Accounting for Labor

Chapter
1-1
McGraw-Hill/Irwin Slide 1
 Classification of Income

Compensation Income

The gain derived from labor, especially employment

(earned from employer-employee relationship)

Examples:
Salaries, wages, holiday pay, sick leave pay, night shift
differential, tips, bonus, etc.

Chapter
1-2
McGraw-Hill/Irwin Slide 2
 Gross Income

Exception:
The compensation income including overtime pay,
holiday pay, night shift differential pay, and
hazard pay, earned by Minimum Wage Earner
(MWE), who has no other returnable income,
are non taxable and not subject to withholding tax
on wages.
R.A. 9504, Rev. Reg. No. 10-2008

Chapter
1-3
McGraw-Hill/Irwin Slide 3
 Learning Objective 1

Wage Plans use by

Companies

Chapter
1-4
McGraw-Hill/Irwin Slide 4
 Wage Plans

Definite rate per hour per employee

Hourly-rate Plan (rate per hour x no. of hours worked)

Definite rate per output per employee

Piece-rate Plan (rate per output x no. of output worked)

Combination of hourly-rate
Modified Wage Plan and piece-rate plans

Definite rate per day per employee

Daily-rate Plan (rate per day x no. of days worked)

Chapter
1-5
McGraw-Hill/Irwin Slide 5
 Learning Objective 2

Controlling Labor Cost

Chapter
1-6
McGraw-Hill/Irwin Slide 6
 Controlling Labor Cost

Maintaining labor records is the responsibility of

the time-keeping and payroll departments

Time-keeping Payroll
-Accounts for the time -Computes each employee’s
earnings (gross, deductions and
spent by the employees net pay)
Chapter
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McGraw-Hill/Irwin Slide 7
 Controlling Labor Cost

Chapter
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McGraw-Hill/Irwin Slide 8
 Controlling Labor Cost

Regular time worked is charged to job

debiting Work in Process.
Overtime may be charged to jobs,
to factory overhead, or allocated partly to
jobs and partly to overhead.

Overtime distributions depends upon the

conditions creating the need for overtime
hours.

Chapter
1-9
McGraw-Hill/Irwin Slide 9
 Controlling Labor Cost

If an additional rate is allowed for the extra

hours worked, the additional rate earned is
called overtime premium.

The premium rate will depend on the

Collective Bargaining Agreement (CBA)
between management and the union.

Chapter
1-10
McGraw-Hill/Irwin Slide 10
 Overhead Classification

• Waiting time or idle time

• Make-up pay
• Overtime premium
• Shift premium
• Employer’s payroll contribution

Chapter
1-11
McGraw-Hill/Irwin Slide 11
 Overhead

Waiting or idle time

cost of non-productive hours of

direct labor caused by lack of work,
waiting for materials delay from
scheduling machine breakdown and
machine set-up

Chapter
1-12
McGraw-Hill/Irwin Slide 12
 Waiting time or Idle time

Maxine Garcia spent 36 hours on Job 101 and was idle for 4
hours during the week. Maxine’s rate is P60.00 per hour for
40-hour week as per union contract.

The following entry should be made to record Maxine’s total

wages:

Work in process Job 101 (36 hours x P60) 2,160

FO control – idle time (4 hours x P60) 240
Salaries and wages payable 2,400

Chapter
1-13
McGraw-Hill/Irwin Slide 13
 Overhead

Make-up pay
this labor payment system
benefits new employees
because it guarantees them a
minimum salary while they are
learning their new job.

Chapter
1-14
McGraw-Hill/Irwin Slide 14
 Make-up Pay
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 (guaranteed pay)
and P1,200 (actual pay) is charged to factory overhead control.

