Time Rate Cost Computation Method: Definition; Applicability; Importance; Formula; Advantages And Disadvantages

1.1 Definition:

Time Rate Method is an approach for computing labor cost which is based on the time taken at work place whether one has actually utilized the time for productive output or not. The employees are paid based on the time rate set for the amount of time they spend at work. The rates are on either weekly or monthly basis which is termed as the standard working time and can for instance be either 35 or 40 hours per week.

1.2 Applicability of Time Rate Method

  1. Time Rate Method applies where the form of payment is very popular and easy.
  2. Time Rate Method is applicable where payroll system is functional.
  3. Time Rate Method is suitable especially where computation of labor cost is simple in nature.
  4. Time Rate Method is fitting where again income for the employees is rest assured. In other words, there is no irregularity or uncertainty regarding wage income to be received.
  5. Time Rate Method is applicable especially where the workers concentrate more on the task or assignment given for the issues of the income are already sorted.

1.3 Importance of using Time Rate Method

Time rate method is justified to be in use by most organizations because of its paramount importance. Some of the reasons as to why the method is popular and useful are;

  1. Time rate method is an approach which guides the employer to assess the potential of each employee.
  2. The main focus of the organization when using time rate method is the quality work done and not necessarily the total units produced and this improves the image of the firm in the market.
  3. Supervision assignment is well utilized when using the time rate method and the management can see the value for money that it pays the supervisory team to undertake its duties of overseeing.
  4. When using time rate method, no single employee will have control over the whole output and hence productivity of each employee is properly controlled by the management.

1.4 Formula for Time Rate Method

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

To determine the total pay, the payroll office will consider the total hours spend at the place of work and the pre-determined standard rate, then compute the product of the two.

Here we go….

Wage Income= Hours Worked x Rate per Hour 


Mark Paul is an employee of Mark company limited whose terms of employment are as follows;

Standard Wage rate per Hour   $10

Working hours from 8 AM to 4 PM per day from Monday to Friday is as per Table 1.1

NB: That lunch hour break is inclusive and any other time break such as tea break where by no production is done during these breaks. However, this payment system does not exclude the hours not worked but assumes that the employee worked for all hours.

1.5 Advantages using Time Rate Method in computing labor cost

  1. Simplicity in computation of the payment amount

    When Time Rate Method is utilized, employers in most firms are able to follow the payment system for it is simple and user friendly.

  2. Clarity of the payment system

    The Time Rate Method is straight forward and employers cannot forge it or collude with the employees to make wrong payments. So, one advantage of this system is that it is very easy to access and that is because of its brief and clear detailed information that it provides to its users.

  3. Foster production quality

    Since Time Rate Method does not focus on output for the payment is anchored on the standard time-based payment rate, the employer ensures that the workers are fully supervised to produce goods or services of the highest quality. This is an advantage to the firm for it gains popularity in the market.

  4. Budgeting is easy for the organization

    Since the wage rate is pre-determined when Time Rate Method is used, it is possible to project on the future profitability of the firm for the expenses are already known or constant. So, there are no fears that some external factors may escalate the salaries upwards.

  5. Learning ground for new employees

    Since the employees are under a close watch by the supervisors when Time Rate Method is used, the new employees are able to learn the job faster for they are not bound to number of pieces to produce to be guaranteed of an income as it is in the piece rate method.

1.6 Disadvantages using Time Rate Method in computing labor cost

  1. Decline in output efficiency of the employees

When Time Rate Method is used, the issue of increased output as compared to input is no more. In fact, the total input monetary value may exceed the total output monetary value hence uneconomical. This is because the output is not the key focus of the worker for, he/she knows that so long as one is in the workplace at the right time, all is okay even if all the time set is not fully utilized. So, firm’s resources are not optimally utilized.

  1. Loss of skilled workers

Time Rate Method does not incorporate the aspect of the best employees as far as efficiency in output is concerned. This is because the method paints both the experienced and new employees with the same brush (i.e., treated equally). As a result, the experienced and skilled employee turnover increases (look for greener pastures) and this is disadvantageous to the organization.

3.. Conflict of interest between the two parties (employer & workers)

Since Time Rate Method encourages the supervisors to be strict in overseeing the work done by the employees, the former may put in place some working or job performance rules without consulting the latter and this may not go well with the two parties. Squabbles may arise, slowing down total output.

4.. Increased supervision cost

As a result of using Time Rate Method in computing payment of the laborers, more supervision endeavors are increased and of course with increased costs to the firm.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.