Overtime Premium of the Workers | Cost Accounting

In this article we will discuss about:- 1. Accounting Treatment of Overtime Premium 2. Control of Overtime Premium 3. Disadvantages of Overtime Working.

Overtime premium is paid to the workers for the extra time worked than the normal working hours specified in the Factories Act, 1948 or work agreement with the union. The extra time is paid at a higher rate than the normal time rate, for example, if a worker works beyond 8 hours in a day or 48 hours in a week, he is paid with double the wages for the extra time worked.

The overtime wages consists of two elements:

(i) Normal wages for extra time, and

(ii) Additional wages paid for the overtime worked.

Accounting Treatment of Overtime Premium:

(1) Overtime hours at the normal rate are treated as direct labour cost and charged to production on the same basis as time worked during normal hours but the premium paid during the overtime period is not a direct charge against production but is recovered as production overhead through overhead recovery rate.

(2) Where the overtime is worked on a specific job to meet the time schedules or to carry out specific rush orders for which extra price is recovered, then the entire labour cost can be charged as direct labour cost to that job.

(3) If overtime wages paid due to negligence or delay of worker of a particular department, it may be charged to the concerned department.

(4) If the overtime premium is paid due to abnormal causes, it should be charged to Costing Profit and Loss Account.

Control of Overtime Premium:

To control the overtime premium, the following may be given due consideration:

(a) Careful production planning and scheduling.

(b) Analysis of reasons for overtime working.

(c) Frequency of overtime working in each department.

(d) If it is due to shortage of labour, steps may be taken to recruit more workers.

(e) If overtime working is due to limiting machine hours available in the production depart­ments, purchase extra machines, working extra shift, sub-contracting etc. may be consid­ered.

(f) Appropriate authority should sanction for overtime working.

(g) Maintenance of proper records for overtime working and payments made for it will help in control of overtime.

(h) Only in urgencies and real necessities the overtime workers may be engaged otherwise the practice of overtime working should be discouraged.

Disadvantages of Overtime Working:

The drawbacks due to overtime working are as follows:

(a) The overtime working increases the fatigue and reduces the efficiency of the workers causing low productivity and higher production cost.

(b) The workers will try to avoid work during normal time and prefers to work overtime for extra earnings.

(c) If overtime working frequently allowed, it becomes a practice of working and workers may desist for any steps to control overtime.

(d) It increases the administrative overhead costs.

(e) Due to overtime working, it may not be possible for carry maintenance work of the plant and machinery and it may lead to sudden major breakdown of plant and machinery causing stoppage of production.

(f) The continuous overtime working may lead to health hazards to workers and it may increase the accident rate at work place.

(g) The uneven distribution of overtime working among the workers may cause discontent in other workers.

(h) It increases the rate of depreciation of plant and machinery.