Overtime Premiums

System

Hi

When calculating costs of direct labour, does anyone know under which circumstances you include the basic rate of pay on overtime in basic pay, and when you include the whole overtime expense including basic pay as a separate line?

For example:

Normal time worked: 8000 hours
Overtime at double time: 1000 hours
Rate of pay: £7

You can write this as:

Normal time worked 8000x7 £56,000
Overtime worked 1000x14 £14,000

Total direct labour cost £70,000

or:

Normal time worked 9000x7 £63,000
Overtime worked 1000x7 £7,000

Total direct labour cost £70,000

Obviously the answers are the same, but which is correct under what circumstances?

Thanks

Simon

System

Re:Overtime Premiums

In probably 99% of cases it will be the second one. Although overtime may be classed as double time, the first half is still normal time with only the second half the premium rate. The same goes for time and a half - only the half is the premium rate...

Time and a half; normal rate per hour = £7.00
Amount paid to employee is £10.50.
Normal hourly rate = £7.00
Overtime premium rate = £3.50

Double time; normal rate per hour = £7.00
Amount paid to employee is £14.00
Normal hourly rate = £7.00
Overtime premium rate = £7.00

Triple time; normal rate per hour = £7.00
Amount paid to employee is £21.00
Normal hourly rate = £7.00
Overtime premium rate = £14.00

And so on...

Logically, you can't ever do any overtime without working the normal time first, if you see what I mean?

This will almost certainly crop up in the ECR exam so you must ensure you are aware of the difference.

Regards,

Robert

System

Re:Overtime Premiums

Thanks, Robert. However, if you look at the answers to ECR questions 1.3 in June '05 and December '05, one gives the answer one way, as you said and the other gives the answer the opposite way! I just can't see the reason for the difference!

System

Re:Overtime Premiums

This was the Dec 05 task 1.3

ADDITIONAL DATA
The following information relates to direct labour costs incurred in producing 18,000 type Y
pharmaceutical bottles during November 2005.
Normal time hours worked 600 hours
Overtime at time and a half worked 120 hours
Overtime at double time worked 90 hours
Total hours worked 810 hours
Normal time hourly rate £6 per hour
Overtime premiums paid are included as part of direct labour cost.
The Production Supervisor has produced the following incorrect calculation of the total cost
of direct labour used to produce type Y pharmaceutical bottles during November.
£
Cost at normal rate 810 hours at £6 = 4,860
Cost at time and a half 90 hours at £9 = 810
Cost at double time 120 hours at £12 = 1,440
Total direct labour cost 7,110
Task 1.3
(a) Calculate the correct total cost of direct labour used to produce type Y
pharmaceutical bottles during the month of November.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

This is the examiner's answer to the Dec 2005 paper

Task 1.3
(a) Cost at normal rate: 600 hours at £6 = £3,600
Cost at time and a half: 120 hours at £9 = £1,080
Cost at double time: 90 hours at £12 = £1,080
Total direct labour cost £5,760

This was a "correct an earlier error" type question, so the format used in the error has been used. This is fine.

I am sure that full marks would have been given to anyone putting there answer in this form:

Cost at normal rate: 810 hours at £6 = £4,860
Cost at a premium of a half: 120 hours at £3 = £360
Cost at a premium of a whole hour: 90 hours at £6 = £540
Total direct labour cost £5,760

This firm treats overtime premium costs as direct labour cost

If instead the question next week is identical in the numbers bur says
This firm treats overtime premium costs as indirect labour cost
then you would have to say:
Total direct labour cost = £4,860
Total indirect labour cost £900

System

Re:Overtime Premiums

Thanks again, Sandy!