The entry to record the Maxine’s pay is:

Work in process Job 101 1,200
FO control – Make-up pay 300
Salaries and wages payable 1,500

If Maxine, is guaranteed a weekly pay of P1,000, then the

entry will be:
Work in process (80 x P15.00) 1,200
Salaries and wages payable 1,200

Chapter
1-15
McGraw-Hill/Irwin Slide 15
 Overhead

Overtime premium
represent amount paid in
excess of regular rate, to
employees in excess of 8
hours in a day, or working
during holidays or their
rest day.

Chapter
1-16
McGraw-Hill/Irwin Slide 16
 Overtime Premium
Maxine Garcia worked for 45 hours during the week and
she paid time and a half, then the entry will be:

Work in process (45 hours x P60) 2,700

FOH control (5 hours x P30) 150
SW payable 2,850

If the overtime worked by Maxine was caused by a rush

order and the customer has agreed to pay for the special
service, then the premium will be debited to work in
process instead of factory overhead control.

Chapter
1-17
McGraw-Hill/Irwin Slide 17
 Overhead

Shift premium
Extra pay to work during less
desirable evening shift (2 pm to 10
pm) or night shift (10 pm to 6 am).

This shift premium should be

charged to FO control rather than
work in process.

Chapter
1-18
McGraw-Hill/Irwin Slide 18
 Shift Premium

Maxine Garcia is assigned to night shift and is paid a shift

premium of P20 per hour, the entry for her pay will be:

Work in process (40 hours x P60) 2,400

FO control (40 hours x P20) 800
SW payable 3,200

Chapter
1-19
McGraw-Hill/Irwin Slide 19
 Overhead

Employers’ contribution

amount remitted to
different government
agencies for SSS premium,
Philhealth contributions,
and HDMF contribution

Chapter
1-20
McGraw-Hill/Irwin Slide 20
 Learning Objective 3

Gross Earnings of
Employees

Chapter
1-21
McGraw-Hill/Irwin Slide 21
 Procedures of Recording Payroll Cost

1. Recording of number of hours in total and by job

2. Recording of 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 to factory
overhead
5. Preparation of the payroll (computation and
recording of the employees gross earnings,
deductions and net earnings)

Chapter
1-22
McGraw-Hill/Irwin Slide 22
 Learning Objective 4

Payroll Deductions

Chapter
1-23
McGraw-Hill/Irwin Slide 23
 Payroll Deductions

These are deducted from the employees’ gross pay:

Social Security System (SSS)
Philippine Health Insurance Corp. (PHILHEALTH)
Home Development Mutual Fund (HDMF)
Withholding taxes on compensation (to the BIR)
Others

Chapter
1-24
McGraw-Hill/Irwin Slide 24
 Payroll Deductions

Employee’s income tax

The amount of tax to be withheld each
period depends on the following

1. The amount of employee’s earnings

2. Frequency of the payroll period

Chapter
1-25
McGraw-Hill/Irwin Slide 25
 Payroll Deductions

Social Security System premiums – levied

against both the employer and the employee
based on table provided.

PhilHealth Contributions – levied against both

the employer and the employee in equal
amounts based on the table provided.

HDMF Contributions – levied against both the

employer and the employee in equal amounts.

Chapter
1-26
McGraw-Hill/Irwin Slide 26
 Payroll Deductions
Pag- ibig Fund Contribution (HDMF)
Employees earnings not more than P1,500 – 1% or
Employees earnings more than P1,500 per month
2%

Employers – 2% of the monthly compensation of

the contributing employees.

Note that the maximum monthly compensation to be

used in computing employee and employer contribution
shall not be more than P5,000; the effect will be a
maximum contribution of only P100.

Chapter
1-27
McGraw-Hill/Irwin Slide 27
 Payroll Deductions

A monthly payroll data made from time ticket shows

the following data pertaining to Job#2:

Employee – Mr. A
Rate per hour – P150
Number of hours work – 166 hours
Classification – factory worker

Chapter
1-28
McGraw-Hill/Irwin Slide 28
 Payroll Deductions
Additional information:

• Hours worked in excess of 160 working hours are

considered overtime [(8 hours/day x 5 days) 4 weeks].

