Labour costing: Bonus and incentive plan

09/05/2020 2 By indiafreenotes
  1. Payroll Accounting:

It is concerned with the maintenance of records for the amounts due to the employees like salaries, wages, allowances, contributions to provident fund and E.S.I, etc. and the deduction to be made from the employees’ earnings. Payroll accounting requires the information relating to employee’s attendance, leaves, rates of pay, amounts to be deducted etc.

  1. Labour Cost Accounting:

It is concerned with identifying the amount of labour cost to be charged to individual jobs and overhead accounts. For this purpose, information relating to the time spent on each job or process or number of units produced is obtained from the job cards, piece work tickets etc. The idle time analysis is also necessary for labour cost accounting.

The main objective of it is to record the time spent by all workers on each activity on a separate job card or time sheet and then apply the appropriate hourly rate. The labour costs are then charged to each of these activities. The job cards, time sheets, idle time cards are the important documents for analyzing production labour costs to various jobs and overhead accounts.

  1. Time Keeping:

Time keeping means to note the attendance of workers for wage payments. It is the marking of attendance of a worker when he comes and leaves the factory. This record is generally kept at the factory gate and the workers coming in and going out have to record their time in it. Based on their attendance in the factory, they receive the wages.

The prime objectives of time keeping are as follows:

(a) Preparation of Payroll:

The wage bills of the organization are prepared by the payroll department on the basis of information given by the time keeping department.

(b) Computation of Cost:

The Costing department will compute the labour cost of different jobs, departments, cost centres etc. basing on the data of time spent provided by the time keeping department.

The time record will give us an idea about the total time for which the workers were present in the factory and for which they are paid. There are various methods of time keeping – hand written record, disc or token system, punch card system etc.

With the advancement of technology, the computers are also being used for time recording and analysis. The person who looks after time keeping is called ‘time keeper’ and his place of work is called ‘time office’. The time records are the basic data used for calculation of salaries and wages, overtime premium etc.

  1. Time Booking:

It is necessary to account for labour cost against each job, department, process, contract, cost centre etc. for which time booking records are kept to ascertain the labour time spent. Time booking means to know how much time is effectively spent by the worker on each job or in each department or on a process or on each contract etc. It is the recording of time spent within the working day upon different jobs.

It is the keeping of record of particulars of work done, or time spent on each job, process, operation etc. It is used to ascertain the labour time spent on each job, analysis of idle time, labour cost of various jobs and products. The time booking record is kept in the form of time cards for each worker, recording therein the actual time spent by him on the work.

The objectives of time booking are as follows:

(a) To ascertain the labour time spent on the job and the idle labour hours.

(b) To ascertain labour cost of various jobs and products.

(c) To calculate the amount of wages and bonus payable under the wage incentive scheme.

(d) To compute and determine overhead rates and absorption of overheads under the labour and machine hour methods.

(e) To evaluate the performance of labour by comparing actual time booked with standard time.

Bonus and Labour incentives

Incentive Scheme: Type # 1. Halsey Premium Plan:

This plan was introduced by F. A. Halsey, an American engineer, in 1891. It recognises individual efficiency and pays bonus on the basis of lime saved. Under the method a worker is given wages at the time rate for the time he actually worked and also paid a bonus if he can complete the work in less than the time allotted to do the work.

The bonus is paid at a fixed percentage of the time saved, usually 50%, (though the percentage varies from 30% to 70% of time saved). The remaining 50% of the time saved is shared by the employer.


Total Earnings = T.T. × H.R. + 50% (T.S. × H.R.)

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

The main advantages of the method are:

(i) The method is simple to operate and easy to understand.

(ii) The slow workers are not penalised, as time wage is guaranteed.

(iii) It provides incentives to more efficient workers.

(iv) Worker’s efficiency means reduction in cost per unit.

(v) The benefit of time saved is shared between employer and employee equally.

The main disadvantages of the method are:

(i) Many employees organisations do not like to share the benefit of time saved equally.

(ii) Attraction of bonus reduces the quality of work.

(iii) Reduction of quality means chances of more wastage, spoilage, defective and break down etc. and more supervision cost.

