Chapter 5: Labor Accounting -

Control and Costing

2BSA-1
Cuenta_Fabito_Felin_Taleon
2BSA- 2
Adame_Almada_Bernal_Nangca
 • Timekeeping Procedures

• Payroll Procedures
PART 1.
• Flow of Payroll Costs

• Computerized Payroll
 Timekeeping Procedures
• Timekeeping function involves two major procedures in labor
costing:
1. Accumulation of the total number of hours worked by each
employee so that their earnings can be computed.
2. Determination how the labor hours were spent so that distribution
can be made in the cost records.

• Time records serves as a basis for calculating gross wages of

employees. From these, appropriate deductions are computed
to determine employee's net pay.
 Time Cards
• called as clock card, for each employee.
• used in timekeeping process to gather data on how many hours
have been worked by each hourly rate employee.
• most common form of employee's attendance record.
• In practice, most of the companies use an electronic system to
record time worked.
• if a time card is used, all time cards are collected from the rack at
the end of the week, and sent to timekeeping department. The
payroll clerk then computes the total hours worked by each workers.
 Payroll Procedures
• Payroll register (sometimes called as payroll sheet) - it is where
the number of hours worked each day of employess under hourly
rate is transferred.

• WEEKLY FACTORY PAYROLL REGISTER- after computing gross

earnings, appropriate deductions are made and the net pay for
each employee is determined.

• SEMI-MONTHLY FACTORY PAYROLL- used to record salaries of

some factory supervisors and managers. These employees earn
fixed monthly salaries payable in two installments on the 15th and
last day of the month.
 Deductions from Employees' Earnings
• Income Taxes. The employer must withhold income taxes from the employees'
salaries and wages. The amount is in accordance with a table issued by the
Bureau of Internal Revenue (BIR) and shall be remitted monthly to the BIR. The
employer acts as a collection agent for the govenment.

• Social Security System Contributions. Employer must deduct a certain amount

from the employees' salaries during the month in accordance with the table issued
by the Social Security System (SSS). The amount deducted is for the protection of
the employees and their families in cases of disability, sickness, old age, and
death. The employer must also pay with respect to the covered employee his
corresponding share in accordance with the same table. Remittance of the
amount deducted is made monthly to SSS.
• Philippine Health Insurance Corporation (Phil. Health) Contributions. An
amount representing halth insurance is automatically deducted from employees
who are members of SSS. The objective of this deduction is to provide the
covered employee adequate health insurance. Employer and employees pay
equal amounts monthly based on employees' salary and in accordance with the
table provided by Philippine Health Insurance Corporation.

• PAG-IBIG Fund or Development Mutual Fund Contributions. A member-

employee is deducted a certain percentage of his monthly basic salary. The
employer also contributes are equivalent share for each covered employee,
which is remitted monthly together with the employer's share.
 Employer Contributions
• As mentioned earlier, the employer has a corresponding share in the
contributions to SSS, Philippine Health Insurance, and PAG-IBIG fund. In
addition, the employer is obligated to contribute to the Employee's
Compensation Commission (ECC) for its covered employee's compensation and
government insurance, depending upon the specified compensation paid to
each employee every month. These contributions of the employer are expenses
of the company. In practice, employer's payroll contributions are usually
recorded at the end of the month. If desired, they could be recorded weekly or at
any other interval.
 RECORDING PAYROLL FROM
PAYROLL REGISTER
• At the end of the payroll period, the total gross earnings and the totals of each of
the various deductions are posted directly from the payroll register to the
general ledger accounts. The effect of this posting is the journal entry to record
payroll as follows.
Factory Payroll (gross earnings) xxx
Withholding Tax Payable xxx
SSS COntributions Payable xxx
Phil. Health Contributions Payable xxx
Pag-ibig Contributions Payable xxx
Payroll Payable (net earnings) xxx
To record payroll.
 Paying the Payroll
In practice, companies use a
special bank account for payroll
payment.

Payroll Clerk Voucher Clerk Treasurer of the Cash

Department
prepares a voucher for the records it in the
net amount of the payroll voucher register. issues a check on the regular
bank account for the amount
of the voucher and enters it in
the check register
This check is deposited to the special payroll bank account. The
payroll liabilities are paid with checks drawn on the regular bank
account.

The journal entries to record payment of the payroll are as follows:

Payroll Payable xx
Vouchers Payable xx

Payroll Payable xx
Vouchers Payable xx
To record payment of factory payroll
Certificate of Compensation - Tax Withheld
(BIR Form 2316)

At the end of the year, the employer computes the gross wages and
the related tax withheld for each employee, which are taken from the
payroll register.

The employer then prepares BIR Form 2316 "Certificate of

Compensation Payment - Tax Withheld" which is prepared in 3
copies:

1. One copy is given to each employee

2. One copy is submitted to the Bureau of Internal Revenue (BIR)
3. Last copy is retained by the employer
 Flow of Payroll Costs
• The flow chart illustrates the flow of costs related with timekeeping. The flow
chart shows that the data from the time cards are transferred to the payroll
register. The information from the payroll register flows in two directions:
Amounts relating to individual employee are recorded in the individual
earnings record, and the summary total are used to prepare journal entry to
record the payroll.
 Computerized Payroll
• A company can either have its own computerized payroll system or contract with
an outside payroll service provider. Using an outside service provider is typically
called outsourcing the payroll function.

