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Accounting For Labor Cost
Accounting For Labor Cost
Accounting For Labor Cost
Objectives
After completing this chapter, you should be able to answer the following questions:
LO.1 What are the procedures in controlling labor cost?
LO.2 What are the three phases in accounting for labor cost?
LO.3 What are the necessary forms used in accounting for labor cost?
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1
Chapter 1 Accounting for Labor Cost 2
Introduction
Labor cost represents the human contribution to production. In many organizations it
is an important cost requiring systematic measurement, control, and analysis. Labor cost
consists of basic pay and fringe benefits. The basic pay for work performed is called the
base rate of job rate. A rate should be established for each operation in a company, and
rates should be grouped by types of operation. An equitable pay structure requires analysis,
description, and evaluation of each type of job. The value of each job should be reconciled
with wages paid for similar work elsewhere in the company, in the total community, and in
the industry. Competitive pay is s critical tool for hiring and retaining quality personnel.
Fringe benefits also form a substantial element of labor cost. Fringe benefits costs – such
as holiday pay, vacation pay, overtime premium pay, insurance benefits, and pension costs –
must be added to the base rate to arrive at the full labor cost. Although these fringe benefit
costs generally are included in overhead, they should not be overlooked in management’s
planning and control responsibilities, in decision making, or in wage negotiations. Workers’
demands for a small increase in pay can result in far greater expenditures by the company
due to the effect on fringe costs.
Wages and fringe benefits are only one element in employee relations, however. Adequate
records, easily understood and readily available, also are important for harmonious relations
between management, employees, labor unions, government agencies, and the general
public.
Production Planning
Production planning starts with an intensive study of the product design and the
manufacturing processes involved and scheduling production runs way ahead of time.
The product design and the nature of manufacturing processes involved serve as a basis
in determining the kind of ' human resources required in production.
Production schedules supported by labor hour requirements indicate when workers
would be needed and what type of skills they must have. The human resource department
should see to it that the required number of qualified workers is available on the dates
they are needed by the production department.
Timekeeping
This is concerned with the determination of total cumber of hours worked by an employee
and how this total is accounted for. The total number of hour hours worked is used as basis
in payroll preparation. How this total is accounted for serves-as the basis in making the
corresponding charges to the different jobs (or processes) worked on.
TIME TICKET
Name: ____________________ Employee No. ______
Department: _______________
Date: ____________ Job order: __________________
Start: ____________ Nature of work: ______________
Finish: ___________ Pieces completed: ___________
Hours worked: _________
Hourly Rate: __________
Labor Cost: ____________
Account to be charged: ____________
Foreman's Approval
Figure 2
Payroll Sheet.
This shows the employees net pat are arrived at. It provides columns for regular pay, overtime
pay, deductions and net pay. It may also serve as evidence for payroll payment by providing
a column for workers’ signatures upon receipt of the amount due them.
PAYROLL SHEET
Clock Regular Overtime Deductions
Employee No. Pay Pay W/H Tax SSS PHIC Pag-IBIG Total Net Pay Signatures
Figure 4
EMPLOYEE’S EARNINGS RECORD
Name of the Company
Employee’s Earnings Record
Name: ________________ Sex: _________ Home Address: _________________ SSS No. _________ Clock No. _________
Department: ___________ Occupation: ____________ Provincial Address: ______________ TIN: ____________
Payroll Net
Regular Earnings Overtime Earnings Total Payroll Deductons Check
Period Amt.
W/h Pag-
Hours Rate Amt. Hours Rate Amt. Earnings Taxes SSS PHIC IBIG Union Advances Others Total Paid No.
Figure 5
Chapter 1 Accounting for Labor Cost
8
9 Chapter 1 Accounting for Labor Cost
Example:
Lucio Montano, a worker with daily rate of P320, timed in a total of 45 hours for
the week August 2-8.
His daily time reports show that during the same week, he accounted for the 45
hours as follows:
The gross pay of Lucio Montano for the week and the corresponding charges
would be as follows:
The 42 direct labor hours are entered on the corresponding job cost sheet and the
3 hour idle time is charge to factory overhead.
Regular Holidays:
New Year’s Day - January 1
Maundy Thursday - Movable Date
Good Friday - Movable Date
Araw ng Kagitingan
(Bataan and Corregidor Day) - April 9
Labor Day - May 1
Independence Day - June 12
National Horoes Day - Last Sunday of August
Bonifacio Day - November 30
Christmas Day - December 25
Rizal Day - December 30
Chapter 1 Accounting for Labor Cost 10
The pay rates for work done on regular holidays and special days differ as stated
in the following sections.