•Withholding taxes on compensation are computed

after deducting mandatory employee contributions.

•Observe lower of 2% or P100 limit on HDMF premium

contributions.

•Overtime premium is 40% of the employees’ basic

rate.
Chapter
1-29
McGraw-Hill/Irwin Slide 29
 Payroll Deductions
Additional information:

•SSS, PhilHealth, and HDMF are deducted in full once

every month.

How much is the net pay of Mr. A?

How much would be the total employer’s contribution
for Mr. A?

Chapter
1-30
McGraw-Hill/Irwin Slide 30
 Payroll Deductions – Employee
Computation:
Direct labor 166 hours at P150 P24,900.00
Factory overhead (overtime premium 6xP60) 360.00
Total earnings P25,260.00

Employee Deductions: Based on RHrs x BR

SSS contribution P581.30
Phil-Health contribution [(24,900 x 2.75%)/2] 342.38
HDMF contribution 100.00 1,023.68
Total earnings before withholding taxes P24,236.32

Chapter
1-31
McGraw-Hill/Irwin Slide 31
 Payroll Deductions – Employee
Computation:

By looking at Column of the monthly withholding tax table, the

withholding tax is computed as follows:

On taxable income of P20,833 P0.00

Add: 20% on the excess of P3,403.32
(P24,236.32 – P20,833) 680.66
Withholding Tax for the period P680.66

Net Pay (P24,236.32 – P680.66) P23,555.66

Chapter
1-32
McGraw-Hill/Irwin Slide 32
 Payroll Deductions – Employer

Computation:
Direct labor 166 hours at P150 P24,900.00
Factory overhead (overtime premium 6xP60) 360.00
Total earnings P25,260.00

Employers Deductions:
SSS contribution P1,208.70
Phil-Health contribution 342.38
HDMF contribution 100.00
Total employer’s taxes P1,651.08

Chapter
1-33
McGraw-Hill/Irwin Slide 33
 Payroll Distributions

Example:
The Focus Manufacturing Company pays
employees every two weeks. Monday, June 1,
is the beginning of a new payroll period.

The following payroll summary is prepared by

the payroll department and forwarded to
accounting for recording:

Chapter
1-34
McGraw-Hill/Irwin Slide 34
 Payroll Distributions
Example:
Payroll Summary
for the period June 1-14

Factory Sales and Adm. Total

Employees Employees

Gross Earnings P100,000 P30,000 P130,000

Withholding & Deduction
Income Tax P 12,000 P 2,400 P 14,400
SSS Premiums P 3,330 P 950 P 4,280
Phil-Health Contributions P 375 P 150 P 525
HDMF P 2,000 P 600 P 2,600
Total P 17,705 P 4,100 P 21,805

Net earnings
Chapter P 82,295 P 25,900 P108,195
1-35
McGraw-Hill/Irwin Slide 35
 Payroll Distributions
After the data are verified, a payroll voucher is
authorized and recorded as follows:

June 1 Payroll 130,000

Withholding Tax payable 14,400
SSS Contribution Payable 4,280
Phil-health Contribution Payable 525
HDMF Contribution Payable 2,600
SW Payable 108,195

To record the payment of the net earnings to

employees, the following entry is required:

June 1 SW payable 108,195

Cash 108,195

Chapter
1-36
McGraw-Hill/Irwin Slide 36
 Payroll Distributions

Assuming that of the total factory payroll of

P100,000 – P30,000 is indirect labor, the entry to
record the distribution of the payroll is:

Work in Process 70,000

Factory Overhead control 30,000
Selling & Adm. Expense 30,000
Payroll 130,000

Chapter
1-37
McGraw-Hill/Irwin Slide 37
 Learning Objective 5

Employer’s Payroll
Contribution

Chapter
1-38
McGraw-Hill/Irