ACCOUNTING FOR LABOR COST

Effective control of labor cost

- Brings about production efficiency and consequently,

- Lower production cost per unit

Labor cost control

- Refers to keeping track of labor costs in total and per unit, comparing them with predetermined figures and
adopting prompt remedial measures in case there are variances.
- Departments involved in labor cost control:
o Production planning
o Personnel
o Time and motion study
o Budgeting
o Timekeeping and
o Accounting

PROCEDURES IN LABOR COST CONTROL

- Labor cost control requires:

a Production planning – as applied to labor cost control, production planning starts with an intensive
study of the product design and the manufacturing processes involved and scheduling production runs
way ahead of time.
 Product design and nature of manufacturing process involved – serve as a basis in determining the
kind of human resources required in production
 Production schedules supported by labor hour requirements – indicate when workers would be
needed and what type of skills they must have.
 Personnel deparment – sees to it that the required number of qualified workers are available on the
dates they are needed by the production department
b Use of labor standards and budgets –
 labor standards in terms of output per labor hour or per day (or allowed number of hours per
unit) are established after an intensive study of the product design and the manufacturing processes
involved and after conducting time and motion studies.
o These standards are used in preparing labor budgets and in measuring performance.
o Budgets for labor hours and labor cost
 Prepared based on
 Budgeted production volume – based on budgeted sales volume
 Allowed number of hours per unit
 Labor rate per hour
 Example:
The production goal for January is 20,000 units and the standard output per labor hour is 5 units.
The budgeted number of labor hours must be 4,000 (or 20,000 units/5). Assuming an hourly rate
of P 20, budgeted labor cost must be P 80,000. If a direct worker is able to put in 160 hours in one
month, 25 direct workers (or 4,000 hours/ 160) are needed to produce 20,000 units in one month.
 Solution:
Budgeted production volume 20,000 units
Divided by: Output per labor hour 5 units
Budgeted number of labor hours (20,000/5) 4,000 hours

Hourly rate P 20.00

Multiply by : Budgeted number of labor hours 4,000 hours
Budgeted labor cost P 80,000.00
The number of indirect workers depends on the volume of work to be done and the desired ratio
of indirect workers to direct workers. The number of foremen depends on the degree of
supervision to be exercised over the workers.
c Labor performance reports – may be prepared on daily, weekly or monthly basis depending on the
level of management to which they are submitted and the nature of the manufacturing processes
involved.
 The factory superintendent should have production data on a daily basis to be able to direct
manufacturing operations in accordance with plans.
 For the middle management – weekly production reports may suffice.
Labor performance is generally compared with standards previously set.
Based on the example in the preceding section wherein the standard output per hour is five units, assume
that one-fourth hour is allowed per unit. Only 4,000 hours are allowed to produced 20,000 units. If 20,000
units are produced in 4,200 hours, the labor time (or efficiency) variance must be unfavourable.
d Appropriate compensation including wage incentive systems
Labor rates and fringe benefits are established based on
 existing labor laws,
 collective bargaining agreement, and
 prevailing rates and practices in an industry in the specific locality.
An incentive wage system is adopted to increase a worker’s take home pay and at the same time reduce
labor cost per unit. It works in such a way that fixed overhead is absorbed by an increased number of
units thereby resulting in a lower product unit cost.
Example:
The daily rate for each of the ten workers in a factory is P 140 with standard output at 20 units or at P 7
per unit. Fixed factory overhead per day is P 400. An incentive system pays P 7.50 for every additional
unit produced. If each worker is able to produce 25 units in one day, he is paid a total of P 177.50 (or
P140 plus 5 units @ P 7.50). Although the average labor cost per unit is at P 7.10, (P 177.50/25), fixed
factory overhead per unit goes down from P 2.00 (or P 400/200 units) to P 1.60 (or P 400/250 units).
Sometimes, incentives are in the form of bonuses or in kind depending on what would encourage the
workers more to improve productivity.

