Types of Incentive Schemes

Definition: The Incentive Schemes are the programs designed to encourage and motivate workmen for
higher efficiency and greater output. The Incentives are the monetary rewards given to the workmen in
recognition of their achievement of specific results during a specified time period.

According to International Labour Organization (ILO), the incentives are “payment by results” but
however it is correct to call it as the “incentive system of payment” since it lays more emphasize on
motivation, i.e., incentives are imparted to the workers for their outstanding performances. Therefore, the
workers are encouraged and motivated to earn more by increasing their productivity.

There are several incentive schemes that can be most successfully employed in larger firms where both the
administrative and engineering staff is required to ensure an efficient production, quality and the
measurement of work. ILO has classified the incentive schemes into four major categories. These are:

1. A scheme in which the worker’s earning vary in the same proportion as output: Under this
category, the income of the worker varies proportionately with his level of output. This means, any
gains and losses incurred as a result of worker’s output shall be accrued to him/her. The two most
popular incentive schemes that fall under this category are:

▪ Straight Piece-Work System

▪ Standard Hour System

2. A scheme in which the worker’s earning vary less proportionately than output: Under this
method, the employees will earn less in proportion to his level of output. There are four methods that
come in this category:

▪ Halsey Plan
▪ Rowan Plan
▪ Barth Variable Sharing Plan
▪ Bedaux Plan
The common feature of all these methods is that time is used as a measure of output and bonus is given for
the time saved ( a difference between the time set for the completion of a job and the time actually taken).
These incentive schemes are also called as gain-sharing schemes since both the employee and the employer
share the gains resulting from the time saved. These methods are typically used in the cases where the
standards of the worker’s output cannot be set or measured accurately.

3. A scheme in which worker’s earning vary proportionately more than output: Under this
category, the worker earns proportionately more than his level of output. There are two methods
under this:

▪ High Piece Rate System

▪ High Standard Hour System

4. A Schemes in which the worker’s earnings vary differently at different levels of output: This
group includes several types incentive schemes which explain that how the worker’s earnings vary
from minimum to maximum levels with respect to their different levels of output. It includes the
following schemes:

▪ Taylor’s Differential Piece-Rate System

 ▪ Merrick Differential Piece-Rate System
▪ Gantt Task System
▪ Emerson Efficiency Plan
Thus, these are some of the incentive programs desirable to be employed in a labor-intensive industry, where
the workers are more than the automated plants.

Incentive Plans for Remunerating

Workers | Cost Accounting
The following points highlight the ten main incentive plans introduced for
remunerating workers.

The incentive plans are: 1. Halsey Premium Plan 2. Rowan Premium Plan 3.
Taylor’s Differential Piece Rate System 4. Merrick’s Differential Piece Rate
System 5. Gantt’s Premium Plan 6. Emerson’s Efficiency Plan 7. Bedaux Plan
8. Profit Sharing Scheme 9. Co-Partnership Scheme 10. Collective Bonus Plan.

1. Halsey Premium Plan:

This plan was introduced by F.A. Halsey in 1981. It is a simple combination of
time and piece rate system.

The main features of this plan are as follows:

i. Workers are paid at a rate per hour for the actual time taken by them.
ii. A standard time is set for each piece of work, job or operation.
iii. If a worker takes standard time or more than standard time to complete his
work, he is paid wages for the actual time taken by him at the time rate. In
other words, under this method time wages are guaranteed.
iv. If a worker takes less than standard time, he is paid a bonus equal to 50% of
the time saved at the time rate fixed. Thus, under this system, total earnings of
a worker are equal to wages for the actual time taken by him plus a bonus.

The formula for calculating bonus and total earnings is as follows:

(a) Bonus = 50% of [Time saved x Time rate]
(b) Total Earnings = Time rate x Time taken + 50% of [Time Saved x Time
rate]
Advantages:
i. It is easy to understand and easy to work.
ii. Under this system efficiency is not penalised.
iii. It records efficiency so it is more profitable for efficient workers.
iv. As bonus is given only for the time saved, incentive is given to workers to
save time.
v. The saving in time results in reduction in labour cost per unit and fixed
overhead cost per unit.
vi. This scheme is beneficial for both employer and employee.

Disadvantages:
The main disadvantages of this method are:
i. Extra efficiency of a worker is not fully rewarded.
ii. Fixation of standard time is really a difficult task.
iii. If standard time is not correctly fixed, there may be disputes between the
employer and the employee.
iv. Workers do not like the employer to share the benefit of time saved by
them.
v. Under this method the quality of the product is deteriorated.

2. Rowan Premium Plan:

This plan is also similar to Halsey plan except in the calculation of bonus.

The main features of Rowan Plan are as follows:

i. Wages are paid on time basis for the actual time worked by the workers.
ii. A standard time is determined for each piece of work.
iii. If a worker completes his work in standard time or in more than the
standard time, he is paid wages for the time actually taken by him.
iv. If a worker completes his work in less than the standard time, he is entitled
to a bonus.
v. Bonus is that proportion of wages of actual time taken which the time saved
bears to the standard time.

