ACCOUNTING FOR LABOR Piece-Rate Plan or Incentive wage plan

Learning Objectives ▪ Employee's wages based on the employer's

quantity of production.
LO1 Distinguish between features of hourly rate and
▪ Number of units produced is multiplied by a
piece-rate plans.
predetermined rate.
LO2 Specify procedures for controlling labor costs.
▪ May be referred to as incentive wage plan or
LO3 Account for labor costs and payroll taxes.
piece-rate plan.
LO4 Prepare accruals for payroll earnings and taxes.
▪ Quality may be sacrificed in order to maximize
LO5 Account for special problems in labor costing.
quantity.

Payroll Accounting Modified Wage Plan

System for a Manufacturer ▪ Minimum hourly wage is set even if an

1. Record the hours worked or quantity of output by established quota is not attained.
employees in total and by job, process, or ▪ lf quota is exceeded, a bonus is added to the
department. minimum wage level.
2. Analyze the hours worked by employees to ▪ On days when the quota is not met, the
determine how labor time is to be charged. difference (make-up guarantee) would be
3. Charge payroll time to jobs, processes, charged to factory overhead.
departments, and factory overhead. ▪ When production work teams are utilized, a
4. Prepare the payroll. single incentive for the group would be
appropriate.

Direct Labor or touch labor- Review

• Represents payroll costs that are traceable to Hours Pieces Earnings Earnings Payroll
Work Finished @ P 5 @ P .30 Make-up Earnings
individual jobs worked on during the period. guarantee
(Quota per hour per unit
• Direct labor costs are debited to the work-in- 400) (Col 3)-
process account. (COL 4)
8 360 P 120 P 108 P 12 P 120
(8 x 15) (360 x
Indirect Labor- Review
.30)
• Costs are incurred for a variety of jobs that are Labor Time Records
related to the production process, but are not ➢ Given the magnetic card reading technology
readily identifiable with the individual jobs available today. The time record typically
worked on during the period. takes the form of a computer file.
• Indirect labor costs are charged to factory ➢ The labor hours recorded should be reviewed
overhead. by a production supervisor for accuracy.

Payroll Function
Hourly Rate Plan
Primary responsibility is to compute the
❖ The employee's wages are calculated by wages and salaries earned by the employees.
multiplying the established rate per hour by Forms should include a payroll record and
the number of hours worked. employees earnings records.
❖ This plan does not provide an incentive for the A summary of include payroll is sent to
employee to achieve a high-level of accounting to record the payroll in the
productivity. accounting records.
The payroll record is sent to the treasurer's
department for making payments to
employees.
Payroll Records Labor Cost Summary

Forms used by companies will vary, but all ❖ Hourly workers should be recording their time
forms possess some common on a labor time record.
characteristics. ❖ Labor costs are recorded on a labor cost
Entry to record payroll. summary.
❖ This Summarizes the direct labor and indirect
Payroll xx
labor charges to a department for the period.
Withholding Tax Payable xx ❖ Salaried employees are often not required to
prepare labor time records.
SSS Premium Payable xx
Flow of Costs from Subsidiary Records to General
Philhealth Premiums Payable xx Ledger
Pag-ibig Premiums Payable xx Labor- Time Records
WagesPayable/AccruedPayroll xx

Employee Earnings Records Job Cost Sheets Factory Overhead Labor Cost
• Company maintains a record of the earnings (Direct Labor) Sheets (Direct Labor) Summary
for each employee.
General Journal and
• The cumulative record of earnings is needed to
General Ledger
compute earnings subject to many types of (WIP-Direct Labor
taxes. FOH-Indirect Labor)
• Information is also used to prepare Form W-2
and Form W-3.

Payment of Net Earnings Employer's Payroll Taxes- would be charged now to

factory overhead control for all factory employees
• Accounting department sends the payroll
whether considered direct or indirect labor.
record to the treasurer's office.
• The treasurer's office is responsible for However, for employees who belong to selling and
making the payments to employees. administrative departments, the employer’s
payroll taxes would be recorded under selling and
Wages payable xx
administrative expenses.
Cash xx
Entry to pay employees. 1. Social Security System (SSS)
2. Philhealth
Recording Salaries and Wages
3. Pag-ibig
• Labor-time records are sent to the payroll Payroll Accrual
department on a daily basis.
• The labor costs are charged to the appropriate ▪ When the end of the period does not coincide
jobs or departments and factory overhead. with the ending date for a payroll period, an
• This analysis is recorded on a labor cost accrual for payroll earnings should be made.
summary, in the job cost ledger-(to record Payroll xx
labor cost work for a particular job) and in the Wages Payable xx
factory overhead ledger. Entry to record accrual payroll.
• Earnings of salaried employees are recorded
in the factory overhead ledger accounts and
on the labor cost summary.
Illustration of Accounting for Labor Costs Holiday Pay Liability xx
Incurred payroll and bonus, vacation, and holiday pay.
1. General Journal Entry to record payroll

