Part Two:

Cost accumulation for inventory valuation and profit

measurement
Payroll and Labour Accounting

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Accounting for labour costs

Two distinct phases:
1 Computations of gross pay for each employee and
calculation of payments to be made to employees,
government, pension funds etc. (i.e. Payroll accounting).
2 Allocation of labour costs to cost objects such as
products or services, individual customers orders and
overhead accounts (i.e. labour cost accounting).

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Payroll accounting
Payroll accounting requires the provision of
information relating to an employees
attendance time, details of absenteeism,
hourly rates of pay, and
details of various deductions such as tax,
health and social insurances, etc.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Payroll accounting
Clock cards or absenteeism reports
provide the basic information for the
calculation of attendance time, and
The employees personal record card
provides details of the various deductions.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Labor Time Records

Given the magnetic card reading technology
available today, the time record typically
takes the form of a computer file.
The labor hours recorded should be
reviewed by a production supervisor for
accuracy.

Payroll Function
Primary responsibility is to compute the wages and
salaries earned by the employees.
Forms should include a payroll record and
employees earnings records.
A summary of the payroll is sent to accounting to
record the payroll in the accounting records.
The payroll record is sent to the treasurers
department for making payments to employees.

Payroll Records
Forms used by companies will vary, but all forms
possess some common characteristics.
Entry to record payroll.
Payroll

XX

Withholding Tax Payable

XX

SSS Premium Payable

XX

Health Insurance Payable

XX

Employee Receivable

XX

Wages Payable

XX

Payroll accounting
the objective of an incentive scheme is to benefit both the employer
and employee.
Consider a situation where an employee is paid P8 per hour and in one
hour produces 10 units. The average labour cost per unit will be P0.80.
To stimulate production, a piecework system is introduced where
workers are paid P0.70 per unit produced. Assuming that this results in
an increase in productivity to12 units per hour, the hourly rate would
increase to P8.40 (12 P0.70). The overall effect is that there is an
increase in the hourly rate of the employee and a reduction in the
labour cost per unit produced for the employer (from P0.80 to P0.70).

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Hourly Rate Plan

The employees wages are calculated by
multiplying the established rate per hour by
the number of hours worked.
This plan does not provide an incentive for
the employee to achieve a high level of
productivity.

Piece-Rate Plan
Employees wages based on the employers
quantity of production.
Number of units produced is multiplied by a
predetermined rate.
May be referred to as incentive wage plan
or piece-rate plan.
Quality may be sacrificed in order to
maximize quantity.

Payroll accounting
Where incentive payment systems are in
operation, piecework tickets contain
details of the number of items produced by
each employee, and this is multiplied by the
rate per item to give the total weekly wage.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Modified Wage Plan

Minimum hourly wage is set even if an established
quota is not attained.
If quota is exceeded, a bonus is added to the minimum
wage level.
On days when the quota is not met, the difference
(make-up guarantee) would be charged to factory
overhead.
When production work teams are utilized, a single
incentive for the group would be appropriate.

Special Labor Cost Problems

Shift Premiums
Employee Pension
Costs
Bonuses
Vacation and Holiday
Pay

Payroll accounting
Where bonus schemes are in operation,
the total payment will be based on an attendance
time (the time rate wage) plus a bonus. The time
rate wage is obtained from the clock card and the
bonus details from the job card. Under a bonus
scheme, a set time is allowed for each operation
and a bonus is paid based on the proportion of
time that is saved.
Use with Management and Cost Accounting 7e
by Colin Drury ISBN 9781844805662
2008 Colin Drury

Bonus, illustrated
The time allowed for a specific operation is 20
hours and the actual time taken by an employee
was 16 hours. A bonus scheme is in operation
where employees receive a bonus of 50% of the
time saved. The hourly wage rate is P8 per hour.
The employee, having worked for 16 hours, will
receive a time rate wage of P128 (16 hours at P8)
plus a bonus of P16 (50% of 4 hours saved at P8
per hour).
Use with Management and Cost Accounting 7e
by Colin Drury ISBN 9781844805662
2008 Colin Drury

