CHAPTER 3—ACCOUNTING FOR LABOR
MULTIPLE CHOICE
1. At a plant where car doors were manufactured, all of the following would be classified as direct
labor except:
a. Machinists.
b. Assembly workers.
c. Maintenance personnel.
d. Painters.
ANS: C
Maintenance workers, while integral to the manufacturing process as they keep the machinery
maintained, are not direct laborers because they do not actually add value to the product. Machinists,
assembly workers and painters would all add value to the manufacture of a car door.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: Introduction
TOP: AACSB - Reflective
2. All of the following personnel would be classified as indirect labor except the:
a. machinist.
b. supervisor.
c. fork lift driver.
d. plant janitor.
ANS: A
The machinist would most likely be a direct laborer. The supervisor, fork lift driver and plant janitor,
while part of the manufacturing process, do not add value to the goods being produced.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: Introduction
TOP: AACSB - Reflective
3. All of the following are characteristics of hourly wage plans except:
a. They provide no extra recognition for doing more than the minimum required.
b. They are easy to apply.
c. They establish a definite rate per hour for each employee.
d. They encourage employees to sacrifice quality in order to maximize earnings.
ANS: D
Hourly wage plans pay a fixed rate per hour, so they are easy to apply, but they do not provide any
incentive to do more than what is required, nor do they encourage employees to work so fast as to
sacrifice quality.
PTS: 1
DIF: Easy
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1
TOP: AACSB - Reflective
4. A wage plan based solely on an employee's quantity of production is known as a(n):
a. Modified wage plan.
b. Hourly-rate plan.
c. Incentive wage plan.
d. Piece-rate plan.
ANS: D
A piece-rate plan bases an employee's earnings strictly on the number of units produced.
PTS: 1
DIF: Easy
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1
TOP: AACSB - Analytic
5. Wage plans that encourage employees to work harder and earn more by producing a high level of
output are known as:
a. Modified wage plans.
b. Salary wage plans.
c. Piece-rate plans.
d. Hourly-rate plans.
ANS: C
Piece-rate plans encourage employees to work harder and earn more by producing more or by meeting
and exceeding quotas.
PTS: 1
DIF: Easy
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1
TOP: AACSB - Analytic
6. Under a modified wage plan, an employee earns $.75 for each finished unit and is guaranteed $10 per
hour as a minimum wage. If the daily quota is 100 units, on a particular day when an employee
completes 85 units and works 8 hours, the amount of the make-up guarantee will be:
a. $80.00
b. $72.25
c. $16.25
d. $5.00
ANS: C
Make-up guarantee = ($10  8 hours) - ($.75  85 pieces) = $16.25
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1
TOP: AACSB - Analytic
7. Under a modified wage plan, Jim Phillips works an eight-hour day and earns $.50 for each finished
unit he produces in excess of 200 units. However, he is guaranteed $12.50 per hour as a minimum
wage. His production this week was a follows:
Monday
Tuesday
Wednesday
Thursday
Friday
220 units
180 units
200 units
200 units
190 units
How much was the make-up guarantee paid to Jim this week?
a. $10
b. $5
c. $15
d. $12.50
ANS: C
The make-up guarantee is $15 as follows:
Hours
Worked
Monday
Tuesday
Pieces
Finished
8
8
220
180
Earnings @
$12.50/hr
Earnings @
$.50/unit
$100
100
$110
90
Make-up
Guarantee
$10
Payroll
Earnings
$110
100
8
8
8
Wednesday
Thursday
Friday
200
200
190
100
100
100
$500
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
100
100
95
$495
5
$15
100
100
100
$510
REF: P.
OBJ: 1
TOP: AACSB - Analytic
8. Under a modified wage plan, Jim Phillips works an eight-hour day and earns $.50 for each finished
unit he produces in excess of 200 units. However, he is guaranteed $12.50 per hour as a minimum
wage. His production this week was a follows:
Monday
Tuesday
Wednesday
Thursday
Friday
220 units
180 units
200 units
200 units
190 units
What were Jim’s total earnings this week?
a. $500
b. $510
c. $495
d. $515
ANS: B
Jim’s total earnings were $510 as follows:
Hours
Worked
Monday
Tuesday
Wednesday
Thursday
Friday
Pieces
Finished
8
8
8
8
8
220
180
200
200
190
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
Earnings @
$12.50/hr
Earnings @
$.50/unit
$100
100
100
100
100
$500
$110
90
100
100
95
$495
Make-up
Guarantee
$10
5
$15
Payroll
Earnings
$110
100
100
100
100
$510
REF: P.
OBJ: 1
TOP: AACSB - Analytic
9. Under a modified wage plan, an employee working an eight-hour day earns $.40 for each finished unit
and is guaranteed $20 per hour as a minimum wage. At what level should the daily quota be set?
a. 160 units
b. 400 units
c. 500 units
d. 640 units
ANS: B
Daily wage = $20 x 8 hours = $160.
Units made in a day to reach $160 at a rate of $.40 = $160 / $.40 = 400 units
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1
TOP: AACSB - Reflective
10. Idle time should be treated as follows:
a. It should be recorded along with the reason for it, and charged to Factory Overhead.
b. It should be charged to the job from which the employee took a break.
c. It should be documented and the employee should not be paid for that time.
d. It should be allocated to the various manufacturing departments and the supervisors should
decide how to handle it.
ANS: A
Idle time should be recorded and charged to Factory Overhead as it does not add value to any specific
jobs.
