Before understanding system of wage payment in cost accounting, get to know What is Wage?

A wage is monetary compensation paid by an employer to an employee in exchange for work done. Payment may be calculated as a fixed amount for each task completed or at an hourly or daily rate, or based on an easily measured quantity of work done.

Wages are part of the expenses that are involved in running a business.

Payment by wage contrasts with salaried work, in which the employer pays an arranged amount at steady intervals (such as a week or month) regardless of hours worked, with commission which conditions pay on individual performance, and with compensation based on the performance of the company as a whole.

Waged employees may also receive tips or gratuity paid directly by clients and employee benefits which are non-monetary forms of compensation. Since wage labour is the predominant form of work, the term “wage” sometimes refers to all forms (or all monetary forms) of employee compensation.


Wages are the biggest incentive for employees to perform their jobs sincerely and error free. Several wage systems have been devised for fulfilling the requirements of both employees and employers.

Thus, the wage system should be planned carefully. A system that reduces the labour cost per unit while increasing the output and giving a fair return to workers will be the most suitable one. The aim of the wage system should be the introduction of a fair wage. A good wage system should possess the following characteristics:

(i) Simplicity: The wage system should be easy to understand and simple to operate. A complex system may lead to strikes and agitations and may be a hindrance to a harmonious employer-employee relationship.

(ii) Fair to Employer and Employee: The system should be satisfactory from the point of view of both employer and employees.

(iii) Guaranteed minimum wage: The system should guarantee a minimum wage to every worker irrespective of the work done by them.

(iv) Incentive to work: Adequate incentives should be provided to the workers to work hard with great care. Efficient workers should be able to earn more wages as compared to the inefficient workers.

(v) Quality output: The system should encourage the workers not only to increase the quantity of output but also to improve the quality of output.

(vi) Certainty: There shouldn’t be any ambiguity in the wage distribution.

(vii) Conformity with local and national labour laws: The system should to conformity with various labour laws and regulations both local and national.

(viii) Minimization of labour turnover: The system should minimize labor turnover, absenteeism and late attendance.

(ix) Adjustment to price changes: The system should invariably contain provision for automatic rise in wages as cost of living index increases.

(x) Flexibility: The system should incorporate flexibility to adjust with changing circumstances of the business.


The system of wage payment in cost accounting are:

  • Time Rate System
  • Piece Rate System
  • Taylor’s Differential Piece Rate System
  • Merrick’s Differential Piece Rate System
  • Emerson’s Plan
  • Gantt’s Task and Bonus Plan


It is another system of wage payment in cost accounting.

Time Rate System is otherwise called as Time Work, Day Work, Day Wages and Day Rate. It is the oldest method of remuneration. The time rate system is that system of wage payment in which the workers are paid on the basis of time spent by them in the factory.
Under this system, the workers and employees are paid wages on the basis of the time they have worked rather than the volume of output they have produced. The wage rate is fixed on hourly, daily weekly, fortnightly or monthly on the basis of the nature of work.

The time is the prevalent rate of the industry or area. The rate may either be a fixed one or there may be a progressive scale of pay that starts at minimum and rises up to a maximum, in various stages by way of increments.

Time Rate System Formula

This time rate system calculation is based on the working hours of the employee, that is the amount of time spent on the work along with the amount of work delivered within the specific period of time.

And the actual formula that helps to calculate the total amount by using this time rate system formula is

Formula: Wages= Total hours worked X Wages rate per hour.

Examples of Time Rate System

An employee works for Rs. 20 an hour and he spends a total of around 400 hrs in a month of 30 days at work. What would be his salary?

Calculation under time rate system.
Total hours worked = 400 hrs, wage per hour = 20
Wages= Total hours worked X Wages rate per hour.
Wages = 400*20 = 8000.Therefore, the employee receives a salary of 8000/- on a monthly basis.

