Idle time represents the labour cost of direct labour employees who are unable to perform their assigned duties due to machine breakdowns, material shortages, power failures, etc.
The labour costs for idle time hours are charged to Mfg. Overhead at normal wage rates. regardless of when the hours were worked.
Any premium paid for labour time in excess of normal work times for direct labour employees is treated as part of MO. We are dealing only with the premium. The regular wage even for excess hours over and above normal work times is still charged to Direct Labour.
Example: Employee works 44 hours and earns an hourly rate of $16/hr. Any hours worked over 40 hours are paid at time and one half ($24/hr).
1. Calculate Gross Wages paid
Total Gross Wages paid:
Wages paid: (regular hours) 40 x $16 = $640
(overtime hrs) 4 x $24 = 96
2. Allocate Gross Wages Paid between DL (WIP) and MO
Allocation of labour cost:
Direct Labour (total hrs worked x regular rate) 44 x $16 = $704 (charged to WIP)
Overtime premium (overtime hrs x premium over regular rate) 4 x $8) = $32
Total labour cost recorded $736
If there was idle time incurred during the overtime period, the normal rate will be charged to idle time and the premium will be charged to overtime premium (i.e., both end up charged to MO).
If the overtime was worked specifically at the request of a customer (to speed up the completion of a order), then the overtime premium should be charged to direct labour (WIP).
Cost of Labour Fringe Benefits and Payroll Taxes (EI, CPP) Paid by the Employer
These costs include employer share of EI, CPP, supplementary health plans, long-term disablility plans, etc. While such costs usually arise from the existence of wages paid, they are normally charged to MO, even for direct labour employees.