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CA Intermediate · Cost and Management Accounting · Employee Cost and Direct Expenses

A firm pays Rs 25 per hour for normal time and double rate for overtime beyond 8 hours a day. A worker works 10 hours on a day due to an urgent customer order that was specifically requested by the customer. How should the overtime premium be treated in costing?

The overtime premium should be charged directly to the specific job. Because the customer specifically requested urgent work, the extra premium is attributable to that job. Overtime from general pressure goes to factory overheads, and abnormal overtime goes to costing profit and loss account.

  1. ACharged to the specific job as direct costCorrect
  2. BCharged to factory overheads for all jobs
  3. CCharged to costing profit and loss account
  4. DCharged to administration overheads

Explanation

If overtime is required by a customer's specific request, the overtime premium is charged to that job. If it arises from general production pressure it is a factory overhead; if due to abnormal causes it goes to costing profit and loss account. Here the customer requested it, so the job bears it.

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