Chief Features of Time Wage Payment Methods

  • Very popular and easy form of payment.
  • Helpful in the payroll function
  • All the calculations are quite simple
  • There will be no irregularity or uncertainty regarding income or wages
  • Can concentrate more on the work as the income will be regular

Suitability of Time Wage Payment Methods

  • When the output or result cannot be assessed or measured
  • The work may get delayed depending upon the industry you are working for.
  • When the quality of work is given preference
  • When workers having an idea regarding the output quantity
  • When employees are freshers and are in training period for the respected job.
  • When trying to reduce the risk of errors or accidents depending upon the work speed

Importance of Time Wage Payment Methods

  • The worth of the employee can be assessed
  • Quality work is given more importance when compared to quantity work.
  • High level of monitoring of work can be achieved
  • Delays and risks of accidents are high and are out of control.
  • No single employee will have control over the whole output

Advantages / Disadvantages of Time Rate System

There are several advantages and disadvantages of the time rate systems, and these advantages and disadvantages create differentiation for the purpose of the company benefits.

Advantages of the Time Rate System

1. Simple formulation:

The calculation and nature of the time rate system are very easy and simple to understand. It is one of the methods that can be understood by all the employers of the company.

Its measurement and the calculation of this wage system provide the actual picture about the overall time rate system.

Therefore, as it is mentioned earlier, it is easy and simple to understand and formulate in the company.

2. Easy access:

This time rate system is very easy to access and that is because of its brief and clear detailed information. The details collected and maintained through this time rate system are very economical.

In other words, it is one of the simple methods of understanding the total wages of the employees of the company. It makes records maintenance, affordable and clear. Therefore, it is one of the economic methods of calculating wages under time rate systems.

3. Production quality:

As per the information provided by different sources of the production unit, the company performs better with these time rate systems.

Eventually, the production quality will increase and the employer monitors all the production units without any mistakes.

Therefore, because of this time rate system, the quality of production gets improved and it favours the overall development of the company.

4. Fixed wage:

Even when it comes to a salary expense calculation, the company earns better profits because of its fixed rate of price.

The time rate systems incorporate fixed-wage systems because of which the company using it confirms a fixed rate of price per day.

And this fixed rate per price helps to increase the profits of the company as its only a small amount of profit returns.

5. Improves equality among employees:

Because of the time rate system, the employees of the company may feel equal within themselves.

Most of the time several companies face a certain kind of union problems and if the company incorporates these time rate system policy, then the possibility of inequality issue will be considerably less among the employees of the company.

Therefore, all the employees of the company experience equality among them.

Disadvantages of Time Rate Systems:

1. It ignores efficiency:

As per the formulation of this time rate system, the actual focus of this time rate system is on the part of the production where the employee works according to the specific number of time and production.

Most importantly the work delivered by the employees will be based on their total daily production output. And it is obvious that it completely ignores the efficiency of its employees, because of which deserving employee feels unappreciated for their work.

2. Loss of skilled workers:

As explained above, the company works according to the specific production rate and it totally ignores the efficiency of its employees and because of that, the employees of the company decide to leave the company. This is one of the disadvantages of this time rate system.

Therefore, the company suffers a loss of their skilled workers because of the time rate system methods of wage calculations.

3. Inefficiency:

The workers and the employees of the company eventually understand that the company expects a certain level of production from them not the quality of work from them. This kind of ignorance creates inefficiency among the employees of the company.

Therefore, all the employees of the company decide to work as per their specific production expectation and they try to not bring efficiency in their work because their efficiency will not reward them for their excellent work delivery.

4. Conflicts of thinking:

Most of the time the company incorporates some kind of rules and regulations in the company without consulting their employees of the company.

And when it comes to the wage system and salary system, then the employees of the company will definitely have some conflicts of thinking.

This conflict of thinking creates a communication difference between the employees and the employers of the company which is not at all good for the company development.

5. Cost of production:

As the company prefers its employees to provide a specified number of productions and the employees of the company meet their daily production unit, then there is a possibility that the company might increase the production output. This increment in production output leads to the increment of cost of production.