ACCOUNTING FOR LABOR COST

Accounting for labor may be divided into three phases, namely, timekeeping, financial accounting and cost accounting.

Timekeeping – concerned with the determination of total number of hours worked by an employee (used as a
basis in payroll preparation) and how this total is accounted for (serves as the basis in making the
corresponding charges to the different jobs or processes worked on).
 Financial accounting phase – involves payroll preparation and the keeping of records of employees’ earnings,
deductions, payment of salaries and wages and the different payroll-related liabilities.

Cost accounting phase – concerned with the allocation of the payroll charges to the different jobs, departments
or to overhead based on the nature of work done by the employees.

 Direct labor hours and their cost are entered on the respective job order cost sheets (usually on
weekly basis) and indirect labor costs are entered on the analysis sheet (or subsidiary records for
Manufacturing Overhead Control).

FORMS USED IN CONTROLLING LABOR COST

Clock Card ( Time Card) – shows the time an employee reports for work and goes out and is used in payroll preparation.

- So called because it is punched in with the use of a time clock (or time recorder).
- In companies where control of man hours is computerized, the employees use their identification cards in
punching in and out. It serves as evidence for labor time purchased or that payment is being made only for man
hours expended within the company.

Time Ticket (or Job ticket) – shows the number of hours a worker devotes to a certain job (or his accomplishment on
that job) during a day so that it serves as a primary basis in making charges to direct labor cost of the jobs worked on.

- If a worker works on four different jobs on one day, he must accomplish four time tickets for the particular day.

TIME TICKET
Name: ____________________________ Employee No. ______________
Department: _______________________
Date: _________ Job Order: __________________
Start: _________ Nature of work: ______________
Finish: ________ Pieces completed: _____________
Hours worked: ________
Hourly rate: __________
Labor cost: __________
Account to be charged: __________ Foreman’s Approval

Daily time report – shows how a worker spends the total number of hours timed-in for a day.

- The report on which he accounts for the number of hours he is being paid.
Payroll sheet – shows how the employees’ net pays are arrived at.
- Provides columns for regular pay, overtime pay, deductions and net pay.
- May also serve as evidence for payroll payment by providing a column for workers’ signatures upon receipt of the
amounts due them.

PAYROLL SHEET May 8 to 14, 2014

DEDUCTIONS
Employee Regular Overtime Gross W/h Tax SSS Medicare Pag-IBIG Total Net Signature
Pay Pay Pay Pay

Employees’ Earnings Records - show the periodic and accumulated earnings of each employee aside from the payroll
deductions made. The earnings records are used in the computation for fringe benefits that the employees may be entitle
to and in reporting taxes withheld.

Employees are being paid weekly (for daily wage earners) and twice a month (for those paid on monthly rates). Per Book
III Rule No. VIII, Section 3 of the Labor Code:

Wages shall be paid not less often than once every two (2) weeks or twice a month at intervals not
exceeding sixteen (16) days, unless payment can not be made with such regularity due to force majeure or
circumstances beyond the employer’s control, in which case the employer shall pay the wages immediately after
such force majeure or circumstances have ceased.

Timekeeping department – collects and controls clock (or time) cards and job tickets (or daily time reports). The number
of hours timed in per clock (or time) cards is reconciled with that per time tickets or daily time reports.

- If clock card shows more hours than the daily time reports (or time tickets), the difference is unproductive hours
and is charged to factory overhead.
- If the daily time reports show more hours, the supervisor and the worker are consulter to correct the error.
 - Time cards and daily time reports (or time tickets) are subsequently forwarded to the accounting department for
payroll preparation and for entries to cost sheets, respectively.

Accounting department – prepares the payroll based on time (or clock) cards. The number of hours devoted to jobs are
posted to cost sheets.

