then it is allotted to the worker who takes up that particular job. The worker makes an entry in this card the time of starting as well as finishing the job. The worker submits his work along with his job card after the completion of his job work. He is issued another job card for the next job. Therefore, only one job card is issued to a worker at a time. Such job cards serve the purpose of authorising the worker to carry out the job mentioned therein. Figure 3.1 shows a model job card. Figure 3.1 Job Card/Ticket JOB CARD Worker's No------
Job No--------
Worker's Name------
Date------
Department----------
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Machine No---------
Starting Time--------
Operation No------
Finishing Time--------
Time Allowed-----------
Hours Taken-------
Job Description
Hours
Workman------------
Rate (Rs)
Amount (Rs.)
Forman------------
Cost Clerk----------
Daily Time Sheet: Daily time sheet is a daily record of the nature of work done by an individual worker. It also includes the time spent on each job by him. Entry may be made by either the worker himself or officials of the time office. The time sheet will be sent to the foreman everyday for his signature. Then it will be forwarded to the cost office. This is a simple method of recording work time. Daily Time Sheets (also known as time cards) include details relating to Name of the worker Work Order Number Description of Work Quantity Produced Time of starting and finishing the job Total hours consumed on the job Rate of Wages per hour, and Amount of wages
Weekly Time Sheet: The procedure adopted for time booking on time sheets is the same as for daily time sheets. However, the weekly time sheet gives particulars of work done and the time spent on each job for a full week. The difficulty of consolidation is overcome and the total hours spent during the work can be compared and reconciled with the attendance time for the same week.
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Figure 3.2 Daily Time Sheet
DAILY TIME SHEET Name: Cost Centre Job Order No.
Work Done
Clock No Date Time
On
Worker's Signature
Hours
Off
Ordinary
Standard Hours
Rate
Cost
Overtime
Foreman's Signature
Cost Office
11. What is the role of payroll department in an undertaking? The payroll accounting is maintained by each organisation with the help of payroll department. The payroll department has an important task of computation of wages payable to workers. The important functions of payroll department in the accounting and control of labour costs may be listed as follows: a. b. c. d. e.
It It It It It
records hours worked and wages earned by different workers. makes payroll deduction. determines the net amount due. maintains a permanent earning records of every worker. provides the treasurer’s office with necessary records to make payments.
12. What do you mean by wage sheet or payroll sheet? Explain the purpose for which it is prepared. Wage Sheet: The main task of payroll department is to prepare payroll sheet. It is commonly known as wage sheet. It is a consolidated statement showing the gross wages, deductions and net wages payable to workers. Time or clock cards are the basis for the preparation of wage sheets. Departmental wages sheets are summarised in a master wage sheet, which forms the basis for the preparation of the payroll voucher entry in the general ledger in cost control accounts. Purpose of Payroll Accounting: Payroll accounting based on payroll sheet helps an undertaking in a) providing relevant data for cost control;
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b) determining the net amount of wages; c) understanding the wage commitment in a week or a month of different departments; d) minimizing the occurrence of errors and frauds in wage payments; and e) Preparing pay slips for each worker. 13. Describe about idle time. Idle time represents time lost by time workers. When workers are paid based on time, there may be some difference between the time paid for and the time actually spent on production. The difference is known as ‘idle time’. Idle time refers to the time for which they are paid but no production is obtained. This is a wastage, which needs some effective control. Idle time is categorised into two. They are (a) normal idle time due to unavoidable factors and (b) abnormal idle time caused by avoidable factors. 14. Give major causes of idle time with examples. Idle time may occur due to the following reasons: a) Administrative Cause: Idle time is sometimes arising out of administrative decisions. There exists surplus capacity of plant and machinery in some undertakings due to management decisions. This will lead to idle time. During the period of depression, the management may abandon some products from the product line temporarily. The regular workers are not sent out during these period. This is because the management is not willing to lose well-trained workers. Such idle time arises out of abnormal situations, which is generally not controllable. b) Productive Cause: Idle time is arising out of many productive causes. Machine breakdown, power failures, waiting for tools or raw materials, delay due to work order and delay due to instructions are some causes brought under the category. Idle time arising out of productive causes is usually controllable by proper planning, strict supervision and proper maintenance of plant and machinery. c) Economic Cause: Fall in the demand for your product is one of the major economic reasons, which gives rise to idle time. This may be due to severe competition or seasonal character of your product. In such cases, it is not possible to get rid of workers during slack period. Such surplus labour force is usually utilized for doing some other jobs and if such complimentary jobs cannot be found, there will be some idle time, which is beyond control. 