VL and Holiday Pay

should be charged to activities by means of an inflated hourly rate.
For example, if the employee is normally paid P8 per hour for a 40hour week and is entitled to four weeks annual VL and two weeks
holiday he or she will receive a total of P1920 VL & holiday pay (six
weeks at P320 per week). Assuming that the employee works the
remaining 46 weeks, the attendance time will amount to 1840 hours
(46 weeks at 40 hours per week). Dividing P1920 by 1840 hours gives
an addition of approximately P1.04 per hour to the employees hourly
wage rate to ensure that the holiday pay is recovered. The advantage of
this approach is that holiday pay is treated as a direct labour cost.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Overtime premiums and shiftwork premiums

included as part of overheads.
If charged directly to products/services or
customers orders undertaken during the
overtime or night-shift period, they will
bear higher costs than those produced
during a regular working week.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Overtime premiums and shiftwork premiums

If, however, the overtime or shift premiums
are a direct result of a customers urgent
request for the completion of the order and
not due to the general pressure of work,
then the overtime or shift premiums should
be charged directly to the customer.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Overtime premiums and shiftwork premiums

Consider a situation where an employee is
paid time and a half for weekly hours
worked in excess of 40 hours. Assume that
the employee works for 50 hours and that
the 10 hours of overtime were spent on a
particular activity. The hourly wage rate is
P8.
Use with Management and Cost Accounting 7e
by Colin Drury ISBN 9781844805662
2008 Colin Drury

Overtime premiums and shiftwork premiums

Normal time rate wage:
50 hours at P8 P400
Overtime premium
(1/2 10 hours at P8)
P40
P440

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Labor cost accounting

The objective of labour cost accounting is to record the
amount of time that employees have taken on various
activities. The time spent on providing a service to a
specific customer, or manufacturing a specific product, is
recorded on source documents, such as time sheets or job
cards.
Details of the customers account number, job number or
the products code are also entered on these documents.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Labor cost accounting

The employees hourly rate of pay is then entered so that
the direct labour cost for the employee can be assigned to
the appropriate cost object.
For indirect labour costs the same procedure applies with
the overhead account number to which the costs should be
assigned being entered on the source documents.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Labor cost accounting

idle time cards are used to record the amount of
idle or waiting time incurred.
The amount of idle time is costed at the

hourly wage rate and charged to an idle time

overhead account for each department. An
entry should be made on the card indicating
the reasons for the idle time.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Labor cost accounting

Periodically, a report should be compiled
for each department, showing a breakdown
of the idle time and the proportion that it
represents of recorded direct labour hours.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Flow of Costs from Subsidiary Records

to General Ledger
Labor Time
Records

Job Cost Sheets

(Direct Labor)

Factory Overhead
Sheets
(Indirect Labor)

Labor Cost
Summary
(Direct and Indirect
Labor)

General Journal and

General Ledger
(WIP-Direct Labor
FOH-Indirect Labor)

Illustration of Accounting for

Labor Costs

General Journal Entry to Record

Payroll
Payroll

xx

Withholding Tax Payable

SSS Premium Payable
Health Insu Prem Payable
Wages Payable

xx
xx
xx
xx

Record Payment of Net Earnings

to Employees

Wages Payable

Cash

xx
xx

Work in Process
Factory Overhead
Sales Salaries
Administrative Salaries

Distribution of Payroll

Payroll

xx

Employers Payroll Taxes

Factory Overhead xx
Payroll Tax Exp Sales
Payroll Tax Exp Admin

xx
xx
xx
xx

SSS Premium Payable

Philheath Payable
Pag-ibig Cont. Payable

xx
xx
xx
xx
xx

Accounting for Bonuses, Vacations, and

Holiday Pay
Work in Process

XX

Factory Overhead (Bonus)

XX

Factory Overhead (Vacation)

XX

Factory Overhead (Holiday)

XX

Payroll

XX

Bonus Liability

XX

Vacation Pay Liability

XX

Holiday Pay Liability

XX

Incurred payroll and bonus, vacation, and holiday pay.

Employers Payroll Taxes

(Employment Cost)

SSS
EC
Philhealth
Pag-Ibig
Others

Employment costs
Normally recorded as overhead
Preferably treated as direct cost
calculate an average hourly rate for
employment costs and add this to the hourly
wage rate paid to the employees.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury

Employment costs
Example:
the employer may be responsible for employment
costs of P40 for an operative who is paid P8 per
hour for a 40-hour week. Here we can establish
that the employment costs are P1 per hour and this
cost can be added to the hourly wage rate of P8
per hour, giving a total rate of P9 per hour.

Use with Management and Cost Accounting 7e

by Colin Drury ISBN 9781844805662
2008 Colin Drury