Cost Accounting

Cost Accounting
Chapter 10
Labor: Controlling and Accounting
for Costs
Learning Objectives
1. Discuss the importance and nature of productivity,
and productivity’s relationship to labor costs.
2. Explain the design and application of incentive wage
plans.
3. Explain and apply learning curve theory.
4. State the necessary organization for labor cost
accounting and control.
5. (Appendix) Account for fringe benefits, payroll taxes,
and other labor-related deductions.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to
a publicly accessible website, in whole or in part. 2
Labor: Controlling and Accounting for
Costs
• Labor cost represents the human contribution to
production.
• The basic pay for work performed is called the base
rate or job rate.
• Fringe benefits also form a substantial element of
labor cost.
• Although these fringe costs generally are included in
overhead, they should not be overlooked in
management’s planning and control responsibilities,
in decision making, or in wage negotiations.
10-1 Productivity and Labor Costs
• Labor productivity can be defined as a measure of
production performance using the expenditure of
human effort as a yardstick.
• Productivity can be described as the efficiency with
which resources are converted into commodities
and/or services.
• Planning Productivity
– Questions typically answered by a productivity plan include the
following:
1. How does the organization define productivity and quality
of work?
2. What priority should be attached to productivity improvement?
Who is responsible?
3. How will executive management’s commitment be communicated?
4. How much uniformity of application is desired?
5. How much employee involvement in planning and implementation
is appropriate?
6. How will progress be measured?
• Measuring Productivity
– Productivity should be measured, analyzed, interpreted, and
understood.
– To provide a concise, accurate index for comparing actual
results with a target or standard of performance.
– Normal time—the time it should take a person to do the
job when working at a normal pace.
– The result is the standard time for the job in minutes per
piece or in units to be produced per hour.
– The productivity-efficiency ratio output of an individual
compared to the performance standard.
• Economic Impact of Productivity
– productivity increases, business profits and the real
earnings of workers also increase.
– increased productivity enables society to obtain more and
better output from the resources available in the economy.
• Increasing Productivity by Better Management of
Human Resources
– Four fundamental assumptions characterize better human
resource management:
1. People who do the work are best qualified to improve it.
2. Decision making should take place at the lowest level
possible.
3. Worker participation increases both job satisfaction and
commitment to company objectives.
4. There is a vast pool of ideas in the work force waiting to be
tapped.
• Increasing Productivity by Better Management of
Human Resources
– Better management of human resources is an essential
requirement for increased productivity.
10-2 Incentive Wage Plans
• An incentive wage plan rewards workers in
proportion to their increased high quality output.
• To be successful, an incentive wage plan must:
(1) be applicable to situations in which workers can
increase output.
(2) provide for proportionately more pay for output above
standard.
(3) set fair standards so that extra effort will result in
bonus pay.
10-2 Incentive Wage Plans
• Purpose of an Incentive Wage Plan
– The primary purpose of an incentive wage plan is to induce
workers to produce more to earn a higher wage and at the
same time to reduce unit costs.
– The plan seeks to ensure greater output, to increase control
over labor cost by ensuring more uniform unit costs, and to
change the basis for reward from hours served to work
accomplished.
EXHIBIT 10-1
10-3 Time Standards and Learning Curve Theory
• Learning curve theory stipulates that each time the

cumulative quantity of output doubles, the cumulative
average time per unit is reduced by a certain
percentage.
• Cumulative-average-time learning model, or Wright’s
model.
10-3 Time Standards and Learning Curve Theory
• Based on an observed learning curve, the time

