Piece Rate System | Cost Accounting - B Com PDF Download

Piece Wage System: Advantages, Limitations and Other Details!
Under piece system of payment, wages are based on output and not on time. There is no consideration for time taken in completing a task. A fixed rate is paid for each unit produced, job completed or an operation performed. Workers are not guaranteed minimum wages under this system of wage payment.
The wages to be paid to a worker can be calculated as follows:
Quantity produced = output x piece rate
The quantity produced by a worker will be multiplied by the rate per unit for calculating wages. An equitable piece rate should be fixed for giving incentive to the workers for producing more. Different piece rates will be determined for separate jobs. The factors like efforts involved, conditions under which work is to be performed, risk involved, etc. should also be taken into consideration while fixing piece rates.
The piece rate should be reviewed from time to time. These should be linked to price index so that workers are able to get a minimum level of real wages. Piece rates should also be revised when competitors do so otherwise there may be a discontentment among workers and they may opt for changing in the unit/enterprise.

Advantages:
The piece rate system has the following advantages:
1. Wages linked to efforts:
Under piece wage system, wages are linked to the output of a worker. The higher the output, higher will be the wages. Workers will try to put in more and more effort for increasing output because their wages will go up.

2. Increase in production:
Production goes up when wages are paid according to piece rate system. Workers will feel encouraged to increase output because their wages will also increase. This system is fair to both employees and employers. Efficient workers will try to exert maximum in order to raise their production and hence wages.

3. Better utilization of equipment/machines:
The machines and other equipment’s are put to maximum utilization. Workers may not like to keep the machines idle. The use of machines will also be systematic because any breakdown in these may affect the workers adversely. Thus, better machine utilization will give better output.

4. Distinction between Efficient and Inefficient:
As in time wages system, efficient and in efficient workers are not given equal treatment in the piece wage system. Efficient workers will get more because of their better results. Inefficient workers on the other hand will get less because of low production. This method provides sufficient encouragement to efficient workers or showing better results.

5. Less supervision required:
Since payments are on the basis of output, workers will not waste time. They will continue to work irrespective of supervision. There may be more and more voluntary efforts on the part of workers and need for supervision is reduced to a minimum.

6. Effective cost control:
The increase in output will result in reduction of overhead expenses per unit. Some of the overhead expenses being fixed, increase in production will reduce expenses per unit. Reduction in cost may benefit consumers in the form of decrease in product price.

7. Better planning and control:
The certainty in achieving production targets will improve planning and control. When management is sure of certain quantity of production, then it can plan other things with more confidence, it will also ensure better control over production because targets may be regularly reviewed from time to time. Thus, better planning and control is possible.

Limitations:
1. No guarantee or minimum wage:
There is a direct relationship between output and wages. If a worker does not ensure certain productions, then wages may also be uncertain. Any type of interruption in work may reduce earnings of workers. So workers are not sure about getting minimum wages. So this system does not provide guarantee of minimum wages.

2. Poor quality of goods/products:
The workers will bother more about the number of units otherwise more supervisors are appointed to keep watch on quality of products being produced.

3. Not suitable for beginners:
The beginners will not be able to produce more goods because of less experience. They will earn much low wages as compared to experienced workers because their rate of production will be low. Thus, this system is not suitable for beginners.

4. Deterioration in health:
Workers may try to work more than their capacity. This may adversely affect their health. They may try to work even when they are not keeping good health, since wages are linked with production.

5. Cause of dissatisfaction:
There may be difference in earning of various workers. Some may earn less and others may earn more. Those who get low wages feel so jealous of others who earn more and this becomes a cause of dissatisfaction among slow workers. Thus, this system can see dissatisfaction among workers.

6. Opposition from unions:
Piece-rate system of paying wages is opposed by trade unions. There is an unhealthy competition among workers for increasing their wages. It encourages rivalry among workers and it may become a cause of disunity.
The existence of unions is endangered when some section among them feel jealous of other. Union will never support a system where workers earn different amounts of wages and this becomes a cause of disharmony among them. So trade unions oppose this system.

7. Difficulty in fixing piece-rates:
The fixation of piece rates is not an easy job. If a low rate is fixed then workers may not feel encouraged to increase their production. When a high piece-rate is fixed then it will increase the cost of production of goods. The fixation of piece rate may become a cause of an industrial dispute. It may be very difficult to fix a rate acceptable to workers as well as management.

Suitability:
Piece rate system is suitable under following situations:
(1) Where production quantity is more important than the quality of the product.
(2) When the work is of repetitive nature.
(3) When the mass manufacturing system of production is followed and the work is standardized suitable for continuous manufacturing.
(4) When it is possible to measure the production output of worker separately.
(5) When strict supervision is not required and difficult.
(6) When the production is dependent on human efforts.

Types of Piece Rate System:
Piece rate system may be of following three types:
(i) Straight piece rate
(ii) Increasing piece rate
(iii) Decreasing piece rate
(i) Straight piece rate:
In this system, the piece rate forms the basis of payment i.e. payment for whole production is made on the basis of piece rate fixed. If the piece rate of Rs. 1.5 per .unit is fixed, then the wages will be calculated by multiplying the output by the rate fixed.
A worker producing 200 units will get Rs. 3000 (i.e. 200 x 15). If the production output is raised to 210 the wages will be Rs. 3150 (210 x 15). Thus a worker will have to increase the output in order to get higher wages. The rate of payment remains same irrespective of production level or level of output.

(ii) Increasing piece rate:
In this system different rates are fixed for different levels of production. A certain production level is decided and if the production goes beyond that level, higher rates are given. For example, a piece rate of Rs. 21- per unit may be fixed for production up to 100 units, Rs 2.10 per unit for output between 101 to 150 units and Rs. 2.25 per unit for a production beyond 150 units and so no. There is an incentive to get higher rate for production beyond a certain level.

(iii) Decreasing piece rate:
In certain cases, where quality is of great consideration, this system is followed to discourage negligence of workers. In this method, the rate per unit decreases with increase in output. For example Re. 1/- per unit may be allowed up to a certain production level say 100 units. Re. 0.95 per unit for production between 100 to 150 units and Re. 0.90 per unit for an output beyond 150 units and so on.