PTS: 1
DIF: Easy
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 2
TOP: AACSB - Analytic
11. The file for each factory employee that shows the time the employee spent on each job, as well as time
spent as indirect labor is the:
a. labor time record.
b. payroll record.
c. employee’s earnings record.
d. labor cost summary.
ANS: A
Each factory employee’s time will be summarized on a labor time record. The labor cost summary
reports the total payroll distribution. The payroll record and employee’s earnings record relate to the
payment of payroll rather than the timekeeping function.
PTS: 1
DIF: Easy
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 2
TOP: AACSB - Analytic
12. The departmental responsibilities of the payroll function include all of the following except:
a. Reviewing the labor hours on the time record for accuracy.
b. Summarizing the period’s payroll data.
c. Keeping a record of earnings for each employee.
d. Computing deductions and withholdings for each employee.
ANS: A
Items (b), (c), and (d) are the responsibilities of the payroll function, whereas item (a) is the
responsibility of the production supervisor.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 2
TOP: AACSB - Analytic
13. The file that serves as a basis for reporting payroll information to governmental agencies and preparing
Form W-2 is the:
a. labor time record.
b. payroll record.
c. employee’s earnings record.
d. labor cost summary.
ANS: C
The employee’s earnings record is a cumulative record of employee earnings needed to calculate
payroll taxes. It also serves as the basis for reporting salary and wage information to government
agencies.
PTS: 1
DIF: Moderate
REF: P.
OBJ: 2
NAT: IMA 2B - Cost Management
TOP: AACSB - Analytic
14. An analysis of total labor costs into work in process and factory overhead components is recorded on
a(n):
a. Labor cost summary.
b. Payroll record.
c. Individual production report.
d. Employee earnings record.
ANS: A
An analysis of labor costs into their work in process and factory overhead components is recorded on a
labor cost summary.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
15. An employee regularly earns $12 per hour for an 8-hour day with time-and-a-half for overtime hours.
Assuming that the employee works a 10-hour day, the amount of overtime premium is:
a. $36.
b. $18.
c. $12.
d. $6.
ANS: C
Overtime premium = 2 hours  $6 = $12
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
16. If the amount of overtime premium is to be charged to all jobs worked on during the period as a result
of random scheduling of jobs, the debit will be to:
a. Factory Overhead.
b. Payroll.
c. Work in Process.
d. Accrued Payroll.
ANS: A
By charging the overtime premium to factory overhead, all jobs worked on during the period share the
cost.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
17. David Andrews works at the Neal Company where he makes $12 per hour with “time-and-a-half” for
overtime. For the week ended January 8, David worked 45 hours as follows:
Job 417
Job 532
34 hours
11 hours
Assuming the overtime was due to priority scheduling for Job 532, how much will be charged to Job
532?
a. $147
b. $132
c. $198
d. $162
ANS: D
Regular wages
Overtime premium
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
11 hrs. x $12
5 hrs. x $ 6
$132
30
$162
REF: P.
OBJ: 3
TOP: AACSB - Analytic
18. The Dehl Company payroll for the first week in January was $12,000. The amount of income tax
withheld was 12 percent and the FICA, state unemployment, and federal unemployment tax rates were
8 percent, 5 percent, and 1 percent, respectively. The amount of the employees' withholding taxes are:
a. $1,680.
b. $2,400.
c. $1,440.
d. $3,120.
ANS: B
Employees' withheld taxes = (12% + 8%) $12,000 = $2,400. The state and federal unemployment
taxes are the employer’s responsibility, as is the FICA employer’s portion.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
19. The payroll summary for EVB Inc. for the period August 3 - 10 is as follows:
Factory
Employees
Gross Earnings
Withholding and deductions:
FICA
Income taxes
Union dues
Total
Net earnings
Sales and Admin.
Employees
Total
$80,000
$25,000
$105,000
6,400
10,600
400
17,400
$62,600
2,000
5,000
7,000
$18,000
8,400
15,600
400
24,400
$80,600
The entry to record payroll would be:
a. Payroll
FICA Payable
Employees Income Tax Payable
Union Dues Payable
Wages Payable
b. Work in Process
Factory Overhead
Payroll
c. Factory Overhead
Selling and Administrative Expense
FICA Payable
Employees Income Tax Payable
Union Dues Payable
Wages Payable
105,000
8,400
15,600
400
80,600
80,000
25,000
105,000
80,000
25,000
8,400
15,600
400
80,600
d. Payroll
105,000
Wages Payable
105,000
ANS: A
The entry to record the payroll would be:
105,000
Payroll
FICA Payable
Employees Income Tax Payable
Union Dues Payable
Cash
8,400
15,600
400
80,600
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
20. The payroll summary for EVB Inc. for the period August 3 - 10 is as follows:
Factory
Employees
Gross Earnings
Withholding and deductions:
FICA
Income taxes
Union dues
Total
Net earnings
Sales and Admin.
Employees
Total
$80,000
$25,000
$105,000
6,400
10,600
400
17,400
$62,600
2,000
5,000
7,000
$18,000
8,400
15,600
400
24,400
$80,600
The entry to record the payment of earnings to the employees would include:
a.
b.
c.
d.
A debit to payroll for $105,000.
A credit to wages payable for $80,600.
A debit to wages payable for $80,600.
A credit to cash of $105,000.
ANS: C
The entry to record the payment of earnings to the employees would be:
Wages Payable
Cash
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
80,600
80,600
REF: P.
