overtime and premium rate

System

Hi just doing ECR June 2005 past paper and task 1.3 you have to calculate the total cost of direct labour for product b.

I worked it out as
Normal hrs 8,000hrs @ £7 = 56,000
time & half 1,500hrs @ £10.50 = 15,750
double time 1,000hrs @ £14.00 = 14,000
TOTAL COST = 85,750

the answers to the past paper did it a different way but i got the same answer, is there a right way of doing it or doesn't it matter.

please can anyone help
aly

System

Re:overtime and premium rate

Alynig

I can guess the other way. AND your way would get you the marks.

But your approach is a payroll clerks approach rather than a cost accountant's.

As cost accountants we are expected to post the costs according to company policy. In your example company policy is to treat overtime premium payments as DIRECT costs, but the firm next door could treat them as INDIRECT.

This becomes significant because direct costs are charged to work in progress whereas indirect production costs are charged to production overheads.

As a cost accountant my calculation would be:
Total hours x £7 = direct labour
1,500hrs x £3.50(overtime premium)=
and
1,000 x £7.00 (overtime premium)=

We would get the same answer, but if the question had said:
Overtime Premium is treated as an indirect cost then I could work out that the
10,500 x £7 is a direct cost to be debited to WIP
and the
1,500 x £3.50 plus the 1,000 x £7 is an indirect cost to be charged to the Overhead Control account.