An employee is paid a basic rate of £8 per hour for a 40-hour week and works 46 hours in one week, with overtime paid at time and a half. The overtime arose from general pressure of work and not because of any particular job or customer request. How is the cost of the 46 hours classified?
Answer and explanation
Correct answer: A. £368 direct labour and £24 overtime premium as production overhead
- Step 1: All 46 hours are valued at the basic rate: 46 × £8 = £368 (direct labour).
- Step 2: The overtime premium is the extra 50% on the 6 overtime hours: 6 × £4 = £24.
- Step 3: Because the overtime was not caused by one particular job, the premium is treated as a production overhead shared by all jobs.
Answer
£368 direct labour and £24 overtime premium as production overhead.
Why not the others: The overtime premium arose from general pressure of work, so it is normally treated as an overhead and not charged to a job. This takes only 40 hours as direct labour, though overtime hours at basic rate are still direct labour. The hours worked on production are direct labour at the basic rate.
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