Is "Overtime Premium" a Product Cost or Product Expense?

Answer 1

It's actually a labor expense but some people would assign it to product expense in the GL. Now if the premium is part of the normal process then it becomes a product cost, part of the standard cost.

Answer 2

I believe it's both cost and expense.

Cost, because paying people for their overtime (if that's what you mean by "overtime premium") has the economic effect of transforming resources into products or services.

Expense, because paying people represents a physical reduction of assets (cash outflow).

However, if it's PRODUCT expense / cost depends on whose overtime we're talking about and whether the accounting in this particular example is capable of directly linking the overtime to the products created.

A few examples:

(i) An accountant is asked to review the books of a company. Because their records are a mess, it takes her longer than planned and she has to work overtime. This overtime is directly linked to the product (here service) created - it's direct product cost and will be billed to the customer.

(ii) An assembly line worker works overtime and puts together 55 additional gadgets in the process. His overtime cost cannot be attributed to any particular product, but it can be averaged over the 55 he created during that time - it's still product cost, but the company may not be able to recover the additional cost if it can't sell those 55 "overtime gadgets" at a higher price.

(iii) A security guard at the company gate has to work (and be paid) overtime because his colleague called in sick. Since securing the premises can't be linked to any particular product created inside, the guard's overtime would be general overhead, and not product cost. The company would almost certainly not be able to recover those extra cost from anwhere.

Hope this helps.

Answer 3

If the business in manufacturing the overtime expense would be part of Product Cost. Assuming it was overtime for someone directly involved in making the product.

If you were a service provider or retailer it would be an operating expense.