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

Meenakshi Textiles pays a skilled worker Rs 120 per hour for a 48-hour week. Normal week is 40 hours. Overtime beyond 40 hours is paid at double the normal rate. In that week 8 overtime hours were worked, caused by a rush order from a specific customer, Arjun Exports, at its request. Which treatment and amount of overtime premium is correct for cost accounting?

The premium is Rs 960, charged directly to Arjun Exports' job. Overtime pay at double rate is 8 x 240 = Rs 1,920, of which the normal portion is 8 x 120 = Rs 960 and the rest is premium. Since the customer requested the rush, the premium belongs to that job.

  1. APremium Rs 960 charged to Arjun Exports' job as direct costCorrect
  2. BPremium Rs 960 charged to factory overheads
  3. CPremium Rs 1,920 charged to the job of Arjun Exports
  4. DPremium Rs 1,920 charged to costing profit and loss account

Explanation

Overtime premium = extra over normal rate = 8 x (240 - 120) = Rs 960. When overtime is at the customer's special request, the premium is charged to that customer's job. Rs 1,920 is the whole overtime pay at double rate, not just the premium. Overheads treatment applies when overtime is due to general pressure of work.

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