# BBA Study Material Cost Accounting to Direct Labour Remuneration Methods Topic Wise Short Notes

### Emerson’s Efficiency Bonus Plan

This plan is also called as ‘Emerson’s Empirical Plan’. It provides for guaranteed time wages to the worker and the bonus is paid according to the efficiency of the worker. The formula for calculation of earnings if worker is given below:

Emerson used 32 different steps. The step bonus rates are as follows:

Under Emerson’s plan, 100% efficiency is considered as standard. The efficiency percentage is calculated as follows:

1. If time is considered
1. If output is considered

### Barth Variable Bonus Plan

This plan is also called as ‘variable sharing plan’. Under this system the earnings of a worker is calculated by multiplying the hourly rate of pay with square root or the product of standard time and time taken.

This plan is difficult to understand by the workers and hence it is not popular. This plan may specially be used for trainees, beginners, apprentices and unskilled workers. The main disadvantage of this plan is that total wages is higher for less efficient people. As the efficiency increases, the earning of a worker decrease. This plan discourages the efficient workers.

### Bedaux Points Plan

Under this system the standard time i

s fixed for completion of the job and each minute of time is called ‘Bedaux point’. Time wages are paid up to 100% efficiency and bonus is paid on the basis of number of bedaux pints saved. A worker gets a bonus which is equal to 75% of bedaux points saved and 25% is either retained by the employer or paid to foremen and indirect workers. Under this plan, time wages are guaranteed. The formula is given below:

### Bba Cost Accounting Short Notes of Gantt’s Task Bonus Plan

This system is a combination of both time and piece wages systems. Day wages are guaranteed under this plan. Standard time is set for a job or task and the worker’s efficiency is ascertained by comparing the actual performance with the standard set. The formula is given below:

## Price Rate Remuneration Methods

Under piece rate system of wages payment, the worker’s efficiency is measured in terms of production against standard set. Workers who produce more units than standard set for him is eligible for bonus in piece rate wage payment systems.

### Merits

• Employee morale is more due to higher earnings.
• Increased production result in decrease in cost of production per unit.
• It is possible to set accurate labour standards.
• A task is done in the most economical manner which reduces labour cost.
• Less supervision is required resulting less cost of supervision.
• Productivity of the organisation will increase.
• Labour cost can be accurately estimated.
• Optimum utilization of resources is possible.

### Demerits

• Quality may deteriorate in order to increase the production quantity to earn more.
• Safety conditions may be violated by the workers in order to increase production which may lead to accidents at work place.
• There may be apprehensions regarding rate cutting.
• Unskilled workers sometimes earn more than skilled workers if the latter have to work on time basis.
• If rates are not uniform for same type of jobs, it causes discontent among workers.
• It involves more calculations and detailed production records are to be maintained.
• The worker’s health may be affected due to over – strain taken by the workers to earn more wages.
• Inefficient workers may envy the efficient ones which may cause unrest.

### Straight Piece Rate Method

Under this method, a fixed wages rate is paid for each unit of production, job completed or number of operations completed irrespective of the time spent on it. The wages are calculated as follows:

This method is used where the production is repetitive in nature and it cannot be applied to the work which require skill and artistic work. The worker’s pay depends upon his output and not upon the time he spends in the factory.  The supervision cost is reduced as workers are paid depending on their actual units produced. This method will act as an incentive to efficient workers and act as disincentive to inefficient workers. The main disadvantage is that the production may need to be thoroughly inspected for its quality. The stoppage of work due to abnormal causes like machine bread – down, power failure, shortage of power etc. may cause the workers to lose their wages, and they feel insecure under this method of wage payment. The spoilage, defectives and wastage of materials is more, if this wage plan is adopted, due to reckless use to achieve higher output.

### Piece Rate with Guaranteed Time Rate method

Under this method, the employee is assured of agreed level of wages for the specified level of performance. The wage rate consists of two components. The first component is of fixed nature depending on the time spent the wages are paid and the other part is variable in nature linked to merit rating and cost of living. The main disadvantage in this method is that it is more complicated in computation of wages and it is not popular.

### Differential Piece Rate Method

Under this method, an incentive is offered to workers to increase their output by paying higher rates for increased levels of production. Under the straight piece rate system, the time factor is not taken into consideration but under differential piece rate plan, a series of production targets will be established and as each target is reached a new piece work rate will apply. In this plan the fast doing skilled workers can able to reach higher levels of targets and will be compensated at higher piece rates. The extra rates of pay can act as an inducement to the employee to aim for higher productivity to increase their earnings by putting more efforts. Differential piece work plan is normally accompanied by the guaranteed day rates.