15. How would you treat the idle time in cost accounting? Normal Idle Time: This is wastage of labour time. Normal idle time cannot be totally avoided. Therefore, it is borne by the employer. For example, an employee takes time to reach from the entrance gate to the shop floor, where he works. The cost of normal idle time may be treated in two ways. They are as follows:
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a. It is generally charged to factory overhead. Idle time is classified according to causes and each type of idle time. It is allotted a separate standing order number. This will to an effective control. b. Wage rate may be inflated. It is because to make allowance for normal loss of labour time. Example 3.1 The production time of a worker is only 7 hours during an 8 hours day. What is the inflated wage rate if he is paid Rs.10 per hour? The inflated wage rate is Rs. (8/7) X Rs.10 = Rs.11.43
Abnormal Idle Time: Abnormal idle time arises due to reasons in no way connected with usual routine manufacture and for which management must pay. For example, time lost due to strikes and lockouts, time lost in waiting for raw material etc. Poor planning, inefficient executions are some reasons for occurrence of abnormal idle time. It is generally adjusted through the costing profit and loss account. 16. Explain the term ‘overtime’. What are the disadvantages of overtime? Overtime: It refers to a work done by an employee beyond normal working hours. The Factories Act lays down the rules for normal working hour. Any employee working for more than 9 hours per day or more than 48 hours per week is entitled to overtime payment. The Factories Act prescribes that the normal wage rate is to be doubled to compensate the overtime work. Therefore, the overtime work is a costly affair, which should be avoided. Disadvantages of having overtime work: (a) (b) (c) (d) (e) (f)
It leads to excessive labour cost Diminishing labour efficiency gives rise to deteriorating labour productivity It has a bad effect on the health of workers Excessive use of plant and machinery gives rise to high wear and tear There will be escalation of factory overhead. e.g., lighting etc. Widespread discontent among workers due to uneven distribution of overtime is another demerit.
17. Explain the treatment of overtime with examples The treatment of overtime cost in cost accounting depends upon the circumstances necessitating overtime work. Additional payment for overtime should be charged as follows: Nature of Overtime 1. Due to customer’s request to complete a job with in a specified period
Charged to JOB directly
2. Due to general pressure of work
GENERAL OVERHEAD
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3. Due to delayed schedule 4. Due to loss of time for unavoidable reasons 5. Due to seasonal rush and peak load
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DEPARTMENT COSTING PROFIT AND LOSS ACCOUNT PRIME COST
18. Describe the term ‘Labour Turnover’. How is it measured? It is a common thing that workers in an undertaking leave the employment and new workers join in place of those leaving. The change in work force is known as labour turnover.
Labour turnover is defined as the rate of change in the composition of the labour force in the organisation.
Though labour turnover is a normal process, the frequent changes in the composition of labour affect the continuity as well as the productivity of the organisation. Labour turnover can be measured by two methods. a. Separation method: This method takes into account only those workers who have left during a particular period. The formula is: No. of workers left during a period Labour Turnover Rate =
X 100 Average no. of workers during the period
b. Replacement method: This method considers only those workers who join in place of those who have left. Its formula is: No. of workers replaced during a period Labour Turnover Rate =
X 100 Average no. of workers during the period
If new workers are engaged for expansion programme or any other such purpose, they are not considered for this composition. c. Flux method: This method shows the total change in the composition of labour force due to separation and additions of workers. The formula is: This method considers only those workers who join in place of those who have left. Its formula is: No. of workers left + No. of workers replaced Labour Turnover Rate =
X 100 Average no. of workers during the period
Megaton Co. has following information:
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Example 3.2
Number of Number of Number of Number of Number of
Rupees 1000 1200 70 20 80
workers on 1 Jan 2001 workers on 31 Dec 2001 workers resigned workers discharged replacement
Calculate labour turnover Solution 3.2
Average Number of workers Number of workers left 1. Separation Rate 2. Replacement Rate 3. Flux Rate 19. What are the causes of labour turnover?
