701211 Cost Accounting

Chapter 4

Accounting for Labor Cost

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 Labor Cost

Factory Office

1.Labor cost-Factory 2.Labor cost-Office

Wages and salaries expenses– factory Wages and salaries expenses - office
2.1 Direct Labor Cost : DL
2.2 Indirect Labor Cost : IDL
Departments

Personnel Production Payroll Cost Accounting

Department Department Department Department
 1. Gathering information
about working time

2. Calculating and paying

wages/salaries

3. Classifying labor cost to

Accounting for be direct labor and indirect
labor cost
Labors
1. Gathering information
about working time

Clock Card

Time Ticket
Clock Card
Time Ticket
2. Calculating and paying
wages/salaries

1. Gross payrolls

2. Net payrolls
1. Gross payrolls 1.1 Regular wages 1.2 Overtime
1.1 Regular wages

Hourly wage plan = Working hours x hourly rate

Piece rate plan = Units x Rate per Units

Salary plan = Salary Rate

The Labour Protection
Normal working hours:
• Not exceed 8 hours per day and 48 hours per week
• Not exceed 7 hours per day and 42 hours per week for the work which may be
harmful to health and safety of the employees
A rest on a working day:
• Not less than 1 hour per day after the employee has been working for not more than five
consecutive hours
• Twenty minutes before the Employee commences the overtime work (after normal working
time is more than 2 hours
Holidays:
• Weekly holidays: Not less than one day per week and the interval shall not be more than 6
days
• Traditional holidays: Not less than 13 holidays per year
• Annual holidays: Not less than 6 days for employees who have worked for an uninterrupted
period of one year
The Labour Protection

Leave:
• Sick leave: Actual (employer shall pay wages to employees for not exceeding
30 working days per year). Sick leave of three days or more, employer may
require employee to produce a certificate from a first class physician or an official medical
establishment
• Leave for necessary business: Not less than 3 days
• Leave for sterilization and leave as a result of sterilization: for a period determined, and
with a certificate issued by a first class physician
• Military service leave: under the law concerning military service (employer shall pay wages
to employees for not exceeding 60 days per year).
• Maternity leave: Not more than 98 days. (employer shall pay wages to employees for not
exceeding 45 days per year).
• Leave for training or the development of his/her knowledge/skills: Employer shall not pay
wages to employees
1.2 Overtime

1) Overtime on a working Day: Not less than 1.5 times of the hourly wage rate or of
the piece rate

2) Work on a holiday:
- For employees entitled to wages on holidays: At least equal to the hourly
wage rate of a working day/piece rate
- For employees not entitled to wages on holidays: Not less than two times of
the hourly wage rate of a working day/piece rate

3) Overtime on a holiday: Not less than 3 times of the hourly wage rate of a working
day/ piece rate
1.2 Overtime

Equal to normal rate Overtime premium

 2. Calculating and paying
wages/salaries

1. Gross payrolls 1.1 Regular wages 1.2 Overtime

Normal rate Equal to normal rate Overtime premium

Example 4-1
2. Net payrolls

1) Withholding income taxes

2) Social security fund

3) Provident fund

4) Loans

5) Leaves
1. Recording gross payroll, deductions and net payment

Dr. Salary and wages xx

Cr. Salary and wages payable xx
Withholding income tax payable xx
Social security contribution payable xx
Provident fund payable xx
Employee loans receivables xx
2. Recording contributions from employer

Dr. OH Control xx
Cr. Social security contribution payable xx
Provident fund payable xx

3. Recording the payment of salary and wages

Dr. Salary and wages payable xx

Cr. Cash / cash at bank xx
4. Recording the payment of W/T, social security, provident fund
payable

Dr. Withholding income tax payable xx

Social security contribution payable xx
Provident fund payable xx
Cr. Cash/Cash in bank xx
3. Classifying labor cost to
be direct labor and indirect
labor cost

Salary and wages

Time Ticket

Direct labor cost Indirect labor cost

Work in process OH control

Classifying labor cost to be direct labor and indirect
labor cost

Dr. WIP Direct labor xx

OH control Indirect labor xx
Cr. Salary and wages xx
Other Compensation

1. Overtime
1.1 Urgent production requirements, and the production is planned in order
to meet the deadline, or to carry out a specific order requested by the customer who
allows the overtime pay to be charged to the cost of product

Overtime

Equal to normal rate Overtime premium

Direct labor cost

Other Compensation

1. Overtime
1.2 The production did not go as planned, such as absent workers, broken
machines, material shortage, or other unexpected errors

Overtime

Equal to normal rate Overtime premium

Direct labor cost Indirect labor cost

Example 4-2
Dr. Salary and wages 3,300
Cr. Salary and wages payable 3,201
Withholding income tax payable 99

Dr. WIP 3,300

Cr. Salary and wages 3,300
Example 4-3
Dr. Salary and wages 34,800
Cr. Salary and wages payable 33,756
Withholding income tax payable 1,044

Dr. WIP 31,800

OH control 3,000
Cr. Salary and wages 34,800
Other Compensation

2. Bonus
A one-time payment paid to labor. Can be paid as a percentage of company
profit or times of salaries, and can be paid every 6 months or every year

Bonus

Direct labor cost Indirect labor cost

If the company knows the exact amount of bonus that will be paid, this amount will
be averaged and allocated to their monthly labor cost, resulting in a consistent cost
of production.
Example 4-4

Dr. Salary and wages 50,000

Cr. Salary and wages payable 50,000
Dr. WIP 50,000
Cr. Salary and wages 50,000
Dr. OH control 10,000
Cr. Allowance for bonus 10,000

Dr. Allowance for bonus 120,000

Cr. Cash/Cash in bank 120,000
Other Compensation

3. Vacation pay
- A common fringe benefit given to employees during vacation.
- Accounting for vacation pay is the same as which of bonus
Example 4-5
Jan-Nov Dr. Salary and wages 108,000
Cr. Salary and wages payable 108,000
Dr. WIP 108,000
Cr. Salary and wages 108,000
Dr. OH control 3,000
Cr. Allowance for vacation pay 3,000
Dec Dr. Salary and wages 108,000
Cr. Salary and wages payable 108,000
Dr. WIP (20 days) 72,000
Cr. Salary and wages 72,000
Dr. OH control 3,000
Cr. Allowance for vacation pay 3,000
Dr. Allowance for vacation pay 36,000
Cr. Salary and wages 36,000
Other Compensation

4. Reward
- To motivate employees for quicker and more productive work

Reward

Normal rate of cost Over normal rate of cost

Direct labor cost Indirect labor cost

Example 4-6
Dr. Salary and wages 2,020
Cr. Salary and wages payable 2,020

Dr. WIP 1,920

OH control 100
Cr. Salary and wages 2,020
Example 4-7
Dr. Salary and wages 954
Cr. Salary and wages payable 954

Dr. WIP 910

OH control 44
Cr. Salary and wages 954
Other Compensation

5. Other benefits
Example: Medical care, lunch, training, logistic

Other benefits

Factory overhead
Example 4-8
Dr. Wages - Chef 15,000
Food expense 30,000
Utilities 11,000
Depreciation – Canteen 2,000
Cr. Cash 56,000
Accumulated depreciation – Canteen 2,000
Dr. OH control 58,000
Cr. Wages - Chef 15,000
Food expense 30,000
Utilities 11,000
Depreciation – Canteen 2,000
Example 4-9