OBJ: 3
TOP: AACSB - Analytic
21. Joel Williams works at Allentown Company where he assembles components for small appliances and
earns $16 per hour with “time-an-a-half” for overtime. During the week ended July 25, Joel worked
43 hours as follows:
Job XBRL
Job FASB
Idle time due to power outage
Machine maintenance
20.5 hours
14.5 hours
2.0 hours
6.0 hours
The amount of Joel’s wages that will be charged to the Work in Process account, assuming that the
overtime worked was due to a rush order on the FASB job is:
a.
b.
c.
d.
$560
$608
$584
$680
ANS: C
Job XBRL
Job FASB
Overtime premium
Total
20.5 hrs. x $16
14.5 hrs. x $16
3.0 hrs. x $ 8
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
$328
232
24
$584
REF: P.
OBJ: 3
TOP: AACSB - Analytic
22. Joel Williams works at Allentown Company where he assembles components for small appliances and
earns $16 per hour with “time-an-a-half” for overtime. During the week ended July 25, Joel worked
43 hours as follows:
Job XBRL
Job FASB
Idle time due to power outage
Machine maintenance
20.5 hours
14.5 hours
2.0 hours
6.0 hours
The amount of Joel’s wages that will be charged to Factory Overhead assuming the overtime is due to
the random scheduling of jobs is:
a.
b.
c.
d.
$120
$152
$40
$128
ANS: B
Idle time
Machine maintenance
Overtime premium
Total
2 hrs. x $16
6 hrs. x $16
3 hrs. x $ 8
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
$ 32
96
24
$152
REF: P.
OBJ: 3
TOP: AACSB - Analytic
23. Daktari Enterprises’ Schedule of Earnings and Payroll Taxes for April is as follows:
Gross
Earnings
Non-Factory Employees:
Sales
Administrative
Factory Employees:
Direct Labor:
Regular
$ 10,000
7,000
17,000
80,000
FICA
8%
$
800
560
1,360
6,400
FUTA
1%
$
100
70
170
800
SUTA
4%
$
Total
Taxes
400
280
680
$ 1,300
910
2,210
3,200
10,400
Overtime Premium
Indirect Labor
Total
5,000
30,000
115,000
$132,000
400
2,400
9,200
$10,560
50
300
1,150
$1,320
200
1,200
4,600
$5,280
650
3,900
14,950
$17,160
Assuming overtime was the result of random scheduling of jobs, the entry to distribute payroll would
include:
a. A debit to Payroll for $132,000.
b. A credit to Wages Payable for $114,800.
c. A debit to Factory Overhead for $35,000.
d. A debit to Work in Process for $85,000
ANS: C
The entry to distribute payroll would be:
80,000
35,000
10,000
7,000
Work in Process
Factory Overhead
Sales Salaries
Administrative Salaries
Payroll
132,000
If overtime is the result of random scheduling of jobs, the overtime premium is charged to Factory
Overhead along with Indirect Labor (5,000 + 30,000).
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
24. The Dehl Company payroll for the first week in January was $12,000. The amount of income tax
withheld was 12 percent and the FICA, state unemployment, and federal unemployment tax rates were
8 percent, 5 percent, and 1 percent, respectively. The amount of the employer's payroll taxes are:
a. $3,120.
b. $1,440.
c. $ 720.
d. $1,680.
ANS: D
Employer's payroll taxes = (8% + 5% + 1%) $12,000 = $1,680. Income tax withheld is the
responsibility of the employee, as is the employees’ portion of FICA.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
25. Daktari Enterprises’ Schedule of Earnings and Payroll Taxes for April is as follows:
Gross
Earnings
Non-Factory Employees:
Sales
Administrative
Factory Employees:
Direct Labor:
Regular
Overtime Premium
$ 10,000
7,000
17,000
80,000
5,000
FICA
8%
$
800
560
1,360
6,400
400
FUTA
1%
$
100
70
170
800
50
SUTA
4%
$
Total
Taxes
400
280
680
$ 1,300
910
2,210
3,200
200
10,400
650
Indirect Labor
Total
30,000
115,000
$132,000
2,400
9,200
$10,560
300
1,150
$1,320
1,200
4,600
$5,280
3,900
14,950
$17,160
Assuming overhead is a result of the random scheduling of jobs, the entry to record and distribute the
employer’s payroll taxes would include:
a. A debit to Factory Overhead for 14,950.
b. A debit to FICA Expense of $10,560.
c. A credit to Payroll of $132,000.
d. A debit to Work in Process for $11,050.
ANS: A
The entry to record and distribute payroll taxes would be:
Factory Overhead
Payroll Tax Expense - Sales Salaries
Payroll Tax Expense - Administrative Salaries
FICA Tax Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
14,950
1,300
910
10,560
1,320
5,280
Generally, payroll taxes on direct labor wages are charged to Factory Overhead for the purpose of
convenience.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
26. Of the following taxes, the only one that the employer pays in entirety is:
a. State income tax.
b. State unemployment tax.
c. FICA tax.
d. Federal income tax.
ANS: B
Items (a) and (d) are paid only by the wage earner, Item (c) is paid by both employer and employee,
whereas state unemployment taxes are paid only by the employer.
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
27. The payroll for the week ended January 8 is $15,000 with 15 percent withheld for employee income
taxes and 8 percent for FICA taxes. The total amount of taxes to be remitted by the employer for this
payroll would be:
a. $2,250.
b. $1,200.
c. $3,450.
d. $4,650.
ANS: D
The taxes remitted would be:
Employees' income taxes
Employee FICA
Employer FICA
Total
$2,250
1,200
1,200
$4,650
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
28. An accrued expense such as Wages Payable can best be described as an amount:
a. Paid and not currently matched with earnings.
b. Not paid and not currently matched with earnings.
c. Not paid and currently matched with earnings.
d. Paid and currently matched with earnings.
