The Hindu Business Line : Right incentive for workers

ZED Ltd employs 50 skilled workers. It is considering the introduction of an incentive scheme — either Halsey (with 50 per cent bonus) or Rowan — of wage payment for increasing labour productivity and cope with the increasing demand of 40 per cent for the product. It is believed that the proposed incentive scheme would increase the current earnings of the workers by an average of 20 per cent; it could act as sufficient incentive for them to produce more.

Because of assurance, the increase in productivity has been observed as revealed by the figures for April 2004.

Hourly rate of wages (guaranteed) — Rs 30

Average time for producing one unit by one worker at the previous performance level (this may be taken as time allowed) — 1.975 hours

Number of working days in the month — 24

Number of working hours per day of each worker — eight

Actual production during the month — 6,120 units

Required: Calculate the effective rate of earnings under the Halsey and the Rowan schemes. Calculate the savings to ZED Ltd in terms of direct labour cost per piece.

Advise ZED about the selection of the scheme to fulfil his assurance.

Solution: Working notes: Time allowed — 6,120 units x 1.975 hours = 12,087 hours

Hours worked: 50 workers x 24 days x 8 hours = 9,600 hours

Time saved = 2,487 hours

Halsey scheme: E = HW x RH + (50 per cent x TS x RH)

9,600 x 30 + (50 per cent x 2487 x 30)

2,88,000 + 37,305 = Rs 3,25,305

Effective rate of earnings per hour = 3,25,305/9,600 = Rs 33.8859

Rowan scheme: E = HW x RH + (TS/TA x HW x RH)

9,600 x 30 + (2,487/12,087 x 9600 x 30)

2,88,000 + 59258.38 = Rs 347258.38

Effective rate of earnings per hour = 347258.38 / 9600 = Rs 36.1727

ii) Direct labour cost per piece = 1.975 x 30 = Rs 59.25

Under Halsey scheme — 3,25,305 / 6,120 units = 53.15

Savings = 6.10

Direct labour cost per piece = 59.25

Under Rowan scheme — 3,47,258.38 / 6,120 units = 56.74

Savings = 2.51

iii) Normal production = 50 x 24 x 8 = 9,600 / 1.975 = 4,861 units

Actual production = 6,120 units

Increase in production = 1,259 units

Increase in labour productivity = 1,259/4,861 x 100 = 25.9 per cent

That is, 25.9 per cent increase in production as compared to normal production.

Increase over present earnings of the workers:

Present earnings per hour — Rs 30

Under Halsey Scheme per hour — Rs 33.89

Increase per hour — Rs 3.89

Percentage increase = 3.89/30 x 100 =12.97 per cent

Increase of earnings under the Rowan scheme = 36.17 - 30 = Rs 6.17 per hour

Percentage increase = 6.17/30 x 100 = 20.57 per cent

Advice: The Rowan scheme is to be selected as it fulfils the company's assurance of 20 per cent increase over the present earnings of the workers. This will increase productivity by 25.9 per cent only. But it will not help cope with the increased demand of 40 per cent for the product.

Note: A similar question was asked in the November 1993 CA (Intermediate) paper.

Suggested answers to the May 2004 CA (PE II) paper on cost accounting and financial management.

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