Overtime

Normal idle time of all workers should be collected under standing order number and charged to factory overheads. However, some of the normal idle time of direct workers, which are associated with the job or work order, such as, time taken for machine setting, change-over or tool setting, can be added to the product cost as direct wages by inflating the hourly rate of wages.   Abnormal idle time cost shall be collected as per standing order numbers or accounts code numbers and shall be charged to costing profit and loss account. Under no circumstances, abnormal idle time can be charged to product-cost.  The control of overtime is very important, because of its tendency to increase and to become a normal practice for earning extra money. It has harmful effect on the health and morale of the workers, besides unfavourable effect on productivity. It may also lead to high absenteeism.  The overtime hours should, therefore, be controlled rigorously. Excepting unavoidable reasons, overtime work should not be allowed. Sanctioned overtime work should be supervised properly to ensure full utilisation of time. Daily or weekly overtime report should be reviewed by higher management.  Overtime is normally paid at a rate higher than normal wages. Usually, it is one and half or double the normal wage-rate. The extra amount over the normal wage-rate is called overtime premium. Normal wages form part of direct labour cost. The charging of overtime premium needs consideration of the circumstances under which overtime was undertaken, and accordingly, the standing order number will be debited.

Accounting of Overtime Premium

• If overtime is paid to complete a job at the request of the customer, overtime premium is charged to the job order concerned.
• If overtime is undertaken in order to cope up with increased production, overtime premium is treated as factory overheads. Alternative method is to distribute the overhead premium over all the jobs undertaken during normal as well as overtime hours at an average rate
• If overtime is paid for any capital order, such as, fabrication of a machine to be used internally, the overtime premium shall be charged to capital work order account.
• If overtime is worked to recover production loss due to abnormal conditions such as, strike, lock out, flood, etc., the premium should be charged to costing profit and loss account. 

Overtime work should be controlled in the following ways —

• No overtime work shall be allowed without prior authorisation.
• If overtime is unavoidable, then it should be planned in advance, and actual overtime hours should be compared against plan.
• Overtime hours with normal working hours should be reported daily. A monthly overtime report showing overtime hours, and cost compared to the previous month as well as plan should be submitted to higher authority.
• Cost of overtime work vis-à-vis recruitment of additional worker should be reviewed periodically.