ACCOUNTING FOR LABOR

 Labor cost
 Labor productivity
 Accounting for labor
 Wage plan
 Incentive wage plan

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.

This is a common and simple formula of Labor Cost:

Labor Costs = (total sales x labor %) / average hourly rate of labor

1. Direct labor cost – cost of traceable work done to transform the raw materials to finished
goods.
 Accountants
 Salespeople
 Maintenance personnel
 Administrative assistants
 Marketing executives’ janitors
2. Indirect Labor cost– cost of work not directly traceable to the production of the product but is
still related to the production process.
 Factory workers
 Engineers
 Quality control
 Machine operators’ painters
 Raw materials delivery people

Illustration 1

Company RangKuba has a total Sales of $1,000,000, 15% Labor and $10 Average hourly rate of labor,
how much is the labor cost?

Labor Costs = (total sales x labor %) / average hourly rate of labor

Labor Costs = ($1,000,000 x .15) / $10

= (150,000) / $10

= $15,000

INCLUSIONS TO LABOR COST

 Basic salaries of workers

 Overtime pays
 Bonuses for exemplary performance
 SSS, PHIC, HDMF dues (employer share)
 Medical benefits and the like
Wages – payment made on an hourly, daily or piecework basis.

Salary – fixed payments made regularly for managerial and clerical services.

PRODUCTIVITY

1. Labor productivity
2. Factors affecting productivity
3. Measuring productivity

Labor productivity

- a measure of production performance using the expenditure of human effort as a yardstick.

- Greater Productivity can be achieved by making production process more efficient through
elimination of non- value-added activities.

Non-Value-Added activities

- Inspection
- Storing

Factors Affecting Productivity

Training
Level of training influences labor productivity. If proper training is provided to the
workers, productively is expected to increase.
Overtime
If the workers are subjected to overtime hours, the productively will be negatively
impacted as the workers will feel tired and lethargic.
Motivation Level
The workers tend to perform better when they feel motivated. Thus, it is important to
create an environment in the organization in which the workers feel motivated and confident.
Inputs Used
o If a worker is using raw materials or machinery which is defective, the productivity of
worker will be affected.

Measuring Productivity

Productivity-efficiency Ratio

o measures the output of an individual compared to the performance standard.

o The objective of productivity measurement is to provide a concise, accurate index for
comparing actual results with target or standard of performance.

Productivity = Output / input

Productivity rate = Standard time / Actual Time (total hours Worked)

Standard time = normal time + allowance

90% is working slower than normal, 110% is working faster than normal, 100% is normal.
ILLUSTRATIONS

Illustration 1

4,000 hours are standard for a department, but 4,400 hours are used. Find the productivity rate of the
department?

Productivity rate = Standard time / Actual Time

= 4,000 / 4,400

= 90.9 % (unfavorable ratio of 90.9%)

Illustration 2

Find the productivity rate using the data relating to a job:

Standard rate of wage per hour 20

Standard hours 2500

Actual rate of wage per hour 21

Actual hours 2400

Productivity rate = Standard time / Actual time

= 2500 / 2400

= 104.2 % Favorable

Illustration 3

Mr. Co is a craftsperson working in Company K. In 50 hours, Mr. Co creates 500 handmade canoes from
wood and sold it for 5000 each. Company K measures the productivity of Mr. Co base on the gross
revenue and hours spent on the creating the canoes. Find the productivity of Mr.Co.

Output =?

Input = 50 hours

Output = P 5,000 x 500

=P 2,500,000

Productivity = Output / Input

= P 2,500,000 / 50 hours

= P 50,000 per hour