(iv) It is not so much attractive as in the case of piece rate payments.

(v) It offers less incentive to the workers as compared to other incentive plans.

(vi) If the time rate is not fixed properly, this may lead to a higher bonus.

Incentive Scheme: Type # 2. Halsey-Weir Premium Scheme:

The scheme was introduced by Weir Ltd. of Glasgow in about 1900. It is similar to Halsey Scheme except that under this scheme the employee gets 33⅓% (often 30%) of the time saved as bonus and the remaining 66⅔% goes to the employer.


Total Earnings = T.T. × H.R. + 33⅓% (T.S. × H.R.)

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

Incentive Scheme: Type # 3. Rowan Plan:

Grames Rowan first introduced this plan in Glasgow in 1898. Under this scheme also the worker gets his guaranteed time wages for the hours of his actual work, like Halsey Scheme. But here the premium is calculated by a different method.

If the worker can complete the job in less than the time allowed, his bonus becomes equal to his time wages for that proportion of the time taken as the time saved bears to the time allowed.

Thus, the bonus is calculated as:

and, Total Earnings = T.T × H.R. + (T.T. × H.R.) × T.S./T.A.

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

T.A. = Time Allowed

The following are the main advantages of the scheme:

(i) It provides incentives to learners and slow workers.

(ii) Since the premium is proportionate to the time saved, the employers get protection if the rate is not fixed properly.

(iii) From the point of view of employer the Rowan Scheme is safer than the Halsey Scheme.

(iv) Up to 50% of the time saved, bonus under the scheme is higher than that under Halsey Scheme.

(v) As the bonus increases at a decreasing rate; the employees do not rush for rapid completion of job, hence lesser chances of wastage etc.

(vi) Due to higher output, fixed overhead per unit will be lower.

The main disadvantages are:

(i) Method is complicated.

(ii) At the level of higher production, incentive is low.

(iii) Employees are not willing to share their time savings with their employers.

Comparison between Halsey and Rowan Scheme:

(1) Up to 50% of time saved, the premium will be same under the two schemes.

(2) Under Rowan Scheme bonus rises faster than Halsey Scheme until the job performed in half than the standard time.

(3) But when the time taken to perform the work is less than half of the standard time, premium and total earnings under the Halsey Scheme are both greater than those under Rowan Scheme.

(4) On the other hand, when the time taken to perform the work is more than half of the standard time, bonus and total earning under the Rowan Scheme are both greater than those under the Halsey Scheme.

(5) The Halsey Scheme provides more incentive to speed up production but there is an automatic check under the Rowan Scheme after certain stage.

(6) Halsey Scheme proves to be costlier if more than half the time is saved, while Rowan Scheme is costlier if less than half the standard time is saved.

Incentive Scheme: Type # 4. Taylor’s Differential Piece Rate System:

This system was first introduced by F. W. Taylor, the Father of Scientific Management. This system provides no minimum guaranteed time wages.

But under the system two piece rates are fixed:

(a) A low piece rate for output below the standard is paid to the workers, and

(b) A higher rate is paid to the workers who produce equal or more than the standard. Thus, this system penalises the inefficient workers and rewards the efficient workers.

The efficiency of a worker may be determined as a percentage, either:

(i) Of the time allowed for a job to the actual time taken, or

(ii) Of actual output to the standard output, within a specified time.

Incentive Scheme: Type # 5. Merrick Differential Piece Rate Plan:

This is a slight modification of Taylor’s System and uses three rates instead of two. Under this system also day wages are not guaranteed.

The three piece rates are:

Efficiency – Piece rate applicable

Up to 83% – Normal rate

Up to 100% – 10% above normal rate

Above 100% – 20% above normal rate

The main feature of this system is that it does not penalise the workers who produce below the standard output up to 83% and the earnings increase with increased efficiency at two stages.

Incentive Scheme: Type # 6. Gantt Task and Bonus Plan:

The plan is a good combination of time-work and piecework. Under the scheme the day wages of the worker are guaranteed.

The main features of the bonus scheme are:

Output – Bonus

At 100% – 20% on the total output

Above 100% – 20% of the wages of the standard time, or High piece rate on the worker’s whole output.

