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Unit 6: Labour Cost
production of a period rather than just the jobs that happen to be in process when breakdown or Notes
other disruptions occur.
Example: To give an example of how the cost of idle time is handled, assume that a
press operator earns $12 per hour. If the press operator is paid for a normal 40-hour workweek
but is idle for 3 hours during a given week due to breakdowns, labor cost would be allocated as
follows.
Direct labor $12 per hour × 37 hours) $444
Manufacturing overhead (idle time: $12 per hour × 3 hours) 36
Total cost for the week -------
$480
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Overtime Measurement
The overtime paid to all factory workers (direct labor as well as indirect labor) is usually
considered to be part of manufacturing overhead and is not assigned to any particular order. At
first glance this may seem strange, since overtime is always spent working on some particular
order. Why not charge that order for the overtime cost? The reason is that it would be considered
unfair and arbitrary to charge an overtime against a particular order simply because the order
happened to fall on the tail end of the daily production schedule.
Example: Assume that a press operator in a plant earns $12 per hour. She is paid time
and half for over time (time in excess of 40 hours a week). During a given week, she worked 45
hours and has no idle time. Her labor cost would be allocated as follows:
Observe from this computation that only the overtime premium of $6 per hour is charged to
overhead account -- not the entire $18 earned for each hour of overtime work ($12 regular rate ×
1.5 = $18)
Direct labor ($12 × 45 hours) $540
Manufacturing overhead (overtime premium: $6 per hour × 5 hours) 30
Total Cost for the week -----
$570
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!
Caution It is a principle of costing that all abnormal expenses and losses should not be
included in costs and as such wages paid for abnormal idle time should not form part of
the cost of production. The wages paid for abnormal idle time should be debited to costing
Profit & Loss Account.
Self Assessment
Fill in the blanks:
1. ………………… denotes the percentage change in the labour force of an organisation.
2. Cost of labour turnover is treated as an ………………… and should not be charged direct
to any work order.
3. ………………… is that time for which the employer pays, but from which he obtains no
production.
LOVELY PROFESSIONAL UNIVERSITY 125
