Ichel'''Cost | Piece Work | Payroll

Westmead International School

Gulod Labac Batangas City

Accounting for Labor

Prepared By: Geuel Royce M. Peñalosa Richelle C. Daigdigan

11-August-2011

XI.ACCOUNTING FOR LABOR I. VIII. V. Labor Procedures for recording payroll costs Wage plans Controlling Labor cost Accounting for labor costs Employer s payroll taxes Classification for labor Gross earnings of employees Payroll deductions Transactions involving Labor Productivity and labor costs Economic impact of productivity OBJECTIVES: o To distinguish between direct and indirect labor as they are used in the production process o To account for direct and indirect labor o To understand the consequences of employee and employer taxes and fringe benefit costs o To account for taxes and fringe benefit costs o To identify the guaranteed wage and incentive plans that may be used o To discuss the importance and nature of productivity o To know the productivity s relationship to labor costs . IV. VI. VII. II. X. III. XII. IX.

Although these fringe costs generally are included in overhead. The value of each job should be reconciled with wages paid for similar work elsewhere in the company. in the local community. The principal labor cost is wages paid to production workers. daily. It consists of basic pay and fringe benefits. Wages are payments made on an hourly. and in the industry. LABOR Labour(British English) or labor (American) is the physical or mental effort expended in manufacturing a product. and b) indirect labor. or piecework basis. Fringe benefits also form a substantial element in labor costs. janitors. clerks. An equitable pay structure requires analysis. Factory payroll costs are divided into a) direct labor. The compensation paid to employees who engage in production related activities represents factory labor. in practice. and insurance benefits. supervisors. factory accountants. However. and timekeepers. The basic pay for work performed is called the base rate or job rate. the term wages and salaries are often incorrectly used interchangeably. description and evaluation of each type of job.must be added to the base rate to arrive at the full labor cost.DISCUSSION I. Fringe costs-such as the holiday pay. so it is the price paid for using human resources. and rates should be grouped by type of operation. Indirect labor costs are charged to the factory overhead control account. In many organizations it is an important cost requiring systematic measurement. Included as indirect labor are: salaries and wages of the factory superintendent. Labor cost represents the human contribution to production. Salaries are fixed payments made regularly for managerial or clerical services. A base rate should be established for each operation in a company. 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 the production. they . control and analysis. Competitive pay is a critical tool for hiring and retaining quality personnel. overtime premium pay.

an incentive wage plan rewards workers in proportion to their increased high quality output. also are important for harmonious relations between management. Adequate records. To be successful. WAGE PLANS A workers total compensation may be based on negotiated labor contracts. easily understood and readily available. 5) Preparation of the payroll. II. Wages and fringe benefits are only one element in employee relations. however. 2) Recording the quantity produced by the workers. 3) Analysing he hours used by employees to determine how time is to be charged. and accountants. In contrast. 4) Allocation of payroll costs to jobs and factory overhead accounts. The operation of an incentive wage plan requires not only the combined efforts of the personnel department. government agencies. incentive wage plans.should not be overlooked in management s planning and control responsibilities in decision making. but also the cooperation of workers. and general public. week. factory engineers. A standard hour s or day s work should be established so workers can exceed it with reasonable effort and thereby receive full benefit from the incentive. productivity studies. profit sharing. or month. or in wage negotiations. Worker s demands for a small increase in pay can result in far greater expenditures by the company due to the effect on fringe costs. job evaluations. an incentive wage plan must: (1) be applicable to . to pay by the hour. including computation and recording of the employees gross earnings. PROCEDURES FOR RECRDING PAYROLL COSTS The accounting system of a manufacturer must include the following procedures for recording payroll costs: 1) Recording the numbers of hours used in total and by job. and net earnings III. labor unions. deductions. and guaranteed hourly wages. employees. labor unions.