Formula (1000+1200)/2 = (70+20) = (90/1100)/100 = (80/1100)/100 = ((90+80)/1100)/100=
1100 90 8.18% 7.27% 15.45%
Factors that cause labour turnover may be grouped into two categories: a. Avoidable Causes: This includes i) ii) iii) iv) v) vi)
low wages and allowances Unhappy relations with co-workers and supervisors Unsatisfactory working conditions Trade union rivalry Lack of medical facilities, transport facilities and so on Inadequate job security and retirement benefits
b. Unavoidable Causes: i) ii) iii) iv) v) vi)
Personal dislike for job or environment Death or retirement Illness or accident Domestic disputes Discharge on disciplinary grounds Marriage.
20. What are the effects of labour turnover? A high rate of labour turnover means the workers often leave. They do not stay for long. Old workers generally possess more experience than new workers possess. Replacement of workers, therefore, declines the overall efficiency. The gap between the old and the new labour often brings down both quality and quantity of output. Undue labour turnover gives rise to an additional cost to the organisation. These additional costs may be broadly classified into two broad categories – (I) preventive, and (ii) Replacement costs. (a) Preventive Costs:
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The costs, which are incurred to keep the work force satisfied, are known as preventive costs. These include cost of personnel management, cost of welfare activities and services, cost of medical services, pension schemes, extra bonus and other perquisites. (b) Replacement Costs: These costs include all such losses and wastage arising because of the inexperienced new labour force replacing the existing experienced group. These include cost of recruitment of new employees, cost of training new workers, loss of output, loss due to inefficiency of new workers, cost of accidents and cost of scrap and defective work of new workers. 21. How do you control labour turnover? Labour turnover is expensive. It should be minimised because it results in increased cost of production. Some of the steps are to be initiated by the management to minimize labour turnover. They are as follows: a. Institute a proper system to redress the grievances of employees b. Create congenial atmosphere in the factory c. Provide adequate welfare facilities to the workers d. Improve workers’ morale e. Ensure workers’ participation in management f. Introduce a suitable policy of promotion and transfers and g. Evolve a sound system of recruitment and training. 22. Describe the requisites of a good system of labour remuneration. The term ‘remuneration’ refers to the total monetary earnings of employees. It includes wages according to time or piece basis and other financial incentives. There are various methods of remunerating labour. Each method has its merits and demerits. However, a good method of wage payment should (a) produce the best quality and quantity of work (b) be satisfactory to both employer and employee (c) be clearly defined and intelligible to workers (d) be easy and simple (e) guarantee a minimum wage for the time devoted by the worker (f) ensure compensation to workers in case of power failure, machine break-down for which he is not responsible (g) reduce labour turnover and absenteeism (h) be flexible (i) avoid disparity of pay in similar level of operation 23. Explain and evaluate the time wage system? Wages are based on the amount of time spent by worker inside the factory. He may be paid on hourly basis, daily basis or monthly basis. Calculation of wages under this method of remuneration takes into account a. the time for which the workers are engaged on the job and b. the rate per unit of time fixed for payment. Example 3.3 A worker gets Rs. 15 per hour. He works for 8 hours per day. He has
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been present for duties on 25 days during the month. What is his wage for the month? Solution: His wage based on Time Rate will be: Rs.15X8X25=Rs.3000/Advantages of Time Rate System: (a) (b) (c) (d) (e) (f)
It offers a fixed minimum wage It ensures simple calculation It makes a stable and secure return to the workers It ensures quality, care and efficiency It promotes a sense of equality and unity among the workers It is an economical system in respect of wage administration, material use, plant operation and quality control. Disadvantages of Time method of wage payment: (a) (b) (c) (d)
It ignores the individual quality and quantity of output It reduces personal initiative to work faster It treats both efficient and inefficient workers at par It increases the cost of labour per unit because of the tendency to consume more time in finishing a job (e) It needs a close supervision to ensure continuity of operation
24. Explain and evaluate piece wage system A worker is paid a fixed amount per unit produced without any regard to the time taken under the piece rate system. The rate of payment under this method is related to the quantity of work done i.e., per unit of output, per article, per job or per commodity. The total units produced or manufactured by the worker during a period form the basis of computation of his wages for the period. Example 3.4 The rate of labour per chair is Rs. 80/- The worker has completed 20 chairs during a week. What is the wage of the worker? Solution: His wage based on piece rate will be: Rs. 80 X 20 = Rs.1600
Advantages of Piece Wage System: (a) The method provides a strong incentive because the remuneration is in direct proportion to the worker’s effort. (b) It simplifies costing because labour cost per unit is easily known in advance (c) The overhead per unit is reduced because of high production. (d) The piece rates are fixed after a careful time and motion study. Therefore, the system contributes a sound basis for production control. (e) Workers are self-motivated to maximise their income. Therefore, strict supervision is not required (f) The method is simple and is easily understood by the workers. Disadvantages of Piece Wage System: (a) It ignores quality of products in an effort to maximize output.