Computation for Daily Rate- The daily rate for employees whose rates are stated
on monthly basis is computed as follows:
Thus, the rate per day of the employee with monthly salary rate of P10,000 must
be P328.77 or [P10,000 x 12 months) / 365 days]
Premium Pay
Premium pay refer to the additional compensation for work performed with in eight (8)
hours on non working days (such as rest day and special days) as required by law. The
premium pay rates are as follows:
Rate of Pay
For work performed on Based on Daily Rate
Rest days 130%
Special days 130%
Rest day which is also a special day 150%
Regular holiday 200%
Regular which is also rest day 260% (200% x 130%)
Based on the foregoing rates, the amount earned by a worker with daily rate is P400 and
who works for eight (8) hours in one day shall be as follows:
With a daily rate of P400 the hourly rate is P50 (or P400/ 8) so that the overtime premium
per hour must be P12.50 or (P50x25%). The amount earned for ten (10) hours may be also
arrived at as follows:
The treatment for overtime premium depends on the reason for overtime work. Refer to
the section on Accounting for Overtime Premium.
Overtime work rendered on a schedule rest day, a special day or a regular holiday is entitled
to overtime premium of 30% based on the hourly rate he is entitled to on that particular day.
Per labor Code of the Philippines (art. No. 87) , work performed beyond eight hours on a
holiday or rest day shall be additional compensation equivalent to the rate of the first eight
hours on a holiday or rest day plus at least thirsty percent thereof. Thus the overtime rates
maybe summarized as follows:
Based on the foregoing rates, the amounted earned ten (10) hours by a worker (with daily
arte of P400) must be as follows:
Regular Amount
Worked Performed Ovetime Pay
Premium Earned
On rest day:
= P169.00 P520 P689.00
[(130%x 130%) x P25]x2 hrs.
On a special day:
= 169.00 520 689.00
[(130%x 130%) x P25] x 2 hrs
On a rest day which is also a
special day: = 195.00 600 795.00
[(150%x130%)xP25] x 2hrs.
On regular holiday:
= 260.00 800 1,060.00
[200%x130%)x P25] x 2hrs
On a regular holiday which is
also a rest day = 338.00 1,040 1,378.00
[260%x 130%) x P25] 2 hrs.
Chapter 1 Accounting for Labor Cost 12
In accounting for labor cost, whatever amount is earned by the works undertime on
one day then work on another day, he is entitled to overtime pay for the latter. Undertime
work on any particular day shall not be offset by overtime work on any other day. (art.88)
Absence before a Regular Holiday. The Labor Code (Book III Rule IV, Section 6) states.
Employees who are on leave of absence without pay on the day immediately preceding a
regular holiday may not be paid the required holiday pay if he has not worked on such regular
holiday.
Payroll Deductions
The deductions from gross pay or amount earned by employees are income taxes withheld
and the contribution to the Social Security System (SSS), Medicare and Pag-IBIG Fund.
Occasional deductions are labor union check off (or unions dues) and collection of receivables
and advances.
Payroll Preparation
The payroll is prepared based on clock (or time) cards, authority granted to work on
overtime and required payroll deductions.
13 Chapter 1 Accounting for Labor Cost
ILLUSTRATION PROBLEM
The following information is given for the payroll period, August 8 to 14:
Hours Timed In
Hourly Monthly August 8 - 14 W/H
Employees’
Name Position Rate Earnings Regular Overtime Taxes
Cuenca, Jake Foreman 55 11,500 48 240
Abrenica, Aljur Worker 45 8,500 40 180
Avelino, Paulo Worker 40 8,000 43 165
Escudero, Mart Worker 42 8,200 46 3 150
Trillo, Dennis Worker 40 7,100 45 2 150
Gil, Enrique Worker 35 7,800 47 4 135
The time tickets, as summarized, show the following number of hours expended on the
different jobs.
JOB Number
801 802 803 804
Regular OT Regular OT Regular OT
Regular OT
Cuenca, Jake
Abrenica, Aljur 15 18 5
Avelino, Paulo 6 12 20
Escudero, Mart 18 19 3 8
Trillo, Dennis 10 12 2 11
2
Gil, Enrique 7 4 16 15 7
Avelino did some errands per request by the foreman for four (4) hours. Trillo did some
repair work for eight (8) hours.
