Accounting for Idle Time (J. March) ‘The labor distribution of the Dunne Desk Company is made from its payroll, all the wages of its twenty shop employees, except the foreman’s, being treated as direct labor. The company pays for idle time of workmen caused by material shortages, and this amounts to a substantial portion of the payroll.

For the year 19_1, the direct labor, according to the ledger, was $20,000 and the overhead $16,000. Accordingly, an overhead rate of 80 percent was used in 19_2 for the purpose of estimating costs of new products. The manager thinks that the estimates are wrong, for his income statement shows a gross margin of only $1 a desk, whereas his selling prices are at least $5 a desk above the estimated costs. He suspects that the idle-time factor is not being included in the cost estimates, and he asks you to investigate the situation. ve 1. How would you proceed to determine whether the manager’s suspicions are correct? :

2. Recompute the overhead rate for 19_1 on the assumption that $2,000 was paid for idle time that should be treated as overhead instead of as direct labor.

3. Suggest a change in the method’ of labor-cost allocation that would result in a more accurate accounting for idle time. lop5