CHAPTER 3

QUESTIONS
1. Direct labor is that part of factory wages
earned by employees who perform work on
the item manufactured; it is charged directly
to the job or product. Indirect labor is that
part of factory wages earned by employees
engaged in the manufacturing process who
do not work directly on the units being
manufactured; it cannot be charged to any
particular job or product but must be treated
as overhead.
2. a. An advantage of the hourly rate plan is
that there is no temptation on the part of
the workers to speed up their work at
the sacrifice of quality or perfection. On
the other hand, it provides no incentive
for increased production.
b. The principal advantage of the piecerate plan is that it provides an incentive
for increased production. The more
units produced under such a plan, the
higher
the
employee's
earnings.
However, there may be a temptation to
strive for a high level of output at a
sacrifice of quality. A greater degree of
supervision is required and more
detailed records must be maintained
when a piece-rate plan is used.
3. A modified wage plan combines certain
features of both the hourly rate and piecerate plans. Employees are paid a regular
hourly wage plus an additional incentive
rate if established quotas are exceeded.
4. In production work teams, output is
dependent upon contributions made by all
members of the work crew. If the number of
pieces finished depends on a group effort,
then a single incentive plan for the group
may be appropriate.
5. The payroll department is responsible for
determining
the
amount
of
each
employees:
a. gross earnings.
b. withholdings and deductions.
c. net pay.
The payroll department should also provide
the accounting department with the
information necessary to allocate the labor
costs.

66

6. The labor-time record shows the employees

time spent on each job, as well as the time
spent on indirect labor activities. It is the
source document for allocating the cost of
labor to jobs or departments in the job cost
ledger and the factory overhead ledger.
7. Many companies issue magnetic cards to
direct laborers who use them to log on and
log off to specific job assignments. They
slide the card through a magnetic card
reader that is connected to a computer
terminal. The computer sends this
information to the accounting department
for the preparation of the payroll and the
distribution of the labor costs to the
appropriate jobs.
8. Almost all payroll records would contain the
following employee information:
a. Marital status
b. Number of withholding allowances for
income tax purposes
c. Rate of pay
d. Hours worked per day
e. Regular earningshours and amount
f. Overtime earningshours and amount
g. Total earnings
h. FICA taxable earnings
i. Withholdings and deductionsFICA
tax, federal, state, and local income
taxes, health insurance, union dues,
etc.
j. Net earnings paidcheck number and
amount.
9. a. The source for posting direct labor cost
to the individual accounts in the job cost
ledger are the labor-time records.
b. The labor cost summary is the source
for posting direct labor cost to the work
in process account in the general
ledger.
10. Labor-time records and a salaried-employee
list provide the sources for posting to the
indirect labor account in the factory
overhead ledger.
11. Regular pay represents the regular hourly
rate to be paid for an established hourly

67
64

12.

13.

Chapter 3

payroll period. Regular payroll payments are

charged to the job or product when they
constitute direct labor.
Overtime premium pay is an extra amount
paid for each hour worked beyond the
prescribed
hourly
payroll.
Overtime
premium pay is generally charged to factory
overhead in order to avoid overcharging a
single job with an abnormally high amount
of direct labor cost. (If the overtime was
caused by a rush order, that job should be
charged with the overtime premium.)
Effective internal control would require that
the charge to the work in process account
be determined from the labor cost summary
that was prepared from the labor-time
records. The charge to the work in process
control account should be supported by the
separate charges made to individual jobs
from labor-time records. The offsetting
credit to the payroll account should be
supported by the separate calculation of the
gross wages earned by each employee.
Accounts used to record employees taxes
are: FICA Tax Payable and Employees
Income Tax Payable.

16.

17.

18.

19.

The employer's accounts for payroll taxes are:

FICA Tax Payable, Federal Unemployment
Tax Payable, State Unemployment Tax
Payable, Factory Overhead (for payroll taxes
on factory labor), and Payroll Tax Expense (for
payroll taxes on administrative and sales
salaries).

The procedures involved in accounting for

labor and supporting forms are:
a. Recording the length of time each
employee works in the factory, both in
total and in detail.
Forms used: labor-time records.
b. Analyzing the time worked to determine
how each employees time was spent.
Forms used: labor-time records.
c. Charging the daily cost of factory labor
to the proper jobs or the proper factory
overhead accounts.
Forms used: labor-time records and
labor cost summary.
d. Preparing the payroll, computing the
payroll taxes and other deductions, and
determining the net wages payable to
factory employees.
Forms used: payroll record and
employees earnings records.
15. a. and b. The schedule of earnings and
payroll taxes is used to distribute the total

payroll and to record the employers payroll

taxes.
A shift premium is the additional pay that
a worker receives for working the second
or third shift of a workday. If a day worker
receives $8 per hour, a worker on a night
shift may receive an additional $1 per
hour because of the later shift. The
additional $1 per hour would be a shift
premium.
A basic provision of all pension plans
should be to accrue systematically, over
the period of active service, the total
estimated cost of the employees pension
from the date of the pension plan to the
date the worker retires.
Factory bonuses, vacation pay, and holiday
pay are all chargeable to factory overhead
and are accrued with other factory payroll
costs over the period that the employee
works during the year.
An hourly rate may be developed for each
direct laborer that includes an amount for
fringe benefits and then used to trace gross
earnings plus fringe benefits to the specific
jobs being worked on, or the fringe benefits
may be collected in an overhead cost pool
and allocated to all jobs worked on during
the period using an allocation base such as
direct labor hours.
20. a.