Payroll xx
Vacation Accrual Example
Withholding Tax Pay xx
SSS Premiums Payable xx ▪ A business has 4 employees who are each
Philhealth Premiums Payable xx paid 13,000 annually and are entitled to 4
Pag-ibig Premiums Payable xx weeks (20 days) paid annual vacation. By the
Wages Payable xx end of the accounting period, two of the
employees have taken their full entitlement,
2. Record Payment of Net Earnings to employees one has taken 16 days, and the other has taken
only 5 days.
Wages Payable xx
▪ Assuming a 5-day working week, the vacation
Cash xx
accrual is calculated as follows:

3. Distribution of Payroll Annual working days = 52 weeks x 5 = 260 days

Work in Process xx Daily pay rate= 13,000/260 = 50 per day

Factory Overhead xx
Days earned not taken = (20-16) + (20-5) = 19 days
Sales Salaries xx
Administrative Salaries xx Vacation accrual= Days earned not taken x Daily rate
Payroll xx
Vacation accrual = 19 x 50 = 950

4. Employer’s Payroll Taxes

Factory Overhead xx Journal Entry

Payroll Tax Expense- Sales Salaries xx Factory Overhead (Vacation) 950
Payroll Tax Expense- Admin Salaries xx Vacation payable 950
SSS Premium Payable xx
Philhealth Premium Payable xx
Pag-ibig Premium Payable xx

Special Labor Cost Problems

1. Shift Premiums- Ex. night shift deferential

2. Employee Pension Costs- Employers'
contributions to the retirement plan of the
employees.
3. Bonuses
4. Vacation and Holiday Pay

Accounting for Bonuses, Vacations, and Holiday

Pay

Work in Process xx
Factory Overhead (Bonus) xx
Factory Overhead (Vacation) xx
Factory Overhead (Holiday) xx
Payroll xx
Bonus Liability xx
Vacation Pay Liability xx
ACCOUNTING FOR FACTORY OVERHEAD Applying Variable Overhead
For one month
Allocating Overhead Actual vs Normal
Actual activity level 4,300 actual machines
Product Cost Actual Cost Normal Cost Times hours times
System System Predetermined P7.50 Predetermined
Direct Actual Actual Overhead rate variable overhead rate
Materials Equals equals
Direct Labor Actual Actual overhead applied P32,250 overhead
Overhead Actual Predetermined applied
Overhead Rate
Apply Variable overhead
Predetermined Overhead Rate Work in process Inventory 32, 250
Variable manufacturing Overhead 32,250
A budgeted, constant charge per unit of
activity used to assign overhead to production Applying Fixed Overhead
or services. For one month
Predetermined Overhead Rate Actual activity level 4,300 actual machines
Times Hours times
_Total budgeted overhead__ = Predetermined Predetermined P 12.60 Predetermined
Overhead Activity level Overhead Overhead rate fixed overhead rate
(Volume) Rate Equals equals
overhead applied P 54, 180 overhead
P100,000 applied
5,000 = P 20 per Dl Hours
DL Hours Apply Fixed Overhead
Work in Process Inventory 54,180
The Activity Level Fixed Manufacturing Overhead 54,180
(The Denominator)
Relationship between the overhead cost and Recording and Applying Overhead
the activity For one month
1. production volume Overhead Account
2. direct labor hours __(Combined Fixed/Variable__
3. direct labor cost Actual Overhead Applied Overhead
4. machine hours
5. number of purchase orders or parts
6. machine setups
7. material handling time
Apply Overhead ( combined journal entry)
Predetermined Overhead Rate Work in Process Inventory 86,430
Total budgeted Variable Factory Overhead Applied 32,250
variable overhead P375,000 = P 7.50 Fixed Factory Overhead Applied 54,180
Activity level 50,000 per machine hours
(Volume)
Total budgeted
fixed overhead P 630,000 = P 12.60
Activity level 50,000 per machine hour
(Volume)
Recording Actual Overhead Alternative Capacity Levels
For one month (The Denominator Level)
1. Theoretical capacity
Overhead Account ▪ All production factors are
Combined/Fixed/Variable operating perfectly.
Actual Overhead Applied Overhead ➢ Disregards
Variable 31,385 Variable 32,250 ▪ Machinery breakdown
Fixed 55,970 Fixed 54,180 ▪ Holiday downtime
➢ Results in
Record actual overhead ▪ Significant underapplied
Variable Manufacturing Overhead 31,385 overhead
Fixed Manufacturing Overhead 55,970 ▪ Lowest product cost
Various accounts 87,355
Alternative Capacity Levels
Manufacturing Overhead (The Denominator Level)
For the entire year 2. Practical capacity
Overhead Account ▪ Theoretical capacity reduced
(Combined/Fixed/Variable) by ongoing, regular operating
Actual Overhead Applied Overhead interruptions (holidays,
87,335 86,430 downtime, and start-up time).
➢ Usually results in
Overhead is P925 underapplied ▪ Underapplied overhead
P87,355 of actual overhead was incurred ▪ Low product cost
P86,430 was applied to Work in Process
Alternative Capacity Levels
Disposing of Overhead Differences
(The Denominator Level)
If overhead is underapplied 3. Normal capacity
▪ Cost of Goods Sold increases - Considers
▪ Income decreases • Historical production
If overhead is overapplied level
▪ Cost of Goods Sold decreases • Estimated future
▪ Income increases production level
• Cyclical fluctuations
Disposing of Overhead Differences
- Attainable level of activity
• Immaterial - When normal capacity is greater than
- Cost of Goods Sold expected capacity, may result in
• Material - Prorate to • Underapplied
- Work in Process overhead
- Finished Goods • Higher production cost
- Cost of Goods Sold