An example of a modified wage plan would be to set a minimum hourly wage that will be paid by the company even if an established quota of production is not attained by an employee. a definite rate per hour is set for each employee. the plans need to be reasonably simple and understandable. earnings are calculated by multiplying the employee s output by the rate per piece. Modified Wade Plan This plan combines the features of hourly-rate and piece-rate plans. to increase control over labor costs by ensuring more uniform unit costs. The plan seeks to ensure greater output.situations in which workers can increase output. The employees wages are calculated by multiplying the rate per hour by the number of hours worked. Piece-Rate Plan Under a piece rate plan. Types of Wage Plans Hourly-Rate Plan Under this plan. the employee might sacrifice quality to maximise earnings. If the established quota exceeded. The primary purpose of wage plan is to induce workers to produce more to earn a higher wage. Along with these essentials. producing more in a given period of time should result in higher pay. Naturally. The greater number of units produced should also result in a lower cost per unit for factory overhead and labor cost combined. The hourlyrate plan is simple to use but does not provide incentive for the employee to achieve a high level of productivity. The plan provides an incentive for the employee to produce more. The employee is paid for merely being on the job . Straight Piecework Plan . and to change the basis for reward from hours served to work accomplished. However. an additional payment per piece would be added to the minimum wage level. and at the same time to reduce unit costs. (2) provide for proportionately more payment for output above standard. and (3) set fair standards so that extra effort will result in bonus pay.

Instead of a price per piece. the labor cost per unit declines until it reaches the piece rate. a standard time is allowed to complete a unit. The 100-percent bonus plan has gained in popularity because of the frequency of wage increases. Also. for example. where the reported hours worked are multiplied by the hourly production standard to determine the standard units. One-Hundred-Percent Bonus Plan The 100% bon on us plan is a variation of the piecework plan. if the rate of output depends on a group effort. Thus if a worker produces 100 units in an 8-hour shift and the standard time is 80 units per shift (or 10 units per hour). The worker s production is then divided by the standard quantity. it is necessary to modify production standards and labor rates if output increases due to improved technology. but in time per unit of output. Although piece rates reflect an obvious cause-and-effect relationship between output and pay. Piece rates are not effective when output is machine paced. then a group rather than an individual incentive plan is appropriate. In other variations of 100% bonus plan. It differs in that standards are stated not in terms of money. resulting in the efficiency ratio. The production standard is computed in minutes per piece and then translated into amount to pay per piece. Hours of work and units produced are reported to the payroll department. and the worker is paid for the standard time or less.The straight piecework plan. pays wages above the base rate for production above the standard. one of the simplest incentive wage plans. savings are shared with the supervisor and/or company. The efficiency ratio multiplied by the worker s base rate results in the hourly earnings for the period. Each payroll period. the incentive is effective only if workers can control their individual rates of output. an efficiency ratio must be figured for every worker before earnings can be computed. Production standards in units of output per hour are set by industrial engineers. Finally. As the rate of output increases. Because the standards are stated in terms of time and output quantity. the worker is paid the hourly rate for 10 hours. they need .

with the capability of performing a wide range of tasks. IV. Factory operations using large machines often require employees to work in groups or crews. the plan lends itself to development of efficiency standards. The time-keeping department account for the time spent by the employees in the factory.not be adjusted when wage rates change. like plans designed for individual incentive. some of which depend on the superior productive performance of a whole department or an entire factory and can include support or indirect labor as well as direct labor. the individual workers may be required to be flexible in work assignments. Each worker in the group receives an hourly rate for production up to the standard output. Group bonus plans. it I frequently impossible to separate the work of one member of a crew. and the net earnings to be paid to the employee. Group Bonus Plan Industry uses a great variety of incentive wage plans. areintended to encourage production at rates above a standard. A worker on an assembly line cannot increase output without the cooperation of the entire group. Because the system emphasizes time rather than money. CONTROLLING LABOR COST Maintaining labor records is the responsibility of the time-keeping and payroll departments. for example. The payroll department computes each employee s gross earnings. The departmental responsibilities of time-keeping and payroll are carried out by completing and maintaining the following forms and records: . Also. Group bonus plans have proved successfully in such situations. the amount of withholdings and deductions. Units produced in excess of the standard are regarded as time saved by the group. Although the work of each employee is essential to machine operation. and each worker is in effect paid a bonus for time saved. Usually the bonus earned by the group is divided among the group members in proportion to their base pay rates.