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(b) It destroys the long-term interest and continuity of engagement in the organisation of the workers. (c) It creates dissatisfaction among workers owing to disparity in wages. (d) It needs a continuous supervision over the quality of operation. (e) It enhances wastage of materials. (f) It declines the level of labour discipline. 25. What is the main purpose of incentive plans? Incentive plans attempt to combine the good points of both the systems. The primary purpose of an incentive plan is to induce a worker to produce more to earn a higher wage and at the same time to reduce unit costs. Producing more in the same period should result in higher pay for the worker naturally. It should result in a lower cost per unit for fixed factory overhead and for labour cost. 26. What are the different methods of remunerating labour? Explain any one of them in detail. Premium Bonus Plans: Premium Bonus Plans are known as Incentive Systems of wage payment. The system of wage payment under this plan aim at inducing workers to increased efficiency and greater output. Therefore, the plan is beneficial to both employer and employee. They combine the basic ideas of time and piece rate systems with an aim to avoid the demerits of these methods. They strike a balance between the two. The main features of most incentive plans are: (a) They combine both time and piece rate systems (b) The benefit of labour productivity goes to employer under time wage system and the benefit of piece rate system goes to workers. The benefit of premium bonus plan goes to both employer and employee. (c) They link payment to production either directly or indirectly (d) Time wages are guaranteed to all workers (e) They check the speed so as to that workers neither tend to slow down nor increase their speed (f) In addition to normal time wages, they ensure a bonus based on the time saved (1) Halsey Plan: F. A. Halsey, an American Engineer, evolved a method of incentive. The method recognises individual efficiency. It advocates a bonus based on time saved. A standard time is fixed for doing a job, by time and motion study. The main features of his plan are as follows: (a) Standard time and standard work are prescribed in advance. (b) Workers are paid for the actual time they take to finish a job as per the time rate (c) If an employee completes the job less than the standard time, he is entitled to receive a bonus for the time saved. (d) A bonus equal to 50% of the wage time saved is paid to the workers as a reward to his good work (e) Workers, who fail to achieve the standard, get the time wage The rate of bonus under the Halsey Premium Plan may change according to the policies of an undertaking. It may be 1/3 of the wages of time saved in some cases.
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Evaluation: It is a simple system to operate. It is easily understood by employees. It guarantees the hourly wages to workers for the actual time. However, fixation of standard time is a difficult process. Employees, however, feel that they do not get the full benefit for the time saved under this system. Method of Computation: Total Earnings of the worker (Time Rate X Time Taken) + (1/2 X Time Saved X Time Rate) Example 3.5
The standard time for producing 250 articles is 65 hours. The rate of wages is Rs. 2.50 per hour. The actual time taken for producing 250 articles is 55 hours. What are the earnings of the worker under Halsey plan? Solution 3.5
1. Total Earnings of the worker = (Time Rate X Time Taken) + (1/2 X Time Saved X Time Rate) (Rs. 2.50 X 55 hours) + (1/2 X 10 X Rs. 2.50) =Rs. 150 2. Effective Wage rate per hour = (150/55 hours)= Rs. 2.72
(2) Halsey Weir Plan: This method is more or less similar to the Halsey plan except that in Halsey Weir plan the bonus is equal to 30% of the time saved. (3) Rowan Premium Plan: Rowan plan is also similar to Halsey plan, except in the calculation of bonus. The main features of his plan are: (a) Workers receive remuneration based on actual time taken by them in completing the job. (b) Workers receive bonus for the time saved i.e., for the difference between the standard time and actual time. (c) Bonus is calculated as a proportion of the time wages as time saved bears to the standard time. The Rowan plan also guarantees wages on time basis. Its formula is: 1. Bonus = (Time Saved/Time allowed) X Time taken X Time rate 2. Earnings = (Time taken X Time rate) + Bonus Example 3.6 The standard time for producing 250 articles is 65 hours. The rate of
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wages is Rs. 2.50 per hour. The actual time taken for producing 250 articles is 55 hours. What are the earnings of the worker under Halsey plan? Solution 3.6
