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A company employs 20 direct production operatives and 10 indirect staff in its manufacturing department. The normal operating hours for all employees is 38 hours per week and all staff are paid a basic rate of $5 per hour. Overtime hours are paid at time and a half. During a particular week all employees worked for 44 hours to meet the company’s general production requirements.
What amount would be charged to production overhead ?
A $300
B $450
C $2,350
D $2,650Show me how you would do this then I will be able to give better advice about any errors you make – if any.
indirect: 38 x 5 x 100= 1900
6 x 7.5 x 10= 450
direct: 6 x 1.5 x 20= 180
—————
total: 2530Nearly right.
However, the basic pay for 6 extra hours direct would not be part of overhead – these costs would stay as direct. The overtime premium would be added to production overhead
Therefore: 1900 + 450 + 6 x 0.5 x 5 x 20 = 2,650
See p65 of MA1 notes
What’s the difference between:
6 x 0.5 x 5 x 20 (mine)
and
6 x 2.5 x 20 (yours)?
2.5 is ur ot premium. ot is paid at time and a half, which means 1.5, so 5 x 1.5=7.5
premium=7.5-5=2.5
welcome.. gromit’s calculation is better than mine as it explains what i just wrote
Sorry, I still have some don’t understand. In direct, 5 x1.5=7.5, in indirect, 5 x 0.5= 2.5, why is a multiplied by 1.5, one is multiplied by 0.5?
ur question tells me that you do not understand what goes into overhead costs.
the answer is all overtime costs are part of OH.
now.. how do u calculate only the Overtime costs?
OT cost = ot premium x number of hours
what is ot premium?
premium = Hourly rate of OT – Hourly rate of Basic
our basic rate =5
our ot is time and a half, which means 1.5
therefore, our Hourly rate of OT = 5 x 1.5 = 7.5premium= Hourly rate of OT – HOurly Rate of Basic
premium= 7.5 – 5 = 2.5hope this helps
Production ovh is calculated as indirect labour costs which include: overtime premium for direct workers, ilde time for direct workers, and labour cost for indirect workers, isn’t it ?
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