Alternative Capacity Levels

(The Denominator Level)
• Capacity- measure of volume or some other
activity base
• Alternative measures
- Theoretical
- Practical
- Normal
- Expected
Alternative Capacity Levels
(The Denominator Level)
4. Expected capacity
- Anticipated activity level for the upcoming
period based on projected product demand.
- Determined during the budget process.
- Should closely reflect actual costs.
- Results in
▪ Immaterial overapplied or
underapplied overhead
▪ Highest product cost

Alternative Capacity Levels

(The Denominator Level)
1. Theoretical lowest product cost
2. Practical low product cost
3. Normal higher product cost
4. Expected highest product cost

❖ assuming normal exceeds expected capacity

Plantwide vs. Departmental

Predetermined Overhead Rates
• Plantwide Overhead Rate
▪ Homogeneous activities
throughout plant.
• Departmental Overhead Rate
▪ Different types of work effort
in departments.
▪ Diverse material requiring
different times in
departments.
▪ Usually provides better
information for planning,
control, and decision making.
SERVICE COST ALLOCATION Allocation Bases for
Service Department Costs
Plantwide vs. Departmental
✓ Rational and systematic base
Predetermined Overhead Rates
o Benefit received by revenue-producing
Plantwide Overhead Rate
department.
▪ Homogeneous
o Causal relationship
activities throughout
o Fairness or equity of the allocations
plant
o Ability of revenue-producing
Departmental Overhead Rate
department to bear the allocated cost.
▪ Different types of work
effort in departments. Service Cost Allocation Methods
▪ Diverse material
✓ Direct method
requiring different
✓ Step method
times in departments.
o Benefits-provided ranking
▪ Usually provides better
✓ Algebraic method
information for
o Simultaneous equations
planning control, and
decision making. Step Method
Factory Overhead: Departmentalization Partially recognizes relationships among service
departments
✓ Departmentalization - means dividing the
plant into segments, called departments to Service Revenue
which overhead costs are charged. Step 1 1 2 A B C
1. Producing Department - manufactures the P
product by changing the form of or material or Step 2 P
by assembling parts.
2. Service Department - renders a service that Does not recognize the two-way exchange of services
contributes in an indirect way to the between service departments.
manufacture of the product.
Algebraic Method- Provides best allocation
Advantages of Departmentalization information.

• Provides improved product costing. Service Revenue

• Promotes responsible control of overhead At the same 1 2 A B C
costs. time P
P
Service Department Cost Allocation Recognizes all interrelationships among
departments.
✓ Service departments provide functional tasks
for other internal units. Service Cost Allocation
o Purchasing
• Allocated service department costs are
o Maintenance
o Engineering included in the overhead application rate for
o Security
o Warehousing the revenue-producing areas.
✓ Administrative departments provide • Service department costs are allocated to
management activities for the organization.
o Personnel products or jobs through normal overhead
o Legal assignment procedures.
o Payroll
o Insurance