14.

Under a defined benefit plan an

employee receives a specific amount
of retirement income based on a
predetermined formula related to
income level and years of service.
Under a defined contribution plan an
employee may contribute a certain
amount of pre-tax earnings, that are
often matched by the employer, to
numerous investment vehicle choices.
The amount of the pension is tied to
the performance of the investments.

b. Non-contributory pension plans are

completely funded by the employer.
Contributory plans require a partial
contribution from the employee.
Contributory plans are much more
common
than
non-contributory
plans nowadays.
21.

In 2006, employees could contribute a

prescribed percentage of their income to a
401(K) plan up to maximums of $15,000
and $20,000 for employees under 50 years
old and 50 years of age and greater,
respectively.

Chapter 3

68

68

E3-1
a. $810
Regular:
57 hours $15.00 (regular rate) =
Overtime premium:
13 hours $7.50 (half of regular rate)
4 hours $15 (equal to regular rate)

= $97.50
= $60.00

855.00

$697.50
$157.50

Factory Overhead
(Overtime Premium)

157.50
$ 1,012.50

b. Work in Process.............................................................
Factory Overhead (Overtime Premium).........................
Factory Overhead (Maintenance and Repair)...............
Payroll........................................................................

Work in Process
Factory Overhead
(Maintenance and Repair)

697.50
157.50
157.50
1,012.50

Note: The single journal entry for one employee is required here only for the purpose of illustrating the principle involved. Normally the entry would be for the total factory payroll for the period.
Calculation for distribution of labor costs (not required in students solution):

Hours

Regular
Sunday (indirect)
Monday (direct)
Tuesday (direct)
Wednesday (direct)
Thursday (direct)
Friday (direct)
Saturday (indirect)

8
8
8
8
8

DoubleTime
4

$15.00
15.00
15.00
15.00
15.00

3
3
6
13

Regular

Time-anda-Half

$22.50
22.50
22.50

DoubleTime
$30.00

Total

Gross
Earnings
$120.00
120.00
120.00
120.00
198.75
187.50
146.25

Account Debited
Factory Overhead
Expense
Work in Overtime
Process Premium
M&R
$ 60.00 $ 60.00
$120.00
120.00
120.00
172.50
26.25
165.00
22.50
48.75
97.50

$1,012.50

$ 697.50

$ 157.50

$ 157.50

Chapter 3

40

Time-anda-Half

Rate

Chapter 3

69

EXERCISES
E3-2
a.

Payroll ...............................................................................
FICA Tax Payable (8.0% of $1,012.50).......................
Employees Income Tax Payable (10.0% of $1,012.50)
Wages Payable............................................................

1,012.50
81.00
101.25
830.25

b. Wages Payable.................................................................
Cash.............................................................................

830.25
830.25

E3-3
a.
Day
Monday
Tuesday
Wednesda
y
Thursday
Friday
Total

Hours
Worked

Pieces
Finished

Earnings @
$20/hr.

Earnings @
$.40/piece

8
8
8

400
380
440

$160
160
160

$160
152
176

8
8
40

450
360

160
160
$800

180
144
$812

b.
Work in Process..............................
Factory Overhead...........................
Payroll.........................................

812
24
836

Make-Up
Guarantee
$8

16
$24

Payroll
Earnings
$160
160
176
180
160
$836

E3-4
a. The overtime premium could be charged to Job 402 or charged to Factory
Overhead and allocated between Jobs 401 and 402. If the contract provisions for
Job 402 indicate the necessity for overtime in order to complete the job in
accordance with the customers specifications, or if the overtime is due to an
emergency demand by the customer, the overtime premium should be charged
directly to Job 402. If the overtime is not directly attributable to contract provisions
or other factors identified with Job 402, the overtime premium should be charged to
Factory Overhead.
b. Costs of Jobs 401 and 402:
Overtime Premium
Charged to
Job 402

Overtime Premium
Charged to
Factory Overhead

Job 401

Job 402

Job 401

Job 402

Direct materials..................................
Direct labor.........................................
Factory overhead...............................

$ 28,000
18,000
5,600

$ 37,000
29,000*
11,200

$28,000
18,000
7,600

$37,000
23,000
15,200

Total cost.....................................

$ 51,600

$ 77,200

$ 53,600

$ 75,200

*Includes overtime premium of $6,000.

E3-5
a.
FICA tax.................................
Total deductions....................
Net earnings..........................

June 7

June 14

June 21

June 28

$ 2,920
9,560
26,940

$ 2,736
9,236
24,964

$ 2,984
9,759
27,541

$ 3,072
9,952
28,448

b. 1. June 7 Payroll.............................................................
FICA Tax Payable...................................
Employees Income Tax Payable.............
Health Insurance Payable.......................
Employees Annuity Payable....................
Wages Payable.......................................

36,500

14 Payroll..........................................................
FICA Tax Payable...................................
Employees Income Tax Payable.............
Health insurance Payable.......................
Employees Annuity Payable ..................
Wages Payable.......................................

34,200

2,920
4,215
600
1,825
26,940
2,736
4,120
600
1,780
24,964

Chapter 3

E3-5

71

Concluded
21 Payroll..........................................................
FICA Tax Payable...................................
Employees Income Tax Payable.............
Health Insurance Payable.......................
Employees Annuity Payable....................
Wages Payable.......................................

37,300

28 Payroll..........................................................
FICA Tax Payable...................................
Employees Income Tax Payable.............
Health Insurance Payable.......................
Employees Annuity Payable ..................
Wages Payable.......................................

