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Chapter 2: Problem 43

Labor cost, overtime, and idle time. David Letterman works in the production department of Northeast Plastics (NEP) as a machine operator. David, a long- time employee of NEP, is paid on an hourly basis at a rate of \(\$ 24\) per hour. David works five 8 -hour shifts per week Monday-Friday (40 hours). Any time David works over and above these 40 hours is considered overtime for which he is paid at a rate of time and a half \((\$ 36\) per hour). If the overtime falls on weekends, David is paid at a rate of double time (\$48 per hour). David is also paid an additional \(\$ 24\) per hour for any holidays worked, even if it is part of his regular 40 hours. David is paid his regular wages even if the machines are down (not operating) due to regular machine maintenance, slow order periods, or unexpected mechanical problems. These hours are considered "idle time." During December David worked the following hours: Included in the total hours worked are two company holidays (Christmas Eve and Christmas Day) during Week \(4 .\) All overtime worked by David was Monday- Friday, except for the hours worked in Week 3 ; all of the Week 3 overtime hours were worked on a Saturday. 1\. Calculate (a) direct manufacturing labor, (b) idle time, (c) overtime and holiday premium, and (d) total earnings for David in December. 2\. Is idle time and overtime premium a direct or indirect cost of the products that David worked on in December? Explain.

Short Answer

Expert verified
1. (a) Direct manufacturing labor: \$3840, (b) Idle time: Included in regular wages, (c) Overtime and holiday premium: \$432, and (d) Total earnings for David in December: \$4272. 2. Idle time and overtime premium are indirect costs of the products that David worked on in December because they cannot be attributed to a specific product or production activity.

Step by step solution

01

Break Down David's Working Hours

First, let's break down David's working hours by creating a table to summarize the information given in the problem. The table should include the number of hours worked each week and any additional information about holidays and overtime. | Week | Regular Hours | Total Hours | |------|---------------|--------------| | 1 | 40 | 40 | | 2 | 40 | 40 | | 3 | 40 | 48 (8 OT) | | 4 | 40 (2 Holidays)| 40 | | Total Hours | 160 | 168 (8 OT) |
02

Calculate Regular Wages

Calculate the regular wages for David, which is the regular hours (160) multiplied by his hourly rate (\$24). Regular Wages: \(160 * \$24 = \$ 3840\)
03

Calculate Idle Time Earnings

Since David is paid for his regular wages even if machines are down (idle time), we don't need to make any additional calculations for idle time. Idle time earnings will be included in regular wages.
04

Calculate Overtime Earnings

Calculate David's overtime wages for Week 3 where he worked 8 hours on a Saturday. Overtime Wage (Saturday): \(8 * \$48 = \$384\)
05

Calculate Holiday Earnings

Calculate the holiday earnings for David who was paid an extra \$24 per hour for working on holidays (Christmas Eve and Christmas Day) Holiday Earnings: \(2 * \$24 = \$48\)
06

Calculate Total Earnings

Sum earnings from regular wages, overtime, and holiday pay to find the total earnings for David in December. Total Earnings: \(\$3840 + \$384 + \$48 = \$4272\)
07

Classify Idle Time and Overtime Premium Costs

- Idle Time: Idle time refers to hours paid for non-productive time, which is an indirect cost. It cannot be directly associated with a particular production activity or product. - Overtime Premium: The overtime premium is the difference between David's regular hourly rate and his overtime hourly rate. This additional cost must be considered an indirect cost because it cannot be accurately assigned to a particular unit of production or product. So, both idle time and overtime premium are indirect costs for the products David worked on in December. In conclusion, 1. (a) Direct manufacturing labor: \$3840, (b) Idle time: Included in regular wages, (c) Overtime and holiday premium: \$384 + \$48 = \$432, and (d) Total earnings for David in December: \$4272. 2. Idle time and overtime premium are indirect costs of the products that David worked on in December because they cannot be attributed to a specific product or production activity.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Direct Manufacturing Labor
Direct manufacturing labor costs are those expenses directly tied to the production of goods. They include wages paid to employees like David who actively participate in the manufacturing process. In this case, David鈥檚 regular hours contribute to the direct manufacturing labor cost. He works 40 hours each week at an hourly rate of \( \\(24 \). Since these hours are directly connected to production work, the total for his direct manufacturing labor in December comes to \( 160 \times \\)24 = \$3840 \).

This calculation accurately represents the labor cost associated with producing the goods at Northeast Plastics (NEP). The direct labor cost is crucial as it goes into calculating the total production cost, helping to set product prices and assess profitability.
Idle Time Costs
Idle time costs occur when workers are paid for being essentially on standby. This happens when production halts due to machine maintenance, mechanical failures, or reduced demand. Workers like David are still paid their regular hourly wages during these non-productive periods, which affects labor cost calculations.

Importantly, idle time represents an indirect cost. It's indirect because these wages are not tied directly to a specific product or ongoing production activity. These costs are typically categorized under overhead expenses, impacting the total cost of production but not directly traceable to any single product line. Understanding idle time costs helps companies manage labor expenses more effectively by reducing downtime and improving operational efficiency.
Overtime Premium
Overtime premium is an additional labor cost incurred when employees work beyond their regular hours. For David, overtime pay is calculated at time and a half (\( \\(36 \) per hour) for weekdays, and double time (\( \\)48 \) per hour) for weekends. In December, David worked 8 overtime hours on a Saturday, which cost NEP \( 8 \times \\(48 = \\)384 \).

