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if overtime is done by indirect workers on the specific request of costumer, will it be classified as direct cost or indirect cost….
i would be glad to here the properly explained answer on both basic overtime pay and premium overtime pay..
The cost of indirect workers is always an indirect costs (see page 31 of our free lecture notes, and the lectures working through this chapter), whether or not the work is at the specific required of the customer. (It is only for direct workers that overtime premiums are regarded as being a direct cost if the work is at the specific request of the customer.
With regard to your second question. Suppose a worker is normally paid $5 per hour, but if they work overtime then they are paid $7 per hour for the overtime hours.
$7 per hour is their overtime pay. However because the normal rate is $5 per hour, the extra $2 is called the overtime premium.
Hi tutor,
I have gone through your lecture note and the corresponding video lecture on this topic. However, I still couldn’t fully grasp the treatment of overtime premium.
In the following example from BPP’s MA text book, can you kindly explain why the semi-skilled workers’ “specific overtime” pay is being treated as a direct cost?
QUESTION: Jaffa Co employs two types of labour: skilled workers, considered to be direct workers, and semi-skilled workers considered to be indirect workers. Skilled workers are paid $10 per hour and semi-skilled $5 per hour.
The skilled workers have worked 20 hours overtime this week, 12 hours on specific orders and 8 hours
on general overtime. Overtime is paid at a rate of time and a quarter.The semi-skilled workers have worked 30 hours overtime, 20 hours for a specific order at a customer’s
request and the rest for general purposes. Overtime again is paid at time and a quarter.What would be the total overtime pay considered to be a direct cost for this week?
$275; $355; $375; $437.50ANSWER:
Skilled workers: Specific overtime (12 hours x $10 x 1.25) = $150 [Direct cost]
Skilled workers: General overtime (8 hours x $10 x 1) = $80 [Direct cost]
Skilled workers: General overtime (8 hours x $10 x 0.25) = $20 [Indirect cost]Semi-skilled workers: Specific overtime (20 hours x $5 x 1.25) = $125 [Direct cost]
Semi-skilled workers: General overtime (10 hours x $5 x 1.25) = $62.50 [Indirect cost]The correct answer is therefore B. [$150+$80+$125=$355]
If you selected option A, you forgot to include the direct cost of the general overtime of $80 for the
skilled workers.
If you selected option C, you included the overtime premium for skilled workers’ general overtime of
$20.
If you selected option D, you calculated the total of direct cost + indirect cost instead of the direct cost.If you look at the first page of Chapter 7 in our free lecture notes (and the lectures that work through the chapter) you will see that general overtime premiums are an indirect cost. However if the overtime is done for a specific job at the customers request then the premium is a direct cost.
Because, it says on Chapter 7 (page 31) of the lecture notes: “All costs of indirect workers are indirect costs.”
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