38,400

7 Wages Payable...........................................
Cash........................................................

26,940

14 Wages Payable...........................................
Cash........................................................

24,964

21 Wages Payable...........................................
Cash........................................................
28 Wages Payable...........................................
Cash........................................................

27,541

Sinclair ($102,000 $100,000).........................................

$2,000

2. June

2,984
4,320
600
1,855
27,541
3,072
4,410
600
1,870
28,448
26,940
24,964
27,541
28,448
28,448

E3-6
a.

b. The total payroll amounts to $306,400. The employer is taxed on the first $8,000 of
each employees earnings for federal and state unemployment taxes. All eight
employees have earned more than $8,000; therefore, $64,000 is taxable and
$242,400 is exempt.
c. None. The federal income tax is a progressive tax that is based on the amount that
someone earns. There is no maximum cap on the amount subject to income taxes.

E3-7
a.

Payroll ...............................................................................
FICA Tax Payable........................................................
Employees Income Tax Payable.................................
Wages Payable............................................................

1,012.50

b. Wages Payable.................................................................
Cash.............................................................................

830.25

c.

Factory Overhead..............................................................
FICA Tax Payable........................................................
Federal Unemployment Tax Payable (1.0% of $100).
State Unemployment Tax Payable (4.0% of $100).....

81.00
101.25
830.25
830.25
86.00
81.00
1.00
4.00

E3-8
a.

Payroll ...............................................................................
FICA Tax Payable (8.0% of $200)...............................
Employees Income Tax Payable ................................
Wages Payable ...........................................................

1,012.50

b. Wages Payable ................................................................

Cash.............................................................................

895.25

c.

Factory Overhead..............................................................
FICA Tax Payable .......................................................

16.00
101.25
895.25
895.25
16.00
16.00

E3-9
a.

Work in Process................................................................
Factory Overhead (Indirect Labor)....................................
Administrative Salaries......................................................
Sales Salaries...................................................................
Payroll..........................................................................

625,125
162,120
140,200
172,500
1,099,945

b. Employers payroll taxes = 8.0% (FICA) + 1.0% (Federal Unemployment) +

4.0% (State Unemployment) = 13% of total wages for the period, reduced by
5% of portion of wages directed to employees whose calendar-year earnings prior
to period have exceeded $8,000
(.13 1,099,945) (.05 $1,500) = $142,917

Chapter 3

73

Chapter 3

E3-10
a.
Employee

Hours

Regular Earnings
Rate
Amount

Overtime Premium
Hours Rate
Amount

Doellman, J.
Burrell, S.

42
43

$12
12

$ 504.00
516.00

2
3

Cage, J.

44

15

660.00

$6.00

$12.00
18.00

Total
Earnings

FICA
8%

Income
Tax

Net
Earnings

516.00
534.00

$ 41.28
42.72

$ 77.40
80.10

$ 397.32
411.18

690.00

55.20

103.50

531.30

360.00
720.00

28.80
57.60

54.00
108.00

277.20
554.40

$2,820.00

$225.60

$423.00

$2,171.40

6.00
30.00
7.50
Lavender, D.
Wolf, J.

40
40

9
18

360.00
720.00
$2,760.00

$60.00

b. 1. Payroll..........................................................................
FICA Tax Payable..................................................
Employees Income Tax Payable............................
Wages Payable......................................................

2,820.00

2. Wages Payable............................................................
Cash.......................................................................

2,171.40

3. Work in Process ($504 + $516 + $660).......................

Factory Overhead ($360 +$720 + $60).......................
Payroll.....................................................................

1,680.00
1,140.00

4. Factory overhead.........................................................
FICA Tax Payable..................................................
Federal Unemployment Tax Payable*...................
State Unemployment Tax Payable**......................

366.60

225.60
423.00
2,171.40
2,171.40

2,820.00
225.60
28.20
112.80

*Federal unemployment tax = $2,820 1.0% = $28.20

**State unemployment tax = $2,820 4.0% = $112.80

73

74

E3-11
a.

Employee

Classification Hours

Cooper,R.
Crabbe,E.
Hill,R.
Pendery,J.
Roberts,R.
Wanous,E.
Wilson,H.

Direct
Direct
Direct
Direct
Indirect
Indirect
Indirect

42
48
39
40
40
40
40

Pieces

2,000
1,800

Rate
$18.00/hr
17.60/hr
.44/pc
.44/pc
$800/wk
$1,600/wk
$1,400/w
k

Regular
Earnings

Overtime
Premium

Total
Earnings

FICA
8%

Income
Tax
Withheld

$756.00
844.80
880.00
792.00
800.00
1,600.00
1,400.00

$ 18.00
70.40

$ 774.00
915.20
880.00
792.00
800.00
1,600.00
1,400.00

$ 61.92
73.22
70.40
63.36
64.00
128.00
112.00

$ 80.00
84.00
110.00
100.00
100.00
240.00
120.00

$7,072.80

$88.40

$7,161.20

$572.90

$834.00

$5,754.30

b. 1. Payroll..........................................................................
FICA Tax Payable..................................................
Employees Income Tax Payable............................
Wages Payable......................................................

7,161.20

2. Wages Payable............................................................
Cash.......................................................................

5,754.30

3. Work in Process
($756.00 + $844.80 + $880.00 + $792.00)..................
Factory Overhead
($18.00 + $70.40 + $800.00 + $1,600.00 + $1,400.00)
Payroll.....................................................................