Therefore, this can affect the company effectively because of this time rate system of the wage calculations.

6. Increased supervision cost:

When it comes to the cost of supervision the company may end up being in trouble because of these time rate systems. Therefore, the company needs to cut back its supervision cost so that they can regain the position of the company.

And to make that happen, the company needs to cut back from the time rate systems so that they can reduce the cost of supervision eventually.

Variations of the time rate system

There are a few variations of the time rate system with a view to introducing an element of incentive in the time wages. These methods are:

(a) High Wage Rate:

Under this wage system, a time rate of a worker is fixed at a higher level than the average wage rate of the industry. The wage rate is fixed by hour or day. Higher rate is given to attract efficient workers. Overtime is not permitted under this system. Stable working conditions are created to enable the workers to achieve the standard output within the regular hours of work. Those who are not able to achieve the standard are taken off the scheme.

(b) Graduated Time Rate:

Under this method, wages we paid at time rates which vary with changes in cost of living index. The wage rate per hour or per day goes on changing with changes in the general cost of living index. This system is preferred by the workers during the time of rising prices because their wages go on increasing with increase in the cost of living index. In India, the basic wage rates normally remain fixed and the worker is paid dearness allowance which rises with cost of living.

(c) Differential Time Rate:

Under this wage plan, different wage rates are fixed for different levels efficiency. Normal time rate is paid to the workers up to certain percentage efficiency. The rate gradually increases beyond the standard. Thus higher rates are giving to efficient workers in recognisation of their efficient performance.


It is another system of wage payment in cost accounting.

The piece rate system is that system of wage payment in which the workers are paid on the basis of the units of output produced. Piece rate system does not consider the time spent by the workers. Piece rate system is the method of remunerating the workers according to the number of unit produced or job completed. It is also known as payment by result or output. Piece rate system pays wages at a fixed piece rate for each unit of output produced. The total wages earned by a worker is calculated by using the following formula.

Total Wages Earned= Total units of outputs produced x Wage rate per unit of output.

Total Wages Earned= Output x Piece Rate

Piece-rate pay is also sometimes referred to as Payment by Results System.

Suitability of Piece rate pay system Methods

Here are a few cases where the piece rate system methods can be successfully applied.

  • When the type of work is repetitive in nature
  • When the quantity of output can be assessed
  • When goods quality needs to be measured
  • Workers are paid reasonable rates.
  • When a fair and acceptable piece rate is fixed
  • To create discipline among workers time cards are introduced
  • Rates need to be adjusted depending on the price level changes
  • Sufficient sources are present for production increase

Types of Piece Rate Pay System

There are mainly 2 types of piece-rate system. They are

1. Straight piece rate system
2. Differential piece rate system

Straight piece rate system:

This is the type of wage system where the wages are paid to the workers based on the output or result of work done.

Differential piece rate system:

This is a type of wage system where the wages are paid to the workers after the completion of work. High piece rate is offered to workers who completed the work within the given time and low piece rate for those who exceeded the given time for the task.

Advantages of Piece Rate Pay System

1. Increases the efficiency of all the employees:

One of the biggest and major advantages of this piece-rate pay system is that it helps to increase the efficiency of the employees keeping them busy all the time.

They are well aware of the fact that them getting paid or not is dependent on their own work output. If they fail to work efficiently and quickly then that is going to bring about their own downfall.

Having such efficient workers in the company not only ensures that the work is done quickly but it also ensures that the company rises from strength to strength slowly making its way to the top.

2. They do not constantly require any kind of micromanagement:

In the time rate system, the workers need to have constant supervision, because if not then they will try to drag out the task for as long as possible so that they can get as much money as possible.

Why would they try to finish the task off faster when they can get more money for doing nothing at all?

Tactics like this are often employed by the workers, where they take the employers for a ride. In this piece-rate plan system, very often the workers take it upon themselves to do the task as fast as they can and they have their own sense of responsibility.

