Calculating overtime premium Help!

Ogaufi
Ogaufi Registered Posts: 9 Regular contributor ⭐ ? ⭐
I am having a difficult time trying to understand calculation of overtime premium as an indirect cost.

How do i deal with a question like the one below?


John works 40 hours a week. During the third week of the month, he worked 45 hours. He earns £20.00 per hour and any overtime worked is paid at time and a half.

Calculate:

1. His direct labour cost
2. His indirect labour cost

Comments

  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    If I remember this right (bear in mind it's been a long time!):

    Direct cost is total hours worked x normal rate of pay, so for the week with overtime, it's 45hrs x £20 = £900.

    The indirect cost is the extra they pay him for overtime, so 5hrs x £10 (overtime pay of £30ph less normal rate of £20 as a direct cost) = £50

    You need to break the total overtime pay into direct (normal rate of pay) and indirect (the extra he gets for overtime) costs, and the direct portion is added to the regular pay.

    If that's right (do wait for confirmation!!) then I hope that helps :)
  • Rinske
    Rinske Registered Posts: 2,453
    I agree with Monsoon here!
  • Ogaufi
    Ogaufi Registered Posts: 9 Regular contributor ⭐ ? ⭐
    ok...i`m getting more confused but i think, I'll wrap my head around it after much practice. @ Monsoon, I'm yet to understand how you got the overtime pay of £30 because i had calculated overtime as £150( 5 hours overtime worked x 1.5 x £20). if then question the asks to calculate his pay for the week, would it be the same as direct labour cost?
  • A-Vic
    A-Vic Registered Posts: 6,970
    if overtime is an indirect cost you have to work the hours worked seprately

    i.e

    (direct costs)

    He worked 45 hours in total = £20 x 45 hours = 900

    (indirect costs)

    he worked 5 hours overtime = £10 x 5 Hours overtime = £50

    total weekly cost pay = £950

    assuming its a four week month it would be

    3 weeks @ 40 hours x £20 = £2400 + £950 for week 3 = £3350 (just an added extra) :)
  • A-Vic
    A-Vic Registered Posts: 6,970
    all you have to remember they are stating that overtime is an indirect cost so you only charge 0.5 (the extra paid)
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Ogaufi wrote: »
    ok...i`m getting more confused but i think, I'll wrap my head around it after much practice. @ Monsoon, I'm yet to understand how you got the overtime pay of £30 because i had calculated overtime as £150( 5 hours overtime worked x 1.5 x £20). if then question the asks to calculate his pay for the week, would it be the same as direct labour cost?

    The £30 is per hour (£20 at time and a half). So yes, the overtime itself is calculated as 5 hours overtime x £30 = £150 but in costing you don't do this caluclation. you're not running payroll, its an entirely different exercise, so scrub the "overtime hours x overtime rate" calcualtion out of your brain! :)

    It's total hours x normal rate of pay, then overtime hours x overtime premium.
  • coojee
    coojee Registered Posts: 794
    Just to add to the confusion, the new standards want you to calculate it differently apparantly. They want you to do:

    Basic Pay = 40 hours x £20 = £800
    Overtime = 5 hours x £30 = £150
    Total = £950

    This is different to what was required under the old standards where what everyone else has said was correct.

    Why the AAT have changed their minds I do not know. They're a law unto themselves.
  • A-Vic
    A-Vic Registered Posts: 6,970
    thats the way we calculate it at work and at last nice to see they have changed it now when i had to do this first time around it took me a while to get my head around as i was used to working out the (correct way)
  • Ogaufi
    Ogaufi Registered Posts: 9 Regular contributor ⭐ ? ⭐
    Thanks everyone, i'm new to this forum, that was my first post and you've all been a great help.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    coojee wrote: »
    Just to add to the confusion, the new standards want you to calculate it differently apparantly. They want you to do:

    Basic Pay = 40 hours x £20 = £800
    Overtime = 5 hours x £30 = £150
    Total = £950

    This is different to what was required under the old standards where what everyone else has said was correct.

    Why the AAT have changed their minds I do not know. They're a law unto themselves.
    And there was me proud of remembering something from 2004-05 Costing! :lol:

    That calculation is much simpler.
  • PGM
    PGM Registered Posts: 1,954
    I prefer the old method, it worked better with variances and highlighted the premium you are paying for overtime.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    PGM wrote: »
    I prefer the old method, it worked better with variances and highlighted the premium you are paying for overtime.

    I agree, from a costing standpoint it makes more sense.
  • twinks01
    twinks01 Registered Posts: 16 Dedicated contributor ? ? ?
    I'm doing the new standards and the BPP costs and revenues book Ive been reading says to work it out as 45 hours @ basic rate and 5 hours at the overtime premium (the half bit). ?

    Although to add to the confusion, it also says when no hours are required to be worked on a Sunday but overtime is paid at double time on this day, it works out the premium as, say, 3 hours @ £40/hour rather than 3 hours @ £20/hour plus overtime premium of 3 hours @ £20/hour. I don't get why Sunday is different.
  • Rinske
    Rinske Registered Posts: 2,453
    Because they are no extra hours or overtime, it is not a premium.