Its formula is:

(a) Bonus = (Time Saved/Time allowed) x Time taken x Time rate
(b) Earnings = (Time taken x Rate) + Bonus

Advantages:
i. Like Halsey plan, it provides guaranteed minimum wage to workers. That
means, inefficiency is not penalised.
ii. It provides quarter incentive (bonus) than Halsey plan up to 50% of the time
saved.
iii. It protects the employer against loose rate setting, i.e., against errors in the
setting up of standards.
iv. The gain arising from the time saved by the worker is shared by both
employer and employee.
v. It results in reduction in labour, cost per unit.
vi. It contributes to reduction in fixed overheads cost per unit.
vii. It acts as a check on over-earnings.

Disadvantages:
The main disadvantages of this system are:
i. This system cannot be easily understood by the workers.
ii. This method of incentive wage payment is not easy to operate.
iii. This system encourages inaccuracies in rate fixing.
iv. The incentive given to workers, under this method, is low at higher levels of
efficiency. That means the incentive given to a more efficient worker is very
low.
v. The sharing of the gain arising from the time saved by both the employer
and the workers, provided for under this method is resented to by the workers.

Difference between Halsey and Rowan Method:

The main differences between these two schemes are:
i. Halsey scheme is simple to understand and execute, whereas Rowan plan is
difficult to understand and execute.

ii. Under the Halsey scheme, the gains arising from the time saved is shared by
employer and employees equally but under Rowan scheme it not shared
equally.

iii. Under Halsey plan, bonus is given for 50% of the time saved at the hourly
rate. But under the Rowan plan, bonus is given for that portion of the time
taken which time saved bears to the standard time at the hourly rate.

iv. Under the Halsey plan, bonus increases steadily with rise in efficiency. But
under the Rowan plan, bonus increases rapidly up to a saving of 50% of the
standard time and thereafter it decreases.

v. When the work is completed less than half of the standard time, Halsey plan
provides more bonus than Rowan plan. On the other hand, when the work is
completed in more than 50% of standard time, Rowan plan provides more
bonus than Halsey plan.

vi. The labour cost p.u. under the Rowan plan is more than that under the
Halsey plan upto a saving of 50% of the standard time. But beyond 50% of the
saving of the standard time, the labour cost p.u. under the Halsey plan is more
than that under the Rowan plan.

3. Taylor’s Differential Piece Rate System:

This system was introduced by F.W. Taylor, the father of scientific
management.

The main features of this incentive plan are as follows:

i. Day wages are not guaranteed, i.e., it does not assure any minimum amount
of wages to workers.
ii. A standard time for each job is set very carefully after time and motion
studies.
iii. Two piece rates are set for each job, i.e., the lower rate and higher rate. The
lower piece rate is payable where a worker takes a longer time than the
standard time to complete the work. Higher rate is payable when a worker
completes the work within the standard time. Usually these rates are 83% of
the piece work rate for inefficient workers and 175% of the piece work rate for
efficient workers.

Advantages:
This plan provides strong incentive to efficient workers. The calculation of
wages is also not difficult and can be understood by the workers.

Disadvantages:
However, this system suffers from the following shortcomings:
i. It severely penalises the workers who produce slightly less than standard
output.
ii. It does not guarantee minimum wages.
iii. It makes wide discrimination between efficient and inefficient workers and
thus creates rivalry. This may weaken their unity.

4. Merrick’s Differential Piece Rate System:

This is a modification of Taylor’s plan. While Taylor prescribed two rates,
Merrick’s plan lays down three rates. The lowest rate is for the beginners, the
middle rate is for the developing workers and the highest rate is for the highly
efficient workers. Efficiency of the workers is determined in terms of
percentages.
Thus the rates of remuneration are:

Like Taylor’s plan, this method also does not guarantee minimum wages. The
general criticism levelled against Taylor’s plan also applies to it except that it
lessens or minimises the punitive character of Taylor’s plan.

5. Gantt’s Premium Plan:

This system was introduced by H.L. Gantt. This plan is the mixed form of
Halsey and Taylor’s plan.

The main features of this plan are:

i. Day wages on time basis are guaranteed to all workers.
ii. This plan is a combination of time rate differential piece rate and bonus.

iii. A standard is set and remuneration is calculated as follows:

(a) When output is below standard—Payment at time rate.
(b) When output is at standard—Payment at time rate + 20% Bonus.
(c) When output is above standard—Payment at a high piece rate.

6. Emerson’s Efficiency Plan:

This scheme is designed to give encouragement to the slow workers to perform
better than before. Under this method, time wage is guaranteed. The standard
output in this plan is fixed to represent 100% efficiency. A bonus is paid to a
worker whose efficiency exceeds 67%.
As efficiency increases, the bonus also increases gradually in steps at a stated
rate so that at 100% efficiency, bonus would rise to 20% of wages. Beyond
100% the bonus increases at 1% of the basic rate for each 1% increase in
efficiency.
It can thus, be shown as below in a tabular form:
Advantages:
i. It guarantees minimum time wages.
ii. It is easy to understand and simple to operate.
iii. It provides an incentive to beginners and even to those who are less
proficient.