ANS: C
An accrued expense is best described as an unpaid expense that has been incurred in a period in which
earnings from the expense have been realized. Therefore, the expense incurred but not paid should be
matched to the earnings of the same period.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 4
TOP: AACSB - Reflective
29. Toshlin issues financial statements June 30th. If payroll was $30,000 through June 30th and wages
were to be paid on July 5, what is the correct journal entry on June 30th?
Assume FIT = 15%, FICA = 8%, SUTA = 6%, FUTA = 1%,
a. No entry is required.
b. Payroll
30,000
c. Payroll
30,000
d. Payroll
30,000
Wages Payable
Federal Income Tax
FICA Taxes Payable
Wages Payable
Federal Income Tax
FICA Taxes Payable
SUTA
FUTA
Wages Payable
30,000
4,500
2,400
23,100
4,500
2,400
1,800
300
21,000
ANS: B
When the financial statement date does not match the payroll period, an accrual must be made.
Employer taxes would also be recorded on June 30th. The employees’ taxes are not reported because
they do not affect the financial statements total liabilities or income. The company would however,
have to prepare an entry to record the accrual for the employer’s portion of payroll taxes.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 4
TOP: AACSB - Analytic
30. Harmony Company has accrued payroll costs of $50,000 for the period May 28 - 31 as follows:
Administrative salaries
Sales salaries
Direct labor
Indirect labor
$ 5,000
5,000
30,000
10,000
$50,000
Other Information:
(a) The FICA rate is 8% of the first $100,000 of wages. None of the employees has reached this
maximum.
(b) The company is responsible for state and federal unemployment taxes on the first $8,000 of wages.
All of the employees have previously reached this maximum.
(c) Payroll taxes are spread over all jobs.
What entry would be necessary to accrue payroll taxes for the period of May 28 - 31?
a. Factory Overhead
4,000
FICA Tax Payable
4,000
b. Payroll Tax Expense - Sales
400
Payroll Tax Expense - Administrative 400
Work in Process
3,200
FICA Tax Payable
c. Payroll Tax Expense
FICA Tax Payable
4,000
4,000
4,000
d. Payroll Tax Expense - Sales
400
Payroll Tax Expense - Administrative
400
Factory Overhead
3,200
FICA Tax Payable
4,000
ANS: D
Payroll tax expense - sales
Payroll tax expense - administrative
Factory overhead
5,000 x 8% = 400
5,000 x 8% = 400
(30,000 + 10,000) x 8% = 3,200
The FICA of all factory employees would be charged to Factory Overhead as benefits are to be spread
to all jobs. If the benefits were to be charged to specific jobs, then a debit of $2,400 would be made to
Work in Process for the direct labor portion.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 4
TOP: AACSB - Analytic
31. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous
Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April
30 fell on Thursday. Payroll costs for the week ended May 1 follow:
Non Factory:
Sales
Administrative
Factory:
Direct labor
Overtime premium
Indirect labor
$ 5,000
10,000
$15,000
$25,000
2,500
15,000
$42,500
$57,500
Excluding payroll taxes, what amount should be accrued to the payroll account for the period ended
April 30?
a.
b.
c.
d.
$57,500
$46,000
$42,500
$34,000
ANS: B
If April 30 is Thursday, four days of the payroll fall in April and one in May.
$57,500 / 5 days = $11,500 per day x 4 days = $46,000
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 4
TOP: AACSB - Analytic
32. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous
Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April
30 fell on Thursday. Payroll costs for the week ended May 1 follow:
Non Factory:
Sales
Administrative
$ 5,000
10,000
$15,000
Factory:
Direct labor
Overtime premium
Indirect labor
$25,000
2,500
15,000
$42,500
$57,500
Excluding payroll taxes, how much of the accrued payroll at April 30 should be charged to Factory
Overhead?
a.
b.
c.
d.
$17,500
$26,000
$14,000
$34,000
ANS: C
If April 30 is Thursday, four days of the payroll fall in April and one in May.
$15,000
2,500
$17,500
Indirect labor
Overtime premium
Total payroll relating to factory overhead
$17,500 / 5 days = $3,500 per day x 4 days = $14,000
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 4
TOP: AACSB - Analytic
33. The entry made in November to reverse the entry that was made to accrue October payroll would be:
a. Debit - Wages Payable
Credit - Cash
b. Debit - Wages Payable
Credit - Payroll
c. Debit - Factory Overhead
Credit - Payroll
d. Debit - Payroll
Credit - Wages Payable
ANS: B
The entry to accrue payroll is:
Debit - Payroll
Credit - Wages Payable
This entry is reversed in the following month.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 4
TOP: AACSB - Analytic
34. Which of the following items relating to direct labor employees might be charged to specific jobs in
work in process rather than factory overhead?
a. Make-up guarantee
b. Idle time
c. Shift premiums
d. Fringe benefits
ANS: D
In some cases, workers’ fringe benefits, including holiday pay, are charged to jobs with the workers’
wages. However, many companies charge benefits to Factory Overhead as it is not cost effective to
charge the benefits to jobs.
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 5
TOP: AACSB - Reflective
35. Jay Vato works at Batwing Industries from midnight until 8:00 AM. His normal wage rate is $17 per
hour, while Ben Phillips, who does the same job from 8:00 AM until 4:00 PM makes $15 per hour.
Since Ben and Jay have the same seniority within the plant, the difference in pay is due to a(n):
a. overtime premium.
b. production bonus
c. make-up guarantee.
d. shift premium.
