Professional Documents
Culture Documents
Afar 1 Module On Accounting For Labor
Afar 1 Module On Accounting For Labor
COURSE DESCRIPTION
COURSE OUTLINE
CHAPTER 4
TITLE ACCOUNTING FOR LABOR
I. RATIONALE
The very first topic of the course is Partnership formation, the expected
learning to be achieved by the student are properly disclosed in the
learning objectives stated below. Prior to taking this course, a student
must have already a concrete knowledge on basic accounting
concepts, and skills in preparing financial statements otherwise the
user of this module must review the basic and financial accounting
undertaken in previous courses(preparatory activities)
INSTRUCTION TO THE USERS
The developmental activities section provides the comprehensive and
vital information concerning accounting for partnership formation. For
assessment of learning,closure activities like theoretical questions
and problem solving with different degree in terms of difficulty were
provided. For evaluation , see the evaluation sectionfor details, and
lastly for activities and preparation to be undertaken for next topic this
module provides the student/s the details.
LABOR
Physical or mental effort expended in manufacturing a product.
Labor cost – price paid for using human resources. It is a compensation paid to employees who engage in
production of related activities represents factory labor.
Salary – fixed payments made regularly for managerial and clerical services.
Wages – payment made on an hourly, daily or piecework basis.
Direct Labor Cost – represents payroll costs that are allocated directly to the product and is debited to the
work in process account.
Indirect Labor Cost – cost incurred for a variety of jobs that are related to the production process but are
considered either too remote or too insignificant to be charged directly to the production
LABOR PRODUCTIVITY
Measure of production performance using the expenditure of human effort as a yardstick.
Amount of goods and services a worker produces.
efficiency with which resources are converted into commodities and/or services
greater productivity can be achieved by making production processes more efficient through elimination of
non-value added activities: by improving, modernizing, or replacing equipment; or by any other approach
that improves utilization of resources.
Productivity-efficiency Ratio
measures the output of an individual compared to the performance standard.
WAGE PLANS
Hourly Rate Plan – establishes a definite rate per hour for each employee. The employee’s wage are
calculated by multiplying the rate per hour by the number of hours worked.
Piece- Rate Plan - earnings are calculated by multiplying the employee’s output by the rate per piece. The
plan provides an incentive for the employee to produce more. However, it might sacrifice quality to
maximize earnings.
Modified Wage Plan – combines the features of hourly-rate and piece-rate plans. An example of a modified
wage plan would be to set minimum hourly wage that will be paid by the company even if an established
quota of production is not attained by an employee. If established quota is exceeded, an additional payment
per piece would be added to the minimum wage level.
1. Personnel department - The personnel department is responsible for hiring the right person at the right
place at the right time. Role of personnel department is not over with the hiring of the workforce rather they
have to train them before sending them to the workplace. Whenever a new worker is employed, the
personnel department sends a notification to the time keeping department and paymaster department for
their compensations. The personnel department first receives the following requisition slip from the
concerned departments who are having need of the workforce. After receiving the requisition records will be
checked by the personnel department about the availability of the employees in the required category. If
required employees are not available in the organisation then action will be taken to recruit more
employees.
2. Engineering Department - This department is committed to provide congenial work environment to its
employees also controlling over the production methods and processes followed in the various departments.
This department is majorly involved in planning and conducting motion studies, work studies, time studies,
job analysis and setting piece rates, providing safe and efficient working conditions, supervising production
activities in various production departments.
3. Time-Keeping Department - The time-keeping department plays important role in the accounting and
controlling of labor cost. The main function of this department is to accurately record the time spent by each
worker on the work place and it will be forwarded to the pay-master department then this department will
process it further to prepare the compensations of the employees. There are various methods of time
keeping. Some most prevalent methods are as follows: (1.) Attendance register; (2.) Token or disc method;
(3.) Time-recording clocks; and (4.) Biometric time clock.
4. Payroll Department - The payroll department is concerned with the compensation of the workers. This
department takes data from the time keeping department and computes the salaries of the employees at the
end of every month.
5. Cost Accounting Department - Cost accounting department is the final destination of theall types of costs
related to labor be it direct cost or indirect cost. For the purpose of collecting the data it makes use of clock
cards, daily or weekly time sheets, payroll sheets etc. The cost accounting department collates, analyse and
present a report reflecting the true picture of direct labor cost and indirect labor cost in front of management
to take decision.
