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Q: A business employs two grades of labour in its production department. Grade A workers are considered direct labour employees, and are paid $10 per hour. Grade B employees are considered indirect labour employees, and are paid $6 per hour.
In the week just ended, Grade A labour worked 30 hours of overtime, 10 hours on a specific customer order at the customer’s request, and the other 20 hours as general overtime. Grade B labour worked 45 hours of overtime, as general overtime. Overtime is paid at time-and-one-half.
What would be the total amount of pay for overtime worked in the week that is considered to be a direct labour cost?
A. $50
B. $150
C. $285
D. $350I would love to read a detailed explanation. Thank you.
Is there no explanation in the book in which you found the question? 🙂
Overtime premiums are only treated as a direct cost if it is for a specific job at the customers request (otherwise the overtime premium is treated as an indirect cost).
None of grade B’s pay is a direct cost because the question says they are indirect labour.
For grade A, all of their basic pay is a direct cost. So the basic pay for their overtime is 30 hours x $10 = $300.
The overtime is paid at time and one half, so there is an overtime premium of 1/2 x 10 = $5 per hour. Only the overtime premium for the specific order are treated as direct, and that is 10 hours x $5 = $50So the total overtime pay that is direct is 300 + 50 = $350.
Hello dear tutor
Hope you are doing well
My question is about indirect labour (Grade B employees)
if Grade B labour worked 45 hours of overtime with the direct request of customer, how should we account for overtime premium(ie 45*6*0.5=135) and basic(ie 45*6=270)?
Is it direct cost or indirect cost?In my opinion (according to Ch 7 of OT notes) all related costs of indirect labours must be treated as indirect costs.
Also for me this sentence “None of grade B’s pay is a direct cost because the question says they are indirect labour” means that all related costs of indirect employees are indirect because they are INDIRECT labour and so in my example it is NOT relevant whether their overtime is with direct request of customer or not.
Please let me know if I am wrong.
Thank you in advance
As I wrote in my earlier reply to the original question, all grade B pay is indirect because the question says they are considered indirect labour employees – it is irrelevant why they are working overtime.
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