Chapter 3
Accounting for Labor
1
Learning Objectives
Distinguish between features of hourly rate and
piece-rate plans.
Specify procedures for controlling labor costs.
Account for labor costs and payroll taxes.
Prepare accruals for payroll earnings and
taxes.
Account for special problems in labor costing.
2
Direct Labor
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.
3
Indirect Labor
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.
4
Recording Payroll Costs
Record hours worked or output quantity by
employees by job, process, or department.
Analyze hours worked to determine how to
charge time.
Charge payroll costs to jobs, departments, and
factory overhead accounts.
Prepare payroll.
5
Wage Plans
Employees’ wages are based on plans
that have been established by
management, approved by the unions, if
present, and that comply with the
regulations of governmental agencies.
A manufacturer may use many
variations of wage plans including hourly
rate, piece-rate, and modified wage plans
6
Hourly-Rate Plan
The employee’s 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.
Assume that an employee earns $15/hr and
works 40 hours per week. The employee’s gross
earnings would be $600 (40 * $15 per hour)
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Piece-Rate Plan
Employee’s wages based on the employer’s
quantity of production.
May be referred to as incentive wage plan or
piece-rate plan.
Quality may be sacrificed in order to maximize
quantity.
To illustrate, assume that a machine operator will
earn $0.30 for each part (or ‘‘piece’’) finished. If
the operator finishes 2,200 parts in a week, he or
she will earn $660 ($0.30 * 2,200 parts).
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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 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.
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10
Controlling Labor Cost
The payroll department, or payroll
function within the accounting
department, uses the labor time records,
whether manually or electronically
generated, to compute each employee’s
gross earnings, the amount of
withholdings and deductions, and the net
earnings to be paid to the employee.
11
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.
12
13
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
for recording the payroll in the accounting
records.
The payroll record is sent to the treasurer’s
department for making payments to employees.
14
Forms used by companies will vary, but
all forms possess some common
characteristics.
15
Payroll Records
the entry to record the payroll data in Figure 3-
3 would be as shown below.
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
16
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.
Tax Statements (Form W-2) to
employees for the purpose of preparing
their individual tax returns.
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18
Payment of Net Earnings
Accounting department sends the payroll
record to the treasurer’s office.
The treasurer’s office is responsible for making
the payments to employees.
Wages Payable XX
Cash XX
Entry to pay employees.
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Accounting for Labor Costs
and Employers’ Payroll Taxes
For regular hourly employees, the hours worked
should be recorded on a labor time record.
The payroll department enters pay rates and
gross earnings and forwards the reports to
accounting.
Cost accountants examine the labor time records
and charge the labor costs to the appropriate jobs
or department and to factory overhead.
20
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.
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22
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.
23
The labor cost summary becomes the
source for making a general journal
entry, shown below, to distribute payroll
to the appropriate accounts.
24
Flow of Costs from Subsidiary
Records to General Ledger
Labor – Time
Records
Labor Cost
Factory Overhead
Job Cost Sheets Summary
Sheets
(Direct Labor) (Direct and Indirect
(Indirect Labor)
Labor)
General Journal and
General Ledger
(WIP-Direct Labor
FOH-Indirect Labor)
25
To illustrate how a payroll is computed where
an overtime premium is a factor, assume that
an employee regularly earns $15 per hour for
an 8-hour day. If called upon to work more than
8 hours in a working day, the company pays
time-and-a-half for overtime hours. Assuming
that the employee works 12 hours on Monday,
the earnings would be computed as follows:
26
Employer’s Payroll Taxes
Federal Insurance
Contributions Act
(FICA)
Federal
Unemployment Tax
Act (FUTA)
State Unemployment
Tax Act (SUTA)
27
Illustration of Accounting
for Labor Costs
Magnum Manufacturing Company pays
employees every two weeks. Monday, May
1, is the beginning of a new payroll period.