3. It is very easy to calculate the dues of the worker:

As mentioned above, the simple formula which is applied to calculate the earnings of the workers makes things rather simple for everyone concerned.

In the time rate system, keeping a track for the number of hours of work done by each employee becomes a very difficult task indeed and most often there is no proof or accountability.

In this system, everything is very clear and transparent, since if the task is done, then the finished product will serve as proof. The few calculations involved means that there is less scope for error as well as mistakes.

4. Workers do not end up wasting any time:

In this day and age, time is of the essence and time means money. If the workers take their own sweet time completing the task at hand then the only one who is going to suffer is the company.

The company will suffer on two fronts, firstly they will have to keep paying the employees more and more money because they are taking so much time with the work and secondly, because they will not have any products to sell since the employees are working so slow.

A major advantage of a system like this is that the employees are seldom idle and they are always busy and working as hard as they can to get good results.

5. They are encouraged to think of better working methods:

Owing to the fact that the workers know that the more output they produce, the better things will be for them and it is for this reason that the employees always have their head in the game and are trying to think of new and innovative ways of increasing their output.

Doing things in this way has a dual benefit firstly it increases the amount of money which the employees are able to make and secondly, it increases the profits which the company is able to make.

If everyone thinks of innovative ways to get jobs done then the company is bound to make a huge mark for itself.

6. The number of products produced is much higher:

Another major advantage of this kind of system is that the number of products produced is very high and since the number of products produced is so high, the cost of production becomes lower for the company.

In the other systems, chances are the cost becomes so high because the workers take so much of time to complete even one product. So even if the demand is a lot, the supply is very limit.

Here the demand and supply are both high allowing the company to reap maximum benefits and keep all the customers happy and satisfied.

7. The workers set deadlines for themselves:

Finally, rather than the bosses setting deadlines for the workers, the workers set their own deadlines and sometimes even finish the task before the stipulated time.

Everything is dependent on them, including the money which they make so that is why they take their job very seriously and even work from home when they think that they are running short of time.

Disadvantages of Piece Rate Pay System

1. Workers pay much more attention to quantity and not quality:

As it is often said, there are two sides to every story, so even if there are a number of advantages of the system, there are also disadvantages.

The major disadvantage of this kind of piece-rate pay is that the workers try too hard to finish the task at hand, that the quality of work suffers and they give up substandard work.

In the attempt of trying to make more money, they often cut corners and even give up incomplete work hoping that this will go undetected. Things like this greatly affect the reputation and name of the company concerned.

2. Planning for the future becomes rather tough:

As mentioned above, the workers often decide on their own deadline and they complete the work when they can, it is for this very reason that there is no uniformity in the work output and it becomes quite a challenging task to plan for the future of the company or to even make out a proper schedule of production.

3. Finding and fixing on a reasonable piece cost is a rather tough task:

Another big disadvantage of this system is that the workers and employers find it very tough to fix a reasonable cost for the finished product.

Narrowing down on one figure which both parties will be happy with is quite a challenging and even time-consuming task which requires hours of talking, convincing and negotiations.

4. It puts immense pressure on all the employees:

In such a system the workers try their best to make as many products as possible. In the attempt of trying to make more and more money, they often end up overworking themselves.

Doing too much work without taking any breaks is bound to take a toll on the health of these workers. As a result, they might come in for serious problems like stress, heart trouble or even high blood pressure.

5. Sometimes even more supervision is required:

As mentioned above, an advantage of the system is that the workers work independently and don’t need micromanaging.

But sometimes in the attempt of trying to work quicker, the workers give up bad quality work and even use inferior quality products. By this, the finished products require even more scrutiny and most often many products get rejected because they are not fit to be sold to the customers.


It is another system of wage payment in cost accounting.

Taylor’s Differential Piece-Rate System was introduced by F.W. Taylor, who believed that the workers should be paid on the basis of their degree of efficiencies. Under this method, with the help of Time and Motion Study, the standard time for the completion of a job is fixed on the basis of which the performance of the workers is evaluated.