Example:

Jose Dizon, a worker with daily rate of P 160, timed in a total of 45 hours for the week May 2-8. His daily time reports
show that during the same week, the accounted for the 45 hours as follows:

Job order 656 - 12 hours

671 - 10
675 - 5
679 - 15
Waiting time - 3
45 hours

The gross pay of Jose Dizon for the week and the corresponding charges would be as follows:
Gross pay: 45 hours (160/8 hrs) = P 900
Charges:
Direct labor: 42 hours x P 20 = P 840
Idle time: 3 hours x P 20 = 60
P 900
The 42 direct labor hours are entered on the corresponding job order cost sheets and the 3-hour idle time is charged to
factory overhead.
REGULAR HOLIDAYS, SPECIAL DAYS
Weekday Date Holiday name Holiday type

Wednesday Jan 1 New Year's Day Regular Holiday

Friday Jan 31 Chinese Lunar New Year's Day Special Non-working Holiday
Tuesday Feb 25 People Power Anniversary Observance
Wednesday Apr 9 The Day of Valor ( Araw ng Kagitingan) Regular Holiday
Thursday Apr 17 Maundy Thursday Regular Holiday
Friday Apr 18 Good Friday Regular Holiday
Saturday Apr 19 Holy Saturday Special Non-working Holiday
Sunday Apr 20 Easter Sunday Observance
Thursday May 1 Labor Day Regular Holiday
Tuesday May 27 Lailatul Isra Wal Mi Raj Common Local holidays
Thursday Jun 12 Independence Day Regular Holiday
Tuesday Jul 29 Eidul-Fitar Common Local holidays
Thursday Aug 21 Ninoy Aquino Day Special Non-working Holiday
Sunday Aug 24 National Heroes Day Regular Holiday
Monday Aug 25 National Heroes Day holiday Regular Holiday
Saturday Oct 4 Id-ul-Adha (Feast of the Sacrifice) Common Local holidays
Saturday Nov 1 All Saints' Day Special Non-working Holiday
Sunday Nov 2 All Souls' Day Observance
Sunday Nov 30 Bonifacio Day Regular Holiday
Sunday Dec 21 December Solstice Season
Wednesday Dec 24 Christmas Eve Special Non-working Holiday
Thursday Dec 25 Christmas Day Regular Holiday
Friday Dec 26 Special Day after Christmas Special Non-working Holiday
Tuesday Dec 30 Rizal Day Regular Holiday
Wednesday Dec 31 New Year's Eve Special Non-working Holiday

