AE22 Reviewer: Job-Order: Direct Labor
Payroll Accounting System for a Manufacturer
TOTAL COSTS OF A MANUFACTURING
FIRM
Different wage plan
Common Wage Plans
1. Direct Labor
 Represents payroll costs traced directly to an individual
job.
 Also known as “touch labor”. Wages of machinists,
assemblers, and other workers who physically convert raw
materials to finished goods—thus the term “touch labor”.
 Direct labor costs are debited to the work in process
account.
2. Indirect Labor
 Labor consists of labor costs incurred for a variety
of jobs related to the production process but not readily
traceable to the individual jobs worked on during the period.
 Salaries and wages of the factory superintendent,
supervisors, janitors, clerks, and factory accountants who
support all jobs worked on during the period.
 Indirect labor costs are charged to factory overhead.
1. Record the hours worked or quantity of output by employees
in total and by job, process, or department.
2. Analyze the hours worked by employees to determine how
labor time is to be charged.
3. Charge payroll time to jobs, processes, departments, and
factory overhead.
4. Prepare the payroll.
1. Hourly rate plan
 The employee’s wages are calculated by multiplying the
established rate per hour by the number of hours worked.
 This plan does not provide an incentive for the
employee to achieve a high level of productivity.
2. Piece-rate plan
 Employee’s wages based on the employer’s quantity of
production
 Number of units produced is multiplied by a predetermined
rate.
 incentive wage plan or piece-rate plan.
3. Modified Wage plan
 Minimum hourly wage is set even if an established quota is
not attained.
 If quota is exceeded, a bonus is added to the minimum wage
level.
 On days when the quota is not met, the difference (make-up
guarantee) would be charged to factory overhead.
Labor Time Records  Accounting department sends the payroll record to the
treasurer’s office.
 Given the magnetic card reading technology available today,
 The treasurer’s office is responsible for making the payments
the time record typically takes the form of a computer file.
to employees.
 The labor hours recorded should be reviewed by a
production supervisor for accuracy

Payroll Function

 Primary responsibility is to compute the wages and salaries

earned by the employees.
 Forms should include a payroll record and employees’
earnings records. – Summary of the payroll

Account for labor costs and special payroll cost problems

Accounting for Labor Costs

 Labor-time records are sent to the payroll department on a
daily basis.
 The labor costs are charged to the appropriate jobs or
departments and factory overhead.
 This analysis is recorded on a labor cost summary, in the job
cost ledger, and in the factory overhead ledger.
 Earnings of salaried employees are recorded in the factory
overhead ledger accounts and on the labor cost summary.
Labor Cost Summary
 Hourly workers should be recording their time on a labor
time record.
 Labor costs are recorded on a labor cost summary.
 This summarizes the direct labor and indirect labor charges
to a department for the period.

Payment of earnings to employees

Payroll Accrual

 When the end of the period does not coincide with the
ending date for a payroll period, an accrual for payroll
earnings should be made.

Payroll xxx
Wages payable xxx

Special Labor Cost Problems

 Shift Premiums – additional pay to employees because of

shifts other than the regular daytime shift.
 Employee Pension - originate from an agreement between a
company and its employee group, by which the company
promises to provide income to employees after they retire.
 Bonuses – higher than usual company profits, exceeding
departmental quotas for selling or production, or for any
other achievement that the company feels merits additional
pay.
 Vacation and Holiday pay - Vacation pay is earned by the
employee for daily service on the job over the course of the
year.
 Holiday pay is an agreement that stipulates that certain
holidays during the year will be paid for by the company, but
Order: Accounting for Overhead
they are nonworking days for the employees.
 1. Identify cost behavior patterns.
2. Budget factory overhead costs.
3. Accumulate actual overhead costs.
4. Apply factory overhead estimates to production.
5. Calculate and analyze differences between actual and
applied factory overhead.
Cost Behavior Patterns
1. Variable costs are costs that vary in proportion to volume
changes.
2. Fixed costs remain constant within the relevant range of
production.
Factory overhead or manufacturing overhead is the cost incurred 3. Semi variable costs (or mixed cost) have characteristics of
during the manufacturing process, not including the costs of direct both fixed and variable costs.
labor and direct materials a. Type A – remain constant over a range of
Examples: production, then change abruptly.
b. Type B – vary continuously but not in direct
 Production supervisor salaries proportion to volume changes.
 Quality assurance salaries
Applying Factory Overhead to Production
 Materials management salaries
 Factory rent  Factory overhead costs may not be known until the end of
 Factory utilities the accounting period.
 Factory building insurance  The cost of a job is needed soon after completion, so a
 Fringe benefits method to estimate the amount of factory overhead applied
 Depreciation must be established using pre-determined overhead rates.
 Equipment setup costs  This enables companies to bill customers on a timelier basis
 Equipment maintenance and to prepare bids for new contracts more accurately
 Factory supplies
 Factory small tools charged to expense
 Insurance on production facilities and equipment
 Property taxes on production facilities
Accounting for Factory Overhead
 Under- and Over-applied Factory Overhead

 After the applied factory overhead account is closed, the

under-applied (debit) or overapplied (credit) balance in the
factory overhead account is moved to cost of goods sold if
the amount is immaterial to affect net income

Accounting for Actual and Applied Factory Overhead

 Under a normal costing approach, actual overhead costs are

never assigned to jobs.
Period costs - All costs that are not assigned to the product but are
recognized as expense and charged against revenue in the period
incurred.
Product costs - Costs that are included as part of inventory costs and
expensed when goods are sold.
 incurred to manufacture products and transfer them into
finished goods inventory for retail sale.
 Goods Available For sale – The cost of goods available for
sale is the total recorded cost of beginning finished goods or
merchandise inventory in an accounting period, plus the cost
of any finished goods produced or merchandise added during
the period.
 Cost of goods sold – refers to the direct costs of producing
the goods sold by a company.
 Gross Margin – is a company's net sales revenue minus its
cost of goods sold (COGS).

Statement of Goods Manufactured and Sold

 Work in process – refers to a component of a company’s
inventory that is partially completed
 Finished Goods – refers to the number of manufactured
products in stock that are available for customers to
purchase.
 Cost of Goods Manufactured - refers to a schedule or
statement that shows the total production costs for a
company during a specific period of time. The total cost