Accounting for
Labor
Nikka S. Asidera CAT, RCA, MICB
Learning Objectives
? Distinguish between and account for direct and indirect labor as
theta re used in the production process
? Identify the three activities involved in accounting for labor
? Understand the consequences of and be able to account for
employee and employer taxes and fringe benefits costs.
? Identify the guaranteed wage and incentive plans that may be used.
Labor
Labor is the physical or mental effort expended in manufacturing a
product. Labor cost is the price paid for using human resources. Direct
labor represents payroll costs that are allocated directly to the product
and is debited to the work in process account. Indirect labor costs of
labor costs incurred for a variety of jobs that are related to the
production process but are considered either too remote or too
insignificant to be charged directly to production. Indirect labor costs
are charged to the factory overhead control account.
The accounting system of a manufacturer must include the following
procedures for recording payroll costs.
1. Recording the number of hours used in total and by job
2. Recording the quantity produced by the workers
3. Analyzing the hours used by employees to determine how time is to be charged
4. Allocation of payroll costs to jobs and factory overhead accounts
5. Preparation of the payroll including computation and recording of the
employee's gross earning, deductions and net earnings.
Wage Plans
● Hourly-rate Plan
● Piece-rate Plan
● Modified wage Plan
Accounting for Labor Costs
● Regular time Work in Process
● Overtime either Work in Process or Factory Overhead Control
Overtime Pay Overtime Premium
Equals to the additional
regular hourly rate
rate
Illustrative Problem
Assume that an employee regularly earns P 30 per hour for an 8-hour day.
If called upon to work for more than 8 hours in a working day, the
company will have to pay overtime premium for hours worked in excess
of 8 hours. Assuming the employee works 12 hours on Monday, is paid
50% overtime premium, the earnings would be calculated as follows:
Direct Labor - 8 hours at P30 P240
Direct Labor - 4 hours at P30 P120
Factory Overhead (overtime premium 60 180
- 4 * P15
Total earnings 420
Illustrative Problem
The Ingrid Manufacturing Company pays employees every two weeks. Monday,
May 1, is the beginning of a new payroll period. The following payroll summary
is prepared by the payroll department and forwarded to accounting for recording:
Payroll Summary
for the period May 1-14
Factory Worker Sales and admin employee Total
Gross Earnings P 10,000.00 P 20,000.00 P 30,000.00
Withholdings & deductions:
Income Tax P 1,979.25 P 2,833.33 P 4,812.58
SSS Premiums 333.30 500.00 833.30
PHIC 125.00 250.00 375.00
Pag-ibig 100.00 100.00 200.00
Total deductions P 2,537.55 P 3,683.33 P 6,220.88
Net earnings P 7,462.45 P 16,316.67 P 23,779.12
May 14 Payroll P 30,000.00
Withholding Tax Payable P 4,812.58
SSS Premium Payable 833.30
recording of payroll
Philhealth Contributions Payable 375.00
Pag-ibig Funds Contributions Payable 200.00
Accrued Payroll 23,779.12
May 14 Accrued Payroll P 23,779.12
payment of payroll
Cash P 23,779.12
Work in Process P 7,000.00
Factory Overhead Control 3,000.00
assuming that of the total
Selling & Admin. Expense Control 20,000.00 factory payroll of P10,000 -
3,000 is indirect labor the
Payroll 30,000.00 entry for the distribution of
payroll
SSS Premiums Philhealth Pag-ibig Total
Factory Payroll 706.70 125 100 931.70
information necessary to
Selling & Adm. 1,060.00 125 100 1,285.00 record employer’s payroll
taxes for the period.
Total 1,766.70 250 200 2,216.70
Factory Overhead Control 931.70
Selling & Admin Expense Control 1,285.00
SSS Premiums Payable 1,766.70 entry to record payroll
taxes shouldered by
Philhealth Contributions Payable 250.00 employer
Pag-ibig Funds Contributions Payable 200.00
Other Classifications of Labor
1. Labor Overhead
a. Waiting time or idle time
b. Make up Pay
c. Overtime Premium
d. Shift Premium
e. Employer’s payroll taxes
Waiting time or idle time
Assume Maxine Garcia spent 36 hours on Job 101 and was idle for 4
hours during the week. Maxine’s rate is P50.00 per hour for a 40-hour
week, as per union contract.
Work in Process Job 101 (36 hours * P50) 1,800
Factory Overhead Control - Idle time (4 hours *P50) 200
Accrued Payroll 2,000
Make-up Pay
Assume Maxine Garcia is paid P15.00 per piece produced and during
the week she produced 80 pieces. If the guaranteed weekly pay is P1,500,
then the difference between P1,500 (guaranteed pay) and P1,200 (actual
pay) is charged to factory overhead control.
Work in Process Job 101 1,200
Factory Overhead Control -Make-up pay 300
Accrued Payroll 1,500
Make-up Pay
Assume Maxine Garcia is paid P15.00 per piece produced and during
the week she produced 80 pieces. If the guaranteed weekly pay is P1,000,
then the entry would be:
Work in Process Job 101 1,200
Accrued Payroll 1,200
Shift Premium
Assume that Maxine is assigned to night shift and is paid a shift
premium of P20 per hour
Work in Process (40 hours * P50) 2,000
Factory Overhead control (40 hours * P20) 800
Accrued Payroll 2,800
Gross Earnings of Employees
1. Wages - gross earnings of an employee who is paid by the hour for
only the actual hours worked.
2. Salaries - gross earnings of an employee who is paid a flat amount per
week or month regardless of hours worked in a period.
3. Gross Earnings - the compensation of an employee and includes
regular pay and overtime premiums.