Net
Earnings
632.08
757.96
699.58
628.68
636.00
1,232.00
1,168.00

572.90
834.00
5,754.30
5,754.30
3,272.80
3,888.40
7,161.20
Chapter 3

Chapter 3

E3-11

75

Concluded

4. Factory Overhead........................................................
FICA Tax Payable..................................................
Federal Unemployment Tax Payable*...................
State Unemployment Tax Payable**......................

930.95
572.90
71.61
286.45

*Federal unemployment tax = $7,161.20 1% = $71.61

**State unemployment tax = $7,161.20 4% = $286.45

E3-12
Work in Process.......................................................................
Factory Overhead (Bonus)*.....................................................
Factory Overhead (Vacation)**................................................
Payroll ...............................................................................
Bonus Liability...................................................................
Vacation Pay Liability........................................................

1,000
80
40
1,000
80
40

*$4,000 50 weeks = $80

**($1,000 2 weeks) 50 weeks = $40

E3-13
a. They should be expensed over the fifty weeks that the employee actually works.
b. Holiday pay: ($800/wk. / 5 days) x 12 paid holidays = $1,920
$1,920 / 50 wks. = $38.40/wk.
c. Vacation pay: $800 x 2 wks. = $1,600
$1,600 / 50 wks. = $32 / wk.

76

Chapter 3

PROBLEMS
P3-1
1.

Actual production for week................................................

Standard units (616 500)................................................
Excess units over standard...........................................

330,528 units
308,000 units
22,528

Calculation of bonus percentage:

22,528 units
308,000 units

= .07314 or 7.314%

7.314% 50% = 3.657% (bonus percentage)

$15.00 (average hourly rate) 3.657% = $.5486 hourly bonus rate; 616 hours
$.5486 (bonus rate per hour) = $337.92 (total bonus for week)
2. A. Whelans total wages:
$14.00 (hourly wage) 3.657% (bonus) = $.5120 per hour
$14.00 + $.5120 = $14.5120 hourly wage for week
40 hours $14.5120 = $580.48 (total wages for week)
3. J. Bushs total wages:
$18.00 (hourly rate) 3.657% (bonus) = $.6583 per hour
$18.00 + $.6583 = $18.6583 hourly wage for week
35 hours $18.6583 = $653.04 (total wages for week)

Chapter 3

77

P 3-2
1. LABOR TIME RECORD
Record No: LTR 999
Employee Name: Vicki Barr
Employee No: 036-47-2189
Employee Classification: Grade 1 Machinist
Hourly Rate: $20

Week
Job No.

Su

Tu

Th

Sa

Total

007

12

2525

24

Maintenance

Total

40

Supervisor: Mike Frye

Date: June 17, 2005
2. Direct labor cost:
Job 007: 12 hrs. x $20 = $240
Job 2525: 24 hrs. x $20 = $480
Indirect labor cost:
Maintenance: 4 hrs. x $20 = $80

78

Chapter 3

78

P3-3
1.
Regular
Employees
Arroyo
Aurilia
Griffey
Lopez
Dunn
LaRue
Kearns

2.

3.

Hours

Earnings

Overtim
e
Premium

42
45
48
48
45
42
40

$ 630.00
450.00
480.00
480.00
450.00
420.00
400.00

$ 15.00
25.00
40.00
40.00
25.00
10.00
0

$3,310.00

$155.00

Idle Time
(Included
in Reg.

Total

FICA

Income
Tax

Net

Earnings)

Earnings

8%

18%

Earnings

$ 51.60
38.00
41.60
41.60
38.00
34.40
32.00

$116.10
85.50
93.60
93.60
85.50
77.40
72.00

$100.00
100.00

$ 645.00
475.00
520.00
520.00
475.00
430.00
400.00

$200.00

$3,465.00

$277.20

$623.70

$2,564.10

Payroll ...............................................................................
FICA Tax Payable........................................................
Employees Income Tax Payable.................................
Wages Payable............................................................

3,465.00

Wages Payable.................................................................
Cash.............................................................................

2,564.10

Work in Process................................................................
Factory Overhead..............................................................
Payroll..........................................................................

2,620.00*
845.00

277.20
623.70
2,564.10
2,564.10

3,465.00

$3,465.00
$200.00
645.00

845.00
$2,620.00

Chapter 3

*Total payroll......................................
Less:
Idle time (20 hrs. x $10)............
Supervisor................................
To Work in Process.............

477.30
351.50
384.80
384.80
351.50
318.20
296.00

Chapter 3

P3-3
4.

79

Concluded

Since overtime is proportionate to regular hours chargeable to vans, an average

labor rate, including overtime premium, can be calculated and used for distribution
as follows:
Total Hours
Charged to
Vans

Total Earnings
Chargeable to
Vans

Average Labor
Rate, Including
Overtime for Week

45
48
48
45
32
30

$475.00
520.00
520.00
475.00
330.00
300.00

$10.5556
10.8333
10.8333
10.5556
10.3125
10.0000

Aurilia ..............................
Griffey .............................
Lopez ..............................
Dunn ..............................
LaRue ..............................
Kearns ..............................

Distribution of labor cost to vans using calculated average labor rate:

Van
No. 1

Van
No. 2

Van
No. 3

Aurilia
Griffey
Lopez
Dunn
LaRue
Kearns

$105.56
260.00

$105.56
260.00

158.33
247.50
200.00

158.33
82.50
100.00

Total

$971.39

$706.39

*Answer off by .01 or .02 due to rounding.

