Page 140 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 7.2.2 Piece Rate Method

The second important method of wage payment is piece rate method. Under this method,
the wages are paid on the basis of output of workers without considering the time taken in
performing the work. Thus, the workers are paid on the basis of quantity of work. This quantity
of work is expressed in terms of units e.g. per meter, per tonne, per piece etc. In this method, the
wages are to be calculated from the following formula:
Wage = No. of units produced × Rate per unit

Types of Piece Rate Method

Following are the main types of piece rate method:
Straight Piece Rate Method: Under this system, payment is made on the basis of a fixed amount
per unit or number of units produced without regard to time taken. The wages are to be calculated
from the following formula:

Wages = Number of units × Rate per unit

Notes The piece rate is usually fixed with the help of work study. Standard time for each
job is ascertained first. Piece rate is then ascertained with reference to hourly or daily rate
of pay.

Taylor Differential Piece Rate Method: In the Taylor differential method, piece rates were
determined by time and motion study. Day wages were not guaranteed. There were two rates:
very low piece rate and high piece rate. Thus, the system was designed to:
z z Reward the efficient workers by setting a high piece rate for high level production, and

z z Discourage below-average workers by providing no guaranteed wages and setting low
piece rate for low level production.
Piece Graduated Time Rate: Under this method, workers are paid minimum wages on the basis of
time rates. A piece rate method with graduated time rate may include any one of the following:

z z Guaranteed wages according to time rate plus a piece rate payment for units above a
required minimum,
z z Piece rate with a fixed dearness allowance or cost of living bonus, and

z z If earning on the basis of piece rate is less than the guaranteed minimum wages, the workers
will be paid on the basis of time rate.
Merrick Multiple Piece Rate Method: Merrick afterwards modified the Taylor’s differential piece
rate method. Under this method, the punitive lower rate is not imposed for performance below
standard. On the other hand, performance above a certain level is rewarded by more than one
higher differential rate. Thus, this method rewards the efficient workers and encourages the less
efficient workers to increase their output by not penalizing them for performance. This method
also does not guarantee day wages.

Taylor’s Differential Piece Rate System

Illustration: From the following particulars, calculate the earnings of workers X and Y and also
comment on the labor cost.

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