EXERCISE 3B–3 Classification of Overtime Cost [LO9]
Several weeks ago you called Jiffy Plumbing Company to have some routine repair work done on the plumbing system in your home. The plumber came about two weeks later, at four o’clock in the afternoon, and spent two hours completing your repair work. When you received your bill from the company, it contained a $75 charge for labor—$30 for the first hour and $45 for the second.
When questioned about the difference in hourly rates, the company’s service manager explained that the higher rate for the second hour contained a charge for an “overtime premium,” because the union required that plumbers be paid time and a half for any work in excess of eight hours per day. The service manager further explained that the company was working overtime to “catch up a little” on its backlog of work orders, but still needed to maintain a “decent” profit margin on the plumbers’ time.
1. Do you agree with the company’s computation of the labor charge on your job?
2. The company pays its plumbers $20 per hour for the first eight hours worked in a day and $30 per hour for any additional time worked. Show how the cost of the plumber’s time for the day (nine hours) should be allocated between direct labor and general overhead on the company’s books.
3. Under what circumstances might the company be justified in charging an overtime premium for repair work on your home?