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How do you treat overtime for absorption rates?

Labour cost recovery rates

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I'm looking at the recovery rates for a manufacturing business and I'm going round in circles and confusing myself, so some assistance would be appreciated.

If a worker works a standard 40 hour week, but could work overtime if the need arises, then do I have multiple recovery rates to take account of the basic wage rate plus overhead (say rate 1), then an overtime rate excluding overhead (on the assumption that overheads have been recovered during the standard 40 hours (say rate 2)?

For Example: Rate 1 = Labour £10 per hour + Overhead £25 = £35,   Rate 2 = Labour £15 per hour (assuming time and half for O/T)

Or should there just be one labour rate that encompases potential overtime?

Generally overtime is worked at the site, but it's a moving target, and I would like to have standard rates of recovery in the system to see if the business over or under recovered. If the team worked a 50 hours week then they would cover the basic 40 hours and recover all the overhead, then the final 10 hours would be at a lower rate. Just doesn't seem right??


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By The Innkeeper
25th Oct 2017 11:56


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By Selaen
25th Oct 2017 16:03

The answer is 42.

Surely you'll see over/under-recovery when you times labour hours worked with the standard amount absorbed and recy that to the actuals re: efficiency and cost?

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By Jeffers99
26th Oct 2017 13:28

An option could be to use the same recovery rate - on the basis that the higher labour element is broadly offset by the lower overhead element?

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By D V Fields
08th Nov 2017 20:08

I would adopt a standard costing approach. A standard performance should produce a standard output for a standard price. Say x hours produces y units for z cost. If limiting factors mean overtime is necessary for the y output then factor that into the cost. Now with your actual hours, actual output and actual costs you can effectively measure performance and variances. 
Adopting this approach you can now establish why overtime is a moving target. Is it because output is fluctuating, planned or otherwise, or is efficiency varying?

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