Accounting
for Labor
LEARNING OBJECTIVES
• Distinguish between and account for direct and indirect labor as they are used in
the production process.
• Identify the three activities involved in accounting for labor.
• Understand the consequences of and be able to account for employee and
employer taxes and fringe benefit costs.
• Identify the guaranteed wage and incentive plans that may be used.
LABOR
• The physical or mental effort exerted by individuals in the
creation of a product. This also includes all salaries
earned by employees in the factory.
• The compensation paid to employees who engage in
production related activities represents factory labor.
Inclusions to labor costs
• Basic salaries of workers
• Overtime pay
• Bonuses for exemplary performance
• SSS, PHIC, HDMF dues (employer share)
• Medical benefits and the like
KINDS OF LABOR
• DIRECT LABOR
Cost of traceable work done to transform the raw materials to finished goods.
Cutters, painters, assemblers, machinists
• INDIRECT LABOR
Cost of work not directly traceable to the production of the product but is still
related to the production process.
Factory supervisor, inventory clerks, timekeepers, janitors
Accounting procedures for
payroll costs
1. Recording the number of hours used in total and by job.
2. Recording the quantity produced by workers.
3. Analyzing the hours used by employees to determine how
time is to be charged.
4. Allocation of payroll costs to jobs and factory overhead
accounts.
5. Preparation of the payroll, including computation and
recording of the employees' gross earnings, deductions,
and net earnings.
WAGES PLANS
• There are different wage plans that are being used by
companies. The plan established by management is
approved by the union and should comply with regulations
of government agencies.
Hourly-Rate Plan
Piece-Rate Plan
Modified Wage Plan
HOURLY-RATE PLAN
• Under this plan, a definite rate per hour is set for each
employee. The employer wages are calculated y
multiplying the rate per hour by the number of hours
worked.
• The hourly-rate plan is simply to use but does not provide
incentive for the employee to achieve high level of
productivity.
PIECE-RATE PLAN
• Under a price-rate plan, earnings are calculated by
multiplying the employee’s output by the rate per piece.
• The plan provides an incentive for the employee to
produce more.
MODIFIED-WAGE PLAN
• This plan combines the features of hourly-rate and piece-
rate plans. An example of modified wage plan would be to
set a minimum hourly wage that will be paid by the
company even if an established quota of production is not
attained by an employee.
• If the established quota is exceeded, an additional
payment per piece would be added to the minimum wage
level.
CONTROLLING LABOR COST
TIME-KEEPING PAYROLL
RECORD DOCUMENTS
PAYROLL RECORDS
CLOCK CARDS
EMPLOYEE’S EARNING
TIME TICKETS
RECOCRDS
PRODUCTION REPORTS
PAYROLL SUMMARIES
ACCOUNTING FOR LABOR COSTS
Clock
Time Production
cards/
tickets report
Timecards
SPECIAL CONSIDERATIONS
• When jobs are rush, overtime pay is normally encountered to cover the extra
hours the workers has rendered. Normally, overtime premium is charged to
overhead. However, if because of a rush job, it is inevitable to work overtime, the
whole overtime premium is charged to production.
• Workers in shift different from the normal 8:00 am – 5:00 pm shift is paid a special
premium rate charged to factory overhead (e.g. 10%-night shift differential for
work done between 10:00pm – 6:00am.)
• Workers are also paid during idle time. Idle time refers to the time workers has no
work to perform due to temporary changes in production setup. This is charged to
factory overhead. However, a loss account is to be established when the changes
in production is due to negligence or inefficiency.
FUNDAMENTALS OF PAYROLL
STEP 1. COMPUTE FOR THE GROSS STEP 1. COMPUTE FOR THE TAXABLE
PAY BY GETTING THE TOTAL OF ALL INCOME (BASIS FOR WITHHOLDING).
