Cost Accounting Problem: Sam and Patty typically work 40 hour weeks. Sam gets 2
ID: 2482286 • Letter: C
Question
Cost Accounting Problem:
Sam and Patty typically work 40 hour weeks. Sam gets 2 weeks vacation and Patty gets 4 weeks vacation. Sam earns $12/hour and Patty earns $15 per hour. Each worked 45 hours this week because of a valve leak in one of the machines. Determine the following:
1. The amount of vacation accrued for each.
2. The amount of overtime pay for each using our new employer method.
3. Gross pay for each.
4. Which account we charge the overtime to.
5. Why do we determine overtime using the new method?
Please read the notes for better understanding:
Tangent to the budgeting discussion is how to work with budgeted overtime and vacation pay. In factory accounting we must accrue vacation time for direct laborers. This is done to spread the cost of vacation pay over all of our jobs, otherwise the jobs during the predominant vacation months like December and July would be charged for employees not even working on the job. To accomplish this, we set up an accrued vacation account for each employee based on information supplied by human resources. To determine the amount of the accrual we take the vacation pay and divide it by time worked. For example, if an employee has two weeks’ vacation and earns $500/week we would take the total vacation pay of $1000 and divide it by 50 [52 weeks less the 2 vacation weeks] and accrue $20/week on the credit side of the employee's account. When the employee takes the vacation we debit the account rather than the job so no job is charged for an employee's vacation.
Determining budgeted overtime is different than the method we might normally use to determine overtime pay. From our old payroll days, overtime begins with the 41st hour worked in any seven day period and is compensated at 1.5 times the employee's regular rate. Let’s assume that John earns $10/hour and worked 45 hours this week. In the past we would have determined his pay this way:
Regular pay.........................40 hours x $10/hr. =$400
Overtime........................5 hours x $10/hr. x 1.5 =$75
Total pay...........................................................=$475
Now we must determine it this way:
Regular pay.......................45 hours x $10/hr. =$450
Overtime.......................5 hours x $10/hr. x .5= $25
Total pay........................................................=$475
Note, of course, that in either case the employee earns the same amount of money, but the overtime pay in our new method is based only on the extra .5 in the overtime formula. This is important because scheduled overtime is charged to W.I.P. while unscheduled is charged to factory overhead. Unscheduled usually indicates a problem, while scheduled usually indicates an abundance of orders, a big difference.
Please Answer this Problem by Using the Solution Below:
The amount of vacation to be accrued:
Regular Pay = $15 x 40 hours = $600
So, the accrual for vacation = ($600*2)/50 = $24/Week
Overtime Hours = 10 hours (50 Hours – 40 Regular Hours)
Overtime Pay = $15 x 10 hours x 1.5 = $225
Total amount Paul earned = $600 + $225 = $825
The amount, we must determine:
Regular Pay = $15 x 50 hours = $750
Overtime Hours = 10 hours (50 Hours – 40 Regular Hours)
Overtime Pay = $15 x 10 hours x .5 = $75
Account charged for overtime Pay = $15 x 10 hours x .5 = $75
Explanation / Answer
Ans 1 Sam He works 40 hours a week He earns 40*$12 480 per week So total vacation pay is 480*2 960 accured Ans Per week vacation pay 960/50 weeks 19.2 per week accured Patty He works 40 hours a week He earns 40*$15 $600 per week So total vacation pay is 600*4 $2,400 accured Per week vacation pay 2400/48 weeks 50 per week accured Ans 2 Sam Regular pay 45*$12 540 Overtime 5*$12*.5 30 Ans 2 Total pay 570 Ans 3 Patty Regular pay 45*$15 675 Overtime 5*$15*.5 37.5 Ans 2 Total pay 712.5 Ans 3 Ans 4 The overtime is charged to Factory Overhead account Ans 5 Because by prvious method more amount was charged to factory overhead as all the overtime hours were taken at 1,5 times of rate which gave more of factory overhead which was a problem So by changing the method only the additional amount on overtime over the basic rate is charged to factory overhead therey giving the correct amount.