Page 141 - DCOM202_COST_ACCOUNTING_I

Unit 7: Remuneration and Incentives

Standard time allowed: 20 units per hour Notes
Normal time rate: ` 30 per hour

Differential 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
Labor 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
Labor cost per unit = ` 1.80
Comment: Labor 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.

Did u know? The system works as an incentive to workers to produce more. Under this
method, the efficiency of workers has a tendency to increase. Thus, it maximizes output
and minimizes the cost of per unit.

Advantages of Piece Rate Method

The following are the main advantages of piece rate method:
(i) Under this method, the reward is related to effort and this can be regarded as more equitable
than the time rate method.
(ii) Under this method, the loss of breakage is minimized because the workers handle the
machines, tools and implements with great care. They know that the breakage will reduce
their output which means reduced wages.
(iii) The workers always try to discover new method or technique for efficient production
resulting in more production and more wages for them.
(iv) As the cost per unit can be known exactly the quotations can be made confidently and
accurately.

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