### Taylor’s Differential Piece Rate System

In this system the inefficient workers are penalized by paying him low piece rate and rewarding the efficient worker by paying him a high piece rate for his higher production. Minimum wager are not guaranteed under this method.

### Formula:

1. 80% of normal piece rate when below standard (Low piece rate).
2. 120% of normal piece rate when at or above standard (High piece rate).

This method penalises not only those workers that are not only below the standard but even those whose output is just below standard output.

### Merrick’s Differential Piece Rate System

It is also called as Merrick’s multiple piece rate system. Under this system three piece rates are used unlike the Taylor’s differential piece rate system which consists of only two piece rates. This system is an improvement of the Taylor’s by eliminating its disadvantages.

## Group Bonus Plans

In time rate methods and piece rate methods, the efficiency of each individual worker is considered for wages and bonus calculations. But under group bonus plans, different groups of workers are identified and the task is given to the group and the efficiency of the whole group, instead of each individual worker, is determined for computation of bonus and earnings. The bonus is distributed among the workers belonging to the particular group on predetermined basis. The group incentive plans can be successfully implemented where:

• Output depends on team work and joint efforts of group of workers.
• It is difficult to measure the individual result rather than the group’s result.
• It is necessary to work as a member of a team rather than on individual basis, for example in chemical process industry, an individual worker cannot influence the production of the plant.
• Both direct and indirect workers need to be compensated equally.
• It is possible to create small work units/ groups to set the standards to production and costs.
• Skill of the workers in the group does not vary widely.

• Increase in production and saving in cost of production can be achieved.
• Supervision cost will be reduced substantially.
• The quality of work is improved.
• Absenteeism is reduced to minimum and creates interest in work among the workers.
• Routing and scheduling problems are eliminated.
• It creates team spirit and collective interest in the work.
• Minimises waste and reduces of bonus is reduced.
• Clerical work in calculation of bonus is reduced.

• Individual skills and efficiency are not considered in these systems.
• Difficulty may arise in calculation of bonus and method of its distribution to all the workers in the group.
• The bonus is paid on group efforts; an individual worker may not put his maximum effort in view of equal sharing of bonus by inefficient workers.
• An inefficient group leader may cause the entire group to suffer.

Some of the group bonus plans are given below:

### Priestman Production Bonus Plan

Under this system, the standard output and standard time for each department is predetermined in consultation with the workers. Bonus is payable to the department when the actual production exceeds the standard production. The bonus is calculated as a percentage on such excess production and distributed to all employees in that particular department by increasing their normal wages by the same percentage the actual production increased over the standard. For example, the standard set for a particular division is 10,000 units and actual production achieved is 12,000 units. There is excess production of 20% over the standard output. The employees in that particular division are eligible for 20% increase in their normal salaries as bonus. In this system the time wages are guaranteed if actual production of the particular division, department, and group is less than the standard output. This method not only applicable for excess of actual production over the standard but also saving in material and labour costs is also considered for payment of bonus. The main drawback in this system is the efficiency of individual worker is not considered and inefficient workers can also claim for bonus in this system.

### Cost Efficiency Bonus Plan

In this plan, the standard cost for a particular period is determined and an agreed portion of saving in actual cost over the standard is distributed among the workers as bonus. This plan is for improvement in efficiency of workers; increase in production and to reduce costs.

### Rucker’s Plan

It is also called as share of production plan. Under this plan, the workers will get a fixed percentage of ‘value added’. Value added is defined as “the increase in market value resulting from an alteration in the form, location or availability of a product or service excluded the cost of goods and services purchased from outside.” This plan suggests the payment of bonus on the basis of reduction in the ratio between labour earnings and added value.

### Nunn – Bush Plan

Under this plan, the direct labour cost is fixed and expressed as a percentage of the sales value and any saving in labour cost is credited to a fund account and is distributed among the workers on a method suitable to the work environment.

### Towne Gain Sharing Plan

In this plan, the standard cost of production is determined and saving in cost is calculated as difference between the standard cost and actual cost. In addition to the normal wages, 50% of the saving in cost is paid as bonus to workers and supervisors in proportion to their normal earning.

### Profit Sharing

It refers to the payment of bonus to employees based on profits of the company. Generally, the companies have profit sharing schemes in which employees will receive a bonus related to the profit of the firm. The main objective of this scheme is to provide an incentive for the work force as whole to work collectively to improve the overall results of the organisations.

• Every worker in the organisation contributes towards profit irrespective of their skills and efficiency.
• Better employer – employee relationship is established under this plan.
• A share of profit, capital and control of the management given to employees creates a sense of belonging to the company and the workers contribute to the welfare of the company and wastage is minimized.
• Direct relationship between profits and bonus, will increase bonus by increasing efficiency and production.
• Skilled workers are attracted to the industry.
• Labour and management relations will improve, since labour take interest in management.
• Labour morale is improved which will result in industrial peace and harmony.
• Annual bonus payable will reduce labour turnover.
• Co – operation and team spirit is more.