The premium cost鈥攚hich is the extra \( \\(12 \) or \( \\)24 \) paid over his standard wage鈥攊s not chargeable to a single production activity. Therefore, the overtime premium forms part of the indirect costs since it cannot be precisely allocated to any one product produced. Proper management of overtime helps control these additional costs, ensuring that they do not unduly inflate manufacturing expenses.
Indirect Costs
Indirect costs make up a broad category of expenses not directly linked to the production process of a specific product. Both idle time costs and overtime premiums fall into this category. Unlike direct costs, which can be easily traced to a unit of product, indirect costs require allocation methods to disperse them across various products.

This allocation can sometimes complicate cost calculations and require accounting systems to distribute these costs fairly and accurately. Indirect costs are crucial for determining the total cost of production and pricing of products. By understanding indirect costs, businesses can better strategize to keep production costs low, thereby maximizing profitability.

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Most popular questions from this chapter

Comprehensive problem on unit costs, product costs. Atlanta Office Equipment manufactures and sells metal shelving. It began operations on January \(1,2017 .\) Costs incurred for 2017 are as follows (V stands for variable; \(F\) stands for fixed ): $$\begin{array}{lr} \text { Direct materials used } & \$ 140,000 \mathrm{V} \\ \text { Direct manufacturing labor costs } & 22,000 \mathrm{V} \\ \text { Plant energy costs } & 5,000 \mathrm{V} \\ \text { Indirect manufacturing labor costs } & 18,000 \mathrm{V} \\ \text { Indirect manufacturing labor costs } & 14,000 \mathrm{F} \\ \text { 0ther indirect manufacturing costs } & 8,000 \mathrm{V} \\ \text { Other indirect manufacturing costs } & 26,000 \mathrm{F} \\ \text { Marketing, distribution, and customer-service costs } & 120,000 \mathrm{V} \\ \text { Marketing, distribution, and customer-service costs } & 43,000 \mathrm{F} \\ \text { Administrative costs } & 54,000 \mathrm{F} \end{array}$$ Variable manufacturing costs are variable with respect to units produced. Variable marketing, distribution, and customer-service costs are variable with respect to units sold. Inventory data are as follows: $$\begin{array}{lcc} & \text { Beginning: January 1, 2017 } & \text { Ending: December 31, 2017 } \\\ \hline \text { Direct materials } & 0 \mathrm{Ib} & 2,300 \mathrm{lbs} \\ \text { Work in process } & 0 \text { units } & 0 \text { units } \\ \text { Finished goods } & 0 \text { units } & ? \text { units } \end{array}$$ Production in 2017 was 100,000 units. Two pounds of direct materials are used to make one unit of finished product. Revenues in 2017 were \(\$ 473,200\). The selling price per unit and the purchase price per pound of direct materials were stable throughout the year. The company's ending inventory of finished goods is carried at the average unit manufacturing cost for \(2017 .\) Finished-goods inventory at December \(31,2017,\) was \(\$ 20,970.\) 1\. Calculate direct materials inventory, total cost, December 31, 2017. 2\. Calculate finished-goods inventory, total units, December 31, 2017. 3\. Calculate selling price in 2017 . 4\. Calculate operating income for 2017 .

Why do managers consider direct costs to be more accurate than indirect costs?

Computing cost of goods purchased and cost of goods sold. The following data are for Marvin Department Store. The account balances (in thousands) are for 2017 . Marketing, distribution, and customer-service costs \(\quad\) \(\$ 37,000\) Merchandise inventory, January 1, 2017 \(\quad\) 27,000 Utilities \(\quad\) 17,000 General and administrative costs \(\quad\) 43,000 Merchandise inventory, December 31,2017 \(\quad\) 34,000 Purchases \(\quad\) 155,000 Miscellaneous costs \(\quad\) 4.000 Transportation-in \(\quad\) 7,000 Purchase returns and allowances \(\quad\) 4,000 Purchase discounts \(\quad\) 6,000 Revenues \(\quad\) 280,000 1\. Compute (a) the cost of goods purchased and (b) the cost of goods sold. 2\. Prepare the income statement for 2017.

Cost classification; ethics. Paul Howard, the new plant manager of Garden Scapes Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Howard receives a year-end bonus of \(11.5 \%\) of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, Howard demanded that his controller go back and "work the numbers" again. Howard insisted that if he didn't see a better operat ing income number the next time around he would be forced to look for a new controller. Garden Scapes Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the productis sold. All other expenses, including finished-goods warehousing costs of \(\$ 3,64,000,\) are classified as period expenses. Howard had suggested that warehousing costs be included as product costs because they are "definitely related to our product." The company produced 260,000 units during the period and sold 240,000 units. As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by \(\$ 280,000\). He was also sure these new numbers would make Howard happy. 1\. Show numerically how operating income would improve by \(\$ 280,000\) just by classifying the preceding costs as product costs instead of period expenses. 2\. Is Howard correct in his justification that these costs are "definitely related to our product"? 3\. By how much will Howard profit personally if the controller makes the adjustments in requirement 1? 4\. What should the plant controller do?

Define cost object and give three examples.
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