Disadvantages:
The incentive offered is considered too inadequate to motivate efficient and
ambitious workers.

7. Bedaux Plan:

Under this plan, standard time of each job is determined in minutes known as
Bedaux points or B’s one B unit represents the amount of work which an
average worker can do under ordinary conditions in one minute. The standard
time, is determined by work study and each job is assigned the number of B’s.
Under this system, the worker receives his daily or hourly rate plus (+) 75% of
the points saved, multiplied by one sixtieth of his hourly rate. The remaining
balance of 25% is paid to supervisors and indirect workers. Thus –

Earnings = (Hours worked x Hourly rate) + Bonus

Advantages:
Following are the advantages of this method:
i. It guarantees minimum wage to all workers.
ii. Output of workers is measured in terms of common unit known as B’s. This
makes easier the task of recording production of workers and comparing it
with standard. Suitable data for production control becomes easily available.
iii. As the benefit of 25% of time saved is given to supervisors and indirect
workers, Bedaux plan may be extended to the department as a whole including
indirect workers.

Disadvantages:
i. Detailed calculation of ‘B’ units increases of clerical works. This system is
thus comparatively costly.
ii. This system is generally not preferred by workers because they do not get
the full benefit of the time saved by them.

Other Plans:

8. Profit Sharing Scheme:

Under this system, the employer agrees to pay a certain pre-determined
amount of profit in addition to the usual salary payable to employees. Profit
sharing scheme differs from factory to factory. In some factories, it is restricted
only to executives, while in others it is applicable to all employees.
Again in some factories, it is paid for the year during which profit is earned
while in others, the payment of profit is deferred. This is to enable the
employees to get an appropriate fund at the time of retirement, disability or
separation. The method of distributing profit also differs from factory to
factory. In some factories, the length of service is taken as the basis for
determining the percentage of profit. In others, a fixed percentage of the total
wages or merit rating of the employees constitutes the basis.

Advantages:
Following are the advantages of this method:
i. It reduces excess labour turnover.
ii. It increases production due to increased efforts of workers with a view to
earn profit.
iii. It eliminates conflicts between the employer and the employees.
iv. It leads to better co-operation, team spirit and increased efficiency of
workers.
v. It boosts up labour morale which is responsible for industrial peace.
vi. Workers get a chance to participate in management. This creates a sense of
belonging to the factory. As a result, materials and machineries will be handled
with care, minimising losses and wastages.

Disadvantages:
Following are the drawbacks of this system:
i. Usually the worker has no control over profit and it is not directly related to
his effort.
ii. Unless merit rating is considered as the basis, both efficient and inefficient
workers get profit at the same rate.
iii. Payment of profit is at long intervals, usually once a year and the share
received by employees is negligible.
iv. Employees share only the profit but not the losses.
v. When workers are habituated to the payment of profit on a regular basis,
non-payment of profit in any particular year will discourage the employees.

9. Co-Partnership Scheme:
Co-partnership confers upon employees the opportunity to share in the capital
of the factory and to receive a part of the profit that accrue to their share of
ownership.

Co-partnership differs from profit sharing in two respects:

Difference between Profit Sharing and Co-Partnership Scheme:
i. In co-partnership, employees invest capital in the factory, whereas in profit
sharing scheme, the employees do not contribute to capital.
ii. In co-partnership the employees share profit and loss, if there is any,
whereas in profit sharing scheme, the workers receive only a share in the profit
but they are not called upon to bear the losses.

10. Collective Bonus Plan:

In the schemes discussed so far, the bonus to be paid has been calculated on
the basis of individual worker’s performance. But there are certain jobs which
are required to be done collectively by a group of workers. In continuous
production for example – work flows in a sequence or in assembly work for
televisions, radios, scooters, etc. a team of workers is engaged on various
operations.
As such, it becomes necessary to introduce bonus schemes for collective
efficiency of the group as a whole the intention is to create a collective interest
in the work. The total bonus determined is distributed among the members of
the group on an equitable basis.

The following bases of distribution are commonly used:

i. Equal distribution, if skill and grade of workers in the group is uniform.
ii. On the basis of time wages of each worker.
iii. In proportion to the time rate of each worker, where each worker has
devoted equal time.
iv. In a fixed ratio determined in advance on the basis of merit rating.
Suitability:
Collective bonus schemes may be usefully employed in the
following circumstances:
i. Where it is not possible to measure the performance of each individual
worker.
ii. Where the workers constituting a collective possess the same or equal skill
and efficiency.
iii. Where the number of workers constituting a group is not very large.
iv. Where production is dependent on the collective effort of a group of
workers as a whole.

