COST ACCOUNTING MODULE
ACCOUNTING FOR LABOR
LABOR – is the physical or mental effort expended in manufacturing a
product. Labor cost is the price for using human resources . The
compensation paid to employees who engage in production related activities
represents factory labor. The principal labor cost is wages paid to production
workers . Wages are payments made on an hourly, daily or piecework basis.
Salaries are fixed payments made regularly for managerial or clerical
services.
Factory payroll costs are divided into a. direct labor b. indirect labor . 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 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
production. Indirect labor costs are charged to the factory overhead control
account. Included as indirect labor are salaries and wages of the factory
superintendent , supervisors, janitors, clerks , factory accountants and
timekeepers .
The accounting system of a manufacturer must include the following
procedures for recording payroll costs ;
1. Recording the number of hours used in total and by job
2. Recording the quantity produced by the workers
3. Analyzing the hours used by employees to determine how time is
to be charged
4. Allocation of payroll costs to jobs and factory overhead accounts
5. Preparation of the payroll , including computation and recording
of the employees gross earnings , deductions and net earnings
WAGE PLANS
These are different wages plans that are being used by the companies. The
plan established by management is approved by the union and should
comply with regulations of government agencies. Some of these plans are
hourly rate plan , piece rate plan and modified wage plan.
HOURLY RATE PLAN
Under this plan, a definite rate per hour is set for each employee. The
employees wages are calculated by multiplying the rate per hour by the
number of hours worked. The hourly rate plan is simple to use but does not
provide incentive for the employee to achieve a high level of productivity .
The employee is paid for is paid for merely being on the job.
PIECE RATE PLAN
Under a piece rate plan, earnings are calculated by multiplying the
employees output for the rate per piece. The plan provides an incentive for
the employee to produce more. However, the employee might sacrifice
quality to maximize earnings.
MODIFIED WAGE PLAN
This plan combines the features of hourly rate and piece rate plans. 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. If the established quota is exceeded, an
additional payment per piece would be added to the minimum wage level.
CONTROLLING LABOR COST
Controlling labor records is the responsibility of the timekeeping and payroll
departments . The timekeeping department accounts for the time spent by
the employees in factory. The payroll department computes each employee’s
gross earnings , the amount of withholdings and deductions , and the net
earnings to be paid to the employee.
The departmental responsibilities of time keeping and payroll earned out by
completing and maintaining the following forms and records
TIMEKEEPING PAYROLL
Clock cards Payroll records
Time tickets Employee’s earning records
Production records Payroll summaries
ACCOUNTING FOR LABOR COSTS
For all regular hourly employees, the hours worked should be recorded on a
time ticket individual production report. The timely ticket shows the
employee’s starting and stopping time on each job, the rate of pay and the
amount of earnings. Individual production reports are used instead o time
tickets when labor costs are calculated using piece rates. The time tickets and
production reports are sent to payroll on a daily basis. The pay rates and
gross earnings are entered and the reports are forwarded to accounting .
Cost accountants sort the time tickets and production reports and charge the
labor costs to the appropriate jobs or department and factory overhead. The
accounting department records the earnings in factory overhead ledger and
on the labor cost summary.
The labor cost summary is used as the source for making a general journal
entry to distribute payroll in the appropriate accounts . The entry is then
posted to the control accounts, work in process and factory overhead in the
general ledger.
In preparing the labor cost summary from the tickets, it is important to
separate any overtime from an employee’s regular time because the
accounting treatment maybe different for each type of pay. Regular time
worked is charged to job debiting work in process. Overtime may be charged
to jobs, to factory overhead or allocated partly to overhead. Overtime
distributions depends upon the conditions creating the need for overtime
hours .
If an employee works beyond the regularly scheduled time but the employee
is paid as the regular hourly rate , the extra pay is called overtime pay. If an
additional rate is allowed for the extra hours worked, the additional rate
earned is referred to as overtime premium. The premium pay rate will
depend on the collective bargaining agreement between the management
and the union.