The disadvantages of the scheme are as follows:

• The reward is not linked to immediate effort and workers have to wait long period for getting their share of bonus.
• The bonus is declared only when the profits are available. But in bad years, even though workers might have worked hardly may not get bonus.
• In profit sharing plan, numbers of employees are participating in a single scheme and it is doubtful whether it motivates the employees in their work.
• Profits are more influenced by external factors than by the employees in spite of their efficient and hard work.

### Co – partnership

Co – partnership schemes also known as ‘co – ownership’ involve the issue of share to employees so that they may feel identified with the business. The employees, being share holders also, will take more care of machines and materials as it will increase the sense of belonging and will work towards the progress of the organisation along with that their share value also increases. The improved productivity means low cost of production and higher profits, and improved standard of lining of the workers.

• It helps to reduces labour turnover.
• Contribution of employees to the profitability of the concern is recognized.
• The morale of the employees is high .
• The employees will have a greater sense of belonging since they also hold share capital in the organisation.

• The lack of production oriented incentive system will not create any interest in work .
• Political interference may also possible due to employees association in management.
• Efforts and rewards are not properly related.
• It does not differentiate between efficient and inefficient workers.
• Even though employees are admitted into partnership they will not have any voice in management decision making.

## Requisites of Good Wages Incentive Plan

For design and Introduction of good wage incentive plan the following points are considered:

• It should be simple to understand by the workers and should enable themselves to calculate their earnings.
• It should be simple to administer and reduce clerical work.
• It Should be capable of using computers for increase in speed of calculations.
• It should be introduced only after full consultation and  agreement with the workers and unions.
• It should act as a motivational scheme.
• It Should guarantee the minimum day wages.
• It should be ensured to operate for a long period.
• It should cover as many employees as possible.
• The incentive should be paid as quickly as possible after the completion of the work.
• The cost of administration of the scheme should be minimum.
• The incentives should relate to the efforts and efficiency of the workers.
• The abnormal factors should not effect the earnings of the workers.
• The incentives should be paid only on good production units and discouragement for defective work.
• The standards of work should be set after scientific study of work and the performance levels should be fair to reach.
• It should conform to labour turnover and absenteeism.
• No limits should be placed on additional earnings under the scheme.
• It should be at least equivalent to the incentive schemes prevailing in other units or industries in the region.
• Due consideration should be given for the saving in cost of production due to the incentive plan and the incentive that will pass to the workers.

## Summary

• The labour cost incurred on employees where directly engaged in production process in making the product is called ‘direct labour cost’.
• The labour cost incurred on those employees who assist in the process like stores, materials handling, inspection, supervision, maintenance etc. is called ‘indirect labour cost’.
• The direct labour cost is forming part of prime cost and indirect labour cost is treated as production overhead.
• Job evaluation is the procedure designed to rank jobs and to measure the worth of a job for compensation purposes. It requires the detailed description of each job like skill, qualification, experience, responsibility, effort, conditions etc.
• Merit rating is the evaluation of an individual employee based on his character, intelligence, integrity, attendance, co – operation discipline to fix up his salary increments or promotion etc.
• Time and motion study Is a technique for recording the times and rates of working for the elements of a specified job carried out under specified conditions at a defined rate of working to analyse the data to fix the time necessary for carrying a job.
• Method study is conducted to evolve a better alternative of working by observing the different methods of performing the job.
• In payment of wages under time rate system standard time is predetermined and the efficiency of each individual worker is assessed to compensate them for higher efficiency in work as compared to standard time set.
• The labour cost saving due to higher efficiency of a worker is shared between employee and employer at different rates by using the plans like, high time rate plan, Halsey plan, Rowan plan, Emerson’s plan, Barth plan, Bedaux plan, Gnatt’s plan etc.
• Under piece rate system, the worker’s efficiency is measured in terms of production against standards set. An efficient worker can be able to produce more than the standard and is eligible for bonus. Some of the important piece rate systems are straight piece rate, piece rate with guaranteed time rate, Taylor’s differential piece rate, Merrick’s differential Piece rate.
• Where output depends on team work and joint efforts of group workers is needed in completion of a job , group bonus plan is suggested, where the bonus is distributed among the workers belonging to the particular group on predetermined basis.
• Profit sharing refers to payment of bonus to employees based on the profits of the company and it acts as an incentive for the work force as a whole to work collectively to improve the overall results of the organisation.
• Co – partnership refers to issue of shares to employees to increase the profitability of the concern by increasing the employee morale and sense of belonging.