Advantages:
The main advantages of collective bonus schemes are as follows:
i. It encourages co-operation and team work among the workers.
ii. It reduces absenteeism because an absent member weakens the group and
most of the workers do not like to let down their team.
iii. The calculation of wages requires less clerical work as it involves recording
of the output of the group and not individual workers.
iv. Supervision work is reduced because less efficient workers are taken care of
by the efficient ones.
v. Indirect workers can also be include in the scheme by allocating such
workers to the groups.

Disadvantages:
The main disadvantages of this system are:
i. Collective bonus scheme is unfair to efficient and hardworking workers of the
group because an efficient worker is penalised for inefficiency of other workers
in the group.
ii. There may be difficulties regarding fixing the amount of bonus and the basis
of its distribution among workers in the group.
iii. There may be some discontentment when workers in the group are of
widely varying skills and efficiencies.

Incentive Plans for Indirect Workers:

As it is difficult to measure the productivity of indirect workers, they are
generally excluded from the incentive plans. But indirect workers are as much
essential for production as direct workers and as such full increase in
production cannot be obtained without the full co-operation of the indirect
workers.
Therefore, incentive may be introduced for indirect workers either to achieve
the efficiency of the services they provide to direct workers or to induce
foremen or supervisors to increase departmental efficiency and thus, reduce
costs. Also payment of bonus to indirect workers, when it is being paid to
direct workers will prevent labour unrest.

Reasons for Paying Incentives to Indirect Workers:

1. To reduce the cost of operating various departments by means of increasing
their efficiency.
2. To avoid discrimination between direct and indirect workers.
3. To create team spirit and co-operative attitude.
4. To eliminate labour unrest and dissatisfaction among employees and
reduction in labour turnover.
5. To encourage efficient indirect workers by rewarding them.
6. To enable them to improve their skill so that losses and wastages arising out
of materials can be avoided.
7. To provide better service by indirect employees to direct employees.

Bases of Payment of Incentives:

The indirect workers may be paid a bonus on any one of the
following bases:
1. Where indirect workers serve a group of direct workers, they may be paid a
bonus on the basis of performance of the group of direct workers whom they
serve.
2. When indirect workers provide general services, bonus may be paid on the
basis of output of whole factory.
3. On the basis of job evaluation and merit rating of indirect workers.
4. On some arbitrary basis, like enhanced day rate so as to include an element
of bonus in the rate itself.

Non-Monetary Incentives:
Non-monetary incentives are offered with a view to attract better employees, to
encourage loyalty, reduce labour turnover, promote better health and reduced
absenteeism so as to build up a happy and contented staff. Non-monetary
incentives are sometimes provided free of cost while in some other cases, it
may be subsidised.

This usually takes the following forms:

1. Educational facilities for training the employees or to educate children of
employees.
2. Financial assistance in respect of housing.
3. Medical facilities
4. Transport facilities
5. Recreational facilities
6. Co-operative societies
7. Leave travel concession
8. Contribution to P.F. gratuity etc.,
9. Free uniforms.
Practice Questions on Taylor Differential Piece Rate System
Illustration 1
From the following particulars, calculate the earnings of workers X and Y and also comment on the labour
cost.
Standard time allowed: 20 units per hour
Normal time rate: `30 per hour
Differential Rate to be applied:

80% of piece rate when below standard

120% of piece rate at or above standard

In a particular day of 8 hours, X produces 140 units while Y produces 165 units.
Solution:
Standard production per day is 20 units × 8 hours = 160 units
Worker ‘X’ produces 140 units which means he is below standard and will get wages @ 80% of the normal
piece rate.
X’s earnings:
Normal piece rate = `30 per hour/20 units = `1.5 per unit
80% of the normal piece rate = `1.20 per unit
Earnings = `1.20 × 140 units = `168

Labour cost per unit = `168/140 units = `1.20

Y’s Earnings:
Y has produced more than the standard production of 160 units and hence he will
get wages @ 120% of normal piece rate. His earnings will be as shown below.
Normal piece rate = `30 per hour/20 units = `1.50 per unit
120% of normal piece rate = `1.80 per unit
Earnings = `1.80 ×165 units = `297
Labour cost per unit = `2.97/165 units = `1.80

Comment: Labour cost increases from `1.20 per unit to `1.80 per unit. Taylor’s system is resisted on this ground

as well as on the ground that it is very harsh on the workers.

Illustration 2:
Using Taylor’s differential piece rate system, find out the earnings
of workers X and Y from the following particulars:
Standard Time per piece = 20 minute; Normal Rate per hour = 0.90; In a 9
hour day, X produces 25 units and Y produces 30 units. Lower rate is 80% of
normal rate and higher rate is 120% of normal rate.

Illustration 3:
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 – Rs.1.80
Standard time per unit 20 seconds
Differentials to be applies are:
80% of the piece rate below the standard;
120% of the piece rate at or above standard.
A produced 1,300 units per day of 8 hours & B -1,500 units per day of 8 hours.

