What is Overtime?
Overtime refers to the time that an employee spends at work more than the regular working hours, for which the employer pays money over and above their salary. The additional money which the employer pays over the normal wage rate is the overtime premium.
More precisely, overtime implies the extra hours worked by a worker at his job, which is outside the standard working schedule specified by the Factories Act, 1948. Generally, a person performs overtime when he completes his normal hours of work.
Generally, standard working hours are determined by:
- Custom like the time which, according to society, is healthy and reasonable.
- Practices of a particular trade or profession
- The employment agreement between employer and employee
In many countries, there are strict labour laws. These laws are framed with the aim to prevent the interest of employees.
It may also be referred to as the wages which an employer pays to the worker for the extra hours worked. Payment of overtime comprises:
- Normal Wages
- Extra payment
Table of Contents
- Why should companies avoid overtime?
- When should the company allow overtime work?
- How to Treat Overtime Premium in Cost Accounting?
- Steps to Control
- Wrap Up
Why should companies avoid overtime?
As per law, workers are to be paid double the rate of their wages if they work more than 9 hours a day or 48 hours a week. This is based on the fact that overtime starts at the end of the working day, i.e. when fatigue begins. So, the work carried out in overtime is comparatively costly.
Moreover, besides double payment and low productivity of workers, additional expenses are also involved. These expenses include lighting and extra wear and tear of machinery. Hence, companies should avoid it as much as possible.
Further, there is also a possibility that the workers make it a habit of not carrying out work during their scheduled working hours. And in this way, they will create a need for it.
Therefore, the works manager or any other senior official of the company must authorize it.
One must note here that, occasional overtime is a good indicator. This is because it represents that the labour force and plant and machinery are operating at optimum size and capacity. Also, they are not remaining idle. But when overtime persists for the long term, it indicates that the:
- The firm needs a larger capacity of manpower and machines or
- Workers have got a habit of delaying their normal work towards extra hours so as to earn extra money out of overtime payments.
When should the company allow overtime work?
- At the client’s request: If the client or customer is ready to bear the entire cost of overtime because of the urgency of work.
- Fulfilling the increasing demand: The company can also take recourse to overtime to generate more than normal output so as to take advantage of the increasing market demand.
- Fault of Management: If there is any shortfall in production because of any fault of management, overtime is allowed to make up for that shortfall.
- Increase in labour cost and cost of production
- An increase in fatigue and a reduction in the efficiency of labour result in low productivity and a high cost of production.
- Puts extra strain on plant and machinery
- Development of tendency in workers to postpone work during standard working time and promoting overtime for earning more money. Thus, it reduces output during normal hours.
- Rise in costs like administrative overhead, lighting, depreciation, etc.
- The health of the workers may deteriorate, and accidents at the workplace might increase.
- Discontent due to uneven distribution of overtime among workers.
- High absenteeism.
- Disruption in production because of the breakdown of plant and machinery.
How to Treat Overtime Premium in Cost Accounting?
- When overtime is taken as a recourse to a customer’s request
The company will charge the whole amount of overtime to the job order straightly.
- When overtime results from abnormal conditions like a natural disaster, machinery breakdown, ineffective planning, management fault like strike, etc.
In such cases, the company will charge the amount of overtime to Costing Profit and Loss Account.
- When overtime is a result of any capital order
The company charges the amount to the capital work order account.
- When overtime takes place in a department resulting from negligence or delay of workers of another department
In this case, the overtime premium is charged to the department causing the delay.
- When overtime takes place because of general work pressure or the seasonal nature of production
The company will charge an overtime premium to general or factory overheads.
Steps to Control
- Overtime must need prior approval of the Works Manager
- The firm can set an upper ceiling on overtime for every category of worker.
- When the cause of overtime is a shortage of plant and machinery or other resources, the company should install more machines. Also, it can introduce extra shifts or take the resort of subcontracting.
- No permission for overtime if the workers fail to achieve normal output during normal hours without any special reasons.
- If the cause of overtime is the shortage of workers, then the company can employ more labour. It can also review the cost of overtime and the cost of recruitment of workers at periodical intervals.
- Time-to-time reports on overtime wages coupled with justifications need to be submitted to the management so that they can take corrective measures.
- When it is inevitable, advance planning should be done. After that comparison should be made between the forecasted and actual overtime hours. Furthermore, the actual rate of output during overtime must be compared with the normal rate of output.
- Idle time should be reduced to a minimum through proper planning and supervision. Also, maintenance of the proper flow of work is necessary so that they do not get any time to waste.
All in all, overtime is costly for the enterprise. Hence, the company should make an attempt to avoid it as much as possible. This is because the quality of output degrades. Also, the company has to pay wages twice the normal wages, which is a loss to the firm.