1. Bonus = (Time Saved/Time allowed) X Time taken X Time rate = (65-55/65) X 55 X Rs. 2.50 = Rs. 21.15 2. Earnings = (Time taken X Time rate) + Bonus = (55 X Rs. 2.50) + 21.15385 = Rs. 158.65 3. Effective Wage Rate per hour = Rs. 158.65/55 = Rs. 2.89 Evaluation: The merits and demerits of Rowan plan are similar to those of Halsey Plan. An additional advantage under Rowan plan is that the worker is not induced to rush through the work because if time saved is more than 50% of the standard time, the bonus will come down. However, the calculation of bonus is complicated. You may want to do sum, which comprises all the above models. Try to understand the example as follows first and then try to do sums found at the end of the chapters on your own. Example 3.7 The standard time allowed to complete a job is 100 hours and the hourly rate of wage payment is Rs. 5. The actual time taken by the worker to complete the job is 80 hours. Calculate the total wages of the worker based on (a) Time Rate (b) Piece Rate (c) Halsey Plan (d) Rowan Plan Solution 3.7 1. Time Rate = 80 units X Rs. 5 = Rs. 400 2. Piece Rate = 100 units X Rs. 5 =Rs. 500 3. Halsey Plan Basic Wages = 80 units X Rs. 5 = Rs. 400 Bonus =0.5 X 20 units X Rs. 5 = Rs. 50 Total = Rs. 450 4. Rowan Plan Basic Wages = 80 units X Rs. 5 Bonus = 0.2 X 80 units X Rs. 5 Total
= Rs. 400 = Rs. 80 = Rs. 480
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Comparative Earnings per Hour Rupees Units Rupees Time Rate = Total Cost/Actual units 400 80 5.00 Piece Rate = Total Cost/Actual units 500 80 6.25 Halsey Plan = Total Cost/Actual units 450 80 5.62 Rowan Plan = Total Cost/Actual units 480 80 6.00 27. What is meant by differential piece rate system? Explain various differential rate systems. There is another dimension of thought in respect of incentive methods apart from Halsey and Rowan premium plans. The differential piece rate system seeks to overcome the disadvantage by paying at different rates for different levels of efficiency reflected in the output. This system believes in payment of wages to labour based on piece rates varying with the level of efficiency of workers. In other words, a specific level of output is fixed as the standard. The level is stated in percentage. Then, different piece rates are determined for different levels of output below and above the standard. Some of the exponents of differential piece rate system are (a) Taylor (b) Gantt (c) Emerson (d) Merrick Taylor System: The main features of the system are: (1) It rewards efficient workers by an increased piece rate beyond a certain level of output (2) It distinguishes between workers through two types of piece rates: (a) a lower rate for sub-standard performance (e.g., 80% of piece rate), and (b) a higher rate for standard and above standard performance, which is much more than time wages (e.g., 120% of piece rate) (3) It acts as an additional incentive to expert workers towards maximisation of production; and (4) It ignores any form of guaranteed day wages Evaluation: It is simple to understand. It stimulates workers to achieve high rates of production. This method attracts only the efficient workers. However, it does not guarantee minimum wages and it affects the quality of work. Example 3.7 Ascertain the wages paid to workers Somu and Balu under Taylor’s Differential Piece Rate system: Standard time allowed = 40 units per hour Simple time rate wage = Rs. 4 per hour Differential piece rates to be applied: 75% of piece rate when below standard 125% of piece rate when at and above standard The workers have produced in a day of 8 hours as follows: Somu = 240 units; Balu = 400 units. (B.Com, Madras, March 1993)
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Solution 3.7 Calculations: 1. Standard time allowed = 40 units per hour 2. Time rate = Rs. 4 per hour 3. For 40 units (per hour), the time rate is Rs. 4 per hour 4. For 1 unit, the time rate is = (4/40) = Rs. 0.10 or 10 paise 5. Low price rate = 75% of price rate = Rs. (75 X 0.10)/100 = Rs. 0.075 6. High price rate = 125% of price rate = Rs. (125 X 0.10)/100 = Rs. 0.125 7. At 40 units per hour, standard output for 8 hours = 320 units
Answer 1. Somu produces 240 units. (Less than the standard 320). Hence, he receives at the lower piece rate. Hence, Somu gets = 240 units X 0.075 = Rs. 18.00 2. Balu produces 400 units. (More than the standard 320). Hence, he receives at the higher piece rate. Hence, Balu gets = 400 units X 0.125= Rs. 50.00 Gantt Task Bonus Plan: This is a combination of time and piece wage systems. A standard time is determined for achieving a particular task by time and motion study. Workers’ efficiency is ascertained by comparing the actual performance with the standard set. A worker may fail to achieve the standard. i.e., he takes more time to complete the standard task. His efficiency is treated to be below 100%. He receives wages at time rate for the time taken. Another worker may reach the standard. His efficiency is treated in par with 100%. He earns wages at the time rate plus a bonus of 20% on wages earned. Another worker may be above the standard. His efficiency is considered to be above 100%. He receives wages at piece rate plus bonus of 20% on wages earned. Evaluation: It is simple and easily understandable. It is a good system for beginners, who are guaranteed time wages. It offers good incentive to hard work. It stimulates production since foremen are paid bonus. However, the system does not encourage efficiency if workers feel contented with guaranteed time wages. It groups employees into competing categories, which is not good for organisational growth. Example 3.8 Standard rate Standard Hours for the job Bonus Worker A completes work in Worker B completes work in Worker C completes work in
Rs. 5 per hour 8 hours 20% of standard time 10 hours 8 hours 6 hours
Compare the earnings of A, B, and C under Gantt Task Bonus Plan.