Taylor proceeded on the assumption that through time and motion study it is possible to fix a standard time for doing a particular task. To encourage the workers to complete the work within the standard time, Taylor advocated two piece rates, so that if a worker performs the work within or less than the standard time, he is pad a higher piece rate, and if he does not complete the work within the standard time, he is given a lower piece rate.

EXAMPLE: There are two piece-rates, one who reach the standard output or exceeds it, is paid 120 percent of the piece rate. While the one who fails to reach the standard level of output, is paid 80 percent of the piece-rate. The minimum wages of the worker are not guaranteed.

Standard Output = 200 units
Rate per unit = Rs 10 paise

Case (1): Output = 220 units
Earnings = 220 x (120/200) x 0.1 = Rs 13.20

Case (2): Output = 180 units

Earnings = 180 x (80/200) x 0.1 = Rs 7.20

It is clear from the above example that the worker is paid a higher rate (Rs 13.20) for high production (220 units) and low rate (Rs 7.20) for low production (180 units). 

Features of taylor’s differential piece rate system

(i) The system is based on piece rates.

(ii) The standard output for unit of time is pre-determined on the basis of time and motion study.

(iii) There are two piece rates, one lower and another higher. Those who reach the standard or exceed it, get wages at higher piece rate (e.g. 120% of piece rate) and those who fail to reach it, get wages at a lower piece rate (e.g. 80% of piece rate).

(iv) Minimum wages for the workers are not guaranteed.


  • It makes a distinction between efficient and inefficient workers. Lazy and inefficient workers are penalised, while efficient workers are rewarded.

  • The basis of this system is scientific. It is based on proper work study.

  • It helps in spotting and eliminating inefficient workers.

(1) A worker missing the standard even by narrow margin is penalised heavily.
(2) It is more mechanical and less humane.
(3) Trade unions oppose this plan.
(4) It may lead to discontentment among workers.


It is another system of wage payment in cost accounting.

The worker is paid the straight price rate up to 83% of the standard output, 10 % above the normal rate for producing between 83% – 100% and 20% above the normal rate for producing more than 100% of the standard output. Here also, the minimum wages of the worker are not guaranteed.


Standard Output = 200 units
Piece-rate = 10 paise

Case (1): Output = 160 units
Efficiency = 160/200 x 100 = 80%

Since the efficiency is less than 83%, the worker is paid only the basic rate, i.e. 10 paise. Thus, earnings will be Rs 8 (80 x 0.1).

Case (2): Output= 180 units
Efficiency = 180/200 x 100 = 90%

As the efficiency is more than 83% but less than 100 percent, 10% above the normal rate is paid to the worker. Thus,
Earnings = 90 x 110/100 x 0.1 = Rs 9.9

Case (3): Output = 220 units
Efficiency = 220/200 x 100 = 110%

As the efficiency is 110%, 20% above the normal rate is paid to the worker. Thus,

Earnings = 110 x 120/100 x 0.1 = Rs 13.30

(1) This plan is liberal for the efficient workers. The workers producing more, get their wages at increasing rates.
(2) There is no sudden rise in the wages at one point.
(3) It has all merits of Taylor’s Differential plan.
(1) The system does not guarantee minimum wages for the workers.
(2) There is wide gap in slabs. All workers producing 1% to 83% of the standard output are considered as sub-standard workers and are paid at the same piece rate.
(3) A worker missing the standard even by narrow margin is penalised heavily.
(4) It is more mechanical and less humane.
(5) Trade unions oppose this plan.
(6) It may lead to discontentment among workers.


It is another system of wage payment in cost accounting.

This plan has been named after Harrington Emerson; the innovator of this plan. Under Emerson Plan, the standard time for the completion of a task is fixed against which the actual performance of the workers is measured. The worker’s efficiency can be determined by dividing the time taken by the standard time.