EARNINGS. GROSS PAY XX,XXX
BASIC PAY XX,XXX LESS: SSS EE CONTRIBUTION (XXX)
LESS: LATES AND ABSENCES (XXX) LESS: PHIC EE CONTRIBUTION (XXX)
ADD: OVERTIME X,XXX LESS: HDMF EE (XXX)
ADD: OTHER TAXABLE INCOME X,XXX CONTRIBUTION
ADD: OTHER NONTAXABLE X,XXX LESS: OTHER NONTAXABLE (XXX)
INCOME INCOME
GROSS PAY XX,XXX TAXABLE INCOME XX,XXX
FUNDAMENTALS OF PAYROLL
STEP 3. COMPUTE FOR THE TOTAL STEP 4. COMPUTE FOR THE NET PAY
DEDUCTIONS USING ALL EARNINGS DEDUCTED BY
SSS EE CONTRIBUTION XXX ALL DEDUTIONS
PHIC EE CONTRIBUTION XXX GROSS PAY XX,XXX
HDMF EE CONTRIBUTION XXX LESS: TOTAL DEDUCTIONS (X,XXX)
WITHHOLDING TAX X,XXX TAXABLE INCOME XX,XXX
OTHER DEDUCTIONS XXX
TOTAL DEDUCTIONS X,XXX
WHAT ABOUT WORK DONE ON
SPECIAL DAYS?
• Assume that an employee receives a daily wage rate of P537. How much is the
pay for the day of an employee
[Link]
he/she works on…
DAY
537 X 1.30 P 698.10
A2. SPECIAL HOLIDAY
537 X 1.30 P 698.10
A3. SPECIAL HOLIDAY AT THE SAME TIME REST
DAY
537 X 1.50 P 805.50
A4. REGULAR HOLIDAY
537 X 2 P
1,074.00
A5. REGULAR HOLIDAY AND REST DAY
WHAT ABOUT OVERTIME?
• Assume that an employee receives a daily wage rate or P537. How much is the
hourly rate if overtime is done…
A1. An ordinary day A4. On special holiday at the same time
537 / 8 x 1.25 P 83.91 rest day
537 / 8 x 1.5 x 1.3 P
A2. On a rest day
130.89
537 / 8 X 1.30 x 1.30 P
A5. On a regular holiday
113.44
537 / 8 X 2 x 1.30 P
A3. On a special holiday
174.53
537 / 8 X 1.30 x 1.30 P
A6. On a regular holiday at the same
113.44
time rest day
537 / 8 X 2.6 x 1.30 P
226.44
WHAT ABOUT NIGHT
DIFFERENTIAL?
• Assume that an employee receives a daily wage rate or P537. How much is the
hourly rate if night differential pay if…
A1. An ordinary day A4. On special holiday at the same time
537 / 8 x 1.10 P 73.84 rest day
537 / 8 x 1.10 x 1.50 P
A2. On a rest day
110.76
537 / 8 X 1.10 x 1.30 P 95.99
A5. On a regular holiday
A3. On a special holiday
537 / 8 X 2 x 1.10 P
537 / 8 X 1.10 x 1.30 P 95.99 147.68
A6. On a regular holiday at the same
time rest day
537 / 8 X 2.6 x 1.10 P
191.98
PAYROLL JOURNAL ENTRIES
Factory salaries and xx,xxx Manufacturing xx,xxx
wages overhead
SSS Contributions payable – xx,xxx SSS Contributions payable – xx,xxx
EE ER
PHIC Contributions payable xx,xxx PHIC Contributions payable xx,xxx
– EE – ER
HDMF Contributions payable xx,xxx HDMF Contributions payable xx,xxx
– EE – ER
Withholding tax payable xx,xxx To recognize employer share of
Salaries andwages
wages payable contributions.
Salaries and xx,xxx xx,xxx
payable
To record factory payroll
Cash xx,xxx
To distribute pay to workers.
PAYROLL JOURNAL ENTRIES
SSS Contributions xx,xxx Work in process xx,xxx
payable – EE inventory
PHIC Contributions payable – xx,xxx Manufacturing overhead xx,xxx
EE Factory salaries and xx,xxx
HDMF Contributions payable xx,xxx wages
– EE Charging of factory payroll to
SSS Contributions payable – xx,xxx production.
ER
PHIC Contributions payable – xx,xxx
ER
HDMF Contributions
Withholding payable xx,xxx
tax payable xx,xxx
– ER
Cash xx,xxx
Cash xx,xxx
Payment of withheld taxes to the BIR.
Remittance of statutory contributions
Thank you