The pay rates for work done on regular holidays and special days differ as stated in the following sections.
Computation for Daily Rate. The daily rate, for employees whose rates are stated on monthly basis, is computed as
follows:
Daily rate = Monthly rate x 12 months
365 days
Thus the rate per day of an employee with monthly salary rate of P 5,000 must be P 164. 38.
Daily rate = P 5,000 x 12 months
365 days
= P 164. 38
PREMIUM PAY
- Refers to the additional compensation for work performed within eight (8) hours on non-working days (such as
rest days and special days) as required by law.
- The premium pay rates are as follows:
For work performed on Rate of Pay, Based on Daily Rate
Rest days 130%
Special days 130%
Rest day which is also a special day 150%
Regular holiday 200%
Regular holiday which is also a rest day (200% x 130%) 260%
- Based on the foregoing rates, the amount earned by a worker with daily rate of P 200 and who works for eight (8)
hours only in one day shall be as follows:
On a rest day: P 200 x 130% = P 260.00
On a special day: P 200 x 130% = P 260.00
On a rest day which is also a special day: P 200 x 150% = P 300.00
On a regular holiday: P 200 x 200% = P 400.00
On a regular holiday which is also a rest day: P 200 x 260% = P 520.00
NORMAL HOURS OF WORK, OVERTIME WORK, AND OVERTIME PAY
- The Labor Code of the Philippines (Presidential Decree No. 442, as amended) states that the normal hours of
work of any employee shall not exceed eight (8) hours a day (Art. 83).
- Work performed beyond eight (8) hours in one day
o Considered overtime work and the employee is entitled to overtime pay of at least 125% (Art 87).
- Example:
An employee with daily rate of P 200 who works for ten (10) hours on a working day is entitled to at least
P 262. 50 computed as follows:
For regular eight (8) hours P 200.00
For overtime work of two (2) hours (P 200/8 hrs. X 125% x 2 hrs.) 62.50
Total earned for ten (10) hours P 262.50
 With a daily rate of P 200, the hourly rate is P 25 (P 200/8 hrs) so that the overtime premium per hour
must be P 6.25 (or P 25 x 25%). The amount earned for ten (10) hours may also be arrived at as follows:
Ten hours at the regular rate of P 25 P 250.00
Overtime premium pay (2 hrs x P 6.25) 12.50
Total earned for ten (10) hours P 262.50
- The treatment for overtime premium depends on the reason for overtime work.
- Overtime work rendered on a scheduled rest day, a special day or a regular holiday is entitled to overtime
premium of 30% based on the hourly rate he is entitled to on that particular day.
o Per Labor Code of the Philippines (Art No. 87), work performed beyond eight hours on a holiday or
rest day shall be paid an additional compensation equivalent to the rate of the first eight hours on a
holiday or rest day plus at least thirty percent thereof.
o Thus, the overtime rates may be summarized as follows:
For Overtime Work Performed on Rate of Pay, Based on Regular Rate
Working Day 125%
Rest days (130% x 130%) 169%
Special days ( 130% x 130%) 169%
Rest day which is also a special day (150% x 130%) 195%
Regular holiday (200% x 130%) 260%
Regular holiday which is also a rest day (260% x 130%) 338%
Based on the foregoing rates, the amount earned for ten (10) hours by a worker (with daily rate of P 200)
must be as follows:
Work Performed Overtime Pay + Regular Premium = Amount earned
On a rest day:
[(130% x 130%) x P 25] x 2 hrs = P 84.50 P 260 P 344.50
On a special day
[(130% x 130%) x P 25] x 2 hrs = P 84.50 P 260 P 344.50
On a rest day which is also a special day:
[(150% x 130%) x P 25] x 2 hrs = P 97.50 P 300 P 397.50
On a regular holiday:
[(200% x 130%) x P 25] x 2 hrs = P 130.00 P 400 P 530.00
On a regular holiday which is also a rest day:
[260% x 130%) x P 25] x 2 hrs = P 169.00 P 520 P 689.00
- In accounting for labor cost, whatever amount is earned by the worker for ten (10) hours minus his pay at regular
rate of P 250 (or 10 hours x P 200/8 hrs.) is treated as overtime premium.
- Undertime not offset by overtime. When an employee works undertime on one day and then works on overtime
on another day, he is entitled to overtime pay for the latter. Undertime work on any particular day shall not be
offset by overtime work on any other day. ( Art 88)
- Absence before a Regular Holiday. The Labor Code (Book III Rule IV, Section 6) states:
o Employees who are on leave of absence without pay on the day immediately preceding a regular holiday
may not be paid the required holiday pay if he has not worked on such regular holiday.
ACCOUNTING FOR PREMIUM PAY AND OVERTIME PREMIUM
Overtime premium
- Defined as the additional monetary compensation given to employees for working beyond the eight-hour period
set as limit by law.
- However, for accounting purposes, all premiums (or the difference between amount earned and a worker’s pay at
regular rate) are treated as overtime premiums.
o They may be charged either to direct labor cost or to factory overhead depending on the reason for the
overtime work.
- The premiums is treated as direct labor cost when overtime work is due to the rush nature of a job. When a
contract for a rush job is accepted, it is with the foreknowledge that overtime would be necessary so that the price
charged to the customer should include the overtime factor in the calculations.
- The premium is treated as factory overhead when overtime work is due to greater volume of work, slow
production or inadequate plant capacity. In this case, it would be unfair to charge it to a job that happens to be
in process during the overtime hours.
o The overtime premium should be reflected in the predetermined factory overhead rate by including the
corresponding provision in calculating for the same.
o Example:
Job N0. 605 for 12 dozens of baby dresses has been accepted and required delivery date is May 12th.
 If the order was received only a few days before the required delivery date so that it is rush in
nature and overtime work is anticipated, the premium is a direct charge to the job.
 If the order was received a reasonable number of days before required delivery date but has to be
worked on overtime because of unusually heavy demand, slow production or inadequate
plant capacity, the premium is charged to factory overhead.
PAYROLL DEDUCTIONS
- The deductions from gross pay or amount earned by employees are:
o Income taxes withheld
o Contributions to the Social Security System (SSS)
o Medicare
o Pag-IBIG Fund (HDMF)
o Occasional deductions like labor union check-offs (union dues) and collection of receivables and
advances.
PAYROLL PREPARATION
- The payroll is prepared based on clock (or time) cards, authority granted to work on overtime, and required
payroll deductions.
ILLUSTRATIVE PROBLEM
The following information is given for the payroll period, May 8 to 14:
Hourly Monthly Hours Timed In
Rate Earnings May 8-14
Regular Overtime W/H Taxes
Magno, Josue Foreman P 40 P 7,800 48 P 160
Abcede, Claro Worker 30 5,800 40 120
Benin, Carpio Worker 28 5,400 43 110
Carlos, Ben Worker 28 5,500 46 3 100
Khan, Mario Worker 28 5,300 45 2 100
Paterno, Lucio Worker 28 5,000 47 4 90
 The time tickets, as summarized, show the following number of hours expended on the different jobs:
Job Number
321 335 338 341
Reg. OT Reg. OT Reg. OT Reg. OT
Magno, Josue
Abcede, Claro 15 18 5
Benin, Carpio 6 12 20
Carlos, Ben 18 19 3 8
Khan, Mario 10 12 2 10 2
Paterno, Lucio 7 4 16 15 7

