Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.

May not be copied, scanned, or duplicated, in whole or in part, except for

use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Chapter 3
ACCOUNTING FOR LABOR

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Learning Objectives
• Distinguish between the features of hourly
rate and piece-rate plans.
• Specify procedures for controlling labor
costs.
• Account for labor costs and payroll taxes.
• Prepare accruals for payroll earnings and
taxes.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Learning Objectives (cont.)
• Account for special problems in labor
costing.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Labor Costs Issues
• How can companies control labor costs in
a highly competitive, global environment?
• What incentive wage plans can be put into
place to ensure that workers are
compensated for adding value?
• How should bonuses, holiday pay, and
vacation pay be accounted for?

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Factory Payroll Costs
• Factory payroll costs are divided into two
categories:
• Direct labor – also known as touch labor,
represents payroll costs traced directly to an
individual job.
• Indirect labor – consists of labor incurred for
a variety of jobs related to the production
process but not readily traceable to an
individual job.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Accounting System of a
Manufacturer
• The accounting system of a manufacturer
must include the following procedures for
recording payroll costs:
• Recording the hours worked or quantity of
output by employees in total and by job,
process, or department
• Analyzing the hours worked by employees to
determine how labor time is to be charged.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Accounting System of a
Manufacturer
• Charging payroll costs to jobs, processes,
departments, and factory overhead
accounts.
• Preparing the payroll, which involves
computing and recording employee gross
earnings, withholdings and deductions,
and net earnings.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Hourly-rate and Piece-rate
Plans
• An hourly-rate plan establishes a definite
rate per hour for each employee.
• A piece-rate plan bases earnings on the
employee’s quantity of production.
• Modified wage plans combine some
features of the hourly-rate and piece-rate
plan.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Controlling Labor Cost
• The timekeeping and payroll departments
have responsibility of maintaining labor
records.
• The labor time record shows the
employee’s time spent on each job, as well
as the time spent as indirect labor on
machine repair.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Controlling Labor Cost
Figure 3-1 Labor Time Record

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Controlling Labor Costs
Figure 3-2 Payroll Record

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Controlling Labor Costs
Figure 3-3 Employee Earnings Record

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Labor Costs
• Cost accountants examine the labor time
records and charge the labor costs to the
appropriate jobs or departments and to
factory overhead.
• A labor cost summary summarizes the
direct labor and indirect labor charges to a
department for the period.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Labor Costs
Figure 3-4 Labor Cost Summary

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Labor Costs
• The labor cost summary becomes the
source for making the following general
journal entry:

Work in Process (Direct Labor) XXX

Factory Overhead (Indirect Labor)XXX
Payroll XXX

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Labor Costs
Figure 3-5 Flow of Costs from Subsidiary Records to General Ledger

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Employers’ Payroll Taxes
• Payroll taxes imposed on employers include
Social Security tax and federal and state
unemployment taxes.
• Employers must periodically report and pay
the following taxes to the appropriate
government agencies:
• FICA
• FUTA
• SUTA

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Payroll Accrual
• When the financial statement date does
not coincide with the ending date for a
payroll period, an accrual for payroll
earnings and payroll tax expense should
be made.
• Employer’s payroll taxes are accrued to
avoid understating the expenses and
liabilities for the period.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Special Labor Cost Problems
• Shift premium
• Pensions
• Bonuses
• Vacation and Holiday pay

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.