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Solution 3.8 Wages for 10 hours at Rs. 5 per hour Wages for 8 hours at Rs. 5 per hour = Rs. 40 + 20% of 8 hours = 40 + 8 Wages for 6 hours = Wages for 8 hours at Rs. 5 per hour = Rs. 40 + 20% on 8 hours Earnings of Workers per Hour A’s earnings per hour = (Rs. 50/10) = B’s earnings per hour = (Rs. 48/8) = C’s earnings per hour = (Rs. 48/6) =
Rs. 50 Rs. 48 Rs. 48
Rs. 5 Rs. 6 Rs. 8
Emerson Efficiency Plan: It is also known as Emerson Empirical Plan. This plan guarantees time wages. It also ensures an arbitrary bonus at different levels of efficiency. The following are the basic premises of Emerson plan. (a) (b) (c) (d) (e)
A standard output is determined, which is equivalent to 100% If a worker completes his job in standard time, his efficiency is equivalent to 100% If he takes double time to complete the job, his efficiency is equivalent to 50% A worker receives hourly rate of wages without any bonus up to 662/3% efficiency. A worker receives time wages, with bonus at a stated ratio of time wages, beyond 662/3% efficiency. (f) The rate of bonus increases gradually with increase in the output; the scheme contains about 32 differentiating rates at different levels of efficiency
See the two tables presented and try to understand the mechanism behind the plan STANDARD TIME (20 hours) Time taken to complete the job Level of Efficiency 20 hours 100% 16 hours 125% 40 hours 50%
Level of Efficiency 662/3% 90% 100% Above 100% 125%
Emerson Wage Plan Bonus Rate Guaranteed time 10% 20% Time Wages + 20% Bonus + Wages for Time saved Time Wages + 20% Bonus + 25% of Time saved
Look at the Example 3.9 and see how bonus and wages are calculated under the Emerson Efficiency Plan. Example 3.9 Standard Output Worker W produces Worker X produces Worker Y produces Worker Z produces
6000 3600 4800 6000 7200
units units units units units
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Estimate the bonus rate for W, X, Z and Y under Emerson Efficiency System. Solution 3.9 Worker W X Y Z
Std. Output 6,000 6,000 6,000 6,000
Output 3600 4800 6000 7200
Efficiency Level 60% 80% 100% 120%
Payment Wage at time rate Daily wage at time rate + 4% bonus Time rate for hours worked + 20% bonus Day wage + 20% Bonus + 20% for time saved
Example 3.10 An employee working under a bonus scheme saves time in a job for which the standard time is 60 hours. Calculate the rate per hour worked and wages payable to a worker, if incentive bonus of 10% on the hourly rate is payable. The standard time (viz., 100% efficiency) is achieved. A further incentive bonus of 1% on hourly rate for each 1% in excess of that 100% efficiency is payable. Assume that normal rate of payment is Rs. 5 per hour. Actual time taken is 50 hours. (B. Com., Calicut, Oct 1987) Solution 3.10 Efficiency = (Standard time/Actual time) X 100 = (60/50) X 100 =120% Normal Wage Rate ----------------------------------------------------------------Incentive Bonus For 100% efficiency, 10% on hourly rate = (5/100) X 10 = -------------------For 20% extra efficiency, 1% on hourly rate = (5/100) X 20 (for each 1% in excess of 100% = ----------------------------------------------------------------Hourly Rate Wage payable : 50 hours @ Rs. 6.50
Rs. 5.00 Rs. 0.50 Rs. 1.00 Rs. 6.50 Rs. 325.00
Merrick Differential Piece Rate System: It is also known as ‘Multiple Piece Rate Method’. The method consists of three piece rates, unlike the Taylor’s system, which has only two piece rates. It is a reformed version of Taylor’s method. The basic premises of this scheme are a. Workers get ordinary piece rate up to 83% b. He gets 110% of ordinary piece rate between 83% and 100% and c. He earns 120% of ordinary piece rate above 120% Evaluation: There is no penalty for those who perform below the standard. It is beneficial to beginners and trainees. Reward will be higher for performers. However, it does not guarantee day wages to workers. The standards set may be too high to be reached by workers of normal efficiency. Example 3.11 Estimate the remuneration to be paid to a worker under Merrick Differential Piece Rate System. Standard Production per hour
6 units
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Normal rate per hour In an 8 hour day, units produced by a worker
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Rs. 1.20 32 units
(B. Com., Madras) Solution 3.11
