In addition to direct labor costs, there are other costs associated with direct labor workers. These are idle time, overtime premium and fringe benefits that are provided to workers. These are not part of direct labor cost. The following paragraphs explain the computation and accounting treatment of idle time, overtime premium and labor fringe benefits:
Treatment of idle time:
Idle time means the amount of time the workers remain idle in a normal working day. The idle time is usually caused by a sudden fault in machine or equipment, power failure, lack of orders for the product, inefficient work scheduling, defective materials and shortage of raw materials etc. The cost associated with idle time is treated as indirect labor cost and should, therefore, be included in manufacturing overhead cost. For example, the normal weekly working hours of a worker are 48 and he is paid @ $8 per hour. If he remains idle for 6 hours due to power failure, then the cost of 42 hours would be treated as direct labor cost and the cost of 6 hours (idle time) would be treated as indirect labor cost and included in manufacturing overhead cost.
Treatment of overtime premium:
Overtime premium is the amount that is paid, for the overtime worked, in excess of the normal wage rate. Like idle time, overtime premium is also treated as indirect labor cost and included in manufacturing overhead cost. For example, a worker normally works for 48 hours per week @ $8 per hour. In a particular week, if he works for 52 hours and company pays him $12 for every hour worked in excess of 48 hours, the allocation of the labor cost of the worker would be made as follows:
The amount of $16 is overtime premium and is a part of manufacturing overhead cost.
Treatment of labor fringe benefits:
Fringe benefits are benefits that employers provide to employees in addition to normal salaries or wages. Examples of fringe benefits are hospitalization, insurance programs, retirement plans, paid holidays and stock options etc. Most of the companies treat labor fringe benefits as indirect labor and, therefore, include them in manufacturing overhead costs.
A few firms treat direct labor related fringe benefits as addition direct labor cost that is considered a more superior practice.
The above information has been summarized below: