SSC - R Cost Accounting and Control Accounting for Labor
ACCOUNTING FOR LABOR
Learning Objectives
Upon completion of the topic, the student should be able to:
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 is the physical or mental effort expended in manufacturing a product. Labor cost is the price paid for using human resources. The
compensation paid to employees who engage in production related activities represents factory labor. The principal labor cost is wages paid to
production workers. Wages are payments made on an hourly, daily, or piecework basis. Salaries are fixed payments made regurlarly for managerial
and clerical services. However, in practice, the term “wages” and “salaries” are often incorrectly used interchangeably.
Time Card
To support the labor charged to the job, the company accountant normally maintains a record of labor cost for each job or department. Workers are
provided with timecard to evidence their presence on the work site. The time card reflects the official hours of arrival and departure of each worker.
In bigger manufacturing companies, they use biometric system to monitor the in and out of workers.
Time Ticket
Since the time card shows only the time a worker arrives and leaves the work site, a time ticket is manually prepared by each worker to determine
the type of work and the job worked by each worker together with the time he started and stopped working during the day. This is the used as basis
for distributing the payroll.
Special Problem in Factory Labor
Piece rate with guaranteed wage
Some manufacturing companies pay their workers according to the units they produced with guaranteed wage. In this situation, the work in process
account charged with the number of unit produced multiplied by the piece rate. If a worker produces less than the amount of guaranteed wage, the
difference is charged to factory overhead account.
Illustration 01: A Company’s compensation scheme for its factory workers provides a combined maximum guaranteed wage and a piece rate. Each
worker is paid P50 per piece with a minimum guaranteed wage of P2,100 a week (6 working days). During the first week of May, the production
submitted the following output:
Employee Unit produced
Anne 38
Angel 35
Mariel 55
Toni 40
Sam 48
Lucky 52
Determine the following: (a) The amount of labor charged to work in process and (b) The amount of labor charged to factory overhead:
Guide:
Factory workers Labor charged to WIP To be paid to the worker Labor charged to FOH
Anne 1900 2100 200
Angel 1750 2100 350
Mariel 2750 2750
Toni 2000 2100 100
Sam 2400 2400
Lucky 2600 2600
Total 13,400 14050 650
Journal Entry:
Work In Process 13400
Factory Overhead 650
Accrued Payroll 14050
Rush Job
Generally, overtime premium included in the wages of laborers is charged to factory overhead. But, when a customer request for an overtime to rush
his order, the overtime premium is charged to work in process account together with basic pay.
Illustration 02: The weekly time ticket indicated the following distribution of labor hours for three factory workers who worked on a rush order.
Job 101 Job 102 Job 143 Indirect
Name of worker Rate per hour Reg OT Reg OT Reg OT
Carlo P43.75 9 5 13 5 15 3
Tin P37.50 18 - 15 - 2 5 5
Pamu P40.625 6 2 7 2 25 - 2
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SSC - R Cost Accounting and Control Accounting for Labor
Workers are allowed a maximum of 10 hours overtime per week at 20% overtime premium. During the week, Job 101, Job 102, and Job 143 were
worked on by three labors. Determine the amount of labor charged to WIP and FOH accounts.
Guide:
Worker Computation Direct labor Indirect labor
Carlo (basic) 47* 43.75 2056.25
OT premium 10* (43.75*20%) 87.5
Indirect 3*43.75 131.25
Tin (basic) 40 * 37.50 1500
OT premium 5 * (37.50 * 20%) 37.50
Indirect 5 * 37.50 187.50
Pamu (basic) 42 * 40.625 1706.25
OT premium 4 *(40.625* 20%) 32.5
Indirect 2 * 40.625 81.25
Total 5420 400
Journal Entry: Work in Process 5,420
Factory Overhead 400
Accrued Payroll 5,820
Shift Premium and Night Premium
The work schedule of some manufacturing companies is not usual 8:00 hours work starting from 8:00am and end at 5:00pm. Some are following the
3 shifts schedule as follows: 1st shift: 6:00am – 2:00pm; 2nd shift: 2:00pm – 10:00pm; 3rd shift: 10:00pm – 6:00am.
Illustration 03: The company’s work schedule for a five-working day is as follows:
1st shift: 6:00am – 2:00pm;
2nd shift: 2:00pm – 10:00pm;
3rd shift: 10:00pm – 6:00am.
Laborer working 2 shift are paid the regular rate plus 10% special premium. Assume a laborer works on 2 nd shift earns P350.00 a dat. He worked 5
nd
days in a week. How much will the laborer receive for the week?
Answer: Daily Rate 350
Special Premium (350 * 10%) 35
Total 385
Days Worked 5
Payroll 1925
Three activities involved in Accounting for Labor
1. The entry to record the payroll and the incurrence of liability is:
Payroll Pxxx
Withholding tax Payable Pxxx
SSS Premium Payable Xxx
Phil Health Contribution Payable Xxx
Accrued Factory Payable xxx
2. The entry to record the distribution of payroll
Work in Process Pxxx
Factory Overhead Control Pxxx
Payroll xxx
3. The entry to record the payment of payroll
Accrued Factory Payroll Pxxx
Cash xxx
The accounting system of a manufacturer must include the following procedures for recording payroll costs.
1. Recording the numbers of hours used in total and by job.
2. Recording the quantity produced by the workers.
3. Analyzing the hour used by the employees to determine how time is to be charged.
4. Allocation of payroll cost to job and factory overhead accounts.
5. Preparation of the payroll, including computation and recording of the employees gross earnings, deduction, and net earnings
The labor cost summary is used as the source for making a general journal entry to distribute payroll to the appropriate accounts. The
entry then is posted to the control accounts. WIP and FOH Control ledger.
In preparing labor cost summary from the tickets, it is important to separate the overtime from an employee’s regular time because the
accounting treatment may be different for each type of pay. The regular time worked is charged to job by debiting Work in Process. Overtime may be
charged to job, to factory overhead, or allocated partly to job and partly to overhead. Overtime distribution depends upon the conditions creating the
need for overtime.
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SSC - R Cost Accounting and Control Accounting for Labor
If an employee works beyond the regularly scheduled time but the employee is paid at the regular hourly rate, the extra pay is called
OVERTIME PAY. If an additional rate is allowed for the extra hour worked, the additional rate earned is referred to as OVERTIME PREMIUM. The
premium pay rate is added to the employee’s regular rate for the additional hours worked. The premium rate will depend on the collective bargaining
agreement (CBA) between management and the union.
Illustration 04: Assume an employee regularly earns P1,100 per hour for 8 hour day. If called upon to work more than 8 hours in a working day, the
company will have to pay overtime premium for hours worked in excess of 8 hours. Assume the employee works 12 hours Monday, is paid 50%
overtime premium the earning would be calculated as follows:
Guide:
Direct Labor 1,100*8 8,800
Factory Overhead Control 1100 *4 4400
Overtime Premium 550 * 4 2200 6600
Total 15,400
Illustration 05: If previously mentioned employee paid a premium of 100% (double time), the earning would be:
Guide:
Direct Labor 8800
Direct Labor 4400
FOH-OT PREMIUM 4400 8800
Total 17600
Deductions from Employee’s Earnings
1. Employer’s Payroll Taxes (Creditable Withholding Tax)
2. Social Security System Contribution (SSS) – Private sector or (GSIS) – Government sector
3. Philippine Health Insurance Corporation (PhilHealth)
4 Development Mutual Fund Contribution (Pag-Ibig Fund)
Employer’s Payroll Taxes
Payroll taxes imposed on employees include social security premium, Pag-ibig fund contributions and Philhealth premiums. Employer are
responsible for periodically reporting and paying the taxes to appropriate government agencies. Employer who fail to file require reports or pay taxes
due are subject to civil, and in some cases, criminal penalties.
Social Security System Contribution (SSS)
Requires employers to pay SSS on wages and salaries equivalent to approximately 68% of the total contribution credited to the employee.
Benefits:
Pension Upon Retirement Salary Loan
Educational Loan Maternity Leave (W/ Pay)
Housing Loan Calamity Loan
Illustration 06: Juan Dela Cruz monthly salary P15,800. Compute the SSS contribution of Juan and the employer’s contribution as well.
Guide:
Salary Rate Employer Employee Total Contribution
15 800 1 264 632 1,896
Philippine Health Insurance Corporation (PhilHealth)
The amount contributed by the employer is equal to the amount deducted from the employee’s salary or wage. The maximum deduction per table
P375 for salaries 30,000 and over. The contribution of the employer, maximum, is also P375.
Benefits: Hospitalization
Professional fee Room
Medicine Other expenses
Illustration 07: Assume Perdo monthly salary is P30,500, Compute the PhilHealth contribution of Pedro and the employer’s contribution as well.
Guide:
Salary Rate Employer Employee Total Contribution
30 500 457.5 457.5 915
Development Mutual Fund Contribution(Pag-Ibig Fund)
The amount deducted from the employee’s salary is equivalent to 3% of basic or 100, whichever is lower. The contribution of the employer is also
equal to the amount deducted from the employee
Benefits:
Educational Loan Salary Loan
Housing Loan Upon retirement: return of the total amount paid by the employee and employer plus dividends
Illustrative 08: The Nocos Manufacturing Company pays employees every two weeks. Monday, May 1, is the beginning of a new payroll period. The
payroll summary (for factory worker – single and one administrative employee – single) is prepared by the payroll department and forwarded to
accounting for recording: Payroll Summary - For the period May 1-14
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SSC - R Cost Accounting and Control Accounting for Labor
Factory Worker Sales and Admin Employee Total
Gross Earning P10,000 P20,000 P30,000
Withholdings and Deductions:
Income tax 0 2 083.25 2 083.25
SSS Premium 400 800 1 200
PhilHealth 150 300 450
Pag-Ibig 200 400 600
Total (750) (3 583.25) (4 333.25)
Net earning 9,250 16 416,75 25 666.75
Journal Entries:
Payroll voucher is authorized and recorded as follows:
Dr Cr
Payroll 30,000
Withholding Tax Payable 2 083.25
SSS Contribution Payable 1 200
PhilHealth Contribution Payable 450
Pag-Ibig Contribution Payable 600
Voucher Payroll Payable 25 666.75
Payment of the Net Earning
Voucher Payroll Payable 25 666.75
Cash 25 666.75
The following schedule provides the information necessary to record the employer’s payroll taxes for the period.