Standard Production per hour Normal rate per hour Piece Rate = (1.20/6) Worker’s Efficiency Standard Output = ( 6 units X 8 hours) = Actual Output = Worker’s Efficiency = (32/48) X 100 =
6 units Rs. 1.20 Re. 0.20 48 units 32 units 66.66%
Answer Less than 83%, worker receives ordinary piece rate 32 X Re. 0.20
Rs. 6.40
28. Explain the group bonus scheme. Group Bonus Scheme: Individual incentive plans become inappropriate when production depends on the collective effort of a group. For example, group effort alone is required in case of construction industries like construction of bridges and roads. It is, therefore, necessary to evolve a bonus scheme for collective efficiency. The main features of the group bonus system are: a. Bonus is given for collective efficiency in production b. Bonus is payable to a group of workers for their joint output over and above the given target c. Members of the group gets their bonus based on agreement d. Production is considered to be a team effort governing the efficiency of performance e. The aim is to create a team spirit for increased production and lower cost per unit. 29. What is work study? Explain its components. Work Study: The study of the technical aspects of production is known as Work Study. The successful implementation of incentive systems of wage payment depends on work study. Work study ensures overall improvement by saving time, eliminating the loss of material, evolving new methods of work and lowering costs. It consists of method study and work measurement. Method Study: Method study is a technique adopted by work study engineers for making detailed investigation of the way in which production process is carried on. It covers the following aspects: (a) Examination of various tasks undertaken (b) The methods used in their performance
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(c) The sequence of operations (d) Plant and equipment available and (e) The factory layout. Method study aims at determining the right and effective way of doing jobs. It leads to effective use of resources and improved method of production. Work Measurement: It is known as time study and it follows motion study. Both of these techniques taken together are known as Work Measurement. Work measurement is a technique of establishing standard times after standardisation of methods and establishment of a measure for the work contents of jobs or operation. Motion Study: Motion study is the study of the movements of workers and machines in performing the operation. Its object is to identify and eliminate unnecessary and wasteful motions by workers and machines operated by them. It aims at making effective use of human resources. Time Study: Once the improved methods of performance are ensured, it is necessary to determine the time required finishing a particular task. This involves the use of time study in which the time study engineer, with the help of a stopwatch, records the time taken by an operator, under normal conditions. The time that is thus determined is known as the standard time or time allowed for a particular job. 30. What do you mean by job evaluation? What are the main characteristics of job evaluation? Job Evaluation: Job evaluation is a technique that attempts to show the relative worth of jobs in a reasonably objective manner. It is a systematic way of appraising the worth of each job in relation to other job. The application of this technique helps in determining the ranking of various jobs in some order of importance. For example, the job of an electrician and a machine operator may appear to be quite different. If they are of the same relative worth requiring similar intelligence, skill etc., both of these jobs should be paid at the same rate. The following characteristics of jobs are taken into account in job evaluation: a. Knowledge and skill b. Physical effort and Mental effort c. Responsibility for equipment handled d. Working conditions 31. List out the uses of job evaluation The uses of job evaluation are: 1. It tells us the wage value of each job 2. It makes wage administration simple by bringing uniformity in wage rates 3. It helps in finding right person for the right job 4. It ensures good industrial relations 5. It facilitates merit rating, selection, training, fixation of incentive pay, improvement in working conditions etc 32. What are the various methods of Job Evaluation?
