Piece Rate Payment System: Definition; Straight Method; Applicability; Formula; Example; Advantages And Disadvantages

1.1 General Definition

Piece Rate Payment system is a method of computing the labor cost for the employees which is pegged on the pieces an individual employee produces within a given period. This formula is categorized in to two broad types, namely:

Straight piece rate system
and

Differential piece rate system

Piece Rate Payment System-Straight Method

2.1 Specific Definition:

Straight Rate Method is a Piece Rate Payment System affiliated approach which entails a piece rate which is set per piece of work or output produced and the total number of the units produced.

When using Straight Rate Method, the time taken does not matter for this is a scheme where payment of the employees is pegged on results/output. In other words, the method advocates for worker’s efficiency. The intention of the developers of this method was to overcome the challenges faced in the case of Time Rate Method which focuses much on time worked which may not really be the exact time worked.

2.1.1 Applicability of Piece Rate Method (Straight Rate Method)

1. Piece rate method or scheme (straight method) is most appropriate in certain circumstances. Some of them are;

   Straight Rate Method applies where work done is repetitive in nature.

   That is, the Straight Rate Method is more suitable where the workers keep on doing the same task or similar task every now and then.

2. Output quantity is measurable.

   The Straight Rate Method fits well where it is possible to count the total number of units produced by an individual employee within a specific timeline.

3. Straight Rate Method is appropriate where product quality of the product is controllable.

   The Straight Rate Method advocates that the quality of the product should be of a nature that can be gauged using universally accepted indicator.

4. Straight Rate Method allows the process of setting an equitable and acceptable piece rate for the units being produced.

   The Straight Rate Method is well fitting where it is possible to set piece rate for the laborer without much complexity or confusion.

5. Straight Rate Method is suitable where there is intent to motivate employees if they work extra hard.

   The Straight Rate Method gives an allowance to the workers to exploit their potential by being paid extra if they deliver over and above the set expectations of the firm. 

6. Straight Rate Method works well where tools of production are always available.

   The Straight Rate Method is well suiting when the production tools such as processing, designing or packaging equipment are always available to cater for any extra production when the employee feels like working more than usual. 

2.1.2 Formula for Straight Rate Method

So, how is the total wage income under Straight Rate Method computed?

Wage income= Output x Rate per Unit of Output

EXAMPLE

Mr. William works on contract basis with Williamson co. ltd. The following production schedule portrays the work done by William for the last 14 days of the month of July 2022 as per Table 1.1

Therefore, the total wages for the two weeks is $1,224.60. This amount excludes time when no unit was produced. For instance, the two days of Sunday when he rested from work. Again, you can see that the payment rate is constant but where the amount is varying, the pay also varies. 

2.2.1 Advantages of Straight Rate Method in Computing Labor Cost

1.Straight Rate Method helps in ensuring that workers are paid according to their merit because for this method demarcates the efficient and inefficient workers so that the efficient worker can be paid more wages which is linked to output levels. In other words, this method is an improvement of the time wage system.

2.Straight Rate Method motivates employees as per their individual efforts.

The Straight Rate Method is an assurance way that an inducement is given to the workers to increase their production. This prompts workers to adopt better production methods so as to produce more. 

3.Straight Rate Method help firms to enjoy Economies of scale

The Straight Rate Method advocates for increased production levels which on average bring down the cost per unit and by extension improve profitability.

4. Straight Rate Method eliminates ghost workers

The Straight Rate Method does not give room to payment of idle time as it is in the case of time wage system.

5.Straight Rate Method help in product pricing

Using Straight Rate Method helps the employer in determining his exact labor cost per unit which will help him or her in setting the selling price of the end output.

6. Straight Rate Method aid in ensuring that the workers effectively use their machinery

Straight Rate Method ensures that the workers take care of their machinery during production and this saves the organization repair and maintenance costs or expenses. 

7. Straight Rate Method helps in reducing supervision cost for the organization

Less investment is made by the firm in paying supervisors colossal salaries for them to effectively watch over work done. This is because Straight Rate Method makes workers have the fear of not earning wages if they do not work.

2.2.2 Disadvantages of Straight Rate Method in Computing Labor Cost

1.Frustration of workers at the work place

When the organization for instance uses the Straight Rate Method to fix low piece rate, it becomes the source of disappointment of the employees and it can lead to low productivity of the same targeted individuals which the management wanted to motivate.

2.Straight Rate Method translates to low quality of production.

When Straight Rate Method is used to determine the payments, the workers will try to produce more to earn more wages and as a result, this act compromises the output quality.

3.Raw material wastage

This Straight Rate Method encourages workers to focus more in increasing output and as a result a lot of inputs go to waste for the workers are not careful to optimize the materials.

4.Straight Rate Method instigates fear of losing income amongst workers (i.e., job insecurity)

The Straight Rate Method sends serious signals to workers that if they don’t produce or if they produce less, they are not guaranteed of any wages.

5. Straight Rate Method does not favor low performing workers

The Straight Rate Method does not support low performing or less efficient employees. Now the worse bit is if this happens to those workers who unfortunately may be physically hand capped which may not be their wish. Then this method turns to be a tool of discrimination amongst employees which is not socially acceptable.