The company maintains the following
records: Payroll record, Employee earnings
records, General journal, General ledger,
Job cost ledger, Factory overhead ledger
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Magnum uses the following general
ledger accounts in accounting for labor
costs:
Cash Health Insurance
Work in Process Premiums Payable
Wages Payable Payroll
FICA Tax Payable Factory Overhead
Employees Income Tax Sales Salaries
Payable Administrative Salaries
Federal Unemployment Payroll Tax Expense—
Tax Payable Sales Salaries
State Unemployment Tax Payroll Tax Expense—
Payable Administrative Salaries
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Applicable withholding and payroll tax
rates and wage bases follow:
30
The following payroll summary is
prepared by the payroll department and
forwarded to accounting for recording:
31
After the data are verified, a general journal
entry records the payroll:
To record the payment of the net earnings
to employees, the following entry must be
made:
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33
The distribution of the payroll and the
employer’s payroll taxes are recorded as
follows:
34
The general ledger accounts that reflect the
entries related to the May 1–14 payroll period
follow, assuming a beginning cash balance of
$250,000:
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36
The next payroll period is May 15 to May 28. At
the end of the two week period, the following
schedule for payroll is prepared:
37
The payroll data are verified, and a general
journal entry is prepared as shown below.
The payment of the net earnings to
employees requires the following entry:
38
The schedule of earnings and payroll taxes provides
the information necessary to distribute the total
payroll of $150,000 to the appropriate accounts and
to record the employer’s payroll taxes for the period.
39
The distribution of the payroll and the
employer’s payroll taxes are recorded as
follows:
40
Payroll Accrual
When the end of the period does not coincide
with the ending date for a payroll period, an
accrual for payroll earnings and payroll tax
expense should be made.
Payroll XX
Wages Payable XX
Entry to record accrual of payroll.
41
Payroll Accrual
The next two-week payroll period for Magnum
Manufacturing Company begins on May 29 and ends
June 11. However, the financial statements to be
prepared for May require an accrual of payroll
earnings and taxes for the period May 29–31.
42
Payroll Accrual
43
44
After posting all of the preceding entries
the ledger accounts would appear as
follows
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46
Special Labor Cost
Problems
An employer may be required to account
for a variety of labor-related costs that do
not fall into the normal routine of
accounting for payroll costs. These
special costs may include shift premiums,
pensions (such as employer contributions
to a 401k plan), bonuses, and vacation
and holiday pay.
47
Special Labor Cost
Problems
Shift Premiums
Employee Pension
Costs
Bonuses
Vacation and Holiday
Pay
48
Special Labor Cost
Problems
Shift premium The employees working on
shifts other than the regular daytime shift may
receive additional pay.
The additional payroll costs for the shift
premiums do not increase the productivity of
the shifts, but are paid because of the social
and other lifestyle adjustments required of the
late-shift workers.
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Special Labor Cost
Problems
shift premiums are usually charged to
Factory Overhead and allocated to all
jobs worked on during the period,
regardless of the shift on which they
happened to be produced.
Employee pension costs: company
promises to provide income to
employees after they retire
50
Special Labor Cost
Problems
Defined contribution plan contributions from
employer and employee, but the amount of the
pension benefits is tied to the performance of the
company.
Noncontributory plans are completely funded (paid
for) by the company.
Contributory plans partial contribution from the
employee. When a pension plan is initiated, it is
usually retroactive and recognizes the previous
years of each employee’s service with the company.
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Special Labor Cost
Problems
Bonuses: a sum of money added to a
person's wages as a reward for good
performance.
Factory workers’ bonuses are charged to
Factory Overhead, and sales and
administrative employees’ bonuses are
charged to Selling and Administrative
Expense
52
Special Labor Cost
Problems
Vacation and Holiday Pay:
Vacation pay is earned by the employee
for daily service on the job over the
course of the year.
Holiday pay The agreement stipulates
that certain holidays during the year will
be paid for by the company, but they are
nonworking days for the employees.
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Special Labor Cost
Problems
To illustrate accounting for bonuses, vacations,
and holiday pay, assume that a factory worker,
who is classified as direct labor, earns $700 each
week. In addition, the worker will receive a $1,000
bonus at year-end, a 2-week paid vacation, and
10 paid holidays. The following entry records the
weekly payroll and the costs and liabilities related
to the bonus, vacation, and holiday pay as an
expense of the 50 weeks (52 weeks – 2 weeks
vacation) that the employee actually worked:
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Accounting for Bonuses,
Vacations, and Holiday Pay
Work in Process 700
Factory Overhead (Bonus) 20
Factory Overhead (Vacation) 28
Factory Overhead (Holiday) 28
Payroll 700
Bonus Liability 20
Vacation Pay Liability 28
Holiday Pay Liability 28
Incurred payroll and bonus, vacation, and holiday pay.
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