Solution:
Pieces per minute = 60/20 = 3 units
Units per hour = 60 x 3 = 180 units
Normal piece rate = 1.8 /180 = Rs. 0.01
Standard production in actual time = 8 x 180 = 1440 units

Earnings under Straight Piece Rate:

Earnings of A = 1300 x 0.01 = Rs 13.00
Earnings of B = 1500 x 0.01 = Rs 15.00

Earnings under Taylor’s Differential Piece Rate:

A’s efficiency = 1300 / 1440 x 100 = 90.28%
= < 100%

A’s Earnings = 1300 x 0.01 x 80%

= Rs. 10.42

B’s efficiency = 1500 / 1440 x 100 = 104.17%

= > 100 %

B’s Earnings = 1500 x 0.01 x 120%

= Rs. 18

Practice Questions on Halsey Plan and Rowan Plan

(a)Halsey Premium Plan

Total Earnings = H X R + 50% [S – H] R

Where, H = Hours worked, R = Rate per hour, S = Standard time

Illustration 4
Time allowed for a job is 48 hours; a worker takes 40 hours to complete the job. Time rate per hour is
₹15.
Compute the total earnings of the worker.

Solution:
Total Earnings = H X R + 50% [S – H] R
Total Earnings = 40 X Rs15 + 50% [48 – 40] X 15
Total Earnings = Rs 600 + Rs 60 = Rs 660

(b) Halsey – Weir Plan

Under this method, there is only one difference as compared to the Halsey Plan and that is instead of 50%
bonus for the time saved, it is 33 .33 % of the time saved. Accordingly the formula for this method is modified
as follows.
Total Earnings = H × R + 33.33% of [S-H] × R
H = Hours worked. R = Rate per hour, S = Standard time
(c) Rowan Plan
This premium bonus plan was introduced by Mr. James Rowan. It is similar to that of Halsey Plan in respect of
time saved, but bonus hours are calculated as the proportion of the time taken which the time saved bears
to the time allowed and they are paid for at time rate. The formula for computation of total earnings is as
follows:-
Total Earnings = H × R + [S – H]/S × H × R
Where H = Hours worked, R = Rate per hour, S = Standard time

Illustration 5
Calculate the total earnings and effective rate of earnings per hour of three operators under Rowan System
and Halsey System from the following particulars.
The standard time fixed for producing 1 dozen articles is 50 hours. The rate of wages is `1/- per hour.
The actual time taken by three are as follows:-
A 45 hours
B 40 hours
C 30 hours.

Solution:
Computation of Total Earnings of workers under Halsey Plan
Earnings under Halsey Plan = Hours worked × Rate per hour + (50% × Time saved × Rate per hour)
Worker Earnings Effective Rate
A E = (45 x 1) + 50/100 (50-45) x Effective Rate = 47.5/45
1 = 1.06
= 47.5
B E = (40 x 1) + 50/100 (50-40) x Effective Rate = 45/40
1 = 1.125
= 45
C E = (30 x 1) + 50/100 (50-30) x Effective Rate = 40/30
1 = 1.33
= 40

Earnings under Rowan Plan =

Hours worked × Rate per hour + ( Time saved Time allowed × Hours worked × Rate per hour)

Earnings
Effective Rate
A E = (45 x 1) + [50-45 / 50] x 45 Effective Rate = 49.5/45
x1 = 1.1
= 45 + 4.5
= 49.5
B E = (40 x 1) + [50-40 / 50] x 40 Effective Rate = 48/40
x1 = 1.2
= 40 + 8
= 48
C E = (30 x 1) + [50-30 / 50] x 30 Effective Rate = 42/30
x1 = 1.4
= 30 + 12
= 42

Illustration 6
A workman takes 9 hours to complete a job on daily wages and 6 hours on a scheme of payment by results.
His hourly rate is 25 p. The Material cost of the product is `4 and factory overheads are recovered at 150% of
the total direct wages. Calculate the factory cost of the product under following methods:-
(a) Time rate system (b) Halsey Plan (c) Rowan Plan.
Solution:
Computation of factory cost under three systems: Amount (Rs)
Time Rate System Halsey Plan Rowan Plan
Material 4.00 4.00 4.00
Labour (working notes) 2.25 1.88 2.00
Overheads (150% of 3.38 2.82 3.00
total direct wages)
Factory Cost 9.63 8.70 9.00

Working Notes: Amount (Rs)

Time Rate System Halsey Plan Rowan Plan
Labour 9 x 0.25 6 x 0.25 + 1/2 (9-6) x 6 x 0.25 + (9-6 / 9) x
0.25 6 x 0.25
2.25 1.88 2.00