To illustrate how a payroll is calculated where overtime premium is a factor,
assume an employee regularly earns 30 per hour for an 8 hour day. If called
upon to work more than 8 hours in a working day, the company will have to
pay overtime premium for works in excess of 8 hours . Assuming the
employee works 12 hours on Monday , is paid 50 percent overtime premium
time and half the earnings we calculated as follows ;
Direct labor 8 hours at 30 240
Direct labor 4 hours at 30 120
Factory overhead overtime premium 4 x 15 60 180
Total earnings 420
If the previously mentioned employee is paid a premium of 100 percent ,
double time , the earnings would be
Direct labor 8 hours at 30 240
Direct labor 4 hours at 30 120
Factory overhead 0vertime premium 4x30 120 240
Total Earnings 480
With the preceding illustration , the regular rate 240 plus 120 will be charged
to work in process , while the overtime premium 60 in the first illustration
and 120 in the second illustration will be charged to factory overhead
control. By charging the overtime premium to the Factory overhead account ,
all jobs worked on during the period share the cost of overtime premiums
paid. If the job contract stipulated that it was a rush contract, it would be
appropriate to charge the premium pay to the job work in process instead to
a factory overhead account
EMPLOYER’S PAYROLL TAXES
Payroll taxes imposed on employers include social security premium, pagibig
fund contribution and philhealth premium. Employers are responsible for
periodically reporting and paying the taxes to the appropriate government
agencies. Employers who fail to file require reports or pay taxes due are
subject to civil and in some cases criminal penalties .
CLASSIFICATION FOR LABOR
1. Direct labor – labor identified with particular products which is
considered feasible to be measured and charged to specific
production order cost sheet.
2. Indirect labor –
a. Labor identified with particular products , but which is not
considered feasible to measure and charge to a specific
production order.
b. Labor expected for the benefit of production in general and
not identified with particular products.
3. Labor overhead
a. Waiting time or idle time – cost of non productive hours of
direct labor caused by lack of work, , waiting for materials ,
delays from scheduling , machine breakdown and machine
set up. For example, 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 and cannot
be avoided the cost idle time should be charged to factory
control.
Let us assume Maria Cruz spent 36 hours on job 101 and was
idle for 4 hours during the week , Maria’s rate is 50 per hour
for a 40 hour week , as per union contract .
The following entry should be made to record Maria’s total
wages
Work in process job 101 36x50 1,800
Factory overhead control idle time 4 hours x 50 200
Accrued payroll 2,000
b. Make up pay – when payments to an employee are based
solely on the number of units produced, the employee is
said to be paid at a piecework rate. Many companies will pay
employees a minimum wage but they can earn more if they
produced more. Thus 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 do not produce enough units . if the output
multiplied by the piece rate results in an amount less than
the guaranteed wage, the difference is charged to factory
overhead control. If the output multiplied by the piece rate
results in an amount greater than the guaranteed wage , the
employee is paid the amount earned .
Let us assume Maria is paid 15 per piece produced and
during the week, she produced 80 pieces . If the guaranteed
weekly pay is 1,500 , then the difference between 1,500
guaranteed pay and 1,200 actual pay is charged to factory
overhead control .
The entry to record Maria’s pay is
Work in process job 101 1,200
Factory overhead control make up pay 300
Accrued payroll 1,500
If Maria in the previous illustration 1 is guaranteed a weekly
pay of 1,000 then the entry will be
Work in process job 101 80x15 1,200
Accrued payroll 1,200
c. Overtime premium – represents amount paid in excess of
regular rate , to employees working in excess of 8 hours in a
day, or working during holidays or their rest day. Regular
earnings represent the total hours worked, including
overtime hours by the regular rate. Overtime premium
represents the overtime hours multiplied by the premium
rate . The premium rate for overtime is usually some
fraction of the regular rate.
For example if Maria worked for 45 hours during the week
and she was paid time and a half .
The entry will be;
Work in process 45 hours x 50 2,250
Factory overhead control 5hours x 25 125
Accrued payroll 2,375
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 .
For example, if the overtime worked by Maria was caused by
a rush order and the customer has agreed to pay for the
special service, then the premium will be debited to work in
process instead of factory overhead control .
d. Shift premium – extra pay to work during less desirable
evening shift 2 pm to 10 pm , or night shift 10 pm to 6 am .
This shift premium or shift differential should be charged to
factory overhead control rather than work in process.
Assume that Maria is assigned to night shift and is paid a
shift premium of 20 per hour , the entry for her pay will be
Work in process 40 hours x 50 2,000
Factory overhead control 40 hours x 20 800
Accrued payroll 2,800
e. Employer’s payroll taxes – amounts remitted to different
government agencies for sss premium, philhealth
contributions and pagibig contributions.
GROSS EARNINGS OF EMPLOYEES
1. Wages - gross earnings of an employee who is paid by the hour for
only the actual hours worked.
2. Salaries – gross earnings of an employee who is paid a flat amount per
week or month regardless of the hours worked in a period.
3. Gross earnings – the compensation of an employee and includes
regular pay and overtime premiums