COST ACCOUNTING

ACCOUNTING FOR LABOR COST

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 Timekeeping and
o Personnel o Accounting
o Time and motion study
o Budgeting
PROCEDURES IN LABOR COST CONTROL
a Production planning
o Starts with an intensive study of the product design and the manufacturing process
involved (serve as a basis in determining the kind of human resources required in
production) and scheduling production runs way ahead of time (indicate when
workers would be needed and what type of skills they must have).
b Use of labor standards and budgets
o 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 process involved and after conducting time and motion studies.
o Used in preparing labor budgets and in measuring performance
o Budgets for labor hours and labor cost
▪ Prepared based on
o budgeted production volume (based on budgeted sales volume)
o allowed number of hours per unit
o corresponding labor rate per hour
▪ Example:
The production goal for January is 20,000 units and the standard output per
labor hour is 5 units.
Budgeted number of labor hours = 20,000 units / 5 units per labor hour
= 4,000 hours
Assuming an hourly rate of P 20,
Budgeted labor cost = 4,000 hours x P 20 per hour
= P 80,000

If a direct worker is able to put in 160 hours in one month,

Number of direct workers to produce 20,000 units = 4,000 hours

160 hours per worker

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Number of direct workers to produce 20,000 units = 25 workers

▪ Number of indirect workers depends on the volume of work to be done and the
desired ratio of indirect workers to direct workers.
▪ Number of foremen depends on the degree of supervision to be exercised over
the workers.
c Labor performance reports
o 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.
▪ Factory superintendent - should have
production data on daily basis to be able to
direct manufacturing operations in accordance
with plans
▪ Middle management - weekly production reports may suffice
o Generally compared with standards previously set.
o 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 produce 20,000 units
▪ If 20,000 units are produced in 4,200 hours, the labor time variance must be
unfavourable.
d Appropriate compensation including wage incentive systems
o 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.
o Incentive wage system
▪ 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.
o 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 Solution: 140 plus 5 units @ 7.50
Although the average labor cost per unit is at P 7.10 (177.50/25), fixed
factory overhead per unit goes down from P 2 (or P 400/200 units) to P 1.60
(or P 400/250 units).

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▪ 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.

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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.

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Payroll sheet – shows how the employees’ net pays are arrived at.
PAYROLL SHEET May
8 to 14, 2014
DEDUCTIONS
Employee Regular Overtime Gross W/h SSS Medicare Pag- Total Net Signature
Pay Pay Pay Tax IBIG Pay

- 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.
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 cannot 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.

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- 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 is 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

The following were declared by virtue of Proclamation No. 555, unless otherwise specified:

Regular Holidays
January 1 New Year’s Day
April 9 Araw ng Kagitingan
April 18 Maundy Thursday
April 19 Good Friday
May 1 Labor Day
June 12 Independence Day
August 26 National Heroes Day (Last Monday of August)
November 30 Bonifacio Day
December 25 Christmas Day

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December 30 Rizal Day

Special (Non-Working Days)

February 5 Chinese New Year
February 25 EDSA People Power Revolution Anniversary
April 20 Black Saturday
August 21 Ninoy Aquino Day
November 1 All Saints’ Day
December 8 Feast of the Immaculate Concepcion of Mary
December 31 Last Day of the Year

Additional special (non-working) days

November 2
December 24

The pay rates for work done on regular holida ys 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

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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%

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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.

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- 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

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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 11 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:
GROSS PAY COMPUTATION
Employee Regular Overti Gross
Pay me Pay
Pay
Magno, 48 x P 1,920
Josue P 40 =
P 1,920
Abcede, 40 x 1,200
Claro P 30 =
P 1,200
Benin, 43 x 1,204
Carpio P 28 =
P 1,204
Carlos, Ben 46 x 3 x 1,393
P 28 = P 35 =
P 1,288 P 105
Khan, Mario 45 x 2 x 1,330
P 28 = P 35 =
P 1,260 P 70
Paterno 47 x 4 x 1,456
Lucio P 28 = P 35 =
P 1,316 P 140

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269 P 8,503
P 8,188 P 315

PAYROLL SHEET May 8 to 14, 2014

DEDUCTIONS
Employee Regular Overtim Gross Pay W/h Tax SSS Medica Pag-IBI Total Net Pay Signature
Pay e Pay re G
Magno, Josue P P 1,920.00 P 160.00 P 266.70 P 62.50 P P 589.20 P 1,330.80
1,920.00 100.00
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 105.00 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 1,183.30 375.00 600.00 2,838.30 5,664.70

Weekly Job Time Recapitulation May 8-14, 2014

Employee Job Numbers Direct Indirect Idle Others Total
32 33 33 34 Labor Labor Time
1 5 8 1 Hours 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 Overti Total
321 335 338 341 Labor Labor Cost Cost me
Cost Premiu
m
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 14 1,330
224
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

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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
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.

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Definition of Terms
▪ Range of Compensation – is the lower and upper bound of your Monthly Salary Credit
▪ Monthly Salary Credit (MSC) – is used by SSS to calculate the employee’s benefits and just
right beside the range of compensation.
▪ Employee Contribution (EE) – is the amount of contribution shouldered by the employee.
▪ Employer Contribution (ER) – is the amount of contribution shouldered by the employer.

THE PhilHealth 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.

Effective January of last year and onwards, the monthly premium contributions shall be at the rate
of 2.75% computed straight based on the monthly basic salary, with a salary floor of P10,000 and
a ceiling of P40,000, to be equally shared by the employees and employer. With the removal of the
salary brackets, computation shall be based on the following table:

THE Pag-IBIG FUND CONTRIBUTIONS

Home and Development Mutual Fund (HDMF) or otherwise known as Pag-ibig is a mandatory
benefit given to employees. With the goal to provide both savings and shelter to every Filipino.

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Contributing member may get the savings, total contribution plus accumulated dividends upon
reaching any of the following:

▪ after 20 years of contribution

▪ at retirement
▪ when no longer able to work because of injury, illness, and/or insanity
▪ decided to migrate to another country

Also, note that the maximum compensation used to compute the contribution for this benefit is
being shared by the employee and the employer is pegged at Php 5,000 only.

Here is the Pag-ibig contribution table 2019:

So if an employee is earning Php 30,000 per month then Pag-ibig contribution will be Php 100. If
salary is already above Php 1,500 contribution will be computed using 2% of Php 5,000 or
simply Php 100.

BIR Withholding Tax

New Income Tax Table 2019 Philippines

New Income Tax Table 2019 Philippines (BIR Tax Table 2019). The new income tax table below is
applied effective January 2019 following the new BIR TRAIN, meaning, Tax Reform for
Acceleration and Inclusion Act implementing the Income Tax Provisions of the Republic Act
10963. In computing 2018 and 2019 income tax, taxpayer must now use and apply this new tax
table.

The Tax Reform for Acceleration and Inclusion was introduced last year while the implementation
starts at 2018. Its objectives include reduction of tax rates, simplified tax system, expansion of VAT
base, excise tax on sugary, automobiles, and petroleum products.

The Department of Finance also propose tax reforms for estate tax amnesty, general tax amnesty,
amendments to bank secrecy law, lower estate and donor’s tax rates, lower rates on transaction
taxes on land, limit on VAT zero-rating to direct exporters, rationalization of fiscal incentives, VAT
refund in cash, harmonization of capital income tax rates on deposits, investments, dividends,
equities and other passive income to 10% and increase on stock transaction tax from 0.5% to 1%.

BIR TRAIN timeline has started and the Bureau is still conducting seminars and training to properly
assists people, companies and corporation for the implementation and execution of this new tax
law. Package 1 has started in 2018 while Package 2 which tackles introduction and implementation
of Corporate Income Tax has a timeline from 2018 to 2019. Packages 3 and 4 which tackle Capital
Income Tax and other tax measures will eventually follow.

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BIR Income Tax Table for 2019 Philippines

Annual Income Tax Table (Summarized 2018 – 2022 and 2023 onwards)

For the year 2019, the following tax rate shall apply for annual income tax for taxpayers defined
under R.A. 10963.

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.
- As we know it, employers are basically required to deduct and withhold tax from the
compensation or salary they pay to their employees. When computing for the withholding
tax on compensation income, the following methods are prescribed by the BIR Revenue
Regulations No. 10-2008.

1. Use of withholding tax table. The use of the Revised Withholding Tax Tables is the
general method used for computing tax withheld on compensation. The following are the
four withholding tax tables prescribed by BIR: (see page for the Revised Withholding tax
Table)

a. Monthly tax table – to be used by employers using the monthly payroll period
b. Semi-monthly tax table – to be used by employers using the semi-monthly payroll period
c. Weekly tax table – to be used by employers using the weekly payroll period
d. Daily tax table – to be used by employers using the daily payroll period

2. Cumulative average method. This is used if (a) the employee’s regular compensation is
exempt from withholding tax because it is below the compensation level, but additional
compensation is paid during the calendar year or the additional compensation is equal to or
more than the regular compensation to be paid; or (b) the employee was newly hired and

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had a previous employer/s within the calendar year, other than the present employer doing
this cumulative computation.

3. Annualized withholding tax method. This is used (a) when the employer-employee
relationship is terminated before the end of the calendar year; and (b) when computing for
the year-end adjustment (the employer shall determine the amount to be withheld from the
compensation on the last month of employment or in December of the current calendar
year).

In most cases, the first method is used and the employer needs to use the Revised Withholding Tax
Tables as prescribed in Annex C of Revenue Regulations No. 10-2008 for the computation of tax to
be withheld on the compensation income of employees

Exercises:

Exercise 1: Theory

Match the following terms with the phrases given below:

Time and motion study

Financial accounting phase in labor cost control
Timekeeping
Cost accounting phase in labor cost control
Clock card
Time ticket
Daily time report
Payroll sheet
Earnings record
Payroll check
Incentive system

a It is concerned with the total number of hours worked by each employee and what a worker does each hour
he is being paid.
b It provides for additional financial compensation to workers and at the same time reduces the fixed
overhead cost per unit.
c It shows how each employee’s net pay is arrived at by providing columns for gross pay and deductions
aside from net pay .
d It shows the number of hours a worker has devoted to a job during a day.
e It is concerned with the determination of the breakdown of the payroll and the making of labor cost entries
on cost sheet s or production reports..
f It is concerned with the determination of how much to pay each employee and the keeping of the earnings
records.
g Different tasks are observed and analyzed to eliminate unnecessary motions and set the standard time for
the performance of each task.
h It shows when the worker reports for work and when he goes out and is used as basis in the computation of
his gross pay.
i It is used by a worker in accounting for the total number of hours timed in for a day.
j It shows the different amounts earned by an employee for a period and the deductions made there from.

Exercise 2: Estimated Labor Hours and Required No. of Workers

Five hours of labor are allowed per unit of a product at the rate of P 30 per hour. Budgeted production
volume for June is 25,000 units. Total regular working hours for June is 160 per worker.

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a. What is the estimated number of labor hours required to produce 25,000 units?

b. How many workers must be made available for the production in June?

c. How much must be the budgeted labor cost for June?

Exercise 3: Effect of Wage Incentive System on Fixed Factory Overhead per Unit
ABC Corp. pays its workers at the rate of P 200 per day plus P 21 for every unit produced in excess of 10
units during each working day. The production report for two days show:
Worker No. of Units Completed
Monday Tuesday
A 8 Units 9 units
B 10 12
C 10 15
D 10 10
E 10 11
An analysis of overhead shows that fixed overhead per day is more or less P800.
Required:
a. The amount to be paid to each worker and the average labor cost per unit for each day.
b. Fixed overhead per unit for each day.

