Treatment of Overtime

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I appreciate that any question on the exam requires you to read the question thoroughly, but overtime questions require extremely careful reading. Exactly what you do about the payments is a matter of company policy.

Look at this example taken from a firm of plumbers:

On Tuesday at 5pm Miss Leslie rang the office and asked for a plumber to come round straight away as she had a burst pipe.
The person she spoke to explained that the plumbers had finished work for the day, but one was available for call outs in the evening. Because it was evening time the charge would be more as he would be paid overtime.
Miss Leslie agreed to the higher charge as the plumbing job was urgent.
He went to Miss Leslie's and worked for 3 hours, and fixed her burst pipe.
Company policy treats the labour cost of evening call out charges that have been agreed with the customer as entirely direct cost
Wages are £10 per hour and 1.5 times for hours worked after 5pm

So the plumbing firm looking at the plumbers wages for Tuesday evening would say to the plumber 3 hours at time and a half, £45.

In the labour costing the whole of this £45 would be treated as direct cost.

sandy.hood@chichester.ac.uk


Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Treatment of Overtime
    The company policy on the treatment of labour cost required to rectify errors is to treat such costs as indirect (i.e. overhead)

    Miss Brown called out a plumber to on Tuesday morning. After he had left she found that there was a continuing problem and rang the firm to complain.
    Another plumber was sent to her house and worked from 5pm to 8pm to fix the problem.

    The plumber would be paid his 3 hours at overtime rate according to company policy.

    The labour costing would not treat any of the cost ad direct, as it was rectifying the mistake previously made by another plumber. So £45 would be charged to production overhead.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Treatment of Overtime

    The more widespread treatment of overtime would come in manufacturing.

    Gohl Airconditioning Company are taking orders for the sort of airconditioning machines we might buy from Argos and plug in using a conventional socket.

    This week orders are above normal levels so staff working on the manufacture of these machines are offered overtime.

    The fact that one machine might be made when the staff are on time and a half and another machine might be made when the staff are on their normal rate has no effect on how much the customer pays.

    In this situation if 1800 hours were worked, and that 200 of these hours were overtime then we need to check company policy.
      Overtime premium payments are treated as indirect costs
      The normal hourly rate is £10
      Overtime is paid at time and a half

    So the payroll staff will work out the wage cost as:
    1600 hrs x £10 = £16,000
    200 hrs at £15 = £3,000

    And the labour cost office will get the same total by saying:

    1800 direct hours at £10 = £18,000
    200 overtime premium hrs (production overhead) at £5 = £1000
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Treatment of Overtime

    My advice on the labour cost question is
    RT Q

    read the . question


    In my class yesterday we looked at the questions in the recent past papers (usually question 1.3)

    You must be clear about how this firm treats overtime premiums

    Sometimes they are part of the direct labour cost

    Sometimes they are treated as indirect

    sandy.hood@chichester.ac.uk

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