METHODS OF WAGE COMPUTATION

METHODS OF WAGE COMPUTATION

v FLAT TIME RATES

These are hourly, daily or weekly rates of pay which are paid to workers    irrespective of their output during the time worked. Workers are paid overtime if time worked exceeds normal working time.

v INCENTIVE WAGE SYSTEMS

Incentive wage systems are the methods of remuneration whereby wages earned by the workers vary with their output.

Ø Incentive wage systems based on piece rates

Earned Wages = piece rate × pieces produced

·       Straight piece rates

In straight piece rate system, a same rate per piece is paid to all workers.

·       Piece rates with guaranteed time rates

In this system of wage computation, a standard output is set for all workers. If actual output of a worker is greater than standard output, that worker is paid according to piece rate. But if, for any reason, output of a worker remains less than standard output, the worker is paid a guaranteed time wage.

·       Differential Piece rates

According to this system, there are different piece rates for different levels of productivity such that higher piece rates are paid in case of higher productivity. Following are the two examples of differential piece rate system:

o   Taylor’s Differential piece rate system:

A standard production level is set at first. There are two piece rates under this system. A higher piece rate (i.e. 120%) of standard piece rate is paid to worker who achieves the standard production level and a lower piece rate (i.e. 80%) is paid to a worker who fails to achieve the standard production level. The minimum wages are not guaranteed to workers.  

o   Merrick Differential Piece rate system (Multiple piece rate system)

This system is a modification to the Taylor’s differential piece rate system. In this system, there are three piece rates according to the efficiency level of workers. If output of a workers remains below 83%, normal piece rate is paid to the worker. If output is greater than 83% but below 100% , worker is paid 10% above the normal piece rate (i.e. 110% of normal piece rate). If output of a worker is greater than 100%, worker is paid 120% of normal piece rate (i.e. 20% above normal piece rate).

Ø Incentive wage systems based on time rates

In these systems, a standard time is set for a specific job/task and workers are paid for the time saved (Standard time – actual time taken) in doing the job/task. Following are some examples of these types of systems:

·       100% Premium system:

In this system, workers are paid 100% for the time saved in doing the given task.

·       Helsey Premium Plan/ Split bonus plan/ 50:50 Plan:

In this system, workers are paid 50% of time saved in addition to the guaranteed time wages.

Total Earnings = Guaranteed Time Wages + Bonus of 50% of time saved

OR

Total Earnings = (Time taken × Time rate) + 50% (Standard time –time taken) time rate

·       Helsey-Weir Scheme:

This system is same as Helsey Premium Plan except that under this scheme 30% of time saved is paid as bonus in addition to guaranteed time wages.

·       Rowan Plan:

In this plan the standard time for the completion of a job and the rate per hour is fixed. If a worker completes the task in more time than standard time fixed for the task, then he is paid according to the time rate, i.e. time taken multiplied by the rate per hour.

And if the worker completes the task in less than the standard time, he is paid a bonus along with the time wages. A bonus is the percentage of worker’s time rate. This means, the bonus/premium is calculated on the percentage of wages earned for working on a job. This percentage is equivalent to the proportion of the time saved to the standard time. Numerically,

Bonus = Time Saved/ Standard Time × time wages

Total Earnings = (time taken × hourly rate) + (time saved/standard time × time taken× time rate)

METHODS OF CONTROLLING AND MANAGING INVENTORY

METHODS OF CONTROLLING AND MANAGING INVENTORY

Ø Economic Order Quantity (EOQ)

Please see my earlier posts for this method.

Ø Just in Time (JIT)

According to this method of inventory control, holding inventory is useless because it adds to total cost only and carries no benefit. So there should be no inventory at all. JIT method has two aspects:

·        Just in Time Production

This system tells that production should only be started when a new order of inventory is received. This means that production should be fast so that order may be delivered in time.

·        Just in Time Purchasing

This system tells that purchase order should only be placed with supplier when a new order of inventory is received. This means that supply system should be very efficient.

Ø Two Bin System

Under this method of inventory control two large containers are used for the purpose of holding inventory. As soon as the first container falls short of inventory, order is placed with the supplier. During the period of ordering inventory and receiving delivery of inventory from supplier (i.e. Lead Time), second container is used. Quantity of inventory in second container is enough to be used while new inventory is received from supplier. When second container becomes empty, again a new order is placed with the supplier and in this way, the process continues.

Ø Periodic Review System

Under this system of inventory, there is reorder level and reorder quantity for each item of inventory.

Inventory levels are checked periodically after, say, one, two, three or four weeks. When inventory levels fall below the limit, new order is placed with the supplier.

Ø ABC method of Inventory Control

There are three categories of inventory in this method of control. A, B and C. Category “A” inventory has high holding costs. Category “B” has moderate holding costs (Holding costs higher than Category C and lower than category “A” inventory). Category “C” inventory has low holding costs.

According to this method, each category of inventory should be controlled differently and the closest control should be applied to each category of inventory.

Category “A” may be controlled using EOQ model.

Category “B” may be controlled using Periodic Review System.

Category “C” may be controlled using Two bin System.

Identifying Inventories:

1.     Calculate total amount spent for each item of inventory.

2.     Rank the individual inventory items by the amount total spent and sum the column.

3.     Express each individual total spent item figure as a percentage of the total spent and sum the percentage column..

4.     Identify categories using stated policy.

INVENTORY LEVEL FORMULAS

INVENTORY LEVEL FORMULAS

v Reorder Level (In case of certain lead time and constant demand)

Reorder Level = Demand × Lead Time

• Reorder Level is the level of inventory (or quantity of inventory left in store) at which new order of inventory should be placed with the supplier.
• Lead Time is the time frame from the date of ordering the inventory to the date when the order(inventory) is received from supplier.  

v Reorder Level (In case of Uncertain lead time, Uncertain demand and Without Safety Stock)

Reorder Level = Maximum Demand × Maximum Lead Time

v Reorder Level (With Safety Stock)

Reorder Level=(Average Demand ×Average Lead Time)+ Safety Stock

v Safety Inventory/ Buffer Stock/ Safety Stock/ Minimum Inventory Level

         Safety inventory is the minimum inventory level that should be maintained at every       time to avoid any stock out.

Safety Stock=(Max.Demand ×Max.Lead Time)- (Avg.Demand×Avg.Lead Time)

OR

Safety Stock=Reorder Level- (Avg.Demand×Avg.Lead Time)

v Average Inventory

Average Inventory= (Order Size(Q))/2                         (Without Safety Stock)

OR

Average Inventory=(Order Size(Q))/2+ Safety Stock        (If there is Safety Stock)

OR

Average Inventory=(Min.Inventory Level+Max.Inventory Level)/2

v Maximum Inventory Level    

  It is the level of inventory that a company should not exceed. It would not be cost effective to hold inventory above this level. 

Maximum Inventory Level=(Reorder Level+Reorder Quantity)- (Min.Demand×Min.Lead Time)

v Danger Level

 It is the level of inventory that an organization must have at any time.

Danger Level = Normal Daily Usage × Time required to get emergency supplies