Exercise 4. Gross Pay with Overtime Premium and Payroll Charges

The following information is given based on the contents of clock cards and time tickets for a week.
Rate
Hours Timed In Jobs Worked On Others
per Hr.
Regular Overtime 25 26 27 28 Nature Hrs.
L P 30 48
M 20 40 3 16 12 10 Shipping 4
O 25 50 25 16 7
P 20 45 15 12 11 Repairs 4
Q 28 48 5 10 20 20
R 20 46 21 8 15

L is the foreman with the others as his workers. Overtime premium is 25%.
The time tickets show that overtime work was done on job no. 25 and the corresponding hours are included
already in the tabulation given above.
How much must be the gross pay of each worker?
Determine what accounts are to be debited for the payroll under each of the following assumptions:
a. Overtime work is due to the seasonal changes in the demand for the product.
b. Overtime work is due to the rush nature of the job.

Exercise 6. Payroll Preparation and Charges

You are required to prepare the payroll and the corresponding entries based on the following information:
Check No. Hourly Hours Timed in Monthly W/H
June 7-13 Earnings Taxes
Regular Overtime
Lucero, Magno 55 Foreman P 50 48 P 10,000 P 300
Abe, Mario 22 Worker 30 48 5 7,000 250
Boni, Carlos 23 Worker 30 46 3 6,500 300
Pantig, Jose 29 Worker 30 48 6 7,200 320
Tonio, Ben 32 Worker 28 45 2 6,800 300
Yasay, Dante 39 Worker 25 48 5 6,000 250
Overtime premium is 30%. Jose Pantig worked for four hours on a holiday because of the rush nature of job no. 45.
Other overtime work is due to the greater volume of work for the month. Payroll deductions include union dues of
P 50 from each worker aside from income taxes withheld and the contributions for SSS, Medicare and Pag ibig.

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Time tickets for the week show the following:

Jobs Worked On
39 42 45 46 Others Hrs.
Abe, Mario 15 19 7 10
Boni, Carlos 12 17 10 3 Oiling 5
Pantig, Jose 13 20 20
Tonio, Ben 9 10 25
Yasay, Dante 19 12 16 Inspection 4

Required:
a. Computation for gross pay.
b. Weekly job time recapitulation.
c. Payroll.
d. Journal entries.

Supply the answer.

The following data are given for 2014
Budgeted production volume 70,000 units
Allowed number of hours per unit 1/5 hr.
Labor rate per hour P 25
No. of regular hours in August per worker 192 hours
1. How many workers are required for the August production?

2. How much must be the budgeted labor cost for August?

Items 3 and 4:
The following data are given for the period August 12 to 18, 2014:

Total
Jobs Worked On Others
Hours
Regular Overtime 21 22 23 Nature Hrs.
Pete Tuazon 48 48
Jose Carlos 46 43 3 12 20 9 Delivery 4
Mario Farela 50 48 2 15 25 9
Ben Gomez 53 46 7 16 30 5
Lucio Lim 53 45 8 17 15 20
Gem Tinio 51 45 6 10 18 17 Repairs 5

Pete Tuazon is the foreman with hourly rate of P 30. All the workers under him receive P 25 per hour. Overtime
work was rendered on working days on job 23, based on a rush order. Accordingly, overtime premium is 25%.
3. How much must the total charge to direct labor for the week?

4. How much must be the total payroll for the week?

5. Lucena Manufacturing Co. charges factory overhead toproduction at 80% of direct labor cost. Jobs 842 and
843 were completed and sold in July, 2014. Total direct materials cost and prime cost for Job 842 were P

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ACCOUNTING FOR LABOR COST

9,000 and P 14,000, respectively. Production cost of Job 843 amounted to P 31,200 with factory overhead
equal to 48% of direct materials cost. How much were the direct labor costs of Jobs 842 and 843?

Items 6 and 7
Each of the five (5) workers in a factory is being paid P 250 per day. For every unit produced in excess of 25
units in one day, a worker is paid P 12. Fixed factory overhead per annum is P 198,000 and there are
approximately 330 working days in one year.
Production data for January 6 and 7, 2014 shows the following number of units produced by each worker:
January 6 January 7
Abdon 25 26
Belleza 27 26
Cortes 24 28
Drillon 24 27
Emilio 28 26
6. What is the average direct labor cost per unit for the two day period?

7. How much savings in fixed factory overhead per unit was affected assuming that additional output is due to
the incentive given?

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