What is Time Rate System? (Meaning, Advantages, and Disadvantages) | Free Cost Accounting Articles
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What is Time Rate System?
What is Time Rate System?
This is the most popular method of payment to workers. Under this system, wages are based on the amount of time spent by a worker inside the factory. He is paid at a specified rate per unit of time (for example, per hour, per day, per week or per month) for his services rendered to the organization.
Calculation of wages under this method of remuneration takes into account:
(i) the time for which the workers are engaged on the job and,
(ii) the rate per unit of time fixed for payment. For example, if a worker gets $5 per hour, he works for 8 hours per day, and has been present for duties on 25 days during the month, his wage for the month on the basis of Time Rate will be: $ 5 × 8 × 25 = $ 1,000.
This approach is frequently utilized in fields where it is challenging to quantify the output of the work or where the manufacturing procedures are straightforward and reliable.
The emphasis is on maintaining a continuous workflow rather than rewarding high levels of productivity, and it is frequently used in situations when staff output may not be immediately quantifiable.
The Time Rate System has drawbacks despite its simplicity and ease of use. Its failure to take staff productivity fluctuations into account is a significant negative.
Employees that continuously perform at a higher level may become demotivated if they are paid the same as their less productive peers due to their hard work and skill. Additionally, without performance-based rewards, some employees might lack the drive to work as hard as possible, which would limit overall effectiveness.
- First in First out Method (FIFO)
- Last in First out Method (LIFO)
- Simple Average Method
- Weighted Average Method
Advantages of the Time Rate System
1) It offers a fixed minimum wage to the worker for a defined period of time.
2) It simplifies the calculation of the payable amount of wages.
3) It makes a stable and secure return to the workers.
4) It encourages the workers to do their jobs with utmost quality, care, and efficiency and in the best possible manner.
5) It promotes a sense of equality and unity among the workers.
6) It is an economical system to the organization in respect of wage administration material use, plant operation, and quality control.
Disadvantages of the Time Rate System
1) It ignores the individual quality and quantity of output.
2) It reduces personal initiative to work faster.
3) It treats both efficient and inefficient workers at par.
4) It increases the cost of labour per unit because of the tendency to consume more time in finishing a job.
5) It needs close supervision to ensure continuity of operations.