Advantages of outsourcing the payroll function:

 For a medium size or small company, it may be less expensive and more
convenient to handle the payroll.

 Confidentiality of payroll is more likely to be maintained when the payroll

function is performed outside the company.

 Since the outside provider are in the payroll business, it is easier for them to
stay up-to-date about the changes in tax rates and reportorial requirements.
 Summary
The procedures of timekeeping are as follows:
 The data from the time cards are transferred to the payroll register
 From the Voucher Register, journal entry is prepared to record payroll.
Total gross earnings are debited to Factory Payroll accpunt with offsetting
credits to various liability accounts.

Most companies pay their employees by special payroll checks.

 Under this system, a voucher is prepared and a check is issued to
cover the net payroll. The check is then deposited in separate payroll
bank account, and payroll checks are drawn against the balance.
 • Charging Labor Costs into
Production

• Recording Labor Costs

PART 2.

• Flow of Labor Costs

• Employer's Contributions
TOPICS TO BE DISCUSSED

1 CHARGING LABOR COSTS INTO PRODUCTION

2 RECORDING LABOR COSTS

3 FLOW OF LABOR COSTS

4 EMPLOYER’S CONTRIBUTIONS
1 Charging Labor Costs into Production

• Direct labor costs are to be allocated

between direct labor and indirect labor costs
• Direct labor costs are charged to Work in
Process
• Indirect labor costs are to be charged to
Manufacturing Overhead Control
1 Charging Labor Costs into Production

Time Tickets
• to facilitate the allocation of labor costs
between direct and indirect labor, a time
ticket is prepared by each employee.
• Sometimes called “job time cards” – used
to show how time was used on specific jobs.
1 Charging Labor Costs into Production

Time Tickets
• Workers paid on hourly wage rate (both
indirect and direct) are required to prepare
daily time tickets.
• Workers receiving fixed monthly salary are
not required to prepare.

**see time tickets format on page 177 (doc. 21)**

1 Charging Labor Costs into Production

Summary of Time Tickets

• Each week, a summary of time tickets is
prepared to show the direct labor costs
incurred as well as the indirect labor
• Direct Labor – posted on job cost sheet
• Indirect Labor – posted on departmental
overhead analysis sheet
1 Charging Labor Costs into Production

Semimonthly Payroll
• Shows the wages earned by employees
who are on a fixed monthly salary.
• Earnings are classified as indirect labor.
Unearned Wages
• At the end of the month, time tickets are
analyzed to determine labor costs that have
been incurred but have not yet been paid.
• This labor costs are to be accrued.
2 Recording Labor Costs

• At the end of the month, a summary of

factory wages is prepared from the job cost
sheets and departmental overhead analysis
sheets.
• The summary shows total direct labor costs
and total indirect labor costs incurred during
the month.
2 Recording Labor Costs

Journal entry to record in the Journal Voucher:

Work in Process xx
Manufacturing Overhead Control xx
Factory Payroll xx

• This balance is shown in the statement of

financial position as a current liability
“Payroll Payable” or “Accrued Wages
Payable”
3 Flow of Labor Costs

**illustration for flow of labor costs is shown on page 179

(illustration 5-2)**

Procedures:
1. Record the number of hours worked each
day by each employee on a time card.
2. Record the hours and type of work
performed each day by each employee on
a time ticket.
3 Flow of Labor Costs

3. Record the total earning, deductions and

net pay of all employees for a payroll period in
the payroll register. Post the totals from the
payroll register to the appropriate ledger
accounts.
4. Post the earnings, deductions amd net pay
for each employee to an individual earnings
record.
3 Flow of Labor Costs

5. Record direct labor costs to the individual

job cost sheets. Enter indirect labor costs on
the departmental overhead analysis sheets.
6. Prepare summary of factory wages,
prepare journal entry to charge labor costs to
production. Post the amounts to Work in
Process account, Manufacturing Overhead
Control account, and the Factory Payroll
account.
4 Employer’s Contributions

• The employer is compelled to contribute to

the Employees’ Compensation Commission
(ECC) for its covered employee’s
compensation and government insurance
• These contributions are charged to
Manufacturing Overhead Control account.
4 Employer’s Contributions

Labor – Related Costs

• The term labor costs comprises not only the
wages paid but also the expenditures made
by the employer on behalf of the employees.
• Usually called “Fringe Benefits”
• Ex. Sick pay, vacation and holiday pay,
health insurance, pension payments,
hospitalization benefits, etc.
4 Employer’s Contributions

Labor – Related Deductions

• Other deductions may be withheld from the
salaries upon the request and with the
consent of the employees.
• Ex. Union dues, insurance and payroll
advances
4 Employer’s Contributions

Overtime Premium
• Gross earnings of employees are divided
into two parts: (1) earnings at regular rate;
(2) overtime premium
• Earning at regular rate = total hours x
regular pay rate
• Overtime premium = overtime hours x
overtime pay rate.
**to further understand see illustration on page 181**
Thank you