The number of hours worked each day of employees under the hourly rate is transferred from the time card
to the payroll register/payroll sheet. After all the hours worked by each employee have been entered in the
payroll register, regular earnings, overtime premium earnings, and total earnings are computed and
recorded
Employer’s Payroll Taxes – Payroll taxes imposed on employers include SSS premiums, Pagibig fund
contributions and Philhealth premiums. Employers are responsible for periodically reporting and paying the
taxes to the appropriate government agencies.
Journal Entry:
Payroll xx
Withholding Tax Payable xx
SSS Premium Payable xx
Philhealth Contributions Payable xx
Accrued payable/Cash xx
Idle Time - wastage of time during working hours is considered as idle time. Idle time may arise due to
normal and abnormal reasons. Idle time affects the productivity of the labor. For controlling the cost of labor
reduction in idle time is essential. The reasons behind the idle time must be identified and then steps should
be taken to control them.
Normal Reasons of Idle Time - It refers that any loss of time is inherent in every situation which cannot be
avoided. Any cost which is associated with the normal idle time mostly fixed in nature. The normal idle time
arises due to the following reasons: Time taken for personal affairs. Time taken for lunch tea breaks. Time
taken for obtaining work. Time taken by the workers to walk between factory gate and place of work.
Abnormal Reasons of Idle Time - it generally occurs because of shortage of raw material, machine break-
down, lock-out, strikes etc. Abnormal idle time can be reduced and avoided by maintaining the operational
efficiency in the organisation.
Accounting Treatment:
a) Cost for normal reasons should be segregated under a separated standing order number and
charged as an item of factory overhead.
b) Cost for uncontrollable and normal reasons may be charged to the job by inflating the job rate.
c) Cost because of abnormal reasons should be charged from costing profit and loss account.
OVER-TIME - Over time refers to the extra time spent by the workers on the job than the normal or pre-fixed
working hours. Over-time wages can be treated as direct as well as indirect it depends on the reason of
over-time by the workers. If the over-time has been spent by the worker for the completion of a critical
project on the demand of the customers and associated to a particular job only then it will be treated as
direct expense. On the contrary, if over-time has been spent by the worker because of abnormal reasons
like Machine break-down, shortage or raw material etc. should be treated as an abnormal expense and it
will be charged to costing profit and loss account.
HOLIDAY PAY - Worker are paid for the holidays on weekend, festivals or on gazetted offs. Their wages are
treated as indirect cost and charged from the factory overheads account and thus it will be recovered from
the production.
Illustration. The effect of an 80% learning curve, assuming 10 direct labor hours are required to produce the first unit:
C. CLOSURE ACTIVITIES
I. QUESTIONS:
1. What do you mean by direct labour and indirect labour? What is relevance of separating the direct and
indirect labour in an organisation?
2. Discuss the treatment of overtime in cost accounting.
3. What is idle time? Explain the causes leading to idle time and its treatment in cost accounting.
4. What is overtime? Explain the impact of overtime on the productivity of the workers.
5. Name some situations in which learning curve theory may be applied.
PROBLEMS.
SUMMARY:
Labour refers to the work force which contributes towards the completion of the manufacturing process of
any organisation.
Labour which is directly associated with a manufacturing process or his contribution is directly identifiable
with a particular process will be called as direct labour.
Worker‟s remuneration is based on the hours spent by the workers on the job under time wage payment
system. Under this system workers are more concerned about completing their time on the job rather than
the output on the job.
Under piece wage payment system compensation is paid on the basis of units produced by the workers.
Time spent by the workers on the workplace is irrelevant for the wage calculation under this method.
Incentive plans are used by the employers to motivate the workers and for improving their efficiency at the
work place.
V. EVALUATION
The student’s performance will be evaluated as follows:
VII. REFERENCES Cabrera,et. al, COST ACCOUNTING AND CONTROL 2018-2019 ed.
De Leon, et. al, COST ACCOUNTING.
Guerrero, COST ACCOUNTING Vol 1.
Rainborn, et. al, Cost Accounting Second ed.
Carter, Cost Accounting 14th Edition
http://www.universityofcalicut.info/SDE/BComCoreCostAccounting_on
09March2016.pdf
http://cbseacademic.nic.in/web_material/Curriculum/Vocational/2018/A
ccounting%20and%20Taxation/Cost%20Accounting%20class
%20XI.pdf
END OF CHAPTER 4