ANS: D
Employers who run shifts other than day shifts often pay shift premiums for those shifts which are
designed to attract workers to the less desirable shifts. Shift premiums compensate employees on the
“swing” or “graveyard” shifts for the lifestyle adjustments necessary to work those shifts, even though
productivity is usually not as high as that of the workers on normal day shifts.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 5
TOP: AACSB - Reflective
36. Features of a 401(k) plan include all of the following except:
a. Pension benefits are based on past earnings and length of service with the company.
b. The employer may match a certain portion of the employee’s investment.
c. Taxes are deferred on wages invested in the plan.
d. Investments may be made in company stock, mutual funds or other investment vehicles.
ANS: A
A 401(k) plan is a defined contribution plan which means that the plan specifies the amount of
contributions that can be made to the plan by the employee and employer, but the amount of benefits is
tied to the amounts contributed and performance of the investments. Option (a.) above is a
characteristic of a defined benefit plan.
PTS: 1
DIF: Moderate
NAT: IMA 2B- Cost Management
REF: P.
OBJ: 5
TOP: AACSB - Reflective
37. John Elton, who is classified as direct labor, earns $1,000 per week and is entitled to four weeks of
vacation and 10 holidays each year. How much should be accrued for his vacation each week?
a. $76.92
b. $80.00
c. $83.33
d. $40.00
ANS: C
Total vacation pay per year = $1,000 x 4 weeks = $4,000
Weeks over which vacation is earned = 52 - 4 = 48
$4,000 / 48 weeks = $83.33 per week
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 5
TOP: AACSB - Analytic
38. John Elton, who is classified as direct labor, earns $1,000 per week and is entitled to four weeks of
vacation and 10 holidays each year. How much should be accrued for his holiday pay each week?
a. $38.46
b. $40.00
c. $46.67
d. $130.00
ANS: C
Daily pay = $1,000 / 5 = $200
Annual holiday pay = $200 x 10 = $2,000
Weeks over which holiday pay is earned = 52 - 4 = 48
$2,000 / 48 weeks = $46.67 per week
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 5
TOP: AACSB - Analytic
39. A factory worker earns $500 per week and will receive a $2,000 bonus at year-end, a 2-week paid
vacation, and 5 paid holidays. The combined amount of the accruals for bonus, vacation, and holiday
pay in the weekly payroll would be:
a. $20.00.
b. $70.00.
c. $40.00.
d. None of the above.
ANS: B
Bonus:
Vacation pay:
Holiday pay:
$2,000 / 50 weeks
$500 x 2 weeks
$500 / 5 days
=
=
=
=
=
$40 per week
$1,000 / 50 weeks = $20 per week
$100 per day  5
$500 / 50 weeks
$10 per week
Total accrual = $40 + $20 + $10 = $70
Note that the fringe benefits will be earned over the 50 weeks worked since the worker has 2 weeks
vacation.
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 5
TOP: AACSB - Analytic
PROBLEM
1. Management of the Von Machine Company requests that you calculate the effect of two different wage
payment plans upon employee earnings and also on the unit labor cost of Product A.
The following information is available:
(1)
(2)
The hourly rate is $9.00.
The labor rate per piece of Part X, if the employee is paid on a piece-rate basis, is
$.30.
Ten pieces of Part X are required for one unit of Product A. The plant works a 6-day week and an 8hour day, totaling 48 hours per week. No overtime premium pay is to be considered in your analysis.
During a selected week, the following pieces of Part X were produced:
Day
1
2
3
4
5
6
Part X
Quantities Produced
150
200
240
180
300
200
An agreement with the union requires a minimum rate of $6.50 per clock hour be paid to employees.
a.
b.
Calculate the labor cost each day of the week for an employee under:
(1) the hourly-rate plan.
(2) the piece-rate plan.
If the company could anticipate a steady production level of 250 units of Part X each day,
which plan would you recommend to the company’s management? Why?
ANS:
(a)
(1)
Hourly-Rate Plan:
8 (hours per day)  $9 = $72 per day
(2)
Piece-Rate Plan:
Day






$.3
.3
.3
.3
.3
.3
*8 (hours per day)  $6.50 = $52 per day.
1
2
3
4
5
6
(b)
150
200
240
180
300
200
Legal
Min.*
$52
52
52
52
52
52
Earned
$45.00
60.00
72.00
54.00
90.00
60.00
Amount
Paid
$52
60
72
54
90
60
If the company were to produce 250 units of Part X each day, the hourly rate would result
in a cost of $.288 per unit ($72 / 250), while the piece rate would cost $.30 for each unit
produced. The hourly rate should be recommended because of the lower cost per unit.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1
TOP: AACSB - Analytic
2. Becky Graham earns $15 per hour for up to 300 units of production per eight-hour day. If she
produces more than 300 pieces per day, she will receive an additional piece rate of $.40 per unit. A
summary of her work week follows:
Hours Worked
Pieces Finished
8
8
8
8
8
350
280
320
290
300
Monday
Tuesday
Wednesday
Thursday
Friday
(a)
Determine Graham’s earnings for each day and for the week.
(b)
Prepare the journal entry to distribute the payroll for the week.
