1) Need to describe the measurement of overtime-premium and idle-time categories of manufacturing costs

2) What is operating leverage? How is knowing the degree of operating leverage helpful to managers?

 

Answer 1.

In addition to direct labor costs, there are other costs associated with direct labor workers. These are idle time, overtime premium and fringe benefits that are provided to the workers.

Measurement of overtime premium :

Overtime premium is the amount that is paid, for the overtime worked, in exacsess of the normal wage rate. Like idle time, overtime premium is also treated as indirect labor costs and included in manufacturing overhead costs.

For example, a worker normally works for 48 hours per week at $8 per hour. In a particular week, if he works for 52 hours and company pays him $12 for every Hour workers in excess of 48 hours, the allocation of the labor cost of the worker would be made as follows:

Direct labor (52 hours × $8) = $416

Manufacturing overhead ( 4 hours × $4) = $16

Total costs $432

The amount $16 is overtime premium and is part of manufacturing overhead cost.

Measurement of idle time:

Idle time means the amount of time the workers remain idle in a normal working day. The ideal time is usually caused by a sudden fault in machine or equipment, power failure, lack of orders for the product, inefficient work scheduling, defective materials and shortage of raw materials etc. The cost associated with idle time is treated as indirect labor cost and should, therefore, be included in manufacturing overhead cost. For example, the normal weekly working hours of a worker are 48 and he is paid at $8 per hour. If he remains idel for 6 hours due to power failure, then the cost of 42 hours would be treated as direct labor cost and the cost of 6 hours (idle time) would be treated as indirect labor costa dn included in manufacturing overhead cost.

Direct labor ( 42 hours × $8) = $336

Manufacturing overhead (6 hours × $8) = 48 (idle time)

Total cost = $384

Step-by-step explanation

Answer 2.

Operating leverage is a cost accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.

Operating leverage describes the effects that fixed costs have on changes in operating income as changes occur in units sold, and hence, in contribution margin.

Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes. It helps company's management maximize earningw before interest and tax.

The degree of operating leverage ratio assists analysts in determining the impact of any change in sales on company's earnings or profit.