ACCOUNTING FOR LABOR

WHAT IS LABOR?
1. Physical or mental effort expended in manufacturing
a product.

2. The compensation paid to employees who engage in

production related activities.

3. The principal labor cost is wages paid to production

workers.
Whats the difference between wages and salaries?

Wages represent payment made to production workers

On the account of their hourly, daily or piece works.

Salaries are fixed payments made regularly for

Managerial or clerical services.
Factory payroll are divided into:

1. Direct labor

2. Indirect labor
 DIRECT LABOR
Represents payroll costs that are allocated
directly to the product.
It is debited to work in process
 INDIRECT LABOR
Labor costs incurred for a variety of job that
are related to the production process but are
considered either too remote or too
insignificant to be charged directly to
production.
It is debited to factory overhead control
account.
Procedures for recording payroll costs
1. Recording the numbers of hours used in total and by
job.
2. Recording the quantity produced by the workers.
3. Analyzing the hours used by employees to
determine how time is to be charged.
4. Allocation of payroll costs to jobs and factory
overhead accounts.
5. Preparation of the payroll, including computation
and recording of the employees gross earnings,
deductions, and net earnings.
 DIFFERRENT WAGE PLANS
1. Hourly-rate plan
2. Piece-rate plan
3. Modified wage plan
 Hourly-rate plan
Under this plan, a definite rate per hour is set
for each employee.
The employees wages are calculated by
multiplying the rate per hour by the number
of hours worked.
 Piece-rate plan
Under a piece-rate plan, earnings are
calculated by multiplying the employees
output by the rate per piece.
The plan provides an incentive for the
employee to produce more
 Modified Wage Plan
This plan combines the feature of hourly-rate
and piece-rate plans.
An example of this would be to set a minimum
hourly wage that will be paid by the company
even if an established quota of production is
not attained by the employee.
If the established quota is exceed, an
additional payment per piece would be added
to the minimum wage level.
Whose responsibility is the maintaining of the
labor records?

Time keeping and the payroll departments

The departmental responsibilities of time-keeping
And payroll are carried out by completing and
Maintaining the following forms:

Time keeping Payroll

Clock cards Payroll records

Time tickets Employees earning records
Production reports Payroll summaries
ACCOUNTING FOR LABOR COSTS

Regular time including extra time at regular rate

Worked will be booked to WORK IN PROCESS

Premium rate applied on extra time worked will be

Booked to FACTORY OVERHEAD CONTROL
 SSS Contributions
The SSS required employers to pay social
security taxes on wages and salaries
equivalent to approximately 68% of the total
contribution credited to the employee.
 Philhealth Contributions
The amount contributed by the employer is
equal to the amount deducted from the
employees salary or wage.
 Pag-ibig Funds Contribution
The amount deducted from the employees
salary is equivalent to 3% of basic salary or
P100, whichever is lower.
Illustrative Problem
The Ingrid Manufacturing Company pays employees every two weeks.
Monday, May 1, is the beginning of a new payroll period. The following
Payroll summary (for one factory worker (single) and one administrative
Employee (single) is prepared by the payroll department and forwarded to
Accounting for recording:
Payroll Summary
for the period May 1 - 14
Factory Sale and
worker Adm. Employee Total
Gross Earnings: P10,000 P20,000 P30,000
Withholdings & Deductions:
Income tax P 1,979.25 P 2,833.33 P 4,412.58
SSS premiums 333.30 500.00 833.30
Philhealth Contribution 125.00 250.00 375.00
Pag-ibig Contributions 100.00 100.00 200.00
Total P 2,537.55 P 3,683.33 P 6,280.88
Net Earnings P 7,462.65 P 16,326.67 P23,719.12
After he data are verified, a payroll voucher is authorized and recorded
As follows:
May 14 Payroll 30,000
Withholding tax payable 4,812.58
SSS Premium payable 833.30
Philhealth Contribution payable 375.00
Pag-ibig Funds contribution payable 200.00
Voucher payable 23,719.12

To record the payment of the net earnings to employees, the following

Entry is required:

May 14 Voucher payable P23,719.12

Cash 23,719.12
The following schedule provides the information necessary to record
The employers payroll taxes for the period.

SSS premiums Philhealth Pag-ibig Total

Factory payroll 706.70 125 100 931.70
Selling & Adm. 1,060.00 125 100 1,285.00
Total 1,766.70 250 200 2,216.70

The entry to record the employers payroll taxes is as follows:

Factory Overhead Control 931.70

Selling & Adm. Expense control 1,285.00
SSS Premiums payable 1,766.70
Philhealth Contributions payable 250.00
Pag-ibig Funds contributions payable 200.00
Illustration

Assume an employee regularly earns P30 per hour for an 8-hour day.
If called upon to work more than 8 hours in a working day, the
Company will have to pay overtime premium for hours worked in
Excess of 8 hours. Assuming the employee works 12 hours on Monday,
Is paid 50% overtime premium (time-and-half) the earnings would
Be calculated as follows:
Direct labor 8 hours @ P30 P240
Direct labor 4 hours @ P30 P120
Overtime premium (4 x 15) 60 180
Total earnings P420

Entry
Work in process (240 + 120) 360
Factory overhead control 60
Accrued payroll 420
 LABOR OVERHEAD
1. Waiting time or idle time
2. Make-up pay
3. Overtime premium
4. Shift premium
5. Employers payroll taxes
Waiting time or idle time cost of non-productive hours of
Direct labor caused by lack of work, waiting for materials delays
From scheduling, machine breakdown and machine set-up.

Example,

Let us assume Maxine Garcia spent 36 hours on Job 101 and was
Idle for 4 hours during the week. Maxines rate is P50.00 per hour
For a 40-hour week.

Work in process Job 101 (36 hrs. x P50) 1,800

Factory overhead control idle time (4 hrs x P50) 200
Accrued payroll 2,000
Make-up pay When payments to an employee are based solely
On the number of units produced, the employee is said to be at a
piecework rate. Many companies will pay employees a minimum
Wage but they can earn more if they produced more.

Example

Les us assume Maxine Garcia is paid P15.00 per piece produced and
During the week, she produced 80 pieces. If the guaranteed weekly
Pay is P1,500, then the difference between P1,500 and P1,200 is
Charged to factory overhead control.
Work in process-Job 101 1,200
Factory overhead control-Make up pay 300
Accrued payroll 1,500
Overtime premium represents amount paid, in excess of the
Regular rate, to employees working in excess of 8 hours in a day, or
Working during holidays or their rest day. Regular earnings represent
The total hours worked, including overtime hours, by the regular rate.
Overtime premium represents the overtime hours multiplied by the
Premium rate.

Example

Maxine worked for 45 hours during the week and she paid time and
A half

Work in process (45 hours x P 50) 2,250

Factory overhead control (5 hours x P25) 125
Accrued payroll 2,375
Shift premium extra pay to work during less desirable evening
Shift (2pm to 10pm) or night shift (10pm to 6 am). This shift premium
Or shift differential, should be charged to factory overhead control
Rather than work in process.

Example
Assume Maxine is assigned to night shift and is paid a shift premium
Of P20 per hour.

Work in process (40 hours x P 50) 2,000

Factory overhead control (40 hours xP20) 800
Accrued payroll 2,800

Employers payroll taxes amount remitted to different government

Agencies for SSS premiums, Philhealth Contribution, and pag-ibig
Contributions.
PAYROLL ACCOUNTING
 Nature and Concept
Payroll accounting is not a branch of
accounting;
It is an accounting system embracing the
different procedures and mechanics designed
in handling properly employees
compensation.
 What is compensation?
Compensation refers to all remuneration paid by
the employer to the employee. It may include
and take in the form of:
a) Salary, wage, or fee
b) Commission
c) Honoraria
d) allowances
e) Overtime pay, holiday pay, night shift differential
pay, hazard pay, or emergency pay
f) Sick leave pay or vacation pay
g) Separation pay
h) Fringe benefits

The salient feature of compensation is that there is

an employer-employee relationship existing
between the payor and the payee.
 DEDUCTIONS FROM COMPENSATION
1. Mandatory
2. Organizational deductions
Mandatory Deductions. These deductions from
compensation are required by law. Mandatory
deductions include the following:
a) SSS contribution
b) Philhealth contribution
c) Pag-Ibig contribution
d) Withholding tax
 EMPLOYERS PAYROLL TAXES
1. SSS Contribution
Employee Employer EC Total SE/VM/OFW
Min 33.30 80.70 10 114 104
Max 500.00 1,080.00 10 1,590 1,560
2. Philhealth Contributions
Employee Employer Total
Min 50 50 100
Max 375 375 750
3. Pag-ibig Funds Contributions
100 100 200
Organization deductions. These deductions are not
imposed by law, but become enforceable because
of organizational policies or collective bargaining
agreement executed between the employer and
a duly recognized employee association. This type
of deduction may include the following:
a) Union dues
b) Contribution to private retirement plan duly
approved by the BIR
c) Cash advances of employees
d) Items withdrawn from business canteen or
convenience store