ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD COST ACCOUNTING

CODE (5532)

MBA (Banking and Finance)

2NDSemester

autumn 2009

Assignment # 02 Project

WAGE INCENTIVE PLAN

SUBMITTED TO:

SIR SOHAIL ASIF

SUBMITTED BY: ASMA MUNIR Roll No AD-514325

ACKNOWLEDGEMENTS
All praises are attributed to Almighty Allah, the most Beneficent, the more compassionate who blessed His mercy upon me and gave enough courage, opportunity and above all the teachers to guide me and also to his Prophet Hazrat Muhammad (PBUH) who is real source of knowledge and guidance for all the worlds for all the times to come.

My cordial sources of inspiration were none other than our worthy teachers specially SIR SOHAIL ASIF who painstakingly guided me. The credit if any goes definitely to honorable teachers and any errors, no doubt are for the incompetence of mine, since mistakes are part of learning.

I was fortunate to benefit from the encouragement, help and suggestion of many individuals during process of developing this report. I owe a considerable debt to all those who in one way or another moved the report toward completion. Specially thanks to Ms. Shumaila Munir for their kindness and corporation during this report work.

ABSTRACT
Where it is impossible to relate output to an individual employee's efforts it may be possible to relate it to the efforts of the work group. If, in addition, cooperation is required to produce the desired output, then a group incentive plan may be the best alternative. Interdependence of work, then, is a major reason for choosing a group plan over an individual one. A group incentive plan can reward things that are very different from what an individual plan rewards, in particular: cooperation, teamwork, and coordination of activities. Where these are highly valued, a group plan is most appropriate. As organizations become more complex and the production process more continuous, group incentive pay plans can be expected to become more popular. Group plans are also useful where performance standards and measures cannot be defined objectively. In a group setting, variations tend to average out, so no one gets as hurt by random variation or lack of continuity. Almost any individual plan can be adapted to a group setting. Thus the focus in group plans is still higher level of effort. The primary disadvantage of the group plan is that it weakens the relationship between the individual's effort and performance. Where there is likely to be wide variation in the efforts of group members, a group incentive may lead to more intra group conflict than cooperation. In group plans it is also more difficult to monitor performance standards and measures. Finally, group norms play an expanded role, both positive and negative, in group plans. They are stronger and more controlling on the individual. Where the group norms are congruent with management's goals, this is a plus; but where the two differ, it can harm the chances of success of the incentive plan.

Wage incentive plan

Definition:
A wage system which provides additional pay for qualitative and quantitative performance which exceeds standard or normal levels. By definition, an incentive is a reward for extra effort. If the reward happens to be, more pay for more work, then we call it a wage incentive plan. There are many incentive plans suitable for direct labor personnel, supervisory personnel, office personnel, as well as plans for groups of employees. Profit sharing is a form of wage incentive. Then there's the Merit Pay plan that pays for more that just production. To be successful, any incentive plan should be designed around a companys needs. Wage program where wages rise with productivity increases above an established standard. Individual incentive wage plans are based on the performance of the individual employee, while group incentive plans are based on the performance of the work group, with individual members receiving a respective proportion of the pay allocated.

A Continuum of Time and Output Systems

TYPES OF WAGE INCENTIVE PLANS Incentive plans typically involves wage rates based on various combination of out put and time .many wage incentive system retain the name of industrial engineers and efficiency experts who originated the plans the Taylor differential price rate plan, the Halsey premium plan, the Bedaux point system, the Gannt task and bonus plan, and the