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a. Ranking Method: Various jobs are ranked from the highest to the lowest in the order of their importance, responsibility, skill and effort required. Each job is compared with other job and valued. The wage rate of each job is based on job evaluation. The method is simple and easy to install. However, the method is not very effect because it cannot make accurate measurement of jobs. b. Point Rating Method: This method of job evaluation is based on points system. This method involves the breaking up each important job based on the factors such as skill, effort and responsibility. They are the input factors required in the performance of different jobs. Thereafter, jobs are grouped based on the identical input factors. Jobs involving different degrees of skill and effort and varying in responsibility are assigned weights on their relative importance. The total of weights gives us the value of each job and different wage rates are fixed for different jobs on these totals. c. Grading Method: Numbers of grades of jobs are pre-determined under this method. The existing jobs in the organisation are bases for pre-determination. Then all jobs are placed under these pre-determined grades. The skill, effort and responsibility associated with the existing job are the bases for grading. If grades are predetermined and jobs are placed in these grades, the various jobs in the same grade may be treated alike for the fixation of wages. This method is simple and inexpensive. It is widely used method as it is more accurate than the ranking method. 33. What do you mean by merit rating? What are its advantages? Merit Rating: While job evaluation is concerned with evaluating a job, merit rating determines the relative worth of each worker. Merit rating is a systematic evaluation of an employees merit in terms of the requirement of the job It seeks to rate an employee’s performance on records of performance. Its aim is to help the personnel department whether a worker should be rewarded by promotion or penalised by demotion. The following are the steps in merit rating: (a) Decide the desirable qualities to be found in workers; the attributes like attendance, sincerity, ability, initiative, accuracy, willingness etc., (b) Grade the qualities to reflect the importance of each (c) Use the point system; and (d) Add the points for each worker and rank them. Advantages of merit rating: (a) It determines the fair rates of pay to employees based on their rating (b) It can be used as a fair and scientific basis for transfer, promotion or discharge of employees (c) It highlights workers’ strong points and reveals their weak points (d) It increases labour productivity (e) It improves labour relations by linking reward to merit; and
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(f) It reduces labour turnover
34. What are the limitations of merit rating? The following are the limitations of merit rating: a. It leads to subjective judgement b. Those who do the task of merit rating may be influenced by the past records of employees; and c. The incentive offered may not be strong enough to motivate the employees. Worked-out Exercises Exercises 3.1 From the following information, calculate the labour turnover rate and labour flux rate: Number of workers at the beginning of the year Number of workers at the end of the year
3800 4200
During the year, 40 workers left while 160 workers are discharged. Sixty workers are recruited during the year. Of these, 150 workers are recruited because of leaves and the rest are engaged in accordance with an expansion scheme. B. Com., Bharathidasan, April 1988 Answer 3.1 Labour turnover rate (replacement method) = (Number of replacements/Average number on rolls) X 100 = (150/4000) X 100 = 3.75% Flux Rate = ((No. of separations + No. of replacements))/Average no. in rolls) X 100 = (200 + 600/4000) X 100 = 20% Exercises 3.2 Calculate the earnings of workers A and B under straight piece rate system and Taylor’s differential piece rate system from the following particulars: Normal rate per hour = Standard time per unit =
Rs. 1.80 20 seconds
Differentials to be applied: 80% of piece rate below standards 120% of piece rate at or above standard Worker A produced 1,300 units and worker B produced 1,500 units per day of 8 hours.
Solution 3.2 Rate per hour Standard time per unit
Rs. 1.80 20 seconds
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Number of units per hour = (60 X 60)/20 = Piece rate for 180 units in an hour Piece rate for 1 unit = (1.80/18) = Low piece rate: 80% of piece rate = (80 X 0.01)/100 = High piece rate: 120% of piece rate = (120 X 0.01)/100 = Standard Output for 8 hours = (180 X 8) = Straight Piece Rate A gets for 1300 units @ Re. 0.01 B gets for 1500 units @ Re. 0.01 Taylor’s Rate: A at lower piece rate = 1300 X Rs. 0.008 = B at higher piece rate = 1500 X Rs. 0.012 =
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180 units Rs. 1.80 per hour Re. 0.01 Re. 0.008 Re. 0.012 1440 units Rs. 13 Rs. 15 Rs. 10.40 Rs. 18.00
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