Individual production reports are used instead of time tickets when labor costs are calculated using piece rates. ACCOUNTING FOR LABOR COSTS For all regular hourly employees. If calledupon to work more than 8 hours in a working day. and the amount of earnings. the hours worked should be recorded on a time ticket or individual production report. Assuming the employee works 12 hours on Monday. The accounting department records the earnings in factory overhead ledger and on the labor cost summary. The entry is then posted to the control accounts. The pay rates and gross earnings are entered. and the reports are forwarded to accounting. is 50% overtime premium (time-and-half) the earnings would be calculated as follows: .Time-keeping Clock cards Time tickets Production reports Payroll Payroll records Employee s earnings records Payroll summaries V. the rate of pay. assume an employee regularly earns P30 per hour for an 8-hour day. the company will have to pay overtime premium for hours worked in excess of 8 hours. Work in Process and Factory Overhead in the general ledger. To illustrate how a payroll is calculated where overtime premium is a factor. The time tickets and production reports are sent to payroll on a daily basis. The labor cost summary is used as the source for making a general journal entry to distribute payroll to the appropriate accounts. The time ticket shows the employees starting and stopping time on each job. Cost accountants sort the time tickets and production reports and charge the labor costs to the appropriate jobs and department and factory overhead.

8 hours at P30 Direct labor. pag-ibig fund contributions and philhealth premiums. Employers are responsible for periodically reporting and paying the taxes to the appropriate government agencies. criminal penalties.4 hours at P30 Factory overhead (overtime premium. Let us consider the SSS contribution of an employee with a salary of P10. the earnings would be: Direct labor. . SSS Contribution The Social Security System requires employers to pay social security taxes on wages and salaries equivalent to approximately 55% of the total contribution credited to the employee. Employers who fail to file require reports or pay taxes due are subject to civil. EMPLOYER S PAYROLL TAXES Payroll taxes imposed on employers include social security premiums.8 hours at P30 Direct labor.Direct labor.4 x 15) Total earnings P 120 60 P 240 180 P 420 If the previously mentioned employee is paid a premium of 100% (double time).4 x 30) Total earnings P 120 120 240 P 480 P 240 VI. 000 a month. and in some cases.4 hours at P30 Factory overhead (overtime premium.

Pag-ibig Funds Contribution The amount deducted from the employee s salary is equivalent to 3% of basic or P100. CLASSIFICATION FOR LABOR Labor cost plays a prominent role in small-business operations. There direct labor cost is the cost of personnel that can be identified in the product. 759 and over. The contribution of the employer is also equal to the amount deducted from the employee. Business owners often hire employees to complete various business functions. Each type of business labor is broken down into groups for cost-accounting purposes. The contribution of the employer.50 for salaries P9. such as the salary of the person who works at the production machine. 1) Direct Labor. Business owners use cost accounting to allocate labor cost to the goods or services produced by the company. is also P37.PhilHealth Contributions The amount contributed by the employer is equal to the amount deducted from the employee s salary or wage.50. maximum. VII. The direct labor cost is the cost of wage-bill or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product.labor identified with particular products which is considered feasible to be measured and charged to specific production order. or provision of a service. but not the administrator's or janitor's salary. The maximum deduction per table P37. a particular work order. whichever is lower. Direct labor is a type of work that is directly associated with the production of a good or service. It includes only those who operate the machines or perform the tasks that result in the production of goods are included. The direct labor costs differ from . Management accounting provides business owners with a specific analysis of labor cost.

