Paper F2, Management Accounting Lecture by: Mr.

Farrukh Abbas

1-Page | 27
th
of April 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
RULES FOR IDENTIFYING DIRECT AND INDIRECT LABOR COST

1. Direct Workers:

The basic pay of direct workers is always Direct Cost.
When Overtime is worked they receive overtime pay and overtime pay has two portions.
o The basic portion of overtime pay is always Direct no matter why overtime is worked.
o Overtime premium is normally treated as an Indirect but with one exception. If overtime is worked
on the special request of a particular customer. The overtime premium for those hours will become
Direct.

2. Indirect Workers:

The basic pay for an indirect worker is always indirect.
Overtime pay is also treated as Indirect Cost but with one exception. If indirect workers work overtime on
the special request of a customer. In this case the overtime pay for those hours will be treated as Direct
Cost.

3. General Rules:

Idle time pay, Sick pay and Holiday pay are treated as Indirect Labor Cost.
Any type of allowance is treated as Indirect Cost.
Any type of Bonus is treated as Indirect within the exception of Group Bonus (Direct Cost).


Example:

An employee worked for 36 hours in a week and is paid @ $7/hour. Any overtime is paid at Time & a Half. During a
week employee worked for 41 Hours and overtime was worked due to following reasons,
Machine Breakdown = 3 hours
Special Request of a Customer = 2 hours
Calculate the total pay for the employee and identify the Direct and Indirect Cost?

Solution:

As an employee worked 36 hours out of which 3 hours was idle time so,

Basic Pay = 33 hours x $7/hr = $231 Direct Cost

Idle Time Pay = 3 hours x $7/hr = $21 Indirect Cost

Overtime Basic = 5 hours x $7 = $35 Direct Cost

Overtime Premium = 3 hours x $3.5 = $10.5 Indirect Cost

Overtime Premium = 2 hours x $3.5 = $7 Direct Cost
(On Special Request)

So, Total Direct Cost = $231 + $35 + $7 = $273

And, Total Indirect Cost = $21 + $10.50 = $31.50


Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

2-Page | 27
th
of April 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
DIRECT COST INDIRECT COST
Dr. Work in Progress A/C
Cr. Wages & Salaries A/C

Dr. Work in Progress A/C
Cr. Labor Control A/C

Dr. Work in Progress A/C
Cr. Pay Roll A/C
Dr. Production Overhead A/C
Cr. Wages & Salaries A/C

Dr. Production Overhead A/C
Cr. Labor Control A/C

Dr. Production Overhead A/C
Cr. Pay Roll A/C




Direct
Workers
Basic Pay
Direct
Cost
Overtime
Pay
Basic
Direct
Cost
Premium
Special
Request
Direct
Cost
General
Indirect
Cost
Indirect
Workers
Basic Pay
Indirect
Cost
Overtime
Pay
General
Basic +
Premium
Indirect
Cost
Special
Request
Basic +
Premium
Direct
Cost