Accounting for

Labour
Introduction
Direct and indirect labour costs

• All costs of indirect workers (i.e. those not directly

involved in making products, such as maintenance staff and
supervisors) are indirect costs.
• For direct workers, those directly involved in making
products:
– Direct costs are their basic pay, and any overtime premium
paid for a specific job at the customer’s request; overtime pay
at the basic rate
– Indirect costs are general overtime premiums, bonus
payments, idle time pay, and sick pay.

*Shift allowances or shift premiums are similar to overtime

premiums and are treated as an indirect labour cost.
 Example: overtime and idle time

Given below are the labour costs incurred by a manufacturing

business for the week commencing 23 July 20X5.
– Direct production workers 120 hours at $6.40 per hour
– Direct production workers overtime hours 20 at $9.40 per hour
– Indirect workers 40 hours at $5.20 per hour
– Indirect workers overtime hours 5 at $8.00 per hour
– Of the hours paid to the direct production workers 4 of these were
idle time hours.
What is the total for direct labour cost and indirect labour cost for
the week?
Example 3
Remuneration methods

• There are three basic remuneration methods;

– time work,
– piecework, and
– bonus schemes
i. Time work

• Wages are paid on the basis of hours worked.

• For example, if an employee is paid at the rate of $5 per
hour and works for 8 hours a day,
• Total pay = 5*8 = $ 40
• For example, an employee is paid a normal rate of $5 per
hour and works 4 hours overtime for which he is paid at
time-and-a half.
• The amount paid for the overtime will be 4 x 1.5 x $5 = $30.
ii. Piecework

• Wages are paid on the basis of units produced/output.

• For example, an employee is paid $0.20 for every unit
produced.
• In week 1, they produce 5,000 units and so the;
• Pay will be = 5,000 x $0.20 = $1,000
iii. Bonus (or incentive) schemes

• There are many different ways in which a bonus scheme can

operate, but essentially in all cases the employee is paid a
standard wage but in addition receives a bonus if certain
targets are achieved.
• It is generally, paid to reward group ‘good’ performance.
Changes effect on remuneration
methods and productivity on unit labour
costs

• To increase competitiveness, employers will try to reduce

unit costs and will often attempt to do this by offering
employees productivity payments.
• Employers need to look at the-before and after costs.
Illustration

• Current scheme:
– $7/hour, 40 hour week.
– Overtime pay per hour = time and a half.
– Usually 400 units are produced in 50 hours
• Proposed scheme:
– rates as above, but in addition;
– the overtime premium is paid on any hours saved.
– Assume that 500 units are now made in 44 hours
• Evaluate the proposal
Gross and net earnings

• Gross pay: the total amount earned by the employee

• Net pay: the amount paid to the employee after the
employer makes deduction for income tax and certain
statutory amounts.
• Total labour cost to employer: employees’ gross pay plus
any additional payroll taxes (and perhaps pension costs) that
the employer has to bear.
Example: gross pay to net pay

• An employee is paid at;

– an hourly rate of $7.00 for a 35 hour week
– with any overtime hours paid at time and a half.
– During week 22 the employee worked for 41 hours.
• The income tax to be deducted was $55, the Employee's
benefit contributions for the week were $28, and the
Employer's benefit contributions were $29.
• What is the employee's net pay?
• What is the labour cost to the employer for this employee
for the week?
Ledger accounting for labour costs

• The gross pay is debited to the wages control account and

the;
• Direct cost element is then transferred to the work in
progress account whilst the ;
• Indirect cost element is transferred to the production
overhead control account.
 In double entry, the system is as
follows
• Dr. Work-in-progress with the gross wages, direct cost
• Cr. Wages control account with the gross wages

• Dr. Production overhead A/C (indirect labour cost)

• Cr. Wage A/C

• Dr. Work-in progress with the employer’s payroll tax

• Cr. Wages control account with the employer’s contributions to payroll
tax

• Dr. Wages control account

• CR. Cash as employee paid the net amount
• CR. Cash as the revenue authorities are paid employee deductions and
employer contributions.