ANS:
(a)
Graham’s earnings are calculated as follows:
Hours
Worked
Monday
Tuesday
Wednesday
Thursday
Friday
8
8
8
8
8
Pieces
Finished
350
280
320
290
300
Earnings @
$15.00/hr
Earnings @
$.40/unit
$120
120
120
120
120
$600
$140
112
128
116
120
$616
Make-up
Guarantee
$ 8
4
$12
(b)
Work in Process
Factory Overhead
Payroll
616
12
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 1, 3
TOP: AACSB - Analytic
628
Payroll
Earnings
$140
120
128
120
120
$628
3. Payroll records for selected employees of Tomco Industries for the forty-sixth week of the year are as
follows:
Employee
R. Shuey
K. Dye
J. Rudnick
L. Guzzino
A. Busse
Salary or
wage based
on 40 hour
week
Classification
President
Sales Manager
Direct Labor
Direct Labor
Indirect Labor
$3,000
2,500
800
600
400
Hours
Worked
Income
Tax
Withheld
40
40
42
46
44
$600
500
100
150
80
Gross
Wages
through
45th week
$135,000
98,000
4,500
28,000
7,800
Employees are paid time-and-a-half for overtime.
Employer payroll tax rates are as follows:
FICA: 8% of first $100,000 of salary or wages
FUTA: 1% of first $8,000 of salary or wages
SUTA: 4% of first $8,000 of salary or wages
Calculate:
(a) Total gross payroll for the selected employees.
(b) Total employer payroll taxes for the selected employees.
ANS:
(a)
Employee
Shuey
Dye
Rudnick
Guzzino
Busse
Total
Regular Wages
or Salary
Overtime
Premium
$3,000
2,500
840
690
440
Total
20
45
20
Computations
$3,000
2,500
860 800/40=20; 42x20=840; 2x10=20
735 600/40=15; 46x15=690; 6x7.50=45
460 400/40=10; 44x10=440; 4x5=20
$7,555
(b)
Employee
Shuey
Dye
Rudnick
Guzzino
Busse
Total
Cumulative
Earnings
Week 45
$135,000
98,000
4,500
28,000
7,800
Earnings
Week 46
$3,000
2,500
860
735
460
Cumulative
Earnings
Week 46
$138,000
100,500
5,360
28,735
8,260
FICA
$ 160.00
68.80
58.80
36.80
$324.40
FUTA
SUTA
Total
$ $ $
160.00
8.60
34.40
111.80
58.80
2.00
8.00
46.80
$10.60 $42.40 $377.40
Computations:
Shuey has already exceeded the FICA limit of $100,000 and the unemployment tax limit of $8,000, so
the company does not have any payroll tax expense.
Dye has already exceeded the unemployment tax limit of $8,000. This week’s payroll pushes his
cumulative earnings above $100,000, but the portion between $98,000 and $100,000 or $2,000 is
subject to the 8% FICA tax of $160.00.
Rudnick has not hit either limit as yet, so his total earnings for the week of $860 are subject to all
taxes. FICA - $860 x 8% = $68.80; FUTA - $860 x 1% = $8.60; SUTA $860 x 4% = $34.40.
Guzzino has exceeded the $8,000 limit for unemployment taxes, but his earnings are subject to FICA
taxes - $735 x 8% = $58.80.
Busse’s earnings are subject to FICA ($460 x 8% = $36.80), but only $200 of his earnings are subject
to the unemployment taxes ($8,000 limit - $7,800). FUTA - $200 x 1% = $2.00; SUTA - $200 x 4% =
$8.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
4. Jerrod Sampson is paid $10 an hour for 40 hours a week, with time-and-a-half for overtime and
double-time for Sundays and holidays. Overtime premium is charged to Factory Overhead.
Using the labor-time record below:
a. Compute Jerrod’s total earnings for the week.
b. Present the journal entry to distribute Jerrod’s total earnings.
SUTA = 4%, FUTA = 1%, FICA = 8%, FIT = 10%
F28
M14
Idle
Total
Sun
4
4
Mon
4
3
1
8
Tues
4
2
1
7
Wed
4
5
Thur
4
4
8
9
Fri
4
6
Sat
4
10
4
Total
28
16
6
50
ANS:
a. $570
Regular Pay
Premium
$500
$ 70
(50 hours x $10)
(4 hours x $10) + (6 hours x $5)
b. Work in Process*
Factory Overhead**
Payroll
*
**
Work in Process:
Factory Overhead:
440
130
570
(28 hours x $10 ) + (16 hours x $10 ) = $440
(6 hours x $10) + $70 overtime premium = $130
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3
TOP: AACSB - Analytic
5. The Wagner Company’s Schedule of Earnings and Payroll Taxes for May is summarized as follows:
Gross
Earnings
Non-Factory Employees:
Sales
Administrative
Factory Employees:
Direct Labor:
$ 8,000
9,000
17,000
FICA
8%
$
640
720
1,360
FUTA
1%
$ 80
90
170
SUTA
4%
$
320
360
680
Total
Taxes
$1,040
1,170
2,210
Regular
Overtime Premium
Idle time
Indirect Labor
Total
32,000
5,000
3,000
18,000
58,000
$75,000
2,560
400
240
1,440
4,640
$6,000
320
50
30
180
580
$750
1,280
200
120
720
2,320
$3,000
4,160
650
390
2,340
7,540
$9,750
(a) Prepare the journal entry to distribute payroll under each of the following scenarios:
(1) Overtime resulted from priority scheduling of Job 3bX for which the company
received a rush order.
(2) Overtime resulted from random scheduling of jobs.
(b) Prepare the journal entry to record and distribute the employer’s payroll taxes.
ANS:
(a)
(1) Sales Salaries
Administrative Salaries
Work in Process (32,000 + 5,000)
Factory Overhead (18,000 + 3,000)
Payroll
8,000
9,000
37,000
21,000
75,000
Since the overtime resulted from a rush order, the overtime premium would be charged to the job
(Work in Process). Idle time is charged to Factory Overhead as it can not be allocated to any one job.