Van
No. 4

Van
No. 5

$105.56

$105.56

$52.78

260.00
158.33

260.00

$ 475.02 *
520.00
520.00
474.99 *
330.00
300.00

$523.89

$365.56

$52.78

$2,620.01*

Total

80

Chapter 3

P3-4
1.
Total
Classification
of
Wages and Salaries

Earnings
for
Month

Unemployment Taxes
Federal
State
Tax
Tax
1%
4%

FICA
Tax
8%

Taxes
Imposed on
Employer

Direct labor............. $88,180.00 $ 7,054.40

Indirect labor...........
16,220.00
1,297.60
Payroll taxes on factory
wages...............
$ 8,352.00
Administrative
salaries.............
12,000.00
960.00
Sales salaries.........
11,500.00
920.00

$ 881.80
162.20

$3,527.20 $ 11,463.40
648.80
2,108.60

$1,044.00

$4,176.00 $13,572.00

Total payroll taxes. .

$1,279.00

2.

$ 10,232.00

120.00
115.00

Factory Overhead..............................................................
Payroll Taxes ExpenseAdministrative Salaries.............
Payroll Taxes ExpenseSales Salaries..........................
FICA Tax Payable........................................................
Federal Unemployment Tax Payable..........................
State Unemployment Tax Payable..............................

480.00
460.00

1,560.00
1,495.00

$5,116.00 $16,627.00
13,572.00
1,560.00
1,495.00
10,232.00
1,279.00
5,116.00

P3-5
T

Wie.......................$ 81.60 $
Pak .......................
69.30
Sorenstam............
80.60

85.20 $
70.40
79.30

78.00 $
60.00
92.30

96.00 $
60.00
78.00

60.00
77.00
60.00

Total.............. $231.50

$234.90

$230.30

$234.00

$197.00 $1,127.70

2.

a. Payroll..........................................................................
Employees Income Tax Payable.............................
FICA Tax Payable....................................................
Wages Payable........................................................

1,127.70

b. Wages Payable............................................................
Cash.........................................................................

924.71

c. Factory Overhead........................................................
FICA Tax Payable....................................................
Federal Unemployment Tax Payable......................
State Unemployment Tax Payable..........................

146.61

Total

$400.80
336.70
390.20

112.77
90.22
924.71
924.71
90.22
11.28
45.11

Chapter 3

81

P3-6
1.

a. Payroll..........................................................................
FICA Tax Payable....................................................
Employees Income Tax Payable.............................
Wages Payable........................................................

20,000.00

b. Wages Payable............................................................
Cash.........................................................................

16,400.00

c. Factory Overhead........................................................
Payroll Tax Expense (Sales and Administrative
Salaries).......................................................................
FICA Tax Payable....................................................
Federal Unemployment Tax Payable......................
State Unemployment Tax Payable..........................

1,600.00
2,000.00
16,400.00
16,400.00
2,106.00*
494.00**
1,600.00
200.00
800.00

* ($10,500 + $5,700) x .13

** $3,800 x .13

2.

d. Work in Process...........................................................
Factory Overhead........................................................
Sales and Administrative Salaries...............................
Payroll......................................................................

10,500.00
5,700.00
3,800.00

FICA Tax Payable.............................................................

Employees Income Tax Payable.......................................
Cash.............................................................................

6,300.00
3,937.50

20,000.00

10,237.50

3. $193.75 (Federal Unemployment Tax Payable) represents 1% of the total earnings;

therefore, $193.75 .01 = $19,375 (total earnings January 1 to 15).
or
$775.00 (State Unemployment Tax Payable) represents 4.0% of total earnings;
therefore, $775.00 .04 = $19,375.
or
1/2 $3,100 = $1,550 equals employee portion of FICA Tax Payable (8% of total
earnings); therefore, $1,550 .08 = $19,375.

82

Chapter 3
82

P3-7
1.

Employee
Bush
Clinton, H.
Carter
Cheney
Clinton, W.
Gore
Lieberman
Nader
Kerry

2.

Earnings Per Week

Overtime
Regular
Premium

Total

Total
Earnings
Through
Fortieth
Week

FICA
Taxable
Earnings

$2,489.00
2,238.00
700.00
600.00
460.00
440.00
399.00
315.00
315.00

0
0
0
50.00
30.00
20.00
9.50
7.50
7.50

$2,489.00
2,238.00
700.00
650.00
490.00
460.00
408.50
322.50
322.50

$112,049.00
101,738.00
28,000.00
20,470.00
17,690.00
17,060.00
15,608.50
8,122.50
6,922.50

$7,956.00

$124.50

$8,080..50

$ 327,660.50

$3,853.50

a. Payroll.........................................................................
FICA Tax Payable.................................................
Employees Income Tax Payable..........................
Wages Payable.....................................................

8,080.50

b. Wages Payable..........................................................
Cash......................................................................

6,022.22

c. Work in Process.........................................................
Factory Overhead.......................................................
Administrative Salaries...............................................
Payroll...................................................................

1,899.00
1,454.50
4,727.00

0
500.00
700.00
650.00
490.00
460.00
408.50
322.50
322.50

Income
Tax
Withheld

Net
Earnings

0
40.00
56.00
52.00
39.20
36.80
32.68
25.80
25.80

$ 488.00
402.00
180.00
150.00
160.00
110.00
120.00
80.00
60.00

$2,001.00
1,796.00
464.00
448.00
290.80
313.20
255.82
216.70
236.70

$308.28

$1,750.00

$6,022.22

FICA
$

308.28
1,750.00
6,022.22
6,022.22

8,080.50
Chapter 3

Chapter 3

P3-7

3.

