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A company manufactures a single product, M. Budgeted production output of product M during August is 200 units. Each unit of product M requires 6 labour hours for completion and PR Co anticipates 20 per cent idle time. Labour is paid at a rate of $7 per hour. What is the direct labour cost budget for August?
A $6,720
C $10,080
B $8,400
D $10,500
Answer is D.It is not problem to calculate idle time. But I have a question about direct labour cost. Is idle time a proportion of direct labour expense? If yes, then why?
Thank you in advance for your help
For every 100 hours paid there will be 20 hours idle and therefore 80 hours worked.
They need to work for 200 x 6 = 1200 hours.
Therefore they need to pay for 100/80 x 1200 = 1500 hours.
Therefore the total cost is 1500 x $7 = $10,500
I still don’t get it. Please tell me what I’m missing.
The question meant labour hours per unit to be {6 direct (80%)and 20% idle} hours. That gives 6÷0.8=7.5 hours per unit
7.5*200=1500
1500*7=10500But still this includes idle time as well right? If the question asked for total labour cost, this would have been right.
You can calculate either way – it makes no difference. You have simply written the same thing in a different order 🙂
But the cost of production is still $10,500. They have to pay for the idle time in order to be able to produce. That is the total they pay, and is the total labour cost of production.
I’m sorry to bother you again sir, but I’m finding it difficult to accept. The question clearly asks for direct labour costs. Idle time (from the limited knowledge I have from previous chapters) is an indirect labour cost. What we’ve found out is the total labour cost.
Direct labour cost = 200*6*7
8400The question that Durdana originally asked is a standard costing question.
When determining the standard cost we use budgeted figures and incorporate any budgeted idle time. It would be ridiculous to budget on each unit only costing $4.20 per unit for labour when we know from the beginning that we are going to have to pay for 7.5 hours per unit.
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