Page 146 - BA2 Integrated Workbook STUDENT 2018

Chapter 8

2.2 Direct or indirect labour

It is important to recognise how these components are accounted for. Some will be
treated as direct labour costs and some will be treated as indirect labour costs.

 Gross wages – These will be treated as a direct labour cost if the employee is
a direct worker and indirect labour cost if the employee is an indirect worker.

Note: the net wage is paid to the employee and the income tax and employee
national insurance deductions are paid to the government on the employee’s
behalf.

The employer’s national insurance is an added cost of employment and it is
often referred to as an employment-related cost. Some organisations treat this
as an indirect cost, while others regard this related employment cost as part of
the wage cost of each direct employee and would share it among the tasks
completed by adding it to the gross wages value, thus treating it as part of direct
wages cost.

 Bonuses – If the bonus is paid on an individual task basis and can clearly be
attributed to a particular task, it would be treated as a direct labour cost of that
task. However, if the bonus is not able to be clearly attributed to a particular
task it will usually be treated as an indirect cost.

 Overtime –The treatment of overtime premium depends on the reason for the
overtime:

– Specific customer request. Where a customer requires a job to be
completed early or at a specific time, they should be advised that overtime
would be required and that this cost would be charged to them. In this
situation the overtime premium is treated as a direct cost.
– General circumstances. Overtime may be required as a result of the
organisation’s need to complete work which would not be finished without
the working of overtime. In his case the cost of the overtime premium is
regarded as an indirect cost, even the premium that is paid to direct
workers, because it cannot be identified with a specific cost unit.

 Idle time – Idle time payments are treated as indirect costs.

Illustrations and further practice

Go over illustration 1 and try TYU 2

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