This scheme protects and encourages the less efficient workers who cannot produce the standard output. It offers a good incentive to the efficient workers.

Incentive Scheme: Type # 7. Emerson’s Efficiency Plan:

This scheme is also a combination of time wage, piece rate wage and bonus plans. Under this method a standard time is set for each job, or task or volume of output is fixed as the standard. The standard efficiency is set at 66⅔ or 67%. For efficiency up to 67% the worker gets his day wage only.

If he crosses the standard task, he becomes entitled to bonus and the rate of bonus increases with the increase in efficiency. At 100% level of efficiency, the bonus becomes 20%. Again, if the efficiency exceeds 100%, bonus increases by 1% for every 1% increase of efficiency above 100%.

Incentive Scheme: Type # 8. Group Bonus Plans:

The incentive schemes explained so far are applicable to individual workers only. But, sometimes it becomes necessary to introduce Group Bonus Scheme. Under the scheme bonus is paid to the group as a whole, depending upon the performance of the group and the amount of bonus is shared by themselves equally or at an agreed proportion.

The group bonus is suitable in the following circumstances:

(a) When it is very difficult to measure the performance of individual worker, but the production through collective efforts of a group of workers can be measured.

(b) The nature of the work requires collective effort.

(c) Where it is desirable to develop a team spirit.

(d) Where both the direct and indirect workers are to be rewarded.

(e) When bonus scheme cannot be operated successfully for individual workers.

However, before introducing a group bonus scheme, following points must be considered very carefully:

(i) Well combination among the group.

(ii) The size of the group should be economic.

(iii) The group should be homogeneous.

(iv) The production of the group should be within its control.

Thus, a group bonus scheme encourages team spirit, reduces wastage, assures cooperation, lessens supervisory work and reduces overall costs.

Illustration 1:

Time allowed for a job = 5 hrs

Time taken to complete the job = 4 hrs

Rate Per hour = Rs. 1

Calculate the total earnings of a worker under the Halsey Premium Scheme.


Total Earnings = Hours worked × Rate per hour + 50/100 × (time saved × hourly rate)

= Rs. 4 × 1 + (50/100 × 1) × 1

= Rs. (4 + 1/2) = Rs. 4.50

Illustration 2:

Time allowed for a work = 10 hrs

Time taken to complete the job = 8 hrs

Rate per hour = Rs. 2

Calculate the total earnings of a worker under the Halsey Premium Scheme.


Total Earnings = Time Taken × Hourly Rate + 33⅓ (T.S. × H.R.)

Where T.S. = Time Saved, H.R. = Hourly Rate

Total Earnings = 8 × Rs. 2 + 33⅓/100 × 2 × Rs. 2

= Rs. 16 + Rs. ⅓ × 4 = Rs. 16 + Rs. 1.33 = Rs. 17.33

Illustration 3:

Standard time is 20 hrs, Time taken is 16 hrs, Hourly Rate is Re. 0.50

Find out total earnings under Rowan Plan.


Total Earnings = Time Taken × Hourly Rate + (Time Taken x Hourly Rate) × Time Saved/Time Taken

Time Saved = Time Allowed – Time Taken

= (20 – 16) hrs. = 4 hrs

... Total Earnings = 16 × Re. 0.50 + (Re. 0.50 × 16) × 4 × Rs. 0.50/20

= Rs. 8 + Rs. 8 × 2/20 = Rs. (8 + 0.80)

= Rs. 8.80

A factory works 8 hours a day. The standard output is 10 units per hour and normal rate is Rs. 5 per hour. The factory has introduced the following differentials in the matter of wage payment:

80% of piece rate when below standard.

120% of piece rate when at or above standard.

Find out piece rate at below and above standard.


Normal piece rate = Rs. 5/10 = 0.50

When below standard the piece rate will be = 0.50 × 80/100 = Re. 0.40

When above standard the piece rate will be = 120/100 × 0.5 = Re. 0.60

Standard Production:

80 units per week. No. of men working in the group = 10. Bonus for every 25% increase in production, a bonus of Rs. 10 will be shared prorata among the 10 members of the group.