Emerson efficiency plan. Most of these original plans are no longer used but many adaptations of them are still found. To demonstrate the operation of incentive wage plans, Straight piecework plan One hundred percent bonus plan Group bonus plan Organizational incentive plans Straight piecework plan: Piece work: work paid for according to the quantity. Straight piece: an incentive plan under which employee receive a certain rate for each unit produced. Differential piece rate: is compensation rate under which employees whose exceeds the standard amount of output receives a higher rate for all of their work than the rate paid to those who do no exceed standard amount. Bonus plans: One hundred percent bonus plan: 100 percent bonus plan is a variation of the straight piecework plan. It differs in that standards are stated no in term of money, but in time per unit of output. Instead of a price per piece, a standard time is allowed to complete a unit and the worker is paid for the hourly rate if the unit is completed in the standard time or less. thus if a worker produces 100 units in an 8 hour shift and standard time is 80 unit per shift (10 unit per hour) the worker is paid the hourly rate for 10 hours. in other variation of 100 percent bonus plan, saving are shared with the supervisor and or the company. Individual bonus plan: Providing employees with more pay for excreting gather effort while at they same time they will have the security of a basic wage. A bonus payment may be based on the number of units that an individual procedures as in the case of piece work.

 For example: At the basic wage rat of person 50/p hour plus a bonus 0.5/unit an employee who produced 100 units during an eight hour period is paid 400, computed as follow. Incentive for hourly employee: Wage = (Hour x wage rate) + (number of unit x unit rate) = (8 x 50) + (100 x 0.50) =450 Bonus may also be determined on the basis of cost reduction, quality improvement, or performance criteria established by the organization. Group bonus plan: is most desire able to use when the contribution of individual employee either or difficult to distinguish of depend on group coordination. Production has become more automated as team work and coordination among workers have become more important and as the contribution of those engaged indirectly in production work has increased team bonuses have grown more popular. Most team bonuses plan develop in recent year base incentive payment on such factor as improvement in efficiency product quality or reduction in labor cost. Organizational incentive plans: Management should evaluate the strength and weakness of both individual and group incentive plans to determine what is best for their organization. In situation where productivity of the whole organization needs improvement, an organizational or gain sharing plan may be best. Organizational incentives plan have developed as an answer to the productivity problems that have plagued U.S. industries. These plans have been used with great success by Japanese companies. The central feature of gain sharing plan is that all

individual have the capacity to make valuable contribution to an organization. Inherent in these plans is an employee centered management style that emphasizes involvement and participation of all employees. The key to successfully implementing a gain sharing plan include measurable normal labor cost, a relatively stable ratio of our put value to labor cost, and incentives and policies that are fair to all participant. For example: in a form of gain sharing known as Scanlon plan, the company identifies a formula comprising the key factor. if results improve above a predetermined target level, employees receive incentive payments. The payment is predetermined fraction of the companys estimated saving or gain.All employees, both management and labor, usually participant in the bonus.

Practical study: SELECTED ORGANIZATION

AL-KARAM TEXTILE MILLS PVT.

INTRODUCTION OF THE ORGANIZATION:
The Al Karam group was founded in March 1986 with a vision to be a provider of innovative textile solutions worldwide. We are a manufacturer and supplier of distinguished fabric for apparel, home and industrial markets with clients all over the world. Ability to create forward-thinking solutions that give our clients a competitive advantage is what sets up apart. There core services include: Fiber manufacturing Spinning Weaving Knitting Dyeing and printing of woven and knitted fabrics Designing Cutting and Stitching With a constructed area of over one million square feet, Al Karam has the capacity to fulfill small, medium and large scale orders. They are one of the few vertically integrated operations in Pakistan. Offering a diversified range of products, there customers can mix and match from a wide variety of print, yarn dyed, solids, dobby and jacquard. They also deal in twill, sateen, basket weave and percale, knitted to woven fabric; and thread counts ranging from 130 to 1000.

They also provide there customers with complete in-house design solutions. There creative center is equipped with state of the art designing and sampling equipment and skilled textile artists. In an industry where deadlines are a way of life, Al Karam is proud to have a proven track record of service quality and on-time delivery. They maintain a comprehensive order tracking system, so they can stay on top of your order at all times.

