Piece Rate System and Time Rate System

System of Wage Payment

The success of a concern largely depends upon the efficiency of labor and the efficiency of labor is considerably affected by amountof wages paid to them. Some persons are of the view that the profit of a concern can be maximized only by reducing the wage rates payable to the workers. But, this view is not correct. It should be noticed that low-paid workers are usually inefficient that leads to wastage of materials, frequent breakdown of machinery, less economic use of tools and loss of time, as a result of which the cost of production goes up.

Reasonable and fair wage rates allowed to the workers to ultimately lead to a more economic use of machines, tools, materials, and time. Therefore, the importance of the method of wages payment should never be under-estimated.

Methods or systems of wage payment must possess the given below characteristics:

• It should be simple to operate and easy to understand.

• It should guarantee a minimum wage to each and every worker.

• It should be acceptable to the employer and the employee.

• It should be flexible enough so that changes may be made in future according to the requirements.

• It should ensure the establishment of industrial peace.

The principal methods of wage payment are as follows:

1. Time Rate System
2. Piece Rate System

1. Time Rate System

Under this system, the amount of remuneration or the total wages outstanding to the workers depends on the time for which he is employed. This is a simple and common method of wage payment. In this method, the workman is paid an hourly, daily, monthly or yearly rate of wages.

Thus, the worker is paid on the basis of time but not on his/her performance or unit of output. A number of wages payable to a workman under this method is to be calculated as follows:

Total wages = Actual time took x time rate

or, Total wages = Total hours worked x Wages rate per hour.

Illustration:

A worker is paid Rs. 15 per hour and he spent 400 hours during a particular month in a factory. What is his total earning of that particular month?

Solution:

Total Wages = Total hours Worked * Rate of Wage per hour = 400 hrs * Rs. 15 = Rs. 6000
Thus, the total earning of the worker is Rs. 6000

Given below points are suitable to be applied in the following circumstances:

• Where the quality of work is more important than production.
• Where the volume of production is not within the control of labor.
• When it is difficult to fix the unit of output.
• The nature of work is such that there is no incentive plan.
• Where the amount of output cannot be accurately measured, counted and standardized.

Advantages of Time Rate System

The following are the advantages of time rate system,

• Simplicity: It is really easy to understand and simple to calculate the earnings of workers under this method.

• Guarantee of minimum wages: It guarantees minimum wages to the workers.

• Quality production: Since, a number of wages rate is not linked to the quantity of output, this method ensures production of better quality due to the careful attention of the workers.

• Unity among workers: Under this system, all workers falling under a particular category are paid at an equal rate without any calculation of their quantity of output. It encourages a feeling of equality among workers on account of which this method is also favored by trade unions.

• Economical: It involves less critical work and detailed records are not necessary. Since, the output is not the criteria for identification of wages, tool and materials are handled carefully and wastages are also minimized.

Disadvantages of Time Rate System

This method has the following disadvantages:

• No incentive to the efficient workers: It lacks incentive to efficient workers since all workers are paid equally and no distinction is made between efficient and inefficient workers. So, effort and rewards are not correlated.

• Go-slow policy: The worker in order to earn more wages may try to perform the work slowly which leads to increase in labor cost per unit.

• Dissatisfaction among the efficient workers: The efficient workers are paid wages at the rate equal to those payable to inefficient workers, which creates dissatisfaction among the efficient workers.

• Payment for idle time: Under this method, the idle time of the workers is also paid that increases the cost of production.

• The high cost of supervision: Since, there is no direct link between the quantity of output and wages, wastage of time on the part of the workers is common and the negligence of which requires considerable supervision leading to increased costs.

2. Piece Rate System

In this method, wages are paid to the employees after completion of work. Under it, a worker is paid on the basis of output not the time taken by him. This is one of the simplest and most commonly used systems of wage payment. In this system, the wage rate is expressed in terms of per unit of output, per job or per work-order. A number of wages payable to a workman under this method is to be calculated as follows:

Total wages = Total output x Rate per Unit of Output.

Illustration:

A worker is paid Rs. 20 per unit and he produced 50 units in 8 hours. What is his total earning?

Solution:

Total Wages = Total Output * Wage Rate per Unit of Output = 50 units * Rs. 20 = Rs. 1000
Thus, the total earning of the worker is Rs. 1000.

This system is suitable in the following cases:

• Where a work is of a repetitive nature.
• Where the measurement of work is simple.
• Where the accuracy and quality of output are not very important.
• Where strict supervision is not possible.

Advantages of Piece rate system

The advantages of piece rate system are given below:

• Simplicity: Just like time rate system, the piece rate system is also simple to calculate and easy to understand. It does not involve tedious calculations.

• The incentive to workers: This system provides an incentive to the workers to work hard as the wages are paid on the basis of the quantity of output, not on the basis of time. So, efforts and rewards are correlated.

• Ascertainment of accurate labor cost: Piece rate system wages are paid on the basis of output, the exact cost of labor per unit of output or job can be ascertained.

• No payment for idle time: Under this rating system, no payment were made to the worker for the idle time as a result of which the cost of supervision is not considerable.

• Proper care and use of machines and tools: The workers take proper care of their machines and tools since the breakdown of machines and tools means a decrease in output resulting in less remuneration to them.

Disadvantages of Piece Rate System

This system has the following disadvantages:

• Less attention to quality: As the payment of wages is made on the basis of output, the workers would try to produce more quantity of products and not focus on the quality of products which results in production of less quality products.

• Inefficient use of machines and materials: Since, the wages are paid on the basis of the quantity of output, an excessive wastage of materials and frequent breakdown of machinery may be caused by the workers due to their efforts to obtain maximum output.

• No guarantee of minimum wages: Since, there is a direct relationship between quality of output and wages, the workers suffer if they fail to work efficiently. There is no guarantee of minimum daily wages to workers.

• Dissatisfaction among inefficient workers: The inefficient workers, who work slowly, become dissatisfied by reason of lower wages as compared to the wages paid to their efficient counterparts.

• Adverse effect on worker’s health: The workers may try to work abnormally to earn more which has an adverse effect on their health and efficiency. So, this method is not accepted by a trade union.

Differences between Time Rate and Piece Rate System of Wage Payment

FEATURES OF GOOD PAYMENT SYSTEM OF WAGES

The features of goods system of wages of payment are mentioned below:

1. Suitable for both employer and employee.
2. Simple to understand and easy to apply.
3. Economical system.
4. Guaranteed minimum wages.
5. Assure the equal wages for the similar job.
6. Encourage the competent workers.
7. Accepted by a trade union.
8. In accordance with the law of the country.
9. Flexible

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu