3/12/2016

Cost Accounting

Lecture 2
Costing and Control of Labor

Labor Costs

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Direct Labor

Indirect Labor

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Types of Paying Schemes

• Monthly salary: Some employees receive a monthly salary,
paid at the end of the month worked.
• Basic salary (wages): per week, or per month, which is
augmented by extra payments depending on output levels
or targets achieved.
• Hourly rate (wages): based on actual hours worked,
receiving no payment where no hours are worked.
• Piecework basis (wages): based on number of items of
output or units of services.
• Benefits in kind: There may be labor costs of the business
which are not paid to the employee in the form of wages or
salary. These would include the provision of a car, free
medical insurance, clothing allowances, rent allowances,
relocation payments, inducements to join the company and
lump sum payments on leaving the company.

Shift Premiums

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Accounting for Labor Overtime

Premium
• Treatment 1
• Most overtime should be treated like a shift premium, and
charged to factory overhead control.
• For example: assume that an assembler worked a total of 45
hours in a single week on job. Rate of pay is $6 per hour for any
hours worked up to 36 hours, and $9 per hour for any hours
worked in excess of 36 hours per week.
The journal entry will be:

Work in process (45 hours X $6) 270

Factory overhead control-overtime premium (9 hours X $3) 27
Payroll payable 297

Accounting for Labor Overtime

Premium
• Treatment 2
• When overtime results from the requirements of a
specific job and not from random scheduling. Hence,
the overtime and the base pay will be considered
direct labor costs.
• For example: Suppose in the previous example that the
overtime worked was caused by rush order and the
customer agreed to pay for special services.
The journal entry will be:

Work in process 297

Payroll payable 297

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Accounting for Labor Overtime

Premium
• Treatment 3
• When overtime results from negligence or
poor workmanship, then over time premium
should be charged as a loss.
• The journal entry will be:
Work in process 270
Loss from overtime premium 27
Payroll payable 297

Idle Time
• Results when employees have no work to
perform, but still paid for their time.
• When a new job is being "set up" for
production, some workers may temporarily
have nothing to do.
• If their idleness is normal for the production
process and can not be avoided, then: the
cost of idle time should be charged to factory
overhead control.

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Idle Time
• For example: Assume that Karla spent 36
hours on job No. 97 and was idle for 4 hours
during the week. Karla’s rate of pay is $8 per
hour for the 40 hour a week as per union
contract.
• The journal entry will be:
Work in process (36 hours X $8) 288
Factory overhead control (4 hours X $8) 32
Payroll payable 320

Idle Time
• If the cost of idle time was due to negligence or
inefficiency, it should be charged to a loss account.
• For example: Assume that Karla was idle for 4 hours
because the work station preceding hers was
inefficient and delayed producing the required quantity
of units required.
• The journal entry will be:

Work in process 288

Loss from idle time 32
Payroll payable 320

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End of Lecture 2