Wage incentive plans:

Al-karam textile industry offers different incentives at different levels of their organization. They provide some incentives for their organizational workers like Financial Incentives: Alkaram mills pay financial incentives to their workers when production exceeds to certain criteria. Motivational Incentives Merit pay as incentive Incentives to professionals They provide some incentives for their labor who work in cutting and assembly department. They provide Straight piece work plan 100 percent group bonus plan

Straight piece work plan: The organization gives their labor incentive when they produced the unit above their standard unit. There are 75 workers work in assembly department, here we take 5 labor and make their straight piece wage incentive plan. 1.5 minute producing one unit than the standard rate is =60/1.5 Standard unit =40 units per hour Base pay rate= Rs 150

Piece per rate=base pay rate/standard unit =150/40 =Rs 3.5 Overhead per hour= Rs 70

Straight piece work plan (assembly department) S.N Unit per hour Guaranteed hour rate Rs Piece rate Rs Earne d per hour Rs Labor cost per hour Rs Over head per hour Rs 1 2 3 4 5 38 35 42 45 50 150 150 150 150 150 0 0 3.5 3.5 3.5 150 150 157.5 168.75 187.5 3.947 4.285 3.75 3.75 3.75 70 70 70 70 70 Over head per unit Rs 1.842 2.00 1.666 1.555 1.40 5.789 6.285 5.416 5.305 5.15 Conversio n cost per unit Rs

Earned per hour = unit per hour x piece rate Labor cost per hour=earned per hour/unit per hour Overhead per unit=overhead per hour/units per hour Conversion cost=labor cost per hour + over head per units

One hundred percent Group bonus plan:

In organization work is not completed individually. There are a lot of people work in groups in different department like assembly and cutting department. Those workers who work in the form of group this industry apply the 100 percent group bonus wage incentive plan. We take the 5 groups and make their one hundred percent group bonus plan.

The given data are Actual hours=70 Regular wage per group=Rs 40,000

100 PERCENT GROUP BONUS PLAN S.NO Unit produced ST. hour for units produced Actual hour Regular group wage Bonus (hour saved RS 100) Total group earning Labor cost per unit

1 2 3 4 5

300 350 400 450 500

60 65 75 80 90

70 70 70 70 70

40,000 40,000 40,000 40,000 40,000

0 0 500 1000 2000

40,000 40,000 40,500 41,000 42,000

133.33 114.28 101.25 91.11 84.00

Total group earning=regular group wage + bonus (hour saved) Labor cost per unit= total group earning/unit produced Conversion cost per unit= labor cost per unit + overhead cost per unit

Data collection method:

I took data from internet, books, reports, etc. I have collected secondary data which I use as my primary data.

SWOT ANALYSIS:
Strengths Weaknesses Opportunities Threats

STRENGTHS
ISO Certification: State of the art equipment Brand Name Highly motivated workforce Diverse product range Availability of cheap labor Access to high quality cotton (in short staple category) Dealings with high quality international brands Own Power Generation

Weaknesses
Weak Information Systems Seth culture Weak R&D facilities Lack of HR development

Opportunities:
Organization can expand product line Capture new market segment Reduction the cost by the proper utilization of resources

Threats:
Buyers needs demands change Political instability Tough international and national competitors Lack of conducive environment for business

Conclusion:
The wage incentive plans encourage the worker, work properly. When the organization motivates their employees with different type of incentives the workers are more loyal with their organization. These things increase the productivity of organization and reduce the cost. The wage incentives plan are not only for high level of employees its also for labor because labor is the most important part of the organization.

Recommendation:
Eliminate one man show prevailing in the company There must be proper system for training of employees and supervisor Should be given employees turnover There is problem of work overload for the employees and it should be control properly so that the employees are motivated. employee working till 8 pm and some time they work till 1 am late night without any incentive Paid extra for the work which they do after working hour

References: Books: Cost accounting 14th edition (CARTER )

WEBSITES: www.alkarammills.org www.allbusiness.com