educational benefits to the children of the workers and other benefits which include bonuses. The type of labor is directly related to the manufacturing of the products in the company. some workers may temporarily have nothing to do. subsidized housing. machine breakdown and machine set-up. waiting for materials delays from scheduling. Next the costs that is associated with the employees and their pension is analyzed. when a new job is being set-up for production. The additional costs associated with hiring employees. If their idleness is normal for the production and cannot be avoided the cost idle time should be charged to factory control. . There are several steps involved in calculating the direct labor cost. 3) Labor Overhead a. 2) Indirect Labor a. payment for subsidized food. Firstly the total wages of the employees is calculated. etc. allowances and perks etc. benefits costs. Finally all these category costs bring up the total direct labor cost.one factory or company to another depending upon the nature of production. payroll tax contributions. such as advertising open positions or hiring a headhunter is included for the calculation. b. Labor identified with particular products but which is not considered feasible to measure and charge to specific production order. Some of the direct labor costs are wages.cost of non-productive hours of direct labor caused by lack of work. For example. Labor expected for the benefit of production in general and not identified with particular products. Waiting time or Idle time. Also the employer contribution for the taxes that should be paid for each employee is included. The company s health insurance cost per employee is calculated. The calculation of direct labor cost does not include just the payment of wages but also how it impact the company s insurance premiums. The total cost the company that must paid in workers compensation premiums is also included.

Overtime premium represents the overtime hours multiplied by the premium rate. If overtime results from the requirements of a specific job and not from random scheduling the overtime premium should be charged to the specific job that caused the overtime. the employee is said to be paid at a piecework rate. Many companies will pay employees in minimum wage but they can earn more if they produced more. in excess of regular rate. then the premium will be debited to work in process instead of factory overhead control. c. the difference is charged to factory overhead control. or working during holidays or their rest day. d. Shift Premium. if a the overtime worked by a worker was caused by a rush order and the customer has agreed to pay for the special service. For example. to employees working in excess of 8 hours in a day.extra pay to work during less desirable evening shift (2 pm to 10 pm) or night shift (10 pm to 6 am). should be charged to factory overhead control rather than work in process. by the regular rate. Regular earnings represent the total hours worked. or shift differential. If the output multiplied by the piece rate results in an amount greater than the guaranteed wage. including overtime hours.Idle time Accrued Payroll xx xx xx b. The premium rate for overtime is usually some fraction of regular rate.represents amount paid. Make-up Pay. If the output multiplied by the piece rate results in an amount less than the guaranteed wage.when payments to an employee are based solely on the number of units produced. This shift premium. This labor payment system benefits new employees because it guarantees them a minimum salary while they are learning their new job (during which time they usually not produce enough units).Work in Process Factory Overhead Control. Overtime Premium. . the employee is paid the amount earned.

managers and supervisors are the common types of fixed labor in small business. Fixed labor costs can be difficult to lower without compromising the effectiveness or efficiency of business operations. Fixed Labor Fixed labor cost remains the same regardless of the company&rsquo. directors. Small businesses often use variable labor to ensure that business costs do not exceed estimated revenues. Hourly employees are the most common type of variable labor. Many types of small businesses use hourly employees. Retail stores. and Pag-ibig contributions.e. to save money when sales and production output decrease. restaurants. Business owners can hire hourly employees directly or use a temporary employment agency to increase variable labor employees. . GROSS EARNINGS OF EMPLOYEES 1) Wages. Managers and supervisors usually work more hours than regular employees and provide more benefits to small businesses. VIII. These individuals usually earn a fixed salary regardless of the hours worked in the business. Business owners do not usually guarantee hours to these individuals.s production output.amounts remitted to difference government agencies for SSS premiums. Owners. manufacturers and repair companies are traditional examples of businesses that rely on variable labor. Employer s Payroll Taxes. Another examples of Labor Cost: Variable Labor Variable labor cost fluctuates based on the amount of production output. Business owners used fixed salaries to avoid paying managers and supervisors overtime during business operations. PhilHealth Contributions.gross earnings of an employee who is paid by the hour only the actual hours worked.

2) Salaries.the amount of tax to be withheld each period depends on the following: a. 3) Gross Earnings. Amount of the employee s earnings b. X. IX. Cost Ledger Accounting Separate records/books are maintained for cost accounting independent of the financial accounting. . 3) PhilHealth Contributions.levied against both the employer and the employee in equal amounts (based on table provided). Frequency of the payroll period c. 4) Pag-ibig Contributions. PAYROLL DEDUCTIONS 1) Employee s Income Tax.levied against both the employer and the employee (based on table provided). TRANSACTIONS INVOLVING LABOR Transactions involving Costs (those which have a relevance in cost accounting) are recorded in two different methods.gross earnings of an employee who is paid a flat amount per week or month regardless of the hours worked in a period.levied against both the employer and the employee in equal amounts (based on table provided). Classification of the taxpayer and number of qualified dependents 2) Social Security System premiums.the compensation of an employee and includes regular pay and overtime premiums. 1.

