Cost Accounting and control accounting for labor activities PDF

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ACCOUNTING FOR LABORLearning 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 consequen...

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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 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 Factory Overhead Accrued Payroll

13400 650 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) OT premium Indirect

40 * 37.50 5 * (37.50 * 20%) 5 * 37.50

1500 37.50

Pamu (basic) OT premium Indirect Total

42 * 40.625 4 *(40.625* 20%) 2 * 40.625

1706.25 32.5

187.50

5420

81.25 400

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. nd 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 days in a week. How much will the laborer receive for the week? Answer: Daily Rate 350 Special Premium (350 * 10%) Total Days Worked Payroll

35 385 5 1925

Three activities involved in Accounting for Labor 1. The entry to record the payroll and the incurrence of liability is: Payroll Withholding tax Payable SSS Premium Payable Phil Health Contribution Payable Accrued Factory Payable 2. The entry to record the distribution of payroll Work in Process Factory Overhead Control Payroll 3. The entry to record the payment of payroll Accrued Factory Payroll Cash

Pxxx Pxxx Xxx Xxx xxx Pxxx Pxxx xxx Pxxx 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 llustration 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 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 (P (PhilHealth) hilHealth) 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 FFund) und) 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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