Overtime pay is 125%of regular time pay and overtime work is due to the greater volume
of work. Deductions are for withholding taxes and the premiums for SSS, PhilHealth, and
Pag- IBIG (see schedule) are made from the second week’s payroll of each month.
The weekly job time recapitulation, the computations for gross pay, the payroll, and the
corresponding entries are shown on the succeeding pages. (Refer to figures)
P2,456.00 P3,254.00 P1,741.00 P990.00 P 8,441.00 P2,800.00 P320.00 P322.00 P 86.50 P11,969.50
Entry:
b. To take up the payroll charges:
Work in Process - Direct Labor P8,441.00
Factory Overhead Control P3,528.50
Indirect labor P 2,800.00
Cost of Unproductive hours 322.00
Repairs 320.00
Overtime Premium 86.50
Payroll P 11,969.50
A member employee may withdraw his savings upon membership maturity, disability,
permanentdeparturefromthecountry,separationfromserviceordeath.Asidefromthese,members
may avail of short-term (multi-purpose or livelihood) and housing loans at low interest rate.
Membership in the fund became mandatory effective January 1,1995 for SSS and
GSIS (Government Service Insurance System) members with monthly compensation
ofP4,000 and above. The contributions are 1% for workers with monthly compensation
of not more than P 1,500 and 2% for those with monthly earnings of more than P1,500
with maximum fund salary at P5,000. The employer's counterpart contribution is fixed at
2% with maximum amount set at P100 or based on the maximum fund salary of P5,000.
19 Chapter 1 Accounting for Labor Cost
____________________________________________
APPENDIX A
Revised Withholding Tax Tables Effective January 1,2009
Table 1- Daily
A. Table for employees without qualified dependent
1 2 3 4 5 6 7 8
Exemption 0.0 0.0 1.65 8.25 28.05 74.26 165.02 412.54
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
1. Z 0.0 1 0 33 99 231 462 825 1,650
2. S/ME 50.0 1 165 198 264 396 627 990 1,815
Legend: Z- zero exemption; Single; ME- Married; 1,2,3,4- Number of qualified dependent children
Legend: Z- Zero exemption; S- Single; ME- Married; 1,2,3,4- Number of qualified dependent children
Table 2
A. Table for employees without qualified dependent
1 2 3 4 5 6 7 8
Exemption 0.0 0.0 9.62 48.08 163.46 432.69 961.54 2,403.85
Status (‘000) +0% +5% +10% +15% +20% +25% +30% +32%
P over over over over over over over over
1. Z 0.0 1 0 192 1,346 1,346 2,692 4,808 9,615
2. S/ ME 50.0 1 962 1,154 1,538 2,308 3,654 5,769 10,577
Legend: Z-zero exemption; S- Single; ME- Married; 1,2,3,4- Number o qualified dependent
Chapter 1 Accounting for Labor Cost 20
Table 3- Semi-monthly
A. Table for employees without qualified dependent
1 2 3 4 5 6 7 8
Exemption 0.0 0.0 20.83 104.17 354.17 937.50 2,083.33 5,208.33
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
Z 0.0 1 0 417 1,250 2,917 5,833 10,417 20,833
S/ME 50.0 1 2,083 2,500 3,333 5,000 7,917 15,500 22,917
Legend: Z- Zero exemption; S-single; ME- Married; 1,2,3,4- Nu,ber of qualified dependent childred
Legend: Z-Zero exemption; S-Single ; ME- Married; 1,2,3,4- Number of qualified dependent children
21 Chapter 1 Accounting for Labor Cost
Table 3- Semi-monthly
A. Table for employees without qualified dependent
1 2 3 4 5 6 7 8
Exemption 0.0 0.0 41.67 208.33 708.33 1,875 4,166.67 10,416.67
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
Z 0.0 1 0 833 2,500 5,833 11,667 20,833 41,667
S/ME 50.0 1 4,167 5,000 6,667 10,000 15,833 25,000 45,833
Legend: Z-Zero exemption; S-Single ; ME- Married; 1,2,3,4- Number of qualified dependent children
Legend: Z-Zero exemption; S-Single ; ME- Married; 1,2,3,4- Number of qualified dependent children
Chapter 1 Accounting for Labor Cost 22
APPENDIX B
APPENDIX C
Total
Salary Salary Salary Employee Employer
Monthly
Bracket Range Base Share Share
Premium
1 4,999.99 and below 4,000.00 100.00 50.00 50.00
2 5,000.00 - 5,999.99 5,000.00 125.00 62.50 62.50
3 6,000.00 - 6,999.99 6,000.00 150.00 75.00 75.00
4 7,000.00 - 7,999.99 7,000.00 175.00 87.50 87.50
5 8,000.00 - 8,999.99 8,000.00 200.00 100.00 100.00
6 9,000.00 - 9,999.99 9,000.00 225.00 112.50 112.50
7 10,000.00 - 10,999.99 10,000.00 250.00 125.00 125.00
8 11,000.00 - 11,999.99 11,000.00 275.00 137.50 137.50
9 12,000.00 - 12,999.99 12,000.00 300.00 150.00 150.00
10 13,000.00 - 13,999.99 13,000.00 325.00 162.50 162.50
11 14,000.00 - 14,999.99 14,000.00 350.00 175.00 175.00
12 15,000.00 - 15,999.99 15,000.00 375.00 187.50 187.50
13 16,000.00 - 16,999.99 16,000.00 400.00 200.00 200.00
14 17,000.00 - 17,999.99 17,000.00 425.00 212.50 212.50
15 18,000.00 - 18,999.99 18,000.00 450.00 225.00 225.00
16 19,000.00 - 19,999.99 19,000.00 475.00 237.50 237.50
17 20,000.00 - 20,999.99 20,000.00 500.00 250.00 250.00
18 21,000.00 - 21,999.99 21,000.00 525.00 262.50 262.50
19 22,000.00 - 22,999.99 22,000.00 550.00 275.00 275.00
20 23,000.00 - 23,999.99 23,000.00 575.00 287.50 287.50
21 24,000.00 - 24,999.99 24,000.00 600.00 300.00 300.00
22 25,000.00 - 25,999.99 25,000.00 625.00 312.50 312.50
23 26,000.00 - 26,999.99 26,000.00 650.00 325.00 325.00
24 27,000.00 - 27,999.99 27,000.00 675.00 337.50 337.50
25 28,000.00 - 28,999.99 28,000.00 700.00 350.00 350.00
26 29,000.00 - 29,999.99 29,000.00 725.00 362.50 362.50
27 30,000.00 and up 30,000.00 750.00 375.00 375.00
*Employee share represents half of the total monthly premium while the other half is
shouldered by the employer.
Chapter 1 Accounting for Labor Cost 24
EXERCISES
Exercise 1:
Match the following terms with the phrases given below:
a. It is concerned with the total number of hours worked by each employee and what a
worker does each hour he is being paid.
b. It provides for additional financial compensation to workers and at the same time
reduces the fixed overhead cost per unit.
c. It shows how each employee's net pay is arrived at by providing columns for gross pay
and deductions aside from net pay.
d. It shows the number of hours a worker has devoted to a job during a day.
e. It is concerned with the determination of the breakdown of the payroll and the making
of labor cost entries on cost sheets or production reports.
f. It is concerned with the determination of how much to pay each employee and the
keeping of the earnings records
g. Different tasks are observed and analyzed to eliminate unnecessary motions and set
the standard time for the performance of each task.
h. It shows when the worker reports for work and when he goes out and is used as basis
in the computation of his gross pay.
i. It is used by a worker in accounting for the total number of hours timed in for a day.
j. It shows the different amounts earned by an employee for a period and the deductions
made there from.
Exercise 2:
Estimated Labor Hours and Required No. of Workers Five hours of labor are allowed
per unit of a product at the rate of P30 per hour. Budgeted production volume for June is
25,000 units. Total regular working hours for June is 160 per worker.
What is the estimated number of labor hours required to produce 25,000 units? How
many workers must be made available for the production in June? How much must be the
budgeted labor cost for June?
25 Chapter 1 Accounting for Labor Cost
Exercise 3:
Effect of Wage Incentive System on Fixed Factory Overhead per Unit
Sycip Corp. pays its workers at the rate of P400 per day plus P42 for every unit pro-
duced in excess of 10 units during each working day. The production report for two days
show:
An analysis of overhead shows that fixed overhead per day is more or less P1,200.00.
Required:
a. The amount to be paid to each worker and the average labor cost per unit for each
day.
b. Fixed overhead per unit for each day.
