ALLAMA IQBAL OPEN UNIVERSITY

SUBJECT NAME:
NAME: SESSION: Roll #

COST ACCOUNTING
ATIFA TANVIR MBA (2nd) Autumn 2009 AD511555

ASSIGNMENT TOPIC: WAGE INCENTIVE PLANS FOR VARIOUS CATAGORIES OF EMPLOOYEES PRESENTED TO: MS. RUKHSANA ASIF

I want to thank my teacher and colleagues who helped me a lot in preparing this task Last but not the least. I express my heartiest regards to my parents who supported me morally.ACKNOWLEDGEMENT First and the foremost I offer my gratitude to Holy Lord for enabling me to complete this fascinating but hard working project. . This project not only enlarges my vision but also show me the real picture of the ethical issues. spiritually and prayed for my success to achieve all goals in my life.

be applicable to situations in which workers can increase output or provide for proportionately more pay for output above standards or set fair standards so that extra efforts will result in bonus pay. factory engineers and accountants but also the cooperation of workers. different incentive wage plans are applied in the industries for this purpose. weaknesses. incentive wage plans and guaranteed hourly wages. . In contrast to pay by the hour. The operation of an incentive wage plan requires not only the combined efforts of the personnel department. This wage incentive plan has some strengths. To be successful an incentive wage plan must. job evaluation. One hundred percent bonus plan. week or month an incentive wage plan rewards workers in proportion to their increased high quality output. labor unions. As far as case study is concern. Group bonus plan etc. Kohinoor Textile Mills Ltd uses or apply Straight Piece work Plan for its workers. Therefore. A standard hour’s or day’s work should be established so workers can exceed it with reasonable effort and thereby receive full benefit from the incentive. such as Straight piecework. profit sharing. opportunities and Threats that are included in the assignment. productivity studies.Abstract A worker’s total compensation may be based on negotiated labor contracts.

Table of Contents    o o o o o o o •           Wage incentive plans Purpose of wage incentive plan Types of wage incentive plan o Incentive wage plan based on piece rate  Straight piece rate  Piece rate with guaranteed time rate  Differential piece rate  Taylor’s Differential System  Marrick’s Multiple Piece Rate System Incentive Wage System Based on Time Rate o Halsey Plan o Rowan Premium Plan Gantt task and bonus plan: Bedeaux plan: Emerson's efficiency plan: One Hundred Percent Bonus Plan: Group Bonus Plan: Organizational Incentive Plan:  GainSharing Plan Scanlon Profit Sharing Plan: Incentive Plan for White Collar Workers / Salesman Incentive for Management Employees: For Effective Implementation of Incentive Plan CASE STUDY KOHINOOR TEXTILE MILLS SWOT Analysis Ocnclusion Recommendations References .

factory engineers and accountants but also the cooperation of workers. to increase control over labor cost by ensuring more uniform unit cost.WAGE INCENTIVE PLAN A worker’s total compensation may be based on negotiated labor contracts. Provide for proportionately more pay for output above standard. labor unions. or month an incentive wage plan rewards worker in proportion to their increased high quality Output. Naturally.    Along with these essentials. To be successful. producing more in a given period of time should result in higher pay. profit sharing. The plan seek to ensure greater output. week. The greater number . and at the same time to reduce unit cost. job evaluation. the plan needs to be reasonably simple and understandable Purpose of Wage Incentive Plan: The primary purpose of an incentive wage plan is to induce workers to produce more to earn a higher wage. Set fair standards so that extra effort will result in bonus pay. The operation of an incentive wage plan requires not only the combined efforts of the personnel department. incentive wage plans and guaranteed hourly wages. an incentive wage plan must be: Applicable to situation in which worker can increase output. and to change the basis for reward from hours served to work accomplished. productivity studies. The term incentive wage system refers to methods of remuneration whereby wages earned by the workers vary with their output. A standard hour’s or day’s work should be established so workers can exceed it with reasonable effort and thereby receive full benefit from the incentive. In contrast to pay by the hours.

Incentive plans typically involve wage rates based on various combinations of output and time. if the plan is to have its desired effect. Predetermined piece rate is multiplied by the number of pieces produced to arrive at the earned wages. Therefore. Just-in-time and other productivity enhancement program urge employees to perform well and to exercise initiative. Companies are striving to increase productivity of employees at every level. Incentive wage plan can enhance the establishment of a working environment in which everyone must perform. The danger over the long term is that base pay incentive will lose their identity as employees begin to consider the incentive as part of base. time wages and output wages are not clear cut and distinct. there is an art to establishing appropriate wage levels and meaningful incentive plans. standards should be clearly set and communicated to the workers. However. Many wage incentive systems retain the names of industrial engineers and efficiency experts who originate the plans        The piece rate plan Halsey premium plan Rowan premium plan Barth premium plan Bedeaux point plan Scalon plan Time rate plan Incentive Wage Plan Based on Piece Rates: Piece rate systems offer wages to the workers according to number of unit produced or operations performed. .of unit produced should also result in a lower cost per unit for factory overhead and labor cost combined. Types of Wage Incentive Plan: In actual practice.

