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Much appreciate your help here…
A manufacturer employs two grades of labour in its machining department, grade A and grade B. Grade A employees are treated as direct labour employees and grade B employees are treated as indirect labour employees. Grade A employees are paid $8 per hour and grade B workers receive $6 per hour. The basic working week is 40 hours. Overtime is paid at time +50%, to all employees in the department. There are 10 grade A employees and 6 grade B employees.
During a particular week, each grade A employee worked for 45 hours and each grade B employee worked for 43 hours. The overtime was necessary due to staff sickness.
What will be the charge to production overhead for the week?
Here is the calculation from the answer sheet.
Grade B labour. $
Basic wages (6 x 43 hours x $6) 1,548
Overtime premium (6 x 3 hours x $3) 54
Grade A labour
Overtime premium (10 x 5 hours x 50% x $8) 200
I don’t understand the reason behind the overtime rate was charged at 50% of the normal pay as It’s written that the overtime is paid at time + 50%. Isn’t time +50 % same as time and a half which is 50% additional of the normal pay? Or Is the rate (0.5) due to the staff sickness?
The question asks for the production overhead (i.e. the indirect cost).
Therefore the normal wage of the grade A employees is not relevant – they are direct labour and it is therefore a direct cost.
However their overtime premium is an indirect cost (it would only be a direct cost if it was at the specific request of the customer.
Do watch my free lectures on labour where all this is explained. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.