Illustration 7
A worker under the Halsey method of remuneration has a day rate of `12 per week of 48 hours, plus a cost of
living bonus of 10 p. per hour worked. He is given 8 hours task to perform, which he performs in 6 hours, he is
allowed 30% of the time saved as premium bonus. What would be his earnings under Halsey Plan and Rowan
Plan.
Solution:
Computation of earnings of worker under Halsey Plan:
Earnings under Halsey Plan = Hours worked × Rate per hour + (30% × Time Saved × Rate per hour)
= (6 x 0.25) + 30/100 (8-6) x 0.25 = 1.65
(+) Cost of Living Bonus (6 x 0.1) = 0.60
Earnings under Halsey Plan = Rs 2.25
Computation of earnings of worker under Rowan Plan:
Earnings under Rowan Plan =

Hours worked × Rate per hour + ( Time saved / Time allowed × Hours worked )× Rate per hour

= (6 × 0.25) + (8-6 / 8) × 6 × 0.25 = 1.88

(+) Cost of Living Bonus (6 × 0.1) = 0.60
= Rs. 2.48
Earnings under Halsey Plan = Rs 2.25
Earnings under Rowan Plan = Rs 2.48

Illustration 8
In a factory guaranteed wages at the rate of ` 1.80 per hour are paid in a 48 hour week. By time and motion
study it is estimated that to manufacture one unit of a particular product 20 minutes are taken, the time
allowed is increased by 25% . During the week A produced 180 units of the product. Calculate his wages
under the following methods:
(a) Time Rate
(b) Piece Rate with a guaranteed weekly wage
(c) Halsey premium Bonus
(d) Rowan Premium Bonus
Solution:
(a) Calculation of wages under Time Rate System
Earnings under time wages = TR
= 48 × 1.8 = Rs 86.4
(b) Calculation of wages under Piece Rate with a Guaranteed Wage Rate
Normal Time for one unit = 20 minutes
(+) Relaxation allowance @ 25% = 5 minutes
Standard Time = 25 minutes

No. of pieces per hour = 60/25 pieces.

Piece Rate = Hourly Rate / No. of pieces per hour
= 1.8 ÷ (60/25)
= 0.75
Earnings under Piece Rate = 180 x 0.75 = Rs 135
(c) Calculation of wages under Halsey Premium Bonus
Standard time for actual production = 180 x 25 / 60 = 75 hours
Earnings under Halsey Plan =
= (48 x 1.8) + 50/100 (75-48) x 1.8
= 86.4 + 24.3 = Rs 110.70
(d) Calculation of wages under Rowan Premium Bonus
Standard time for actual production = 180 x 25 / 60 = 75 hours
Earnings under Rowan Plan = (48 x 1.8) + (75-48 / 75) x (48 x 1.8)
= 86.4 + 31.104 = Rs 117.50

Illustration 9
From the following particulars work out the earnings for the week of a worker under
(a) Straight Piece Rate
(b) Differential Piece Rate
(c) Halsey Premium System
(d) Rowan System
Number of working hours per week — 48
Wages per hour — ` 3.75
Normal time per piece — 20 Min
Normal output per week — 120 pieces
Actual output for the week — 150 pieces
Differential piece rate — 80% of the piece rate when output is below standard and 120% above standard.

Solution:

Computation of earnings for the week of a worker

(a) Piece rate = (48 x 3.75) / 120 = ` 1.5
Earnings under Straight Piece Rate = 150 x 1.5 = Rs 225

(b) Efficiency = (150 / 120) x 100 = 125% (> 100%)

Earnings under Differential Piece Rate = 150 x 1.5 x 120/100
= Rs 270

(c) Standard time for actual production = 48 x (150 / 120) = 60 hrs

Earnings under Halsey Plan = (48 x 3.75) + 50/100(60 – 48) x 3.75

= 180 + 22.5 = Rs 202.5

(d) Earnings under Rowan Plan = (48 x 3.75) + [(60-48 / 60) x (3.75 x 48)]

= 180 + 36 = Rs 216
OTHER THEORY TOPICS ON LABOUR COSTING:
Q. Explain the concept of Time Keeping and Time Booking

Time Keeping:
This department is concerned with maintenance of attendance time and job time of workers.
Attendance time is recorded for wage calculation and job time or time booking is considered for
computing time spent for each department, job, Operation and Process for calculating labour cost
department wise, job wise and of each process and operation.

Essentials of a good Time-keeping System

1. Good time keeping system prevents ‘proxy’ for one another among workers
2. Time-keeping has to be done for even piece workers to maintain uniformity, regularity and
continuous flow of production.
3. Both the arrival and exit of workers is to be recorded so that total time spent by workers is
available for wage calculations.
4. Mechanised methods of time keeping are to be used to avoid disputes.
5. Late arrival time and early departure time are to be recorded to maintain discipline.
6. The time recording should be simple, quick and smooth.
7. Time recording is to be supervised by a responsible officer to eliminate irregularities.

Methods of time keeping

1. Time Recording Clocks or Clock Cards: This is mechanized method of time recording. Each
worker punches the card given to him when he comes in and goes out. The time and date is
automatically recorded in the card. Each week a new card is prepared and given to the worker so
that weekly calculation of wages will be possible.

