Overtime and Idle Time in Cost Accounting
[Overtime Meaning in Cost Accounting, Treatment of Overtime Premium, Idle Time Meaning in Cost Accounting, Causes of Idle Time, Types of Idle Time, Treatment of Idle Time, Control of Idle Time, Idle Time Vs. Overtime]
Table of Contents
Overtime In Cost Accounting
Overtime premium – Meaning
Overtime is the amount of wages paid for working beyond normal working hours as specified by Factories Act or by a mutual agreement between the workers union and the management. There is a practice is to pay for overtime work at higher rates. Hence, payment of overtime consists of two elements, the normal wages e.g., the usual amount, and the extra payment i.e., the premium. This amount of extra payment paid to a worker under overtime is known as overtime premium.
Treatment of Overtime Premium in Cost Accounting
a) If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.
b) If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which works overtime.
c) If overtime is worked in a department, due to the fault of another department, the overtime premium should be charged to the latter department.
d) Overtime worked on account of abnormal conditions such as flood, earthquake etc. should not be charged to cost but to costing P/L A/c.
Steps for Controlling Overtime:
a) Entire overtime work should be duly authorized after investigating the reasons for it.
b) Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.
c) If overtime is a regular feature, the necessity for recruiting more men and adding a shift should be considered.
d) If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resort to sub-contracting.
e) If possible an upper limit may be fixed for each category of workers in respect of overtime.
Idle Time in Cost Accounting
Idle time meaning in cost accounting
Idle time refers to the labour time paid for but not utilized on production. It, in fact, represents the time for which wages are paid, but during which no output is given out by the workers. This is the period during which workers remain idle. Some idle time are controllable and some idle time cannot be controlled in spite of efficient management.
Causes of Idle Time in Cost Accounting
According to reasons, idle time can be classified into three categories:
a) Productive causes
b) Administrative causes and
c) Economic causes
a) Productive causes: Productive causes of idle time includes
– Time lost between the finish of one job and starting of next job.
– Time taken by workers to travel the distance between the main gate of factory and the place of their work.
– Time wasted due to machine break downs, accidents, power failure etc.
– Time wasted due to non-availability of raw materials.
– Time wasted due to waiting for instructions from foremen relating to production, tools or waiting for jobs due to defective planning.
b) Administrative causes: Administrative causes of idle time include:
– Time wasted due to strike and lockout.
– Loss of time due to inefficiency in management of materials and labour.
– Will full under utilization of resources by administrative staff.
– Loss of time arising due to lack of control by management.
– Due to conscious management policy decision to stop work for some time.
c) Economic causes: Economic causes include:
– Shortage of material and labour.
– Shortage of working capital which causes unintentional closure of work.
Types and Treatment of Idle Time
Types of Idle Time: Normal Idle Time and Abnormal Idle Time
Normal Idle Time
Normal idle time is inherent in any job situation and thus it cannot be eliminated or reduced. The main reasons for the occurrence of normal idle time are as follows:
– Time spent to overcome fatigue.
– Time spent to meet their personal needs like taking lunch, tea etc.
– Time gap between the finishing of one job and the starting of another.
Treatment of Normal Idle Time
Since normal idle time is uncontrollable, the cost of normal idle time should be charged to the cost of production. This may be done by inflating the labour rate. It may also be transferred to factory overheads for absorption, by adopting a factory overhead absorption rate.
Abnormal Idle Time
Abnormal idle time is defined as the idle time which arises on account of abnormal causes. Such an idle time is uncontrollable. The main reasons for the occurrence of abnormal idle time are:
– Strikes; lockouts; floods; major breakdown of machinery; fire etc.
– In the case of seasonal goods producing units, it may not be possible for them to produce evenly throughout the year. Such a factor too results in the generation of abnormal idle time.
Treatment of Abnormal Idle Time
Since, abnormal idle time is controllable, the cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss Account. The main reason for this is to have meaningful comparison of cost of production at different times by keeping away abnormal wages from cost of production.
Control of Idle Time
Following steps are suggested to control idle time:
i) Vigilance must be exercised to control and eliminate idle time.
ii) The instructions to the workers should be given in advance so that workers need not wait.
iii) Plant and machine should be maintained properly so that their breakdown can be avoided
iv) The causes of the idle time should be found out and the root cause must be removed.
v) Regular and timely supply of raw materials must be made available through a good system of storing materials.
Difference between idle time and Overtime:
a) Idle time refers to the labour time paid for but not utilized on production. Whereas, overtime refers to the labour time paid for working beyond normal working hours as specified by Factories Act or by mutual agreement.
b) Idle time can be avoided by proper human resource allocation whereas overtime can be avoided only by employing additional labour which requires decision making.
c) Cost of normal idle time is ignored in cost accounting and cost of abnormal idle time is charged to costing profit and loss account. But, cost of overtime is normally charged to the job.