In Emerson Plan, the worker is paid only the time rate for the efficiency up to 67%. At 100% efficiency, the worker is paid time wagesplus a bonus of 20% on the wages earned. The worker is paid one percent additional bonus for each additional one percent efficiency added after the standard. EXAMPLE

Standard output in 10 hrs = 200 units
Rate per unit = Rs 2

Case (1): Output in 10 hrs = 100 units
Efficiency = 50% (100/200 x 100)

As efficiency is below 67% the worker is entitled to only time wage, thus, Earnings = 10 x 2 = 20.

Case (2): Output in 10 hrs = 200 units
Efficiency = 100% (200/200 x 100)

As the efficiency is 100%, then the worker is paid time wages, plus a bonus of 20% on wages earned. Thus,
Time Wages = 10 x 2 = Rs 20
Bonus = 20/100 x 20 = Rs 4
Total earnings = Rs 24

Case (3): Output in 10 hrs = 260 units
Efficiency = 130% (260/200 x 100)

For 100% efficiency, the worker will get a bonus of 20% on wages earned, plus one percent additional bonus for every one percent increase in efficiency, i.e. 30%. Thus, the total bonus of 50% of time wage is paid to the worker.

Time wages = 10 x 2 = Rs 20
Bonus = 50/100 x 20 = Rs 10
Total Earnings = Rs 30

Advantages (Merits) of Emerson’s Efficiency Plan
1. Beginners are encouraged to work hard under this plan.
2. Proper attention is paid to different kinds of workers.
3. It is easy to understand the Emerson’s Plan.
4. It possesses rational determination of efficiency.
5. The calculation of efficiency is logical.
6. This plan can be applied to individual tasks as well as group tasks.
Disadvantages (Demerits) of Emerson’s Efficiency Plan
1. Labour cost is increased due to payment of bonus on low level of production.
2. There is low rate of bonus in the beginning.
3. It is a complicated plan as far as calculation is concerned.
4. It requires a lot of clerical work.
5. Under this plan, management may be tempted to fix a very high level of standard output.


It is another system of wage payment in cost accounting.

H.L. Gantt, an associate of Taylor, devised this scheme on the basis of Taylor’s plan. Under this scheme, fixed time rates are guaranteed. Output standards and time
Standards are established for the performance of each job. Workers completing the standard job within the standard time or a shorter time receive wages for the standard time plus a bonus! The bonus is a percentage, varying from 20 to 50, of the wage for the standard time. When a worker fails to turn out the required quantity of products, he simply gets his time rate without any bonus.


Standard Rate: $ 2 per hour

Standard hours for the job 10 hours.

Bonus is 20% of standard time.

I. Worker had done the work in 12 hours.

II. Worker had done the work in 10 hours.

III. Worker had done the work in 8 hours.

First worker shall obtain at the rate of $ 2 per hour the wages for the work for 12 hours that is, $ 24. Second worker shall acquire the wages for 10 hours at the rate of $ 2 per hours that is $ 20 plus 20% of 10 hours that is for 2 hours @ 2 or $ 4, so in aggregate 24. We can state that he shall be compensated for 12 hours. The 3rd worker who does the work in 8 hours shall obtain the wages for 10 hours because it is the standard time set for the job plus 20% of 10 hours. So, his compensation shall be 10 × $ 2 + 2 × $ 2 that is, $ 20 + 4 = $ 24 per hour. So, with the reduction of time spent on the job, the salary per hour increases and therefore, the total earnings per day go on rising. So, this system is also termed as Progressive Rate system. So, it is a system of time-rate for sub-standard workers and piece-rate for above standard and standard workers.

(1) It is simple and easily understood.
(2) It guarantees day wages and also provides incentive to efficient workmen.
(3) The employer derives the benefit of decreasing it with higher output.
(1) If the minimum wages are kept high due to union pressure, there will not be much incentive for better performance.
(2) Labour cost is high for low production and also upto standard output because of guaranteed day wages and bonus.
(3) The scheme is preferred by the totally inefficient workers as well as by the most efficient workers. Reasonably efficient workers cut a sorry figure.

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