Idle Time and Overtime
Chapter Nineteen
Syllabus topic 6, "Attendance and payroll procedures, Overview of statutory requirements of Idle time and Overtime Incentives"
Pages 51 to 54 of 82
In one line
Idle time is time paid for but not worked; overtime is time worked beyond the statutory hours and paid for at twice the rate; and in both, the accounting question is who bears the extra.
Idle time
Idle time is the difference between the time a worker is paid for and the time booked to jobs. The attendance record gives the first figure and the time booking record the second, which is why the previous chapter had to come first.
Normal idle time
Inherent in the work and unavoidable, so it is treated as a cost of production:
- the time taken to walk from the gate to the workplace;
- setting up a machine, and cleaning it at the end of a shift;
- tea breaks and time for personal needs;
- normal waiting for instructions, tools or the next job;
- the fatigue that no employer can remove.
Treatment. Two methods are permitted, and both are correct:
- Inflate the direct labour rate, so that the productive hours carry the idle hours; or
- charge it to factory overhead as an item of indirect labour.
Abnormal idle time
Avoidable, and not inherent in the work, so it is excluded from cost altogether and charged to the Costing Profit and Loss Account:
- a machine breakdown or a power failure;
- a shortage of material caused by bad purchasing;
- a strike or a lock-out;
- a fire, a flood or an accident;
- want of orders, where the plant is kept idle for want of work.
The reason it is excluded is the reason it appears in a reconciliation. Costs must be comparable between periods, and an abnormal loss in one month would make that month's cost per unit meaningless.
Idle time worked
A worker is paid Rs 45 an hour. In a month he is present for 200 hours, of which 10 hours are normal idle time and 10 hours abnormal idle time caused by a power failure. Compute the wages, the amount charged to costing profit and loss, and the inflated hourly rate.
| Hours | ||
|---|---|---|
| Attendance | 200 | |
| Less: normal idle time | 10 | |
| Less: abnormal idle time | 10 | 20 |
| Productive hours | 180 |
| Wages | Rs |
|---|---|
| Gross wages, 200 hours at Rs 45 | 9,000 |
| Less: abnormal idle time, 10 hours at Rs 45, to Costing Profit and Loss | 450 |
| Cost to be absorbed by production | 8,550 |
Inflated hourly rate = 8,550 divided by 180 productive hours = Rs 47.50 an hour.
Read the answer. The worker's rate is Rs 45, but each productive hour costs the factory Rs 47.50, because the normal idle hours have to be paid for out of the productive ones. The abnormal ten hours are not in that figure at all.
Idle Time and Overtime
Overtime: the statutory position
The Factories Act 1948 sets the hours; the wage follows from them.
| Provision | Section | |
|---|---|---|
| Daily hours | Not more than nine hours in any day | s.54 |
| Weekly hours | Not more than forty-eight hours in any week | s.51 |
| Rest interval | No spell of work longer than five hours without an interval of at least half an hour | s.55 |
| Spreadover | Not more than ten and a half hours in a day, which the Chief Inspector may raise to twelve | s.56 |
| Extra wages | Work beyond nine hours in a day or forty-eight in a week is paid at twice the ordinary rate of wages | s.59(1) |
"Ordinary rate of wages" is defined by the Act itself, in s.59(2), as basic wages plus the allowances the worker is entitled to, but not bonus and not overtime wages. That definition matters: a student who computes the premium on gross earnings including last year's bonus has the wrong base.
For a piece-rate worker, s.59(3) deems the time rate to be the daily average of his full-time earnings on the same or an identical job during the calendar month immediately preceding the month in which the overtime was worked.
There are limits on how much overtime may be worked, and they sit in the exempting provisions rather than in s.59:
| Limit | Section | |
|---|---|---|
| Under exempting rules | Ten hours a day; spreadover twelve; sixty hours a week including overtime; overtime not more than fifty hours in a quarter | s.64(4) |
| Under an exempting order for an exceptional press of work | Twelve hours a day; spreadover thirteen; sixty hours a week including overtime; overtime not more than seven days at a stretch and not more than seventy-five hours in a quarter | s.65(3) |
A quarter here is three consecutive months beginning on the first of January, April, July or October.
