University of Luzon

COLLEGE OF ACCOUNTANCY Accounting for Labor

2nd Semester 2018 – 2019 ACC205 Cost &Cost Management I

Accounting for Labor

Direct labor, also known as “touch labor,” consists of the workers who physically convert raw
materials to finished goods. It is the portion of payroll cost traced directly to the product, and is
charged to the work-in-process account. Indirect labor consists of all other labor involved in the
manufacturing process and is charged to the factory overhead account. Accounting for labor
involves: recording the time worked and/or the quantity of output by the employee; analyzing
employees’ time to determine how time is to be charged; allocating the factory labor costs to the
proper accounts; and preparing the payroll.
Under an hourly-rate wage plan the employee’s wages are computed by multiplying the
established hourly rate times the hours worked. Although widely used and easy to apply, it
doesn’t provide any incentive to achieve a high level of productivity. Under a piece-rate plan,
earnings are based on a worker’s quantity of production. Such a plan provides an incentive for
the worker to produce a high level of output, but it may encourage sacrificing quality for quantity,
and it is not appropriate if machines control production speed. A modified wage plan combines
some features of hourly-rate wage plans and piece-rate plans in that it may set a minimum wage
that will be paid even if an established quota is not met, while an additional payment for each
piece beyond the established quota is added to the minimum rate.
The timekeeping function is responsible for determining the number of labor hours that the
company should pay for and the type of work that the employees performed. Automated
timekeeping technology, using magnetic cards and card readers, sends labor time information to
the accounting department for the preparation of the payroll and the distribution of labor costs
to jobs. The payroll function is responsible for computing employee gross earnings, deductions,
and net pay. Payroll maintains the payroll record and the employee earnings record. A payroll
record provides information for all employees for one pay period relative to pay rate, hours
worked, regular and overtime earnings, deductions, and net pay. The employee earnings
record is a record of the cumulative earnings for a single employee for the entire year used to
compute the amount of earnings subject to payroll taxes. It also serves as the basis for reporting
payroll information to governmental agencies.
The labor cost summary form is prepared from the labor time records, and it is used for the
preparation of a general journal entry that distributes the payroll to the proper accounts. Work
in Process is debited for the regular-time wages of direct labor, Factory Overhead is debited for
indirect wages and Payroll is credited for the total. The additional rate added to a direct labor
employee’s regular rate for overtime worked is the overtime premium. If the overtime work on a
particular job resulted from random scheduling, then the overtime premium should be charged
to Factory Overhead and spread over all jobs; whereas if the overtime resulted from the unique
demands of a specific job, then the overtime premium should be charged to Work in Process and
the particular job that caused its incurrence. The regular rate is charged to the jobs on which the
employee worked.
Payroll taxes imposed on employers include social security tax and federal and state
unemployment taxes. Theoretically, payroll taxes should be charged to accounts where the
related labor was charged; however, it is usually more practical to record all factory related
payroll taxes as Factory Overhead.
When the financial statement date does not coincide with the ending date for a payroll period, an
accrual for payroll earnings and the employer’s portion of payroll taxes should be made to avoid
understating the expenses and liabilities for the period.
Shift premiums may be paid to employees who do not work the regular day shift. Because these
premiums are paid for inconvenient hours rather than increased productivity, they should be
charged to Factory Overhead and allocated to all jobs, rather than to Work in Process, to avoid
distorting the cost of certain jobs. Defined benefit pension plans determine benefits based on
an employee’s level of income and length of service. Defined contribution pension plans, such
as 401 (k) plans, specify the maximum contribution that can be made to an employee’s account
during the year, but the amount of pension benefits is based on the performance of the
investment vehicles that the employee selected. Non-contributory plans are completely funded
by the company, whereas contributory plans, which are more common, require a partial
contribution from the employee. The company should accrue, systematically, the total estimated
pension cost from the date the plan started to the date the employee retires. Current pension
costs for factory employees are part of the cost of production and may be charged to Factory
Overhead, or they may be charged to General Administrative Expense under the premise that the
costs of pensions are beneficial to the company as a whole. Bonus pay, vacation pay, and
 University of Luzon
COLLEGE OF ACCOUNTANCY Accounting for Labor
2nd Semester 2018 – 2019 ACC205 Cost &Cost Management I

holiday pay are considered to be earned gradually during the employee’s time on the job, and
therefore a portion of this liability is accrued each payroll period that the employee is on the job.