    Basically any EXTRA hours which have additional premiums are indirect costs (the premium or the total, depending on views here) and any costs that are standard are direct costs. Because the Sunday is calculated in and no overtime, but just extra paid because of the day, it falls under the direct costs.

    Does that make sense at all? Can't get it clear in my head today.
  • Jay1981
    Jay1981 Registered Posts: 36 ? ? ?
    Rinske wrote: »
    Because they are no extra hours or overtime, it is not a premium.

    Basically any EXTRA hours which have additional premiums are indirect costs (the premium or the total, depending on views here) and any costs that are standard are direct costs. Because the Sunday is calculated in and no overtime, but just extra paid because of the day, it falls under the direct costs.

    Does that make sense at all? Can't get it clear in my head today.
    I would of thought that if Sunday wasn't a regular working day then all costs of working on that day would be indirect/premium cost? Hence why it's calculated at 3 x 40 rather than 3 x 20(direct cost) + 3 x 20 (indirect cost).

    Although, to be fair i could of misunderstood your answer and be explaining the exact same thing!!!
  • Rinske
    Rinske Registered Posts: 2,453
    No, I think we are saying slightly different things here.

    I was saying if it was a regular working day, but they get paid 150% because its a Sunday (unsociable hours) I would count the total to be all direct costs, rather than indirect.
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    If you are the labour cost accountant you are interested in the way the labour cost is made up. The payroll clerk wants to know the gross pay for each employee.
    The two roles have different purposes.

    But how you treat overtime premiums is a company policy.
    I've got past questions from ECR where it states:
    1. overtime premiums are treated as direct labour cost;
    2. overtime premiums are treated as indirect labour cost or are charged to production overheads which means the same
    3. or are treated as direct labour cost in some named situations but treated as indirect in others

    The examiner will tell you what policy to use in the exam, and there will be someone at work to explain what to do there.
    Sandy
    [email protected]
    www.sandyhood.com
  • oakley
    oakley Registered Posts: 73 ? ? ?
    From a company perspective you need to look further into the accounts as to the reasons why you may decide to show overtime premium as direct or indirect costs. A major decider in this will be the labour costs as a proportion of the total product cost.

    If you treat overtime premium as an indirect labour cost and include only the 'normal' rate overtime as a direct cost, from a costing perspective you get hours charged at normal rate as the direct cost of labour.

    In a standard costing system that has labour recoveries based on labour hours booked to a job, the direct costs can be compared to labour hours recovered to get an efficiency level.

    This is not as important if the cost driver is machine or purchase based and the labour cost is a smaller element of the product cost.
  • emma123
    emma123 Registered Posts: 108 ? ? ?
    coojee wrote: »
    Just to add to the confusion, the new standards want you to calculate it differently apparantly. They want you to do:

    Basic Pay = 40 hours x £20 = £800
    Overtime = 5 hours x £30 = £150
    Total = £950

    This is different to what was required under the old standards where what everyone else has said was correct.

    Why the AAT have changed their minds I do not know. They're a law unto themselves.

    Just picking up on this post, is this the way we have to calculate it from now on? Would we be penalised for calculating it the old way yet still arriving at the correct answer?
  • donnas1977
    donnas1977 Registered Posts: 182 ? ? ?
    coojee, i did the mock exam on kaplan today and it had sunday hrs which were paid at double time (which mentioned basic rate of pay) and they way it wanted us to answer was to put the fulll sunday hours to the overtime premium . Before you would have calculated the hours at standard rate then the different to overtime premium. its all very confusing!

    Donna
  • A-Vic
    A-Vic Registered Posts: 6,970
    I think its better learning it that way for real payroll practise as at work when calculating wages the the Sandard hours are calculated then any overtime is treated seprately
  • donnas1977
    donnas1977 Registered Posts: 182 ? ? ?
    a-vic, i always thought that all hours were calculated at normal rate then any overtime difference was treated separetly. am well confused as previous papers show both ways and looks like you would have got marks for either way .
  • emma123
    emma123 Registered Posts: 108 ? ? ?
    wonder cud we show both calculations? lol
  • JaffasGirl
    JaffasGirl Registered Posts: 387
    if your taking the CBE, you wont need to show calculations - so surely it doesnt matter how you arrive at the answer as long as its the correct answer and a method you are more comfortable with.
  • A-Vic
    A-Vic Registered Posts: 6,970
    donnas1977 wrote: »
    coojee, i did the mock exam on kaplan today and it had sunday hrs which were paid at double time (which mentioned basic rate of pay) and they way it wanted us to answer was to put the fulll sunday hours to the overtime premium . Before you would have calculated the hours at standard rate then the different to overtime premium. its all very confusing!

    Donna

    Hi Donna

    It all depends on how the examiner wishes you to calculate it but at work the software we use calculate the standard hours then any overtime is then calculated separately i.e Joe bloggs works a normal 40 hour week at £10 per hour any overtime is paid at 50% perimium. This week he worked a 50 hour week so:-

    40 Hours @ £10 = £400
    10 Hours OT @ £15 = £150

    Total = £550

    Thats the way it ask to do on our software and as far as i can see its asking you to do the same
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