Idle time is the simply the time for which labour has been paid for but no work has been done. Whereas inefficiency arises when labour is actually engaged on production but output is not as expected or simply not 100%.
Idle time may arise out of normal or abnormal situations and it is the situation that will tell whether it is a normal idle time (unavoidable idle time) or abnormal idle time (avoidable idle time).
Normal idle time, as the name is suggesting arises due to such reasons which are considered:
- either part of the process e.g. in paint industry labour has to wait for certain time to apply the second layer of paint over the first one
- or simply out of control of the entity e.g. delays in receiving orders of raw material due to war etc
On the other hand abnormal idle time is such idle time that given the situation is considered controllable and should have been avoided if due care was taken. In other words abnormal idle is most of the time result of mismanagement.
Accounting treatment of idle time depends on whether:
- idle time is normal or abnormal
- idle time relates to direct or indirect labour
If normal idle time relates to direct labour then it will form part of direct labour cost or simply direct cost. Usually while planning for labour, provision for normal idle time is made in the labour cost budget.
If normal idle time relates to indirect labour then it will considered as overheads cost and will be absorbed in the cost of units produced or services provided as indirect cost.
However, in case of abnormal idle time irrespective of the labour i.e. whether it relates to direct or indirect labour, abnormal idle time will be reported separately as a loss in the profit and loss account and will not form part of the cost of units produced or services rendered. In other words costs related to abnormal idle time are neither direct production cost or indirect production costs they are simply losses to be written of as expenses in the income statement of the entity.