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Chapter 8:
Labor costs and Remuneration
methods
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What you will learn?
Remuneration methods and systems
Labor costs
Gross and net earnings
Accounting for labour costs
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Remuneration methods and systems
Wages and salaries department in large organizations is
responsible for calculating amounts owing, dealing with
employees who leave and with new joiners
The payments to each employee are the same every
week or month or depend on time records (clock cards),
production records, or some other type of calculation
Employees will receive a wage or salary slip showing
their pay and any deductions for tax
The amounts to be paid are passed to the accounting
department which will look after the cash transfers to
employees, the tax authorities and any other recipient
(pension funds)
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Remuneration methods and systems
Payments to employees
Type of payments
Credit
Cash Cheques transfer to
bank account
Become much less common
Be labour intensive as envelopes had to
be filled with the correct cash for each
employee
Security issues because the cash
needed for a large workforce was very
significant and it is an attractive target
for robbery
Signing a register that wages had been
received to ensure that the right people
received the cash when wages were
handed out
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Labor costs
Basic wage or salary
Overtime premiums
Bonuses
Origin of
Commission (per sales made)
labor cost
Holiday pay
Sick pay
Payroll taxes
Paying wages and salaries under a ‘pay as you earn scheme’
means:
The employer deducts the employees’ income tax from the
gross wage and pays that over directly to the tax authority
The net amount after tax is paid to the employee
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Labor costs
Approaches to employee remuneration
Method 1: A constant weekly or monthly amount
Labor cost = remuneration per period x number of periods
Method 2: An amount based on hours worked (basic plus
overtime)
Example: 52 hours are worked in a week. Basic week is 40
hours, the basic rate of wage = $10, and overtime is paid at
time and one half
Hours worked (1) Rate of wage (2) $ = (1) x (2)
Basic wage 52 $10 $520
Overtime
52 - 40 = 12 $10 x 50% = $5 $60
premium
Total wage $580
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Labor costs
Approaches to employee remuneration
Method 3: An amount based on units produced
(piecework)
Often have a guaranteed minimum amount of wage so as to
comply with minimum wage rate legislation
Example: Minimum pay/week = $250; Piece rate = $3/unit
If 100 units are made in a week
=> The wage = $3 x 100 = $300
If 80 units are made in a week
=> The wage = $250 (the piece rate amount = $3 x 80 = $240
< $250)
Method 4: An initial amount plus a bonus
Full instructions would have to be supplied as to how to
calculate the amounts
Example: The bonus could be part of a profit share
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Labor costs
Approaches to employee remuneration
Method 5: An amount based on productivity
There are many different types of bonus scheme and any
question have to set out the precise rules
Example:
Basic wage = $9/hour for 40 hours per week. Normal
production in that time = 120 units. Bonus = 50% of the time
saved on production paid at time and a third. What will be the
total wage in a week in which 150 units are made in 40
hours?
Basic wage = $9 x 40 = $360
Normal: 120 units take 40 hours
=> 150 units take 50 hours
But actual 150 units took 40 hours => Hours saved = 10
hours
Bonus = 50% x ($9 x10 + $9 x 10 x 1/3) = $60
Total wage = Basic wage + Bonus = $360 + $60 = $420
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Gross and net earnings
The total amount earned by the
Gross wages
employee
The amount paid to the employee after
the employer makes deductions for
Net wages
income tax and certain statutory
amounts
Employees’ gross wages plus any
Total labor cost additional payroll taxes and pension
to employer contributions that the employer has to
bear
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Accounting for labor costs
Step Entries
Step Dr Wages and Salaries account: gross wages
1 Cr Wages Control account: gross wages
Dr Wages and Salaries account: additional employer’s
Step
costs
2
Cr Wages Control account: additional employer’s costs
Dr Wages Control account: net wages
Step
Cr Cash: net wages
3
(payment of net wages to employee)
Dr Wages Control account: employee deductions
Step
Cr Cash: employee deductions
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(payment of deductions to government)
Dr Wages Control account: other amounts due
Step
Cr Cash: other amounts due
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(payment of other amounts to government)