Principles of Cost Accounting, 16th Edition, Edward J. VanDerbeck, ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
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Chapter 3
Accounting for Labor
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.
Learning Objectives (cont.)
Account for special problems in labor
costing.
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?
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.
Accounting System of a
manufacturer
• The accounting system of a manufacturer
must include the following procedures for
recording payroll costs:
1. Recording the hours worked or quantity of
output by employees in total and by job,
process, or department
2. Analyzing the hours worked by
employees to determine how labor time is
to be charged.
Accounting System of a
manufacturer
3. Charging payroll costs to jobs, processes,
departments, and factory overhead
accounts.
4. Preparing the payroll, which involves
computing and recording employee gross
earnings, withholdings and deductions,
and net earnings.
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.
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.
Controlling Labor Cost
Controlling Labor Costs
Controlling Labor Costs
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.
Labor Costs
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
Labor Costs
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
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.
Special Labor Cost Problems
• Shift premium
• Pensions
• Bonuses
• Vacation and Holiday pay