Carpio Benin did some errands per request by the foreman for four (4) hours. Mario Khan did some repair work
for eight (8) hours.
Overtime pay is 125% of regular time pay and overtime work is due to the greater volume of work. Deductions
are for withholding taxes and the premium for SSS, PhilHealth and Pag-ibig are made from the second week’s
payroll of each month.
The weekly job time recapitulation, the computation for gross pay, the payroll and the corresponding entries are:
Employee Regular Pay Overtime Pay Gross Pay
Magno, Josue 48 x P 40 = P 1,920 P 1,920
Abcede, Claro 40 x P 30 = P 1,200 1,200
Benin, Carpio 43 x P 28 = P 1,204 1,204
Carlos, Ben 46 x P 28 = P 1,288 3 x P 35 = P 105 1,393
Khan, Mario 45 x P 28 = P 1,260 2 x P 35 = P 70 1,330
Paterno Lucio 47 x P 28 = P 1,316 4 x P 35 = P 140 1,456
270 P 8,188 P 315 P 8,503

PAYROLL SHEET May 8 to 14, 2014

DEDUCTIONS
Employee Regular Overtim Gross Pay W/h Tax SSS Medica Pag- Total Net Pay Signature
Pay e Pay re IBIG
Magno, Josue P 1,920.00 P 1,920.00 P 160.00 P 266.70 P 62.50 P 100.00 P 589.20 P 1,330.80
Abcede, Claro 1,200.00 1,200.00 120.00 200.00 62.50 100.00 482.50 717.50
Benin, Carpio 1,204.00 1,204.00 110.00 183.30 62.50 100.00 455.80 748.20
Carlos, Ben 1,288.00 P 107.00 1,393.00 100.00 183.30 62.50 100.00 445.880 947.20
Khan, Mario 1,260.00 70.00 1,330.00 100.00 183.30 62.50 100.00 445.80 884.20
Paterno Lucio 1,316.00 140.00 1,456.00 90.00 166.70 62.50 100.00 419.20 1,036.80
8,188.00 315.00 8,503.00 680.00 1,183.30 375.00 2,838.30 5,664.70

