Written by Overtime is the hours worked above the normal time. It is the time spent beyond the normal working hours.
Overtime is the additional hours worked by an employee beyond their regular working hours.
It is that extra time spent beyond the working hours which is usually paid higher than the normal time rate.
The extra amount payable beyond the normal wages & salaries for work beyond the normal working hours is called overtime premium, and overtime premium is typically calculated as 150% of the normal wage rate.
For accounting purposes, overtime premium is usually recorded separately from the regular pay.
Accounting Treatment for overtime
In cost accounting, overtime premium is treated as direct costs, overheads or expenses to be allocated to the profit or loss account depending on the specific circumstances requiring such overtime.
- Overtime associated with a specific job or product: When overtime is directly related to the production of a specific job or product, the overtime premium is considered a direct cost. In this case, the overtime premium is included in the total cost of the job or product and is allocated to the respective cost centres.
- Overtime due to exigencies or urgencies: If overtime is worked due to exigencies or urgencies, the overtime premium will be treated as an overhead cost. In this case, the regular wage payment is treated as a direct labour cost, while the amount of overtime premium is treated as an overhead.
- Overtime requested by a customer: If overtime is worked at the request of a customer, both the normal rate and the overtime premium will be treated as direct labour costs and should be charged directly to the job.
- Overtime due to abnormal conditions or factors beyond the organization’s control: If overtime is worked due to abnormal conditions or factors beyond the control of the organization, such as natural disasters or unexpected equipment failure, the overtime premium should be charged to the Profit & Loss account.
Reasons for Overtime
There are several reasons why overtime might be required in an organization. Some of the common reasons for overtime include:
1. To meet an unexpected increase in workload: Overtime may occur when the amount of work required to complete a job suddenly increases beyond what was previously anticipated or planned.
In such a case, the organization may require employees to work overtime to complete the work.
For example, let’s say a company that makes furniture receives a massive order from a customer, which requires the company to produce more furniture than it had originally planned.
To fulfil the order on time, the employees may need to work longer hours or even on weekends to make sure that everything is completed within the required time frame.
So, overtime may result due to an unexpected increase in workload.
2. Shortage of labour: When an organization doesn’t have enough workers to complete a given task in a given time frame, employees may be required to work extra hours so as to cover the shortage in the labour force.
Shortage of labour occurs due to two reasons:
- Workers are on leave due to illness, vacation, or other personal reasons.
- The organization do not employ the adequate number of people required for a job.
3. Seasonal changes: Some industries experience fluctuations in demand based on seasonal changes.
For instance, the tourism industry experiences peak seasons during the summer months or during major holidays, when people typically take vacations.
To handle the increased demand during these seasonal periods, employees may need to work overtime.
4. Production expansion: When a company is increasing its production capacity, it may require employees to work overtime.
The company may be increasing its output to meet the demands of its customers, and sometimes, the regular working hours may not be enough to achieve this goal.
So, it may require employees to work overtime.
Disadvantages of overtime
While overtime may be necessary in some situations, there are several disadvantages associated with excessive or regular use of overtime, which are explained below.
1. Increased labour costs: Overtime is generally paid at a higher rate than regular work hours, which means increased labour costs for the organization. This can negatively impact the profitability of the organization.
2. Decreased productivity and quality: Excessive or regular use of overtime can lead to employee burnout, fatigue, and decreased productivity. Tired and overworked employees may make mistakes or produce lower-quality work.
3. Tendency to slow down work: Workers may intentionally slow down their work in order to pressure management into approving overtime so that they can earn more money.
Remember that overtime is usually paid at a higher rate than the normal day rate.
4. Increased wear-out of machinery and equipment: Overtime can cause machinery and equipment to wear out more quickly as they are being used for longer periods of time.
When machines are used without proper maintenance breaks, their parts would wear out faster than they would under normal operating conditions.
Steps to Control Overtime
Despite its many disadvantages, overtime cannot be completely eliminated. It is, therefore, essential that proper control should be exercised to keep it to the minimum. The following steps should be taken to control overtime.
- Implement a process where overtime will be approved in advance by the Works Manager or another designated authority only after investigating the necessity of such overtime.
- To avoid abuse, organizations should set an upper ceiling on overtime for every category of worker.
- Overtime premiums should be correctly accounted for. That is, overtime premiums should be recorded separately and charged against the department incurring it.
- No permission for overtime should be given if the workers fail to achieve normal output during normal hours without any valid reasons.
- Identify the root cause of overtime and take appropriate steps to address it. For example, if overtime is usually caused by a shortage of manpower, then more workers should be recruited.
- Regular reports on overtime wages should be submitted to the management with justifications so that they can take necessary corrective measures
- If overtime is caused by inadequate facilities, the organization should either limit production to finish within normal time or expand facilities to reduce overtime.