shortage of material etc. Moreover. The same standard piece rate applies to all workers without any regard that some of the workers are more efficient than the others. There are no guaranteed minimum wages for the workers. to earn more Idle time is reduced to the minimum Workers take every precaution to avoid machine breakdowns. Therefore. piece rate are coupled with guaranteed time rates. The reason for guaranteed time rate is that. machine breakdown. straight piece rates are not favorably viewed by workers. but those workers who produce above standard output are paid on piece rate basis. workers are paid at standard rates for the pieces produced. exert pressure for a guaranteed minimum wage.Earned wages: Piece rate X Pieces produced Different variations of piece rate systems are as follows: Straight Piece Rate: Under straight piece rates. Piece Rate With Guaranteed Time Rate: Under this system time rate earnings are assured to workers. Cost of supervision is less Delays beyond one's control could affect workers earnings adversely Beginners and slow learners are left behind in the race The focus on quantity would affect quality Minus Points:    . and labor unions. Such factors include power failure. the workers should be protected against low productivity and low wages caused by factors beyond their control. The standard piece rate is determined by time and motion studies. faulty material. Plus Points:      Encourages efficient workers to produce more Workers adopt better ways of getting things done.

  Taylor’s Differential System Marrick’s Multiple Piece Rate System Taylor’s Differential System This system was introduced by Taylor. The purpose is to provide stronger incentive to workers to increase the output. he is given a lower piece rate.Taylor was of the view that an inefficient worker had no place in an organization and he should be penalised by paying low piece rate for low production. up to 83%of the standard output workers are paid at the ordinary piece rate. 0.  Workers may stretch themselves to unhealthy levels to earn more Encourages rivalry between workers Differential Piece Rates: Differential piece rates systems offer higher piece rates to workers attaining desired level of productivity. between 83% to 100% at 110% of the ordinary piece rate and above 100% at 120% of the ordinary piece rate.Hence Taylor decided to give a large reward to those who would complete the work within or less than the standard time. For example.25 is paid to workers producing less then the standard output and Rs.30 per piece is paid to workers producing standard output or more. The system is very harsh to inefficient workers on account of low rate and low output. A worker is paid more if he finishes the assigned task before the stipulated time. the father of scientific management. piece rate of Rs. may be 80 paise Per unit. the higher piece rate for 8 units or beyond may be Re 1/= per unit and lower rate for an output if less than 8 units per day. Marrick’s Multiple Piece Rate System: This method uses three rates. 0. Thus if standard production has been fixed at 8 units/day of 8 hours . . To encourage the worker to complete the work in standard time .

Halsey Premium plan 50% of the time saved as premium . In simple words A worker is paid on the basis of time spent on the work. If the worker is able to finish the task in less than the standard time. Main advantage to employer is the reduction in per unit fixed factory overhead costs caused by greater volume of output. In addition to regular time rate earnings. he or she is entitled to get fifty (in some cases one third) per cent of time saved at time rate in addition to normal time wages.Earning of efficient workers under defferential piece rates shall be higher than the aernings under straight piece rate. irrespective of the amount of work done. Incentive Wage System Based on Time Rate: Time based incentive wage systems pay to the worker according to the time rates for hours worked. Efficiency of workers is measured in hours produced and not in pieces produced. irrespective of whether the assigned work is completed or not. premium are paid to workers exceeding the standard effieinecy level. Plus Points:     Simple and easy to operate Guaranteed wages to workers Favoured by trade unions Good for precision jobs Minus Points.     Makes no distinction between efficient and inefficient workers Offers very little to efficient workers Requires close supervision so that workers do not waste their time No relationship exists between wages and productivity Halsey Plan: Here the worker gets a guaranteed wages based on the time.

Standard time for each task is fixed. If a worker exceeds the standards.5/15= Rs17.But unlike a fixed percentage .Halsey Weir Premium plan offers 30% of the time saved as premium Example: Rate per hour Time allowed for job Time taken = Rs 15/hour = 20 hours = 15 hours Calculate the total earnings of the worker under the Halsey plan S (standard time) T(time taken) R(rate) Total earnings = 20 hours = 15 hours = Rs 15 per hour. .5 Rowan Premium Plan: It assures minimum time wages.5 Total wages for 15 hrs Find the effective rate of earnings = 262.5X15 = 262. Workers. A worker who reaches the standard is paid time wage plus bonus at a fixed percentage (20 per cent)of normal time wages. he is paid a high piece rate. = TXR+50%(S-T)XR = 15X15+50/100(20-15)X15 = 225+2. who fail to finish the job within the time limits. Bonus is paid on the basis of time saved. it is calculated thus Bonus = Time saved/Hours alloed X Hours worked X Time rate Gantt task and bonus plan: Here time wages are guaranteed. get time wages.

