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Accounting for Wages Assignment / Homework Help
Labour - Accounting for Wages

Accounting for Wages:

    For each department or cost centre, pay-rolls or wage sheets are prepared separately. In respect of every department or cost centre, the total (gross) of each pay-roll or wages sheet indicates the wages for the particular wage period.

    In the case of process costing, analysis of wages is not necessary as the processes are represented by the cost centers & hence the labour cost of a particular process is constituted by the wages of that cost centre.

    In the case of job costing, according to each job order or standing order, the arrangement of the time or piece records is necessary. For the purpose of calculating the amount of wages of a particular wage period which are chargeable to various job accounts & overhead accounts, a wage analysis or wages abstract is used.

    Wages chargeable to job accounts are direct wages whereas those chargeable to overhead accounts are indirect wages. For a wage period, the reconciliation must be done of the total of direct & indirect wages shown in the wages analysis with the gross total wages as per pay-rolls or wage sheets of that wage period.

    The records used for the purpose of making analysis of wages are – job cards, piece work cards, idle time cards, pay-rolls etc.

Accounting Entries:

    (1) For the total wages:

    Wages Control A/c     Dr

    To Cost Ledger Control A/c

    (2) For the total direct wages chargeable to various jobs:

    Work-in-Progress Control A/c            Dr

    To Wages Control A/c

    Note: To the respective cost sheet, amount chargeable to individual job is posted.

    (3) For the total indirect wages chargeable to various overhead accounts:

    Factory Overhead Control A/c                                  Dr

    Administration Overhead Control A/c                       Dr

    Selling & Distribution Overhead Control A/c            Dr

    To Wages Control A/c

Treatment of Overtime Wage:

    According to the Factories Act, overtime work is represented by any work beyond 9 hours in a day or 48 hours in a week & is paid at double the normal rate. Even where the Act is not applicable, on the basis of the agreement between the workers & the employer, overtime work is paid at a rate higher than the normal wages rate.

    Overtime work is not a normal feature- under extraordinary circumstances it is undertaken & before it is undertaken a responsible officer should authorize it after considering carefully the causes for which it has been necessary & also the desirability for which it has been undertaken; the under mentioned disadvantages are involved with the overtime work:

    (a) As it is paid at a higher rate, excess labour cost is involved.

    (b) Less output is provided by the overtime work; because by the end of normal working time workers are already exhausted.

    (c) It acts upon the worker’s health.

    (d) In order to earn extra income, there is a tendency among the workers to keep pending the work so that they can do the same in the overtime hours.

    (e) Discontent may arise in some section of the workers, if the overtime work is not rationally distributed amongst the workers.

    (f) In many cases, extra lighting cost is involved.

    (g) Due to continuous work for a long time, more strain is put on the machinery.

    (h) Once introduced it cannot be easily discontinued due to the workers’ resistance.

    In spite of the above mentioned disadvantages, overtime work has some advantages also, which are mentioned below:

    (a) From the same resources (i.e. men & machines) more work is obtained, particularly where shortage in the supply of suitable men & machines is involved.

    (b) It is possible that the production delay due to any reason can be made up favorably & thus delivery schedules can be maintained.

    (c) If customers can be charged at a higher rate, without extra cost to the organization, extra earnings can be provided to the workers.

    (d) Opportunities in the market can be availed of.

    (e) During overtime work, materials of peculiar nature, which are subject to spoilage unless utilized quickly, can be utilized.

    Treatment of Overtime Wages in Cost Accounts:

    Overtime wage consists in 2 parts: - (a) payment made at normal rate, & (b) payment made at extra rate over the normal rate i.e. the overtime premium.

    The treatment of overtime wages depends upon the circumstances in which it arises:-

    (a) Where due to general pressure of work overtime is caused, the payment made at normal rate should be debited to the job order or standing order number on which the worker has been employed & the premium should be debited to the overhead account of the department. Alternatively & where appropriate, after taking into consideration the estimated direct wages at normal wages & overtime premium, calculation of a comprehensive rate may be done & throughout the period all jobs may be charged to that rate.

    (b) Where specifically at the customer’s request the overtime is worked to expedite delivery, in that case total payment should be charged to the job as direct wage.

    (c) Where due to delay of work in another department, overtime work has to be undertaken in a department, the overtime premium should be charged to the department by which delay had been caused.

    (d) Where a seasonal industry undertakes overtime work so that it can cope with busy season work, the overtime premium should be charged to general overhead or alternatively, may be debited to deferred overhead account & throughout the cycle gets absorbed by the production.

    (e) Where in order to avail special market opportunity, overtime work has to be undertaken, because the market price which will be received shall be high, the total payment should be charged to production as direct wage.

    (f) Where due to abnormal conditions like major breakdown, prolonged power cut, natural calamity etc., overtime job has to be undertaken, it should not be considered for cost accounts. On the contrary, in that case, the overtime wage should be charged to costing profit & loss account.

    (g) Where for the purpose of utilizing the surplus perishable materials which are obtained from one job for utilization in another job, overtime work is undertaken, in that case, to the job in which the material is utilized, the normal payment is to be debited & to the general overhead, the premium should be charged.

Control:

    Overtime premium should be controlled effectively & for that purpose the following steps should be taken:

    (a) To enquire, why it is necessary to undertake overtime work? Who is responsible for creating such necessity?

    Is it due to lack of supervision, faulty planning, worker’s inefficiency or improper maintenance of plant? Is it due to the fact that any order has been accepted which can be executed during overtime? Is it due to any abnormal reason?

    (b) Determine the desirability of allowing overtime work on the basis of the answer. If it is desired to be undertaken, under the signature of a responsible officer, it has to be specially authorized.

    (c) The causes which are within control should be removed so that in future necessity does not recur.

    (d) If, due to shortage of staff or machine, overtime work is going to be a permanent affair, extra men should be recruited & new machine should be installed, if practicable.

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