Overtime Premium:
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
1. If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.
2. 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.
3. If overtime is worked in a department, due to the fault of another department, the overtime premium should be charged to the latter department.
4. 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:
1. Entire overtime work should be duly authorized after investigating the reasons for it.
2. Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.
3. If overtime is a regular feature, the necessity for recruiting more men and adding a shift should be considered.
4. 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.
5. If possible an upper limit may be fixed for each category of workers in respect of overtime.
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