83

Concluded

d. Factory Overhead.................................................
Payroll Taxes Expense
Administrative Salaries.........................................
FICA Tax Payable............................................
SUTA Tax Payable..........................................
FUTA Tax Payable..........................................

294.41

Factory Overhead........................................................
Disability Insurance Expense
Administrative Salaries................................................
Disability Insurance Payable................................

70.00

*[Nader ($200) + Kerry ($322.50)] x .04 = $20.90

**[Nader ($200) + Kerry ($322.50) x .01 = $5.23

40.00
308.28
20.90*
5.23**

20.00
90.00

84

Chapter 3

P3-8
1.

2.

3.

Hours required:
First 100,000 units @ 5 hours per unit.......................
Second 100,000 units @ 5 hours per unit 85%......
Remaining 1,000,000 units @ 5 hours per unit 75%

500,000
425,000
3,750,000

Total hours required...............................................

4,675,000

Wages paid at regular rate:

4,675,000 hours $20 per hour.................................

$93,500,000

Total hours required (from above)..................................

Less regular hours available:
2,250 employees 40 hours per
week 50 weeks........................................................
Less holidays8 holidays 2,250
employees 8 hours per day.....................................

4,675,000

4,500,000
144,000

4,356,000

Overtime hours required.................................................

319,000

Overtime premium:
319,000 hours $10 premium per hour.....................

$ 3,190,000

Second 100,000 units:

Per-unit cost of first 100,000 units5 hours $20 per hour = $100
Expected savings per unit15% $100 = $15
Total savings100,000 units $15 per unit = $1,500,000
Bonus payment on second 100,000 units1/2 of $1,500,000 = $750,000
Remaining 1,000,000 units:
Per-unit costs of first 100,000 units$100
Expected savings per unit25% $100 = $25
Total savings1,000,000 units $25 per unit = $25,000,000
Bonus payment on remaining 1,000,000 units1/2 of $25,000,000 =
$12,500,000
Total incentive bonus payment:
Second 100,000 units........................................
Remaining 1,000,000 units................................
Total................................................................

750,000
12,500,000

$ 13,250,000

Chapter 3

P3-8
4.

85

Concluded

Hours:
Vacation pay2,250 employees 2 weeks 40
hours per week...............................................
Holiday pay2,250 employees 8 days 8
hours per day.................................................

180,000
144,000

Total hours.........................................................

5.

324,000

Cost of vacation and holiday pay:

324,000 hours $20 per hour............................

Wages at regular rate............................................

Overtime premium..................................................
Incentive premium..................................................
Vacation and holiday pay.......................................

$ 93,500,000
3,190,000
13,250,000
6,480,000

Total payroll........................................................

$ 116,420,000

Employers payroll taxes$116,420,000 13%...

$ 15,134,600

6,480,000

86

Chapter 3

86

P3-9
1.
EMPLOYEE EARNINGS RECORDS

Week
Ending

Weekly
Gross

Accumulated
Gross
Earnings

Weekly
Earnings
Subject
to
FICA

Withholdings
FICA
Income
Tax
Tax

Net
Amount
Paid

Earning
s
H. Ford

11/8

$300
280

$12,300
12,580

$300
280

$24.00
22.40

$30.00
28.00

$ 246.00
229.60

290

12,870

290

23.20

29.00

237.80

320

13,190

320

25.60

32.00

262.40

280
270

8,080
8,350

280
270

22.40
21.60

28.00
27.00

229.60
221.40

260

8,610

260

20.80

26.00

213.20

280

8,890

280

22.40

28.00

229.60

320
300

11,820
12,120

320
300

25.60
24.00

32.00
30.00

262.40
246.00

340

12,460

340

27.20

34.00

278.80

280

12,740

280

22.40

28.00

229.60

2,032
2,032

91,432
93,464

600
0

48.00
0

203.20
203.20

1,780.80
1,828.80

11/15
11/22
11/29
M. Gibson

11/8
11/15
11/22
11/29

H. Grant

11/8
11/15
11/22

W. Smith

11/8
11/15

Chapter 3

11/29

Chapter 3

87
2,032

95,496

203.20

1,828.80

2,032

97,528

203.20

1,828.80

800
760

33,600
34,360

800
760

64.00
60.80

80.00
76.00

656.00
623.20

850

35,210

850

68.00

85.00

697.00

870

36,080

870

69.60

87.00

713.40

11/22
11/29
D. Washington

11/8
11/15
11/22
11/29

88

P3-9

Chapter 3

Continued

2.
PAYROLL RECORD
Employees Name
Week Ending 11/8:

H. Ford..........................................
M. Gibson.
H. Grant........................................
W. Smith.......................................
D. Washington..............................

