Accounting for
Labor
Learning Objectives
LO1 Specify procedures for controlling labor
costs.
LO2 Account for labor costs and payroll taxes.
LO3 Prepare accruals for payroll earnings and
taxes.
LO4 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.
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 treasurer’s
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 treasurer’s office.
▪ The treasurer’s office is responsible for making
the payments to employees.
Wages Payable XX
Cash XX
Entry to pay employees.
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
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)
Employer’s Payroll Taxes
▪ SSS
▪ Philhealth
▪ Pag-ibig
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 XX
Entry to record accrual of payroll.
Illustration of Accounting
for Labor Costs
▪ General Journal Entry to Record Payroll ▪ Distribution of Payroll
▪ Payroll xx ▪ Work in Process xx
▪ Factory Overhead xx
▪ Withholding Tax Payable xx ▪ Sales Salaries xx
▪ SSS Contribution Payable xx ▪ Administrative Salaries
xx
▪ Wages Payable XX
▪ Payroll xx
▪ Record Payment of Net Earnings ▪ Employer’s Payroll Taxes
▪ to Employees
▪ Factory Overhead xx
▪ Payroll Tax Expense – Sales Salaries
▪ Wages Payable xx xx
▪ Payroll Tax Expense – Admin Salaries
▪ Cash 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.
▪ Accounting for Overtime
Premiums
▪ Gross earnings of employees are divided
into two parts: the regular rate and the
overtime premium.
▪ The regular rate for direct laborers should
be charged to work in process
▪ However, overtime premium is charged
depending on the nature of the overtime
▪ Accounting for Overtime
Premiums
▪ If the overtime is a result of a rush order
with the knowledge that overtime would be
necessary the regular rate should be
charge to Work in Process
▪ If the overtime is a result of problem in
scheduling or machine breakdowns
(normal) it should be charged to Factory
Overhead
▪ ABC Manufacturing runs a normal 8-hour shift.
The regular rate is ₱100/hour while the
overtime rate is 150% of the regular rate.
On a given day, an employee works 10
hours on a given day.
Required: Journal entry to record the labor pay
assuming:
a. Overtime is incurred specifically for a rush
customer order that must be completed urgently.
b. Overtime was incurred due to a general machine
breakdown earlier in the day, causing delay in
production. The extra hours are not related to a
specific job.