standard used for determining a worker’s incentive
pay may change to a variable time instead of a fixed
time standard.
10-4 Organization for Labor Cost
Accounting and Control
• Labor cost accounting involves the following:
1. The employment history of each worker—date hired, wage
rate, initial assignment, promotions, pay raises, and time-
off for vacations and illness.
2. Information needed to comply with union contracts, social
security laws, wage and hour legislation, income tax
withholdings, and other government requirements.
3. Labor time and cost standards.
4. Each employee’s time worked, wage rate, and total
earnings for each payroll period.
5. The computation of deductions from gross wages for each
employee.
• Labor cost accounting involves the following:
6. The output or accomplishment of each employee.
7. The amount of indirect labor cost and the direct labor cost
and hours to be charged to each job, lot, process, or
department for each period. Direct labor costs or hours are
often used as a basis for allocating overhead cost.
8. Total labor cost in each department for each period.
9. Cumulative data on earnings and payroll deductions for each
employee.
• Personnel Department
– The chief function of a personnel department is to provide
an efficient labor force and ensure that the entire
organization follows appropriate personnel policies.
– Personnel functions include recruiting, hiring, training,
evaluation, retirement counseling, termination, and
outplacement.
– Writing and updating job descriptions and the conduct of
time and motion studies.
• Production Planning Department
– A production planning department is responsible for
scheduling work and releasing work orders to the
producing departments.
– Production schedules prepared several weeks in advance,
using labor time standards for each task, help department
supervisors prepare labor budgets similar to the one shown
in Exhibit 10-2.
EXHIBIT 10-2
• Timekeeping Department
– Accurate timekeeping is usually achieved by the following:
1. A clock card or time card that provides reliable evidence of
the employee’s presence in the plant from time of entry to
departure.
2. Time tickets or job tickets to secure information as to the
type and duration of work performed.
– Time Clock. The time clock or time recorder is an
instrument that records employees’ time in and out of the
office or factory.
– A clock card provides space for the name and number of
the employee and usually covers an entire payroll period.
– Time clocks may be electronically on line as a part of a
computerized system.
– Time Ticket or Report. The time ticket shows the specific
use of the time purchased, and it is comparable to a
materials requisition.
– A daily time report on which the worker lists jobs worked
on during the day.
– The clock card is correct but shows more hours than the
time tickets, the difference is reported as idle time.
– Bar-Coding Technology. Computerized on-site data entry
for both clock cards and time tickets can be achieved by bar
coding.
– Symbols processed electronically to identify numbers,
letters, or other characters.
• Payroll Department
– Two steps:
(1) computing and preparing the payroll.
(2) distributing the payroll cost to jobs and departments.
• Payroll Department
– Payroll Computation and Preparation. The final computed
payroll is recorded in a payroll journal or payroll record.
The record shows total wages, deductions, and the net
payroll.
– Payroll Distribution. The individual time ticker or daily
time report shows the use of the time purchased from each
employee.
– Time tickets are sorted by jobs, departments, and types of
indirect labor to permit distribution of the total payroll to
Work in Process and to the detailed departmental records
supporting Factory Overhead Control.
• Cost Department
• Departmental Interrelationships and Labor Cost
Control and Accounting
FIGURE 10-1 Organization Chart for
Labor Cost Control and Accounting
27
Accounting for Personnel-Related Costs
• Overtime Earnings
– Overtime earnings consist of two elements:
(1) the regular pay rate.
(2) the overtime premium, which is an additional amount for hours
worked in excess of some base.
Accounting for Personnel-Related Costs
• If an employee is paid $8 per hour for a regular work
week of 40 hours
• Charging the overtime premium to a specific job or

product or to factory overhead primarily depends on
the reason for the overtime work.
Appendix: Accounting for Personnel-
Related Costs
• Bonus Payments and Deferred Compensation
Plans
– Bonus payments amounts can be calculated for each
employee or for each job classification.
– Bonus amounts can be a long-established tradition of a
company, or the amount can vary from year to year.
– Payments are a production cost, a marketing expense, or an
administrative expense, depending on where the employee
is assigned to work.
Related Costs
• Vacation Pay
– When an employee is entitled to a paid vacation of 2
weeks, the vacation pay is accrued over the 50 weeks of
productive labor.
Related Costs
• Pension Plans
– A pension plan is an arrangement for payments to
employees during years after retirement.
– The pension cost incurred is charged to factory overhead,
marketing expense, or administrative expense.
Related Costs
• Labor-Related Deductions
– Insurance.
– Union Dues.
– Payroll Advances.

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• Learning curve theory stipulates that each time the

• Based on an observed learning curve, the time

• Charging the overtime premium to a specific job or

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