Actual production during a week = 110 units.


Increase in production over standard = (110 -80) units = 30 units

i.e. 30/80 × 100 or 37.5%

... Bonus = Rs. 10 + 12.5/25 × Rs. 10

= Rs. 10 + 5 = Rs. 15

Each member of the group, therefore, receives = Rs. 15 ÷ 10 = Rs. 1.50

Worked-out Problems:

Problem 1:

Calculate by the Halsey Premium Plan and determine on this basis the total earnings of a worker by the given data:

Standard time for work – 20 hours

Actual time – 16 hours

Rate per hour – Rs. 2


Total Earnings = Time taken × Rate per hour + 50% (Time saved x Rate per hour).

Standard time = 20 hours

Time taken = 16 hours

... Time Saved = Standard time – Time taken i.e. 20 hours – 16 hours = 4 hours.

... Total Earnings = 16 × 2 + 50/100 (4 × 2) = 32 + 4 = Rs. 36

Total Earnings under Halsey Premium Plan = Rs. 36

Problem 2:

From the following particulars, calculate the cash required for wages in a company, during the month of January 2007:


Problem 3:

From the following calculate the total monthly remuneration of each of three workers A, B and C:

(i) Standard production per month per worker = 1,000 units

(ii) Actual production during a month: A = 890 units, B = 720 units, C = 960 units.

(iii) Piece work rate per unit of actual production = 20 paise

(iv) Dearness wages Rs. 50 per month (fixed)

(v) House Rent allowance Rs. 20 per month (fixed)

(vi) Additional production bonus at the rate of Rs. 5 for each percentage of actual production exceeding 80% of the standard.


Working Notes:

  1. Calculation of Bonus:

(i) Worker A:

Actual Production = 890 units i.e. 890/1,000 × 100 = 89% efficiency

... Bonus = (89 – 80) × Rs. 5 = Rs. 45

(ii) Worker B:

Actual Production = 720 units i.e. 720/1,000 × 100 = 72% efficiency

... Bonus = Nil

(iii) Worker C:

Actual Production = 960 units i.e. 960/1,000 × 100 = 96% efficiency

... Bonus = (96 – 80) × Rs. 5 = Rs. 80

Problem 5:

During a certain week in September 2006, a worker manufactured 240 articles. Working hours during a week are 48 hours, standard rate Rs. 5 per hour and standard time to manufacture an article is 15 minutes.

Calculate his gross wages for the week according to (a) Piece work with guaranteed weekly wages, (b) Rowan Premium Bonus Plan, (c) Halsey Premium Bonus Plan.


(a) Under Piece work with guaranteed weekly wages:

Actual Wages = Time Taken × Rate per hour

= 48 hours × Rs. 5 = Rs. 240

Guaranteed weekly wages = Standard Time × Rate per hour

= 60 hours × Rs. 5 = Rs. 300

Therefore, actual wages is less than guaranteed wages. So the worker will receive guaranteed wages Rs. 300 for the week.

... Rate per hour = Rs. 300/48 hrs. = Rs. 6.25

Working Notes:

(i) Standard time for 240 articles = 240 × 15 minutes

= 3,600 minutes or 60 hours.

Problem 6:

From the following data ascertain the total earnings of each worker separable under (i) Halsey Scheme (50%), (ii) Rowan Scheme. Also calculate the effective hourly rate of wages of the workers under both the schemes:


Problem 7:

From the following particulars you are required to calculate under ‘Average Wage Rate’ the labour cost chargeable to Job No. ‘A’ which was completed in 1990:

Basic Wage Rate is Rs. 2 per hour and overtime rates are:

Before or after working hours 150% of basic wage rate.

Sundays and holidays – 200% of basic wage rate.

During the year 1990 the following hours were worked:


... Average Wage Rate = 5,70,000/2,50,000 = Rs. 2.28

Now, computation of labour cost under ‘Average Wage Rate’

Items – Job No. ‘A’

Hours Spent – 3,500

Average Wage Rate – Rs. 2.28

... Labour Cost Chargeable = 3,500 hours × Rs. 2.28 = Rs. 7,980