Weekly Job Time Recapitulation May 8-14, 2014

Employee Job Numbers Direct Labor Indirect Idle Time Others Total
321 335 338 341 Hours Labor Hours
Magno, Josue 48 48
Abcede, Claro 15 18 5 38 2 40
Benin, Carpio 6 12 20 38 4 1 43
Carlos, Ben 18 22 8 48 1 49
Khan, Mario 10 12 2 13 37 2 Repairs 8 47
Paterno Lucio 11 16 15 7 49 2 51
60 80 45 25 210 52 8 8 278
Payroll Charges May 8 -14, 2014
Employee Job Numbers Direct Indirect Idle Time Others Overtime Total
321 335 338 341 Labor Labor Cost Cost Premium
Cost
Magno, Josue P 1,920 P 1,920
Abcede, Claro P 450 P 540 P 150 P 1,140 P 60 1,200
Benin, Carpio 168 336 P560 1,064 112 28 1,204
Carlos, Ben 504 616 224 1,344 28 21 1,393
Khan, Mario 280 336 56 364 1,036 56 Repairs 224 14 1,330
Paterno Lucio 308 448 420 196 1,372 56 28 1,456
P 1,710 P2,276 P1,260 P 5,956 P 2,032 228 224 63 P 8,503

Entries:
a. To take up the payroll:
Payroll P 8,503.00
Withholding Taxes Payable P 680.00
SSS Premiums Payable 1,183.30
Medicare Premiums Payable 375.00
Pagibig Premiums Payable 600.00
Cash 5,664.70
b. To take up the payroll charges:
Work In Process – Direct Labor P 5,956.00
Factory Overhead Control* 2,547.00
Payroll P 8,503.00

*Indirect Labor P 2,032.00

Cost of Unproductive Hours 228.00
Repairs 224.00
Overtime Premium 63.00
P 2,547.00
INCOME TAXES WITHHELD
- These are estimated income taxes that employees are expected to pay based on the earnings and personal
exemptions and are deducted from their pays.
- The Bureau of Internal Revenue (BIR) provides for the schedule of taxes to be withheld.
THE SOCIAL SECURITY SYSTEM (SSS)
- Created per Social Security Law (RA No. 1161). Its mission statement is to provide meaningful protection to the
members and their families against contingencies resulting in loss of income or financial burden and to contribute
to the socio-economic development of the country through a viable social insurance program.
- The program it administers and the corresponding benefits are the following:
o The Social Security Program. It provides sickness, maternity, disability, retirement and death benefits
and financial assistance in the form of salary, stock investment, and privatization of loans.
o The Employees’ Compensation (EC) Program. It provides double compensation to workers when the
illness, death or accident occurs during work-related activities.
- Coverage is compulsory for all employees not over sixty years of age and their employers and for the self
employed. Contributions to the SSS are made based on monthly salary credits and are in accordance with the
 schedule given by the SSS which provides for the counterpart contributions of the employers. All contributions
are made to the SSS within (10) days after the covered month.
THE MEDICARE PROGRAM
- Provides for hospitalization and medical benefits.
- It was originally being administered by the SSS but in 1997, it was privatized and its administration was taken
over by the Philippine Health Insurance Corp. Or PhilHealth.
THE Pag-IBIG FUND CONTRIBUTIONS
- Acronym for Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno.
- Primarily created in 1979 (as the Home Development Mutual Fund) to address two of the nation’s basic concerns:
generation of savings and provision of shelter for workers.
- In effect, Pag-IBIG harnesses the four sectors of our society to provide its members with adequate housing
through effective savings scheme.
- Both the employee and his employer contribute to the fund with the latter’s contributions credited to the name of
the employee so that the employee’s savings immediately double or triple in amount.
- A member may withdraw his savings upon membership maturity, disability, permanent departure from the
country, separation from service or death. Aside from these, members may avail of short-term (multi-purpose or
livelihood) and housing loans at low interest rate.