Integrated Accounting Integrated Ledgers where the cost accounting and financial accounting transactions are integrated and maintained in the same set of books. Direct Labour/Labor worked 3. A separate set of cost ledgers are being maintained for recording the transactions relevant to costing. 2. Wages paid or outstanding 2.Each of these records are self balancing i. if at all a trial balance is prepared. Indirect Labour/Labor worked for Factory 4. Abnormal Idle Time (Loss of Labour/Labor) . Since there is only one set of books.e. Transactions 1. a trial balance (list of ledger account balances) can be prepared independently for each set of books and the trial balance should agree in the absence of any errors. it would contain all the ledger accounts (balances) we come across in cost accounting as well as financial accounting.

raw materials.XI. Thus. by improving. research. and employee development. products and services used. proper planning. However. Labor productivity can be defined as a measure of production performance using the expenditure of human effort as a yardstick. A plan for improving productivity should assign to managers the responsibility for implementing the plan. and compares them to output. motivation control and accounting for labor costs and productivity represent an important problem in managing an enterprise. It is the amount of goods and services a worker produces. productivity should be measured. In addition. technology. plant and equipment. PRODUCTIVITY AND LABOR COSTS Wages are directly or indirectly related to productivity and skill of the worker. capital invested. The objective of productivity measurement is to provide a concise. or replacing equipment. followed by changes in accounting for labor costs. Changes in utilization of labor often require changes in methods of compensation. energy. productivity can be described as the efficiency with which resources are converted into commodities and/or services. analyzed. interpreted and understood. and government services used. the plan should be consistent with other existing plans. such as the operating budget and the plans for capital investment. of Houston. accurate index for comparing actual results with a target or standard of performance. the most . and labor. This measure considers use of capital. In a broader sense. modernizing. Texas. Productivity measurement should recognise the individual contributions of factors such as employees (including management). Once plans have been formulated. Greater productivity can be achieved by making production processes more efficient through elimination of non-valueadded activities. or by any other approach that improves utilization of resources. One such measure has been developed by American Standards for Productivity Measurement.

salaries and fringe benefits rise more than output or production per labor hour. productivity gains sometimes fall. because it often entails disputes between management and unions. When the costs of wages. fatigue and delays due to machine downtime and materials shortages.widely used measurement has been physical output per labor hour. selling prices-increase If prices are to be kept from rising. expressed in minutes per piece or in units to be produced per hour. When increases in output do not keep pace with rising costs-and. business profits and the real earnings of workers also increase. the result is inflation-higher prices to cover unit costs. A slowdown leads to increased costs. Setting a standard of labor performance is not easy. The result is the standard time for the job. resulting in more available goods and services. Allowances are added for personal time. In recent years. labor. The pace at which the observed person is working is noted and referred to as rating or performance rating. Furthermore. productivity has generally been increasing. However. which takes into account only one element of input. therefore. increased productivity enables society to obtain more and better output from the resources available in the economy. the time it should take a person to do the job when working at a normal pace. ECONOMIC IMPACT OF PRODUCTIVITY When productivity increases. XII. rest periods. Thus most productivity measurements at best crude statistics that ignore some important factors such as capital and land. wage increases must reflect the per-unit cost reductions resulting from increased productivity. .that is. Ratings for a selected task are combined to obtain a normal time.

com/homework_answers/cost_accounting/direct_labor_cost/ 4) http://www.chron.com/standard-costing-variance-analysis/studynotes/labour-labor-variances-cost-accounting-treatment.References 1) Thomson Asian Edition Cost Accounting 14th edition by Carter 2) Cost Accounting 2012 Edition by De Leon 3) http://classof1.futureaccountant.com/examples-labor-cost-2168.php 5) http://smallbusiness.html .

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