Gross
Earnings

Withholdings
FICA
Income
Tax
Tax

Net
Amount
Paid

$ 300.00
280.00
320.00
2,032.00
800.00

$ 24.00
22.40
25.60
48.00
64.00

$ 30.00
28.00
32.00
203.20
80.00

246.00
229.60
262.40
1,780.80
656.00

$3,732.00

$ 184.00

$ 373.20

$ 3,174.80

$ 280.00
270.00
300.00
2,032.00
760.00

$ 22.40
21.60
24.00
0
60.80

$ 28.00
27.00
30.00
203.20
76.00

$3,642.00

$ 128.80

$ 364.20

$ 3,149.00

$ 290.00
260.00
340.00
2,032.00
850.00

$ 23.20
20.80
27.20
0
68.00

$ 29.00
26.00
34.00
203.20
85.00

$3,772.00

$ 139.20

$ 377.20

$ 320.00
280.00
280.00
2,032.00
870.00

$ 25.60
22.40
22.40
0
69.60

$ 32.00
28.00
28.00
203.20
87.00

$3,782.00

$ 140.00

$ 378.20

$ 3,263.80

Week Ending 11/15:

H. Ford
...................................
M. Gibson ...................................
H. Grant ...................................
W. Smith ...................................
D. Washington..............................

229.60
221.40
246.00
1,828.80
623.20

Week Ending 11/22:

H. Ford
...................................
M. Gibson ...................................
H. Grant ...................................
W. Smith ...................................
D. Washington..............................

237.80
213.20
278.80
1,828.80
697.00

$ 3,255.60

Week Ending 11/29:

H. Ford
...................................
M. Gibson ...................................
H. Grant ...................................
W. Smith ...................................
D. Washington..............................

262.40
229.60
229.60
1,828.80
713.40

Chapter 3

89

P3-9 Continued
3.
Labor Cost Summary
For the Month Ended November 30, 20

Week Ending

Dr.
Work in Process
(Direct Labor)

Dr.
Factory Overhead
(Indirect Labor)

Dr.
Admin. Salaries
(Office)

Cr.
Payroll
(Total)

11/8
11/15
11/22
11/29

$ 900.00
850.00
890.00
880.00

$2,032.00
2,032.00
2,032.00
2,032.00

$ 800.00
760.00
850.00
870.00

$ 3,732.00
3,642.00
3,772.00
3,782.00

Total

$3,520.00

$8,128.00

$3,280.00

$14,928.00

90

Chapter 3

P3-9
4.

a.

Concluded
Nov. 8

b.
a.

Nov. 15

b.
a.

Nov. 22

b.
a.

Nov. 29

b.
c.

Nov. 30

d. Nov. 30

Payroll.......................................................
FICA Tax Payable.................................
Employees Income Tax Payable..........
Wages Payable....................................

3,732.00

Wages Payable.........................................
Cash......................................................

3,174.80

Payroll.......................................................
FICA Tax Payable.................................
Employees Income Tax Payable..........
Wages Payable....................................

3,642.00

Wages Payable.........................................
Cash......................................................

3,149.00

Payroll.......................................................
FICA Tax Payable.................................
Employees Income Tax Payable..........
Wages Payable....................................

3,772.00

Wages Payable.........................................
Cash......................................................

3,255.60

Payroll.......................................................
FICA Tax Payable.................................
Employees Income Tax Payable..........
Wages Payable....................................

3,782.00

Wages Payable.........................................
Cash......................................................

3,263.80

Work in Process.......................................
Factory Overhead.....................................
Administrative Salaries.............................
Payroll...................................................

3,520.00
8,128.00
3,280.00

Factory Overhead.....................................
Payroll Taxes Expense
Administrative Salaries.............................
FICA Tax Payable.................................
FUTA Tax Payable...............................

339.60

184.00
373.20
3,174.80
3,174.80
128.80
364.20
3,149.00
3,149.00
139.20
377.20
3,255.60
3,255.60
140.00
378.20
3,263.80
3,263.80

14,928.00

262.40 *
592.00
2.00

**
SUTA Tax Payable...............................
***
* Employer shares of Washingtons FICA tax
** Gibson $200 1% = $2
*** Gibson $200 4% = $8

8.00

Chapter 3

91

P3-10
1.
Taxable
Earnings

Items

Factory wages
Administrative
salaries
Sales salaries

2.

Jan. 7

7
14

14
15

15
21

21

FICA
Tax
8%

Federal
Unemployment Tax
1%

State
Unemployment Tax
4%

Total
Payroll
Taxes

$325,000.00$26,000.00$3,250.00$ 13,000.00$42,250.00
18,000.00
34,000.00

1,440.00
2,720.00

180.00
340.00

720.00
1,360.00

2,340.00
4,420.00

$377,000.00 $30,160.00

$3,770.00

$15,080.00

$49,010.00

Payroll...........................................................
Employees Income Tax Payable (10%). . .
FICA Tax Payable (8%)............................
Wages Payable.........................................

68,200.00

Wages Payable.............................................
Cash..........................................................

55,924.00

Payroll...........................................................
Employees Income Tax Payable..............
FICA Tax Payable.....................................
Wages Payable.........................................

66,300.00

Wages Payable.............................................
Cash..........................................................

54,366.00

Payroll...........................................................
Employees Income Tax Payable..............
FICA Tax Payable.....................................
Wages Payable.........................................

26,000.00

Wages Payable.............................................
Cash..........................................................

21,320.00

Payroll...........................................................
Employees Income Tax Payable..............
FICA Tax Payable.....................................
Wages Payable.........................................

72,500.00

Wages Payable.............................................
Cash..........................................................

59,450.00

6,820.00
5,456.00
55,924.00
55,924.00
6,630.00
5,304.00
54,366.00
54,366.00
2,600.00
2,080.00
21,320.00
21,320.00
7,250.00
5,800.00
59,450.00
59,450.00

92

Chapter 3

P3-10

Concluded

Jan. 28

28
31

31
31

31

3.