SSS Philhealth PagIbig Total
Factory Payroll 810 150 200 1 160
Selling & Admin 1 630 300 400 2 330
Total 2 440 450 600 3490
The entry to record the employer’s payroll taxes:
Factory Overhead Control 1 160
Selling and Adminitrative Expenses Control 2 330
SSS Contribution Payable 2 440
PhilHealth Contribution Payable 450
Pag-Ibig Contribution Payable 600
Assessment Task: Theories
1. Employers are required to prepare W-2 forms for every employee at the end for the calendar
Filling of income tax return every year year. These forms are used by the employee for:
Expense for the employer 2. The employer’s portion of SSS premiums is:
Employees 3. Income taxes withheld are levied on whom.
Gross pay less all deductions 4. “Take Home pay” or net pay means:
Income taxes withheld 5. What is deduction are not levied on the employer?
Labor time ticket 6. What is usually prepared daily by employees for each job worked on?
Factory Overhead Control Account 7. Factory workers fringe benefits are usually charged to what account
Factory Overhead Control Account 8. Idle time of factory workers is usually charged to what account.
9. Overtime premium, incurred on rush jobs as requested by the customer, who has agreed to pay
Work in Process Account for the special service, may be charged to what account.
Selling Expense 10. Fringe benefits of sales personnel is usually charged to what account.
Personnel Records 11. To check the accuracy of hours worked, one would ordinarily compare time card with?
Overtime Premium 12. Wages in excess of the regular rate paid for work after normal closing time is?
13. The job is taken as a rush order the knowledge that overtime will be necessary, the overtime
Specific Job premium should be charged
Work in Process Account 14. If the overtime is charge to specific job, it should be debited to:
Timekeeping 15. What procedure for keeping records of the hours worked by each employee?
Problem Solving
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SSC - R Cost Accounting and Control Accounting for Labor
1. Joe worked 46 hours in one week at a rate of P45 an hour. He is paid one and half times the regular rate for hours worked excess of 40. What
is the gross earnings of Joe?
Answer:
Direct Labor 46 * Php 45.00 Php 2,070
Overtime Premium 6* Php 22.5 135
Gross Earnings Php 2,205
2. The data below pertains to the earnings of Eric Buen for the week ended February 15, 2020: What is the net pay for Eric?
Hour and rate 54 hours worked at P800 an hour
Overtime rate One and a half times the regular rate for hours work in excess of 40 hours.
Answer:
Regular Pay 54 * Php *800.00 43,200
Overtime Pay 14 * 400 5600
Gross Earnings 48,800
Deductions
Withholding Tax 12,731.24
SSS Contribution 1,952
Philhealth Contribution 732
Pag-ibig Contribution 976 (16,391.24)
Net Pay 32,408.76
3. Mike, a production employee is paid P180 per hour for a regular work of 40 hours. During the week ended March 23, Mike worked 50 hours and
earned time and a half for overtime hours. What is the amount that should be charged to WIP account if the overtime premium is charged to
production worked on during the overtime hours?
Answer:
Amount Account Charged
Regular Hours 50 * Php 180.00 Php 9.,000 Work in Process
Overtime 10 * Php 90.00 9,00 Work in Process
Total Php 9,900 Work in Process/Accrued Payroll
4. What is the amount that should be charged to WIP account, if overtime premium is charged to FOH account?
Answer:
Amount Account Charged
Regular Hours 50 * Php 180.00 Php 9,000 Work in Process
Overtime 10 * Php 90.00 9,00 Factory Overhead Control
Total Php 9,900 Accrued Payroll
5. Ms. Joy, a punch press operator in a metal fabricating plant is randomly assigned to various jobs. The straight-time wage rate is P40 per hour
and with time and one-half for the time over 40 hours per week. How much of these earnings should be charged to FOH account if 47 hours are
worked in one week?
Answer:
Direct Labor 47 * Php
1,880 Work in Process
40.00
Overtime Premium 7* Php 20.00 140 Factory Overhead Control
Gross Earnings 2,020 Accrued Payroll
