Direct labor , manufacturing overhead cost, total payroll cost A highly skilled

Question

Direct labor , manufacturing overhead cost, total payroll cost

A highly skilled direct labor worker at Kenko Corporation is paid $20 per hour for regular time, and time and a half (extra 50%) for all work in excess of 40 hours per week. This employee works 60 hours in a given week. However, the worker is idle for 3 hours during the week, due to poor raw material quality, requiring the production staff to wait for a later shipment in the day, and idle for 4 hours later in the week due to an equipment failure. Determine how much of the worker's wages for the week would be classified as direct labor cost, as manufacturing overhead cost, and total payroll cost?

Explanation / Answer

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Add up the total manufacturing overhead costs. This can be obtained from the company's financial records. Manufacturing overhead includes many different costs. Some costs will vary with production, while others are fixed. Manufacturing overhead includes everything from the cleaner used on the shop floor to depreciation of the lighting fixtures attached to the ceiling.

Choose an allocation base. An allocation base is a measure of activity that is used to assign overhead costs to products. Manufacturing overhead costs are divided by the allocation base to determine the amount of manufacturing overhead that should be assigned to each unit of production. Two common allocation bases used in manufacturing are direct labor hours and machine hours.

Review payroll or maintenance records to determine the total of the allocation base generated in the current period. For example, the company's payroll records may reflect that 2,000 direct labor hours were worked during the current period.

Divide the total allocation base value by the number of units produced to determine the amount of manufacturing overhead attached to each unit of the allocation base. For instance, if the company has $10,000 in overhead and 1,000 direct-labor hours, each direct labor hour will have $10 ($10,000 / 1,000) of overhead attached to it.

Monitor production to determine the quantity of the allocation base that is to be assigned to each unit of production. For instance, the analysis may reveal that product A requires one labor hour to produce, while product B requires two labor hours.

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