Question

Eastern Products, Inc. has an attractive package of fringe benefits that costs the company $4 for each hour of employee time (either regular or overtime). During a particular week Robert worked 50 hours but was idle for 2 of the 50 hours due to material shortages. If the company treats that part of fringe benefits relating to direct labor as added direct labor cost, how much of Robert’s wages and fringe benefits for the week will be allocated to direct labor costs? To manufacturing overhead?

Answer 1

Answer:

$192 will be allocated to the direct labor cost while $8 will be allocated to manufacturing overhead.

Explanation:

Costs relating to idle time are part of the fringe benefits that are related to direct labor and they are parts of the benefits given to workers.

Idle time is the number of time in which workers are idle during the normal working hours or day. Some of the causes of idle time include defective materials, power outage, faulty machine, shortage of raw materials, and among others.

In cost accounting, idle time costs are not included in the direct labor costs but are considered as indirect labor costs. Idle time costs are therefore included in manufacturing overhead cost.

From the question,

Direct labor cost = (Number of hours worked by Robert – Idle hours) × hourly rate

Direct labor cost = (50 - 2) × $4

                            = 48 × $4

                            = $192  

Idle time cost = Idle time × hourly rate

                      = 2 × $4

                      = $8

Total cost = Direct labor cost + Idle time cost

                 = $192 + $8

                 = $200

Since idle time cost is considered as indirect labor cost and to be included in manufacturing overhead cost, $192 will be allocated to the direct labor cost while $8 will be allocated to manufacturing overhead.

All the best.