2. Disc Method: This is one of the older methods of recording time. A disc, which bears the
identification number of each worker, is given to each one. When the worker comes in, he picks up
his disc from the tray kept near the gate of the factory and drops in the box or hooks it on a board
against his number. Same procedure is followed at the time of leaving the factory. The box is
removed at starting time, and the time keeper becomes aware of late arrivals by requiring the
workers concerned to report him before starting. The time keeper will record in an Attendance
Register any late arrivals and workers leaving early. He will also enter about the absentees in the
register on daily basis.

3. Attendance Records: This is the simplest and the oldest method of marking attendance of
workers. In this method, every worker signs in an attendance register against his name. Leaves
taken by workers as well as late reporting is marked on the attendance register itself.
Time Booking: Time spent by the worker on different jobs and works is called time booking. This
is the productive time of workers.

Objectives:
The following are the objectives of time booking:
1. It ensures that the time paid for, as per time keeping is properly utilized on jobs and orders.
2. It enables the cost department to ascertain the labour cost of each job or work order.
3. It helps in allocation and apportionment of wages among different departments where labour
hour rate method is used as basis.
4. It helps to calculate idle time.
5. It is helpful when incentive schemes are in operation in the factory by revealing the time spent
by the workers on different jobs.
6. Time booking also helps in measuring the efficiency of workers by comparing standard time for
the jobs with actual time.

Time Booking Methods: The following methods are used for time booking.
1. Daily Time Sheet: In this method, each worker records the time spent by him on the work
during the day, for which a sheet is provided to each worker. The time is recorded daily and hence
accuracy is maintained.

2. Weekly Time Sheets: The only difference between the daily time sheet and weekly time sheet
is that these time sheets are maintained on weekly basis. This means that each worker prepares
these sheets weekly rather than daily.

3. Job Ticket: Job tickets are given to all workers where time for commencing the job is recorded
as well as the time when the job is completed. The job tickets are given for each job and the
recording of the time as mentioned above helps to ascertain the time taken for each job.

4. Labour Cost Card: This card is meant for a job, which involves several operations or stages of
completion. Instead of giving one card to each worker, only one card is passed on to all workers
and time taken on the job is recorded by each one of them. This card shows the aggregate labour
cost of the job or the product.

5. Time and Job Card: This card is a combined record, which shows both, the time taken for
completion of the job as well as the attendance time. Therefore, there is no need to keep separate
record of both, time taken and attendance time.

Labour Turnover
Labour turnover refers to the rate at which employees leave employment. Labour turnover can be evaluated
by relating the number of employees leaving their employment during a period of time to the total or
average numbers employed in that period.
It may also be defined as engagements and losses in the working force as related to the total number of
employees who were on the pay roll at the beginning of the period in question.

Example:
Let us assume that in a factory there were 2,000 employees on an average during the year 1990 and 100
persons left the company during this period. So, the labour turnover will be 100*100/2000 = 5%

Causes of labour Turnover:

Avoidable causes are:
(i) Lower wages;

(ii) Bad working conditions;

(iii) Unsympathetic attitude of the management;

(iv) Lack of opportunities for promotion;

(v) Lack of proper training;

(vi) Improper manpower planning;

(vii) Lack of proper incentives;

(viii) Bitter relationship between management and workers;

(ix) Lack of conveyance, accommodation, medical and educational facilities and recreational amenities etc.

Unavoidable causes:
Sometimes workers have to leave the organisation because of management requirements and
administrative actions. They also leave their employment at their own will, that is, on personal reasons. In
the latter case the management can do nothing but remains a helpless onlooker. So, unavoidable causes
may be administrative or personal.

(1) Administrative causes:

(i) Termination of service due to indiscipline, insubordination, bad conduct etc.

(ii) Retrenchment or lay-off due to shortage of resources, low demand for recession.

(2) Personal causes:

(i) Change for better job;

(ii) Death;

(iii) Retirement due to old age;

(iv) Change for better working conditions, better environment;

(v) Change for secured job;

(vi) Marriage, especially of women workers;

(vii) Illness and accident rendering the worker permanently incapable of doing any work;

(viii) Domestic need and responsibility etc.

Effects of Labour Turnover:
Labour turnover is harmful and costly. It results in increased cost of production due to the
following reasons:
(i) With frequent changes in labour force, production planning cannot be properly executed resulting in
substantial loss in production.

(ii) Since the new workers have no previous experience in production there is loss arising out of defective
work, increased spoilage and wastage resulting in high cost of production.

(iii) Newly recruited workers are likely to mishandle tools and equipment which results in breakages.

(iv) The organisation has to incur extra cost for workers’ training.

(v) Labour turnover causes increased replacement cost.

(vi) Labour cost increases because of lower productivity of newly recruited workers as they do not possess
the same expertise as the old workers who have left the organisation.