Computing earnings with incentive compensation

B. Arroyo, an employee of the Cincinnati Cabinet Co., submitted the following data for work
activities last week:
Day Units Produced Each Day
Monday .......................................... 30
Tuesday.......................................... 32
Wednesday ................................... 46
Thursday ....................................... 28
Friday.............................................. 34

During the week, Arroyo worked eight hours each day. Compensation was based on a modified wage
plan where an employee earns P 2.50 per finished unit and is guaranteed a minimum of P 10 per
hour.

Instructions: Complete the schedule below. (Round labor cost per unit to the nearest whole
cent.)
Earnings at Piece-rate Make-up Daily Labor Cost
Day P 10 per Hour Earnings Guarantee Earnings per Unit
Monday __________ __________ __________ __________ __________
Tuesday __________ __________ __________ __________ __________
Wednesday __________ __________ __________ __________ __________
Thursday __________ __________ __________ __________ __________
Friday __________ __________ __________ __________ __________

Accounting for overtime pay

An employee of the Assembly Department is paid P 20 per hour for a regular week of 40 hours. During
the week ended July 15, the employee worked 50 hours and earned time and a half for the overtime
hours.

Instructions:
1. Prepare the entry to distribute the labor cost if the job worked on during overtime was a rush
order, the contract price of which included the overtime premium.
Account Debit Credit

2. Prepare the entry to distribute the labor cost if the job worked on during overtime was the result
of random scheduling.
Account Debit Credit

A production worker earns P 4,400 per month and the company pays the worker a year-end bonus
equal to one month’s wages. The worker receives a one-month paid vacation per year and 10 paid
holidays per year. Bonus, vacation benefits, and holiday pay are treated as indirect costs and
accrued during the 11 months that the employee is at work.
 University of Luzon
COLLEGE OF ACCOUNTANCY Accounting for Labor
2nd Semester 2018 – 2019 ACC205 Cost &Cost Management I

Instructions: Prepare the journal entry to distribute the payroll and the costs and liabilities
associated with the bonus, vacation pay, and holiday pay of the production worker for a month.
Account Debit Credit

Answers to the Problems

Problem 1
Earnings at Piece-rate Make-up Daily Labor Cost
Day P10 per Hour Earnings Guarantee Earnings per Unit
Monday P80 P 75 P 5 P 80 P2.67
Tuesday P80 80 – 80 2.50
Wednesday P80 115 – 115 2.50
Thursday P80 70 10 80 2.86
Friday P80 85 – 85 2.50

Problem 2

1. Work in Process*................................................................................ 1,100

Payroll ............................................................................................. 1,100
2. Work in Process** ............................................................................. 1,000
Factory Overhead*** ........................................................................ 100
Payroll ............................................................................................. 1,100
*(50 hrs. x P 20) + (10 hrs. x P10)
** 50 hrs. x P 20
*** 10 hrs. x P 10

Problem 3

Work in Process ............................................................................................. 4,400.00

Factory Overhead (Bonus)* .......................................................... 400.00
Factory Overhead (Vacation)** ................................................... 400.00
Factory Overhead (Holiday Pay)*** .......................................... 184.62
Payroll ............................................................................................. 4,400.00
Bonus Liability............................................................................ 400.00
Vacation Pay Liability .............................................................. 400.00
Holiday Pay Liability ................................................................ 184.62
* P4,400 ÷ 11 months
** P4,400 ÷ 11 months
*** P4,400 x 12 months = P52,800/52 weeks = P1,015.38

P 1,015.38 x 2 weeks = P 2030.77 holiday pay / 11 months = P 184.62