Danvers Engineering: Idle Time and Overtime Premium on Job 558
Danvers Engineering pays machinists £12.00 per hour for a 40-hour basic week, with overtime at time-and-a-half. In week 22, machinist Ade recorded 45 hours: 3 hours were lost when his machine broke down and he could not be redeployed, and the remaining 42 hours were all worked on Job 558. Of those, 5 hours were overtime worked at the specific request of the customer to bring the delivery date forward. The production manager says 'all of Ade's wages for the week go to Job 558 - he was here for the job'. The company recovers production overhead using a predetermined direct labour hour rate.
1. Calculate Ade's gross pay for week 22 and show how much of it is charged to Job 558 and how much is treated as overhead.
Read the worked answer
Gross pay
- Basic: 40 hours × £12.00 = £480.00
- Overtime: 5 hours × £18.00 (£12.00 × 1.5) = £90.00
- Gross pay = £570.00
Split of the £570 Direct hours worked on the job = 45 total hours − 3 idle hours = 42 hours
| Element | Working | £ | Where it goes |
|---|---|---|---|
| Basic pay for hours worked on the job | 42 × £12.00 | 504.00 | Job 558 (direct labour) |
| Overtime premium (customer's request) | 5 × £6.00 | 30.00 | Job 558 (direct) |
| Idle time | 3 × £12.00 | 36.00 | Production overhead |
| Total | 570.00 |
Charge to Job 558 = £504.00 + £30.00 = £534.00; overhead = £36.00.
Note the arithmetic trap: the £60 of basic pay for the 5 overtime hours is already inside the £504 (42 hours × £12). Only the premium of £6 per hour is additional. Adding 5 × £18 = £90 to the basic figure would double-count.
2. Explain why the production manager's instruction is wrong, and justify the treatment of the idle time and the overtime premium.
Read the worked answer
Why the manager is wrong Adding £570 to Job 558 would overcharge the customer by £36, overstate the job's cost, and leave the overhead of idle time completely unrecovered. Lost time is a cost of running the factory, not of any one job, so charging it to the job makes that job look unprofitable and distorts any comparison between jobs.
Idle time - £36 to production overhead The machine breakdown benefits no customer and no job. There is no cost unit to charge, so the cost is an indirect production cost, absorbed across all jobs through the overhead rate. (If idle time recurs, it should be monitored - high idle time means the overhead rate is recovering inefficiency as well as normal overhead, which eventually pushes prices up.)
Overtime premium - £30 to Job 558 as a direct cost The premium was incurred because the customer asked for an earlier delivery. The customer caused the cost and receives the benefit, so it is a direct cost of that job and can be charged on to them. The basic element is already in the £504 of normal hours.
General rule: overtime premium is a direct cost only when it arises at a customer's specific request; otherwise it is an overhead.
3. Suppose the 5 overtime hours had been worked to catch up on general factory backlog rather than at the customer's request. State the revised figures and explain the effect on the price quoted for similar jobs.
Read the worked answer
Revised position
| Element | £ | Where it goes |
|---|---|---|
| Basic pay, 42 hours × £12.00 | 504.00 | Job 558 (direct) |
| Idle time, 3 × £12.00 | 36.00 | Overhead |
| Overtime premium, 5 × £6.00 | 30.00 | Overhead |
| Charge to Job 558 | 504.00 | |
| Total overhead | 66.00 |
Gross pay is still £570, but the job now carries £504 instead of £534 - £30 lower.
Effect on pricing
- The £30 premium and £36 idle time must be recovered through the predetermined overhead absorption rate, i.e. spread across all jobs.
- If backlog overtime becomes routine, the overhead rate must be recalculated on budgeted overhead that includes the expected premium and idle time. A rate built only on normal costs will under-recover, leaving a balance to write off at the year end.
- Quoting £534 for a standard job when the true chargeable cost is £504 would make Danvers uncompetitive; quoting £504 while the overhead rate has not been updated would make the jobs loss-making. The two decisions - what to charge the job and what to put in the overhead rate - must be kept consistent.
- The backlog itself should be investigated: sustained overtime may be cheaper to solve with capacity (a second machine or shift) than with premium payments.