(2) Sales Salaries
Administrative Salaries
Work in Process
Factory Overhead (18,000 + 3,000 + 5,000)
Payroll
8,000
9,000
32,000
26,000
75,000
Since overtime was the result of random scheduling of jobs, the overtime premium would be charged
to Factory Overhead.
(b) Factory Overhead
Payroll Tax Expense - Sales Salaries
Payroll Tax Expense - Admin. Salaries
FICA Tax Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
7,540
1,040
1,170
6,000
750
3,000
REF: P.
OBJ: 3
TOP: AACSB - Analytic
6. The following payroll summary is prepared for the Sothern Manufacturing Company for the week
ending March 29:
Direct labor:
Job No. 200
Job No. 201
Job No. 202
Total direct labor
Indirect labor
Total gross payroll
$10,300
7,000
6,500
$23,800
6,200
$30,000
Payroll taxes and insurance are to be computed as follows:
Employee's
Share
Federal income tax withheld
State unemployment tax
Federal unemployment tax
FICA tax
Disability insurance
Workmen's compensation insurance
Employer's
Share
$4,300
8.0%
.5%
5.0%
1.0%
8.0%
.25%
2.0%
Prepare the general journal entries to:
a.
b.
c.
d.
Record the payroll.
Pay the payroll.
Distribute the payroll to the appropriate accounts.
Record the employer's share of payroll tax expense. (All of the employees work in
the factory.)
ANS:
(a)
(b)
(c)
(d)
Payroll
FICA Tax Payable (30,000 x 8%)
Federal Income Tax Withheld
Disability Insurance Withheld (30,000 x .5%)
Wages Payable (30,000 - 2,400 - 4,300 - 150)
To record payroll.
30,000
Wages Payable
Cash
23,150
Work in Process
Factory Overhead (Indirect Labor)
Payroll
To distribute payroll.
23,800
6,200
23,150
30,000
Factory Overhead
FICA Tax Payable (30,000 x 8%)
Disability Insurance Withheld (30,000 x .25%)
State Unemployment Tax Payable (30,000 x 5%)
Federal Unemployment Tax Payable (30,000 x 1%)
Workmen's Compensation
Insurance Payable (30,000 x 2%)
To record employer's share of payroll associated
costs.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
2,400
4,300
150
23,150
4,875
2,400
75
1,500
300
600
REF: P.
OBJ: 3
TOP: AACSB - Analytic
7. Tyler Jacob is paid $15 per hour for a 40-hour work week with time-and-a-half for overtime, which is
not charged to specific jobs. For the week of March 4 - 10, Tyler’s labor time record was as follows:
Mon
Tues
Wed
Thur
Fri
Sat
Total
Job B280
Machine maintenance
Total
8
8
5
4
9
6
2
8
10
10
10
10
2
1
3
41
7
48
Other Information:
Tyler’s year-to-date wages as of March 3 were $7,500. He contributes $20 weekly for his health
insurance premiums.
Current tax rates in effect are: FIT withholding rate - 10%; FICA - 8% on the first $100,000 of wages;
SUTA - 4% on the first $8,000 of wages; and FUTA - 1% on the first $8,000 of wages.
(a)
(b)
(c)
Calculate Tyler’s gross and net pay.
Prepare the journal entries necessary to
(1)
Record Tyler’s payroll
(2)
Pay Tyler’s payroll
(3)
Distribute Tyler’s payroll to the appropriate accounts
Calculate the employer’s payroll taxes and prepare the journal entry to record them employer’s
portion of payroll taxes
ANS:
(a)
Gross pay:
48 hours x $15.00/hr.
8 hours x $ 7.50/hr. (15.00/.5)
Total gross pay
Deductions:
FIT Withholding $780 x 10%
FICA - Employee portion $780 x 8%
Health insurance premium
Total deductions
Net Pay
(b)
$720.00
60.00
$780.00
$ 78.00
62.40
20.00
$160.40
$619.60
Payroll
Employees’ Income Tax Payable
FICA Tax Payable
Health Insurance Premium Payable
Wages Payable
To record payroll
780.00
Work in Process (41 hrs. x $15)
Factory Overhead (7 hrs. x $15) + $60 (Overtime)
Payroll
To distribute payroll
615.00
165.00
Wages Payable
Cash
To record payment of payroll
619.60
(c)
Year-to-date payroll, March 3
Earnings March 4 - 10
Year-to-date payroll, March 10
Subject to FUTA and SUTA
78.00
62.40
20.00
619.60
780.00
619.60
$7,500
780
$8,280
8,000
$
Not subject to FUTA and SUTA
280
Amount of earnings March 4 - 10 subject to unemployment taxes = $780 - 280 = $500
Employer’s payroll taxes:
FICA (per above)
SUTA ($500 x 4%)
FUTA ($500 x 1%)
$62.40
20.00
5.00
87.40
Factory Overhead
FICA Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Payable
To record employer’s payroll taxes
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
62.40
20.00
5.00
REF: P.
OBJ: 3
TOP: AACSB - Analytic
8. The Tidle Manufacturing Company uses a job order cost system. Factory wages are paid on a straight
hourly basis with indirect labor getting $8.50 an hour and direct labor getting $10.00 an hour.
During the week of January 7, the following hours were worked:
Cutting Department
Splicing Department
Sanding Department
Joining Department
Direct
Indirect
2,200
2,400
1,850
4,250
250
200
125
325
Salaries and wages are paid weekly, with administrative salaries totaling $16,500 and salesperson's
salaries totaling $12,200.
The following deductions are to be considered:
FICA tax
Federal income tax
State income tax
Federal unemployment tax
State unemployment tax
8.0%
12.0%
2.0%
1.0%
5.0%
Prepare journal entries to record:
a.
b.
c.
d.
