Chapter 3
Accounting for Labor
Learning Objectives
LO1 Distinguish between features of hourly rate
and piece-rate plans.
LO2 Specify procedures for controlling labor
costs.
LO3 Account for labor costs and payroll taxes.
LO4 Prepare accruals for payroll earnings and
taxes.
LO5 Account for special problems in labor
costing.
Payroll Accounting
System for a
Manufacturer
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.
Direct Labor - Review
Represents payroll
costs that are
traceable to
individual jobs
worked on during the
period.
Direct labor costs are
debited to the work in
process account.
Indirect Labor - Review
Costs are incurred for a
variety of jobs that are
related to the production
process, but are not
readily identifiable with
the individual jobs
worked on during the
period.
Indirect labor costs are
charged to factory
overhead.
Hourly Rate Plan
The employees 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.
Piece-Rate Plan
Employees wages based on the
employers quantity of production.
Number of units produced is multiplied by
a predetermined rate.
May be referred to as incentive wage
plan or piece-rate plan.
Quality may be sacrificed in order to
maximize quantity.
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.
When production work teams are utilized, a single
incentive for the group would be appropriate.
Labor Time Records
Given the magnetic card reading
technology available today, the time
record typically takes the form of a
computer file.
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.
A summary of the payroll is sent to accounting to
record the payroll in the accounting records.
The payroll record is sent to the treasurers
department for making payments to employees.
Payroll Records
Forms used by companies will vary, but all
forms possess some common characteristics.
Entry to record payroll.
Payroll
XX
FICA Tax Payable
XX
Employees Income Tax Payable
XX
Health Insurance Payable
XX
Employee Receivable
XX
Wages Payable
XX
Employee Earnings
Records
Company maintains a record of the
earnings for each employee.
The cumulative record of earnings is
needed to compute earnings subject to
many types of taxes.
Information is also used to prepare Form
W-2 and Form W-3.
Payment of Net Earnings
Accounting department sends the payroll
record to the treasurers office.
The treasurers office is responsible for making
the payments to employees.
Wages Payable
XX
Cash
Entry to pay employees.
XX
Recording Salaries and
Wages
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.
Salaried employees are often not required to
prepare labor time records.
Flow of Costs from Subsidiary
Records to General Ledger
Labor Time
Records
Job Cost Sheets
(Direct Labor)
Factory Overhead
Sheets
(Indirect Labor)
Labor Cost
Summary
(Direct and Indirect
Labor)
General Journal and
General Ledger
(WIP-Direct Labor
FOH-Indirect Labor)
Employers Payroll Taxes
Federal Insurance
Contributions Act
(FICA)
Federal
Unemployment Tax
Act (FUTA)
State Unemployment
Tax Act (SUTA)
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
XX
Wages Payable
Entry to record accrual of payroll.
XX
Illustration of
Accounting for Labor
Costs
General Journal Entry to Record Payroll
Payroll
xx
FICA Tax Payable
xx
Employees Income Tax Payable
xx
Health Insurance Premiums Payable
xx
Wages Payable
xx
Record Payment of Net Earnings
to Employees
Wages Payable
Cash
Work in Process
Factory Overhead
Sales Salaries
Administrative Salaries
xx
xx
Employers Payroll Taxes
Factory Overhead
Payroll Tax Expense Sales Salaries
Payroll Tax Expense Admin Salaries
xx
xx
xx
xx
Payroll
xx
Distribution of Payroll
xx
xx
xx
FICA Tax Payable
xx
Federal Unemployment Tax Payable
xx
State Unemployment Tax Payable
xx
Special Labor Cost
Problems
Shift Premiums
Employee Pension
Costs
Bonuses
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
Holiday Pay Liability
XX
Incurred payroll and bonus, vacation, and holiday pay.