Chapter 3Chapter 3

Accounting for LaborAccounting for Labor

Learning ObjectivesLearning Objectives

LO1LO1 Distinguish between features of hourly Distinguish between features of hourly rate rate and piece-rate plans.and piece-rate plans.

LO2LO2 Specify procedures for controlling labor Specify procedures for controlling labor costs.costs.

LO3LO3 Account for labor costs and payroll taxes.Account for labor costs and payroll taxes.LO4LO4 Prepare accruals for payroll earnings and Prepare accruals for payroll earnings and

taxes.taxes.LO5LO5 Account for special problems in labor Account for special problems in labor

costing.costing.

Payroll Accounting Payroll Accounting System for a System for a ManufacturerManufacturer

1.1. Record the hours worked or quantity of Record the hours worked or quantity of output by employees in total and by job, output by employees in total and by job, process, or department.process, or department.

2.2. Analyze the hours worked by employees to Analyze the hours worked by employees to determine how labor time is to be charged.determine how labor time is to be charged.

3.3. Charge payroll time to jobs, processes, Charge payroll time to jobs, processes, departments, and factory overhead.departments, and factory overhead.

4.4. Prepare the payroll.Prepare the payroll.

Direct Labor - ReviewDirect Labor - Review

Represents payroll Represents payroll costs that are costs that are traceable to traceable to individual jobs individual jobs worked on during the worked on during the period.period.

Direct labor costs are Direct labor costs are debited to the work in debited to the work in process account.process account.

Indirect Labor - ReviewIndirect Labor - Review

Costs are incurred for a Costs are incurred for a variety of jobs that are variety of jobs that are related to the production related to the production process, but are not process, but are not readily identifiable with readily identifiable with the individual jobs the individual jobs worked on during the worked on during the period.period.

Indirect labor costs are Indirect labor costs are charged to factory charged to factory overhead.overhead.

Hourly Rate PlanHourly Rate Plan

The employee’s wages are calculated by The employee’s wages are calculated by multiplying the established rate per hour multiplying the established rate per hour by the number of hours worked.by the number of hours worked.

This plan does not provide an incentive This plan does not provide an incentive for the employee to achieve a high level for the employee to achieve a high level of productivity.of productivity.

Piece-Rate PlanPiece-Rate Plan

Employee’s wages based on the Employee’s wages based on the employer’s quantity of production.employer’s quantity of production.

Number of units produced is multiplied by Number of units produced is multiplied by a predetermined rate.a predetermined rate.

May be referred to as May be referred to as incentive wage incentive wage planplan or or piece-rate planpiece-rate plan..

Quality may be sacrificed in order to Quality may be sacrificed in order to maximize quantity.maximize quantity.

Modified Wage PlanModified Wage Plan

Minimum hourly wage is set even if an established Minimum hourly wage is set even if an established quota is not attained.quota is not attained.

If quota is exceeded, a bonus is added to the If quota is exceeded, a bonus is added to the minimum wage level.minimum wage level.

On days when the quota is not met, the difference On days when the quota is not met, the difference (make-up guarantee) would be charged to factory (make-up guarantee) would be charged to factory overhead.overhead.

When production work teams are utilized, a single When production work teams are utilized, a single incentive for the group would be appropriate.incentive for the group would be appropriate.

Labor Time RecordsLabor Time Records

Given the magnetic card reading Given the magnetic card reading technology available today, the time technology available today, the time record typically takes the form of a record typically takes the form of a computer file.computer file.

The labor hours recorded should be The labor hours recorded should be reviewed by a production supervisor for reviewed by a production supervisor for accuracy.accuracy.

Payroll FunctionPayroll Function

Primary responsibility is to compute the wages Primary responsibility is to compute the wages and salaries earned by the employees.and salaries earned by the employees.

Forms should include a payroll record and Forms should include a payroll record and employees’ earnings records.employees’ earnings records.

A summary of the payroll is sent to accounting to A summary of the payroll is sent to accounting to record the payroll in the accounting records.record the payroll in the accounting records.

The payroll record is sent to the treasurer’s The payroll record is sent to the treasurer’s department for making payments to employees.department for making payments to employees.

Payroll RecordsPayroll Records

PayrollPayroll XXXX

FICA Tax PayableFICA Tax Payable XXXX

Employees Income Tax PayableEmployees Income Tax Payable XXXX

Health Insurance PayableHealth Insurance Payable XXXX

Employee ReceivableEmployee Receivable XXXX

Wages PayableWages Payable XXXX

Forms used by companies will vary, but all Forms used by companies will vary, but all forms possess some common characteristics.forms possess some common characteristics.

Entry to record payroll.Entry to record payroll.

Employee Earnings Employee Earnings RecordsRecords

Company maintains a record of the Company maintains a record of the earnings for each employee.earnings for each employee.

The cumulative record of earnings is The cumulative record of earnings is needed to compute earnings subject to needed to compute earnings subject to many types of taxes.many types of taxes.

Information is also used to prepare Form Information is also used to prepare Form W-2 and Form W-3.W-2 and Form W-3.