The payroll.
The payment of the payroll.
The payroll distribution.
The employer's payroll tax expense.
ANS:
(a)
Payroll*
FICA Tax Payable ($143,350 x 8% )
Federal Income Tax Withheld ($143,350 x 12%)
State Income Tax Payable ($143,350 x 2% )
143,350.00
11,468.00
17,202.00
2,867.00
Salaries and Wages Payable
To record payroll.
*(10,700 x $10) + (900 x $8.50) + $16,500 + $12,200
(b)
(c)
111,813.00
Salaries and Wages Payable
Cash
To pay payroll.
111,813.00
Work in Process (10,700 x $10 )
Factory Overhead (900 x $8.50)
Administrative Salaries
Sales Salaries
Payroll
To distribute payroll.
107,000.00
7,650.00
16,500.00
12,200.00
111,813.00
143,350.00
(d)
Factory Overhead*
Payroll Tax Expense**-Sales and Administrative Salaries
FICA Tax Payable ($143,350 x 8%)
Federal Unemployment Tax Payable ($143,350 x 1%)
State Unemployment Tax Payable ($143,350 x 5%)
To record employer's share of payroll taxes.
*($107,000 + $7,650) x (8% + 1% + 5%) = $16,051
**($16,500 + $12,200) x (8% + 1% + 5%) = $4,018
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
16,051.00
4,018.00
11,468.00
1,433.50
7,167.50
REF: P.
OBJ: 3
TOP: AACSB - Analytic
9. Ken Astor is a factory worker at Flox Co. earning $27.00 per hour. Astor is eligible for five paid
holidays and six weeks vacation and is paid “time-and-a-half” for overtime. Astor’s earnings so far
this year are $45,000.
Tax rates are as follows:
Employee income tax
FICA
FUTA
SUTA
15% on all earnings
8% on first $100,000 of earnings
1% on first $8,000 of earnings
4% on first $8,000 of earnings
Assuming Ken worked 46 hours this week, calculate the total expense to Flox Co for this weeks,
wages, payroll taxes and fringe benefits.
ANS:
Wages:
Regular wages
Overtime premium
$27 x 46 hr.
$13.50 x 6 hr.
Employer payroll tax
FICA
*
$1,323 x 8%
Fringe benefits **
Vacation
Holiday
$27 x 40 hours = 1,080 x 6 = 6,480/46 =
5 days paid
= 1,080/46
Total
$1,242.00
81.00
$1,323.00
105.84
140.87
23.48
$1,593.19
*
**
Astor has already exceed the unemployment tax limits.
Since Astor has 6 weeks of vacation, he is earning his benefits over the 46 weeks he works.
PTS: 1
DIF: Hard
NAT: IMA 2B - Cost Management
REF: P.
OBJ: 3, 5
TOP: AACSB - Analytic
10. Tacy Company’s Schedule of Earnings and Payroll taxes for the period ended March 28 - 31 to be paid
April 5 follow:
Gross
Wages
Non-factory:
Sales
Administrative
Factory:
Direct labor
Overtime premium
Indirect labor
FICA
SUTA
$ 7,500
4,000
11,500
$
$
52,000
4,500
10,000
66,500
$78,000
4,160
360
800
5,320
$6,240
600
320
920
Total
payroll
taxes
FUTA
240
112
352
$ 60
28
88
$
2,080
180
400
2,660
$3,012
520
45
100
665
$753
6,760
585
1,300
8,645
$10,005
Prepare the journal entries to:
(a)
Accrue the payroll in the appropriate period
(b)
Distribute the accrued payroll in the appropriate period
(c)
Recognize related accrued employer’s payroll taxes in the appropriate period
assuming payroll taxes are spread over all jobs produced.
ANS:
The following journal entries would be recorded in March
(a) Payroll
Wages Payable
To accrue payroll for the period Mar. 28 - 31
78,000
(b) Work in Process
Factory Overhead (10,000 + 4,500)
Sales Salaries
Administrative Salaries
Payroll
To distribute payroll for period Mar. 28 - 31
52,000
14,500
7,500
4,000
(c) Factory Overhead
Payroll Tax Expense - Sales Salaries
Payroll Tax Expense - Administrative Salaries
FICA Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Payable
To recognize employer’s payroll taxes for the
period Mar. 28 - 31.
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
78,000
78,000
8,645
900
460
REF: P.
OBJ: 4
TOP: AACSB - Analytic
6,240
3,012
753
900
460
1,360
11. A direct laborer in a factory earns $1,000 each week. In addition, she will receive a $2,500 bonus at
year end, a two-week paid vacation, and seven paid holidays.
Prepare the entry to distribute her wages and the costs and liabilities related to bonus, vacation, and
holiday pay. (Round all amounts to two decimal places.)
ANS:
Work in Process
Factory Overhead (bonus)
Factory Overhead (vacation)
Factory Overhead (holiday pay)
Payroll
Bonus Liability*
Vacation Pay Liability**
Holiday Pay Liability***
* Bonus:
** Vacation:
*** Holiday pay:
$2,500 / 50 weeks
$1,000 x 2 weeks
$1,000 / 5 days
$1,400 / 50 weeks
PTS: 1
DIF: Moderate
NAT: IMA 2B - Cost Management
$1,000
50
40
28
1,000
50
40
28
= $50 per week
= $2,000 / 50 = $40 per week
= $200 per day  7
= $1,400
= $28 per week
REF: P.
OBJ: 5
TOP: AACSB - Analytic