Jason Harmon, an employee with Nelson Products, earned a gross wage of $825 for the 50 hours he worked last week. Jason earns $15 per hour and is paid time-and-a-half for overtime. In addition, Nelson paid $100 for Jason's health insurance. The

Question

following chart shows a breakdown of Jason's time worked: Hours worked on a specific job 47 Hours spent as "idle" 3 Total hours worked 50 Discuss how the company should allocate Jason's wage and health insurance costs to products.

Answer 1

Normally, companies allocate the labor costs incurred for specific jobs to those jobs as "direct labor". In the above case, overtime was incurred. The company will allocate this overtime to the job cost as direct labor if the overtime was required to get the job done on time, especially if the job was a "rush job" as dictated by the customer. However, if some of the time spent on the job was due to inefficiencies in the production process (i.e. machine breakdowns), the company may choose to treat that portion of the labor costs as overhead rather than direct labor.

With respect to the "idle" time, the company will probably allocate the labor cost for those hours to overhead since the time was not spent directly on one job or another. In general, fringe benefits costs, like Jason's health insurance, will be classified as direct labor. In the above situation, since some of the labor costs may be classified as overhead rather than direct labor, the company may choose to allocate only a portion of the health insurance cost to direct labor with the other portion being allocated to overhead using a ratio consistent with the allocation of the 50 hours worked to direct labor hours worked.