Exercise 4:
Determine whether each of the following statements is true or false.
a. The control process begins with product design and continues as a cooperative
activity until the product is sold.
b. A clock card is a record of labor time purchased while a time ticket or daily time
report is a record of performance received.
c. When the number of hours per daily time report is less than the number of hours
timed in (per clock card), the difference is treated as unproductive time and is
charged to .factory overhead.
d. Overtime premium is treated as a direct charge to a job when overtime work is due
to greater volume of, or slow production,
e. The excess of the number of hours per time tickets over the number of hours per time
cards is treated as factory overhead.
f. The rate per day of an employee with monthly salary of P9,030 must be P360.
Chapter 1 Accounting for Labor Cost 26
Exercise 5:
Gross Pay with Overtime Premium and Payroll Charges
Thefollowinginformationisgivenbasedonthecontentsofclockcardsandtimeticketsforaweek.
Rate Hours Time In Jobs Worked On Others
Per hr. regular Overtime 101 102 103 104 Nature Hrs.
A P35 P48
B 20 40 3 16 12 10 Inspection 4
C 25 50 25 16 7
D 20 45 15 12 11 Oiling 4
E 28 48 5 10 20 20
F 20 46 21 8 15
A is the foreman with the others as his workers. Overtime premium is 30%.
The time ticket shows that overtime work was done on job no. 101 and the corresponding
hours are included already in the tabulation given above.
How much must be gross pay each worker?
Determine what accounts are to be debited fro the payroll under each of the following
assumptions:
a. Overtime work is due to the seasonal changes in the demand for the product
b. Overtime wok is due to the rush nature of the job.
Hours Timed In
Overtime premium is 30%. Dong Dantes worked for four hours on holiday because
of the rush nature of job no. 145. Otherwise work is due to the greater volume of work
for the month. Payroll deduction include union dues of P50 from each worker aside
from income taxes withheld and the contribution for SSS, Philhealth and Pagibig.
27 Chapter 1 Accounting for Labor Cost
Exercise 7:
The following date are given for 2011
Exercise 8
The following data are given for the period August 15 to 21, 2011:
Gonzales is the foreman with hourly rate of P60. All the workers under him receive P50
per hour. Overtime work was rendered on working days on job 523, based on a rush order.
Accordingly, overtime premium is 25%.
1. How much must be the total charge to direct labor for the week?
2. How much must be the total payroll for the week?
Chapter 1 Accounting for Labor Cost 28
Exercise 9
Kapamilya Manufacturing Co. charges factory overhead to production at 80% of direct
labor cost. Job 1042 and 1043 were completed and sold in January 1,2011. Total direct materials
cost and prime cost for Job 1042 were P18,000 and P28,000, respectively. Production cost of
Job 1043 amounted to P62,400 with factory overhead equal to 48% of direct materials cost.
How much were the direct labor costs of Jobs 1042 and 1043, respectively?
Exercise 10
Each of the five (5) workers in a factory is being paid P250 per day. For every unit produced
in excess of 25 units in one day, a worker is paid P12. Fixed factory overhead per annum id
P198,000 and there are approximately 330 working days in one year.
Production data for December 6 and 7, 2011 shows the following number of units produce
by each worker:
December 6 December 7
Aunor 25 26
Cuneta 27 26
Santos 24 28
Soriano 24 27
Tolentiano 28 26
1. What is the average direct labor cost per unit for the two day period?
2. How much savings in fixed factory overhead per unit was effected assuming that additional
output is due to the incentive given?
Exercise 11
Rafael Rossel earns P10,000 per month on the average and produces 50 units per day.
Accordingly, the employer’s monthly contributions for SSS, Philhealth, Pag-IBIG and EC
premium are P456, P37.50, P100 and P10 respectively. Fringe benefits such as meal and
uniform subsidies amount to P9,900 per annum. Assuming that there are 330 working days in
one year, what is the effective labor cost per unit?
Exercise 12
The regular working days in a factory are Monday to Friday, Jan and Pol (who are
being paid P50 and P54 per hour, respectively) worked on Jobs 631 and 632 for the period
September 12-18, 2011.
The weekly time records and summary of the job tickets show the following
Jan Pol
Total number of hours time in 45 43
Overtime 6 5
Expended on the jobs:
No. 631 26 17
No. 632 20 21
Jan was authorized to work on overtime on job no. 631 because of its rush nature; Pol
had to work on overtime on job no. 632 to make up for a machine breakdown during the
week. Overtime premium is 25%.
Factory overhead is 60% of direct labor cost and materials cost comprises 80% of total
production cost.
What should be the respective production costs of jobs nos. 631 and 632?