One Hundred Percent Bonus Plan: It is a variation of the straight piecework plan. the worker is paid the hourly rate for 10 hours. The rate of bonus increases gradually from 67% to 100%. A worker gets time wages for 100 % performance. and the worker is paid for the standard time at the hourly rate if the unit is completed in the standard time or less. It differs in that standards are stated not in terms of money. a standard time is allowed to complete a unit. he gets bonus at a given rate. Instead of price per piece. Example: If a worker produces 100 units in an 8 hour shift and the standard time is 80 per units per shift (or 10 units per hour). ie. Emerson's efficiency plan: If the worker achieves 67% efficiency. but in time per unit of output.Bedeaux plan: In this plan every operation is expressed in terms of standard minutes called as “B's” representing one minute. Above 100% bonus will be at 20% of the basic rate plus 1% for each increase in efficiency. If actual performance exceeds the standard performance in terms of B's then 75% of the wages of time saved is paid to worker as bonus and 25% is given to the foreman. finishing the job exactly as per standards set. In other .

In . like plans designed for individual incentive. Group Bonus Plan: Iondustry uses a great variety of incentive wage plan . Production standards in units of output per hour are set by industrial engineers. it is frequently impossible to separate the work of one member of a crew. and each worker is in effect paid a bonus for time saved. A worker on the assembly line cannot increase output without the operation of entire group Group bonus plan. Although the worker of each employee is essential to machine operations. Each worker in the group receives an hourly rate for production up to the standard output. Example: A crew of 10 workers uses costly equipment and each is paid Rs.some of which depend on the superior productive performance of a whole department or an entire factory and can include support or indirect labor as well as direct labor.variations of the 100% bonus plans. Fectory operations using large machines often require employee to work in groups or crew. Hour of works and units produced are reported to the payroll department. Unit produce in axcess of the standard are regarded as time saved by the groups. 320 per 8 hour shift or Rs. 10 per hour for a regular 8 hour shift. an efficiency ratio must be figured for every worker before earnings can be computed. the bonus is computer for each day. 40 per hour. are intended to encourage production at rates above a standard. Usally the bonus earned by the group is divided among the group members in proportion to their base pay rate. In this. savings are shared with the supervisor and or the company. where the reported hours worked are multiplied by the hourly production standard to determine the standard units. Each payroll period. Standard production is 50 units per hour or 400 units per shift and overhead is Rs.

. Scanlon: The Scanlon plan was developed by Joseph N. The plan is essentially a suggestion scheme designed to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity. the bonus can be computer for each week. GainSharing Plan: It is based on a mathematical formula that compares a baseline of performance with actual productivity during a given period. Unlike profit sharing plans which have deferred payments. Scanlon. Organizational Incentive Plan: Management should evaluate the strengths and weaknesses of both individual and group incentive plans to determine what is best for their organizations. an organizational and gainsharing plan may be the best answer. In situation where productivity of whole organization needs improvement. These are based on individual performance and are distributed on a monthly or quarterly basis. gain sharing plans are current distribution plans. When productivity exceeds the base line an agreed upon savings is shared with employees. a Lecturer at the Massachusetts Institute of Technology in USA in 1937. month of quarter.other group or individual incentive plans.

Profit Sharing Plan: Here the organisation agrees to pay a particular portion of net profits (given in cash or in the form of shares) to eligible employees. The assumptions the incentives are needed to motivate sales man.. and increased motivation to work. First. improved employee-employer management relations. lesser supervision. Incentive Plan for White Collar Workers / Salesman: The salesman usually given an incentive in the form of sales commissions. reduced employee turnover. but all plans are basically variation of three types of plans . There are several incentive plans. The Scanlon plan.The plan is characterized by two basic features. products. This is due to three factors. Advantages:  Empower the employee to participate in the growth of a company as part owner and get a fair share of the cake. both employees and managers can participate in the plan by submitting their suggestions for cost-cutting methods. Second. each appropriate for different markets. etc. Tradition in the market. wherever adopted. has been successful to encourage a sense of partnership among employees. increase in efficiency on account of cost-cutting is shared by the employees of the unit. One study reported that almost 75% organizations paid salesman on some type of incentive basis. are other benefits.  Helps the company to retain talented employees and make them committed to the job and the company  Better industrial relations.    The unsupervised nature of most sales work.

    Straight salary method Straight commision basis Combination method of salary and commision basis Salary plus commission Incentive for Management Employees: In many organizations the managers are paid bonus.   Determined by formula (some criteria like increased sales) Determined by some discretion used in allocation of bonus (paid on more or less permanent basis) The bonus plan is generally reviewed annually to make them more effective. There are two types of bonus plan. The size of bonus is much higher for top level executives. For top level management. For Effective Implementation of Incentive Plan: Link the incentive with company’s strategy Ensure that efforts and reward are directly related Make the plan understandable and calculableby the employees Set effective standards guarantee an hourly base rate get support for the plan develop good measurement systems Emphasize long term as well as short term goals Take the corporate culture into consideration . bonuses are generally tied to overall corporate result.

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