Overtime Premiums

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
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

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    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
    System Posts: 100,534 🤖 Admin 🤖
    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
    System Posts: 100,534 🤖 Admin 🤖
    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
    System Posts: 100,534 🤖 Admin 🤖
    Re:Overtime Premiums

    Thanks again, Sandy!

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