Overtime premium, and who bears it
Split the overtime wage in two. Because s.59 gives twice the ordinary rate, the payment for an overtime hour is:
| Rs | |
|---|---|
| Normal wage element, at the ordinary rate | equal to one hour's ordinary wage |
| Overtime premium, the excess over the ordinary rate | equal to one hour's ordinary wage |
| Total paid for the overtime hour | twice the ordinary rate |
The normal element is always direct labour on the job. The question is where the premium goes, and there are four answers:
| Why the overtime was worked | Where the premium goes |
|---|---|
| At the customer's request, to get his order out early | To that job, so the customer's job carries it |
| General pressure of work or a seasonal rush | To factory overhead, spread over all production |
| A particular department's own fault or delay | To that department's overhead |
| Abnormal causes - a breakdown, a flood, making up output lost by a power failure | To the Costing Profit and Loss Account |
Idle Time and Overtime
Overtime worked
A worker's ordinary rate is Rs 45 an hour. In a week he works 9 hours of overtime. Show the payment and its treatment under each cause.
The payment is 9 hours at twice Rs 45, that is Rs 810, made up of the normal element 9 × 45 = Rs 405 and the premium 9 × 45 = Rs 405.
| Cause | Charged to the job | Charged to overhead | Charged to profit and loss |
|---|---|---|---|
| Customer asked for early delivery of Job 17 | 810 | - | - |
| General pressure of work | 405 | 405 | - |
| Making up output lost in a power failure | 405 | - | 405 |
Every row totals Rs 810, because the money paid does not change; only its destination does. That is the whole of the topic in one table.
What it does NOT mean
Overtime premium is not the overtime wage. It is the excess over the ordinary rate, and the ordinary-rate half stays with the job in every case.
Normal idle time is not "small" idle time. The test is whether it is inherent in the work, not how many hours it runs to.
Abnormal idle time is not an overhead. It leaves cost entirely.
The ordinary rate is not gross earnings. Section 59(2) excludes bonus and overtime wages from it.
Quick revision
- Idle time = attendance hours less booked hours.
- Normal, unavoidable: inflate the labour rate or charge to factory overhead.
- Abnormal, avoidable: exclude from cost, charge to Costing Profit and Loss.
- Factories Act: nine hours a day (s.54), forty-eight a week (s.51), a half-hour interval every five hours (s.55), spreadover ten and a half hours (s.56).
- Overtime is paid at twice the ordinary rate (s.59), the ordinary rate being basic wages plus allowances but not bonus or overtime wages (s.59(2)).
- Overtime is capped at fifty hours a quarter under exempting rules (s.64(4)) and seventy-five under an exempting order (s.65(3)), sixty hours a week in both.
- Overtime premium: to the job if the customer asked; to overhead if general pressure; to the department if its own fault; to profit and loss if abnormal.
Test yourself
1. Distinguish normal from abnormal idle time. Normal idle time is inherent in the work and unavoidable, such as setting up and personal needs, and is borne by production through an inflated labour rate or factory overhead; abnormal idle time arises from avoidable causes such as a breakdown or a strike, and is excluded from cost and charged to costing profit and loss.
2. At what rate must overtime be paid, and on what base? At twice the ordinary rate of wages under s.59(1) of the Factories Act 1948; the ordinary rate is basic wages plus allowances, excluding bonus and overtime wages, by s.59(2).
Idle Time and Overtime
3. A customer pays extra to have his order finished by Saturday and the men work overtime. How is the premium treated? It is charged to that job, because the cause and the benefit both belong to that customer.
4. Where does the premium go when overtime is worked to make up production lost in a power failure? To the Costing Profit and Loss Account, because the cause is abnormal.
5. A worker is present 200 hours, of which 10 are normal idle and 10 abnormal idle, at Rs 45 an hour. What is the cost of a productive hour? Rs 47.50. Gross wages are Rs 9,000, less Rs 450 of abnormal idle time charged to profit and loss, leaving Rs 8,550 to be absorbed by 180 productive hours.
Answer in one sentence
Explain idle time and overtime and their treatment in cost accounts. Idle time is the excess of attendance hours over hours booked to jobs, normal idle time being unavoidable and borne by production through an inflated labour rate or factory overhead while abnormal idle time is excluded from cost and charged to costing profit and loss; overtime is work beyond nine hours a day or forty-eight a week, for which s.59 of the Factories Act 1948 requires twice the ordinary rate of wages, and of the two halves of that payment the ordinary-rate element is direct labour on the job while the premium follows its cause, going to the job if the customer asked for it, to factory overhead if it arose from general pressure of work, to the department if the department was at fault, and to costing profit and loss if the cause was abnormal.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.