Payment of Net EarningsPayment of Net Earnings

Accounting department sends the payroll Accounting department sends the payroll record to the treasurer’s office.record to the treasurer’s office.

The treasurer’s office is responsible for making The treasurer’s office is responsible for making the payments to employees.the payments to employees.

Wages PayableWages Payable XXXX

CashCash XXXX

Entry to pay employees.Entry to pay employees.

Recording Salaries and Recording Salaries and WagesWages

Labor-time records are sent to the payroll Labor-time records are sent to the payroll department on a daily basis.department on a daily basis.

The labor costs are charged to the appropriate The labor costs are charged to the appropriate jobs or departments and factory overhead.jobs or departments and factory overhead.

This analysis is recorded on a labor cost summary, This analysis is recorded on a labor cost summary, in the job cost ledger, and in the factory overhead in the job cost ledger, and in the factory overhead ledger.ledger.

Earnings of salaried employees are recorded in Earnings of salaried employees are recorded in the factory overhead ledger accounts and on the the factory overhead ledger accounts and on the labor cost summary.labor cost summary.

Labor Cost SummaryLabor Cost Summary

Hourly workers should be recording their time Hourly workers should be recording their time on a labor time record.on a labor time record.

Labor costs are recorded on a labor cost Labor costs are recorded on a labor cost summary.summary.

This summarizes the direct labor and indirect This summarizes the direct labor and indirect labor charges to a department for the period.labor charges to a department for the period.

Salaried employees are often not required to Salaried employees are often not required to prepare labor time records.prepare labor time records.

Flow of Costs from Subsidiary Flow of Costs from Subsidiary Records to General LedgerRecords to General Ledger

Labor – Time Records

Job Cost Sheets(Direct Labor)

Factory Overhead Sheets

(Indirect Labor)

Labor Cost Summary

(Direct and IndirectLabor)

General Journal and General Ledger

(WIP-Direct LaborFOH-Indirect Labor)

Employer’s Payroll TaxesEmployer’s Payroll Taxes

Federal Insurance Federal Insurance Contributions Act Contributions Act (FICA)(FICA)

Federal Federal Unemployment Tax Unemployment Tax Act (FUTA)Act (FUTA)

State Unemployment State Unemployment Tax Act (SUTA)Tax Act (SUTA)

Payroll AccrualPayroll Accrual

When the end of the period does not coincide When the end of the period does not coincide with the ending date for a payroll period, an with the ending date for a payroll period, an accrual for payroll earnings should be made.accrual for payroll earnings should be made.

PayrollPayroll XXXX

Wages PayableWages Payable XXXX

Entry to record accrual of payroll.Entry to record accrual of payroll.

Illustration of Accounting Illustration of Accounting for Labor Costsfor Labor Costs

General Journal Entry to Record PayrollGeneral Journal Entry to Record Payroll

PayrollPayroll xxxx FICA Tax PayableFICA Tax Payable

xx xx Employees Income Tax PayableEmployees Income Tax Payable

xx xx Health Insurance Premiums PayableHealth Insurance Premiums Payable

xx xx Wages PayableWages Payable

xx xx

Record Payment of Net EarningsRecord Payment of Net Earnings to Employeesto Employees

Wages PayableWages Payable xxxx CashCash xx xx

Distribution of PayrollDistribution of Payroll

Work in ProcessWork in Process xxxx Factory OverheadFactory Overhead xxxx Sales SalariesSales Salaries xxxx Administrative SalariesAdministrative Salaries xxxx

PayrollPayroll xx xx

Employer’s Payroll TaxesEmployer’s Payroll Taxes

Factory OverheadFactory Overhead xxxx Payroll Tax Expense – Sales SalariesPayroll Tax Expense – Sales Salaries xxxx Payroll Tax Expense – Admin SalariesPayroll Tax Expense – Admin Salaries xxxx

FICA Tax PayableFICA Tax Payable xx xx

Federal Unemployment Tax PayableFederal Unemployment Tax Payable xx xx

State Unemployment Tax PayableState Unemployment Tax Payable xx xx

Special Labor Cost Special Labor Cost ProblemsProblems

Shift PremiumsShift Premiums Employee Pension Employee Pension

CostsCosts BonusesBonuses Vacation and Holiday Vacation and Holiday

PayPay

Accounting for Bonuses, Accounting for Bonuses, Vacations, and Holiday PayVacations, and Holiday Pay

Work in ProcessWork in Process XXXX

Factory Overhead (Bonus)Factory Overhead (Bonus) XXXX

Factory Overhead (Vacation)Factory Overhead (Vacation) XXXX

Factory Overhead (Holiday)Factory Overhead (Holiday) XXXX

PayrollPayroll XXXX

Bonus LiabilityBonus Liability XXXX

Vacation Pay LiabilityVacation Pay Liability XXXX

Holiday Pay LiabilityHoliday Pay Liability XXXX

Incurred payroll and bonus, vacation, and holiday pay.Incurred payroll and bonus, vacation, and holiday pay.