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Part B Standard costing ⏐ 7: Standard costing
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5.3.1 Conditions for successful operation of incentive schemes
Whatever scheme is used, it must satisfy certain conditions to operate successfully.
(a) Its objectives should be clearly stated and attainable by the employees.
(b) The rules and conditions of the scheme should be easy to understand and not liable to be misinterpreted.
(c) It must win the full acceptance of everyone concerned including, of course, trade union negotiators and
officials.
(d) It should be seen to be fair to employees and employers. Other groups of employees should not feel
unjustly excluded from the scheme, as their work might be affected by their dissatisfaction.
(e) The bonus should ideally be paid soon after the extra effort has been made by the employees, to
associate the ideas of effort and reward.
(f) Allowances should be made for external factors outside the employees' control which reduce their
productivity such as machine breakdowns or raw materials shortages.
(g) Only those employees who make the extra effort should be rewarded. It would not be an incentive, for
example, to institute a scheme in all factories in a country-wide organisation and to pay a productivity
bonus to employees in London for work done by employees in a factory in the North of England
(especially if these North of England employees fail to get an adequate bonus for their efforts as a result of
this sharing).
(h) The scheme must be properly communicated to employees.
5.3.2 Types of incentive schemes
There are many possible types of incentive scheme. Some organisations employ a variety of incentive schemes. A
scheme for a production labour force may not necessarily be appropriate for clerical workers. An organisation's incentive
schemes may be regularly reviewed, and altered as circumstances dictate.
(a) A high day-rate system is an incentive scheme where employees are paid a high hourly wage rate in the
expectation that they will work more efficiently than similar employees on a lower hourly rate in a different
company.
(b) Under an individual bonus scheme, individual employees qualify for a bonus on top of their basic wage,
with each person's bonus being calculated separately.
(c) Where individual effort cannot be measured, and employees work as a team, an individual incentive
scheme is impractical but a group bonus scheme is feasible.
(d) In a profit sharing scheme, employees receive a certain proportion of their company's year-end profits
(the size of their bonus being related to their position in the company and the length of their employment
to date).
(e) Companies operating incentive schemes involving shares use their shares, or the right to acquire them,
as a form of incentive.
5.3.3 Example: incentive schemes
EF Co manufactures a single product. Its work force consists of 10 employees, who work a 36-hour week exclusive of
lunch and tea breaks. The standard time required to make one unit of the product is two hours, but the current efficiency
(or productivity) ratio being achieved is 80%. No overtime is worked, and the work force is paid $8 per attendance hour.
Because of agreements with the work force about work procedures, there is some unavoidable idle time due to
bottlenecks in production, and about four hours per week per person are lost in this way.
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