Payroll and Labor Act

Use with Management and Cost Accounting 7e by Colin Drury ISBN 9781844805662

2008 Colin Drury

Part Two: Cost accumulation for inventory valuation and profit

measurement

Payroll and Labour Accounting

Accounting for labour costs Two distinct phases: 1 Computations of gross pay for each employee and

calculation of payments to be made to employees, government, pension funds etc. (i.e. Payroll accounting).

2 Allocation of labour costs to cost objects such as products or services, individual customers orders and overhead accounts (i.e. labour cost accounting).


2008 Colin Drury

Payroll accounting

Payroll accounting requires the provision of information relating to an employees

attendance time, details of absenteeism, hourly rates of pay, and

details of various deductions such as tax, health and social insurances, etc.


2008 Colin Drury

Payroll accounting

Clock cards or absenteeism reports provide the basic information for the

calculation of attendance time, and The employees personal record card

provides details of the various deductions.


2008 Colin Drury

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 treasurers department for making payments to employees.

Payroll Records

Payroll XX Withholding Tax Payable XX SSS Premium Payable XX

Health Insurance Payable XX

Employee Receivable XX Wages Payable XX

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

Entry to record payroll.

Payroll accounting the objective of an incentive scheme is to benefit both the employer

and employee. Consider a situation where an employee is paid P8 per hour and in one

hour produces 10 units. The average labour cost per unit will be P0.80. To stimulate production, a piecework system is introduced where

workers are paid P0.70 per unit produced. Assuming that this results in an increase in productivity to12 units per hour, the hourly rate would increase to P8.40 (12 P0.70). The overall effect is that there is an increase in the hourly rate of the employee and a reduction in the labour cost per unit produced for the employer (from P0.80 to P0.70).


2008 Colin Drury

Hourly Rate Plan

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

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

Piece-Rate Plan

Employees wages based on the employers quantity of production.

Number of units produced is multiplied by a predetermined rate.

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

Quality may be sacrificed in order to maximize quantity.

Payroll accounting

Where incentive payment systems are in operation, piecework tickets contain details of the number of items produced by each employee, and this is multiplied by the rate per item to give the total weekly wage.


2008 Colin Drury

Modified Wage Plan

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

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

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

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

Special Labor Cost Problems

Shift Premiums Employee Pension

Costs Bonuses Vacation and Holiday

Pay

Payroll accounting

Where bonus schemes are in operation, the total payment will be based on an attendance

time (the time rate wage) plus a bonus. The time rate wage is obtained from the clock card and the bonus details from the job card. Under a bonus scheme, a set time is allowed for each operation and a bonus is paid based on the proportion of time that is saved.


2008 Colin Drury

Bonus, illustrated

The time allowed for a specific operation is 20 hours and the actual time taken by an employee was 16 hours. A bonus scheme is in operation where employees receive a bonus of 50% of the time saved. The hourly wage rate is P8 per hour. The employee, having worked for 16 hours, will receive a time rate wage of P128 (16 hours at P8) plus a bonus of P16 (50% of 4 hours saved at P8 per hour).


2008 Colin Drury

VL and Holiday Pay should be charged to activities by means of an inflated hourly rate. For example, if the employee is normally paid P8 per hour for a 40-

hour week and is entitled to four weeks annual VL and two weeks holiday he or she will receive a total of P1920 VL & holiday pay (six weeks at P320 per week). Assuming that the employee works the remaining 46 weeks, the attendance time will amount to 1840 hours (46 weeks at 40 hours per week). Dividing P1920 by 1840 hours gives an addition of approximately P1.04 per hour to the employees hourly wage rate to ensure that the holiday pay is recovered. The advantage of this approach is that holiday pay is treated as a direct labour cost.


2008 Colin Drury

Overtime premiums and shift-work premiums

included as part of overheads. If charged directly to products/services or

customers orders undertaken during the overtime or night-shift period, they will bear higher costs than those produced during a regular working week.


2008 Colin Drury


If, however, the overtime or shift premiums are a direct result of a customers urgent request for the completion of the order and not due to the general pressure of work, then the overtime or shift premiums should be charged directly to the customer.


2008 Colin Drury


Consider a situation where an employee is paid time and a half for weekly hours worked in excess of 40 hours. Assume that the employee works for 50 hours and that the 10 hours of overtime were spent on a particular activity. The hourly wage rate is P8.


2008 Colin Drury


Normal time rate wage: 50 hours at P8 P400 Overtime premium (1/2 10 hours at P8) P40 P440


2008 Colin Drury

Labor cost accounting The objective of labour cost accounting is to record the

amount of time that employees have taken on various activities. The time spent on providing a service to a specific customer, or manufacturing a specific product, is recorded on source documents, such as time sheets or job cards.

Details of the customers account number, job number or the products code are also entered on these documents.


2008 Colin Drury

Labor cost accounting

The employees hourly rate of pay is then entered so that the direct labour cost for the employee can be assigned to the appropriate cost object.

For indirect labour costs the same procedure applies with the overhead account number to which the costs should be assigned being entered on the source documents.


2008 Colin Drury

Labor cost accounting idle time cards are used to record the amount of

idle or waiting time incurred. The amount of idle time is costed at the

hourly wage rate and charged to an idle time overhead account for each department. An entry should be made on the card indicating the reasons for the idle time.


2008 Colin Drury

Labor cost accounting

Periodically, a report should be compiled for each department, showing a breakdown of the idle time and the proportion that it represents of recorded direct labour hours.


2008 Colin Drury

Flow of Costs from Subsidiary Records to General Ledger

Labor Time Records

Job Cost Sheets (Direct Labor)

Factory Overhead Sheets

(Indirect Labor)

Labor Cost Summary

(Direct and Indirect Labor)

General Journal and General Ledger

(WIP-Direct Labor FOH-Indirect Labor)

Illustration of Accounting for Labor Costs

General Journal Entry to Record Payroll

Payroll xx Withholding Tax Payable xx SSS Premium Payable xx Health Insu Prem Payable xx Wages Payable xx

Record Payment of Net Earnings to Employees

Wages Payable xx Cash xx

Distribution of Payroll

Work in Process xx Factory Overhead xx Sales Salaries xx Administrative Salaries xx

Payroll xx

Employers Payroll Taxes

Factory Overhead xx Payroll Tax Exp Sales xx Payroll Tax Exp Admin xx

SSS Premium Payable xx Philheath Payable xx Pag-ibig Cont. Payable xx

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.

Employers Payroll Taxes (Employment Cost)

SSS EC Philhealth Pag-Ibig Others

Employment costs

Normally recorded as overhead Preferably treated as direct cost

calculate an average hourly rate for employment costs and add this to the hourly wage rate paid to the employees.


2008 Colin Drury

Employment costs

Example: the employer may be responsible for employment

costs of P40 for an operative who is paid P8 per hour for a 40-hour week. Here we can establish that the employment costs are P1 per hour and this cost can be added to the hourly wage rate of P8 per hour, giving a total rate of P9 per hour.


2008 Colin Drury

Payroll and Labor Act

Documents

Transcript of Payroll and Labor Act