Methods of Reducing Labour Turnover

(i) Satisfactory Wage Rates:

Low wage rates in a concern may be the main cause of labour turnover. The wage rates should

correspond to those prevailing at that place and in the industry. Somewhat higher wage rates will

attract good workers from other organisations also.

(ii) Proper Working Conditions:

Working conditions should be such where workers feel like doing more work. There should be
proper sanitation, provision for toilets, canteen facilities, sitting place during work etc.

(iii) Sound Selection and Placement Policies:

A wrong selection and placement may force a worker to change his job. Selection procedure should

be scientific where only suitable persons are taken. The placement of workers should be such that

they take pleasure in working on a job.

(iv) Proper Promotion Policy:

There should be a clear cut promotion policy in the organisation. All workers should be given full

opportunities for going on higher jobs. Any type of favouritism in promotions will discourage

efficient employees and may become a cause of labour turnover.

(v) Good Training Programme:

There should be a well-planned training programme. Workers will have job satisfaction if their

performance is good. Training programmes will help workers in keeping them abreast with latest

job techniques and improve their efficiency.

(vi) Welfare Programmes:

Management should try to look after the welfare of employees. In addition to good wage rates, they

expect some facilities from the management. There should be housing facilities, school for the

children of employees, transport facilities, recreation avenues etc.

(vii) Grievance Settlement Machinery:

Small grievances, sometimes, become the cause of labour turnover. There should be proper

grievances settlement machinery where workers can go with their complaints. Their grievances

should be properly looked into and remedial steps be taken immediately.

(viii) Proper Supervision:

The workers sometimes may not be happy with their supervisors. The nature of a supervisor may

be harsh and autocratic. Such supervisor will not listen to the difficulty of workers and will expect

better result in all situations. The supervisors should be cordial and friendly with their

subordinates and this will help in creating a family atmosphere.

(ix) Promotion Avenues:

Every person will aspire to rise in his profession. There should be sufficient openings for efficient

and capable persons for going up to higher positions.

(x) Incentive Plans:

There should be incentive schemes for efficient workers. The workers with better production

results should be able to earn more.

(xi) Labour Participation:

Relations between management and employees should be improved by encouraging labour

participation in management.

4. Measurement of Labour Turnover:

Labour turnover rate can be measured by the application of any one of the following three
methods:

It is essential for any organisation to measure the Labour Turnover. This is necessary for having an idea
about the turnover in the organisation and also to compare the Labour Turnover of the previous period
with the current one. The following methods are available for measurement of the Labour Turnover:-

(a) Additions Method: Under this method, number of employees added during a particular period is
taken into consideration for computing the Labour Turnover. The method of computing is as follows.
Labour Turnover = (Number of additions/Average number of workers during the period) ×100

(b) Separation Method: In this method, instead of taking the number of employees added, number
of employees left during the period is taken into consideration. The method of computation is as
follows.
Labour Turnover = Number of separations/Average number of workers during the period) ×100

(c) Replacement Method: In this method neither the additions nor the separations are taken into
consideration. The number of employees replaced is taken into consideration for computing the
Labour turnover.
Labour Turnover = (Number of replacements/Average number of workers during the period) ×100

(d) Flux Method: Under this method Labour Turnover is computed by taking into consideration the
additions as well as separations. The turnover can also be computed by taking replacements and
separations also. Computation is done as per the following methods.
Labour Turnover = [Number of additions + Number of separations] /Average number of workers
during the period ×100
Labour Turnover = [Number of replacements + Number of separations] /Average number of
workers during the period × 100

Problem 1:
From the following data given by the Personnel Department calculate the labour turnover
rate by the application of above three methods:
No. of workers on the Pay Roll:
At the beginning of the month Jan, 91 900

At the end of the month 1,100

During the month 10 workers left, 40 persons were discharged and 150 workers were recruited. Of these, 25
workers were recruited in the vacancies of those leaving, while the rest were engaged for an expansion
scheme.

Problem 2
During October 2015, the following information is obtained from the Personnel Department of a
manufacturing company. Labour force at the beginning of the month 1900 and at the end of the month
2100. During the month, 25 people left while 40 persons were discharged. 280 workers were engaged
out of which only 30 were appointed in the vacancy created by the number of workers separated and
the rest on account of expansion scheme. Calculate the Labour Turnover by different methods.

Solution:
Computation of Labour Turnover
Additions Method:
Number of Additions/Number of average workers during the period = 280 / 2000 X 100 = 14%

Separation Method:
Number of Separations/Number of average workers during the period = (25+40)/2000 × 100 = 3.25%

Replacement Method:
Number of Replacements / Number of average workers during the period = 30/2000 X 100 = 1.5%

Flux Method:
[Number of Additions + Number of Separations] / Number of average workers during the period
= [(280 + 65) / 2000] × 100 = 345/2000 X 100 = 17.25%

Note: Average number of workers in all the above methods is computed by taking Opening number of
workers + Closing number of workers / 2 = 1900 + 2100/2 =2000