Payroll...........................................................
Employees Income Tax Payable..............
FICA Tax Payable.....................................
Wages Payable.........................................

74,200.00

Wages Payable.............................................
Cash..........................................................

60,844.00

Payroll...........................................................
Employees Income Tax Payable..............
FICA Tax Payable.....................................
Wages Payable.........................................

26,000.00

Wages Payable.............................................
Cash..........................................................

21,320.00

7,420.00
5,936.00
60,844.00
60,844.00
2,600.00
2,080.00
21,320.00
21,320.00

Work in Process............................................ 302,500.00

Factory Overhead.........................................
22,500.00
Administrative Salaries.................................
18,000.00
Sales Salaries...............................................
34,000.00
Payroll.......................................................
Factory Overhead.........................................
Miscellaneous Administrative Expense........
Miscellaneous Selling Expense....................
FICA Tax Payable.....................................
Federal Unemployment Tax Payable.......
State Unemployment Tax Payable...........

377,000.00

42,250.00
2,340.00
4,420.00
30,160.00
3,770.00
15,080.00

Wages earned and accrued as of January 31:

Direct labor........................................................................
Indirect labor......................................................................

$ 302,500
22,500

Total...............................................................................
Less wages paid during month........................................

$ 325,000
281,200

Accrued wages, January 31..............................................

$ 43,800

Chapter 3

93

P3-11
Factory Overhead (Bonus)*
Factory Overhead (Vacation Pay)**.........................................
Factory Overhead (Holiday Pay)***.........................................
Bonus Liability..................................................................
Vacation Pay Liability........................................................
Holiday Pay Liability..........................................................

8,000
8,000
4,000
8,000
8,000
4,000

*$400,000 50 weeks = $8,000

**($200,000 2 weeks) 50 weeks = $8,000
***($200,000 5 days) 5 days = $200,000
$200,000 50 weeks = $4,000/week

Work in Process140,000
Factory Overhead (Indirect Labor) 60,000
Payroll

200,000

94

Chapter 3

MINI-CASE 1
1. The controller is correct in assuming that the weekday overtime and the bonus are
factory overhead costs and should be spread over all production for the period.
Under the circumstances, however, it would be improper to charge Saturday and
Sunday overtime to factory overhead. These costs should be charged to the
weekend jobs that were rush orders.
The plant manager is incorrect in allocating weekday overtime to particular jobs,
because the overtime was required due to scheduling more work than could be
done during a regular workday. It would be improper to charge jobs that happen to
be in production during the overtime period. All production during the period should
bear part of the additional cost. The plant manager is also incorrect in charging the
bonus to administrative expenses since factory workers bonuses are part of the
cost of production.
The sales managers belief that overtime premiums and bonuses are not part of
factory costs indicates a lack of understanding of the concept that all costs except
selling and administrative expenses should be included in the cost of the product.
Based on the facts given, the most appropriate procedure would be to charge the
weekday overtime and bonus to factory overhead. (The bonus could, however, be
added to each direct laborers hourly rate and traced to the specific job.) The
Saturday and Sunday overtime should be charged to the rush-order jobs that were
worked on during the weekends.
2.

Work in Process................................................................
Factory Overhead..............................................................
Payroll..........................................................................
Computation of Work in Process:
Weekdays: (40,200 hours + 1,700 hours) @ $10...
Weekends: (400 hours + 300 hours) @ $20...........
Computation of Factory Overhead:
Indirect labor............................................................
Overtime premiumweekdays (1,700 $5)...........
Factory Overhead..............................................................
Bonus Liability..............................................................
Computation of Accrued Bonus Liability:
$456,300 1% = $4,563

433,000
23,300
456,300
$419,000
14,000
$433,000
$14,800
8,500
$23,300
4,563
4,563

Chapter 3

95

MINI-CASE 2
1.

A piece-rate plan provides an incentive for employees to produce a high level of

output, thereby maximizing their earnings and company production and revenues.
However, a serious shortcoming of such plans is that they may encourage
employees to sacrifice quality for quantity. One solution is to adopt a piece-rate
plan based on the production of good units, only.

2.

No, the compensation may be a combination of hourly-rate and piece-rate plans.

Because such a modified wage plan provides a base hourly wage regardless of the
level of production, it may cause employees to feel less pressure to maximize
quantity at the expense of quality.

3.

Yes, incentive compensation plans are often used in service businesses. For
example, salespersons in retail stores, real estate agents, and insurance agents
are examples of workers whose compensation is often either on a salary plus
commission or all-commission basis.

96

Chapter 3

INTERNET EXERCISE
1. According to Fidelity, the three-step approach to a successful retirement is:
Plan for your goal---Saving enough? Do you have a plan for living in
retirement?
Explore investment options---How can you help your money grow---and
last as long as youll need it?
Stay on track---Make sure your plan stays up to date.
2. The steps that you will need to follow after you open a Rollover IRA are:
Notify your former employer that you are rolling over your assets to a
Fidelity IRA.
Complete any distribution forms required by your former employer.
Confirm when your former employer will distribute the funds.
Ask your former employer to write your Fidelity IRA account number on
your distribution check and make it payable to Fidelity Management Trust
Company.
3. Fidelitys 10 Smart Moves for Retirement are:
Consider maxing out and catching up in your 401(k) and IRA.
Save now for more later
Make your asset mix match you.
Stretch your salary.
Create your own income stream.
Dont withdraw too much too soon.
Create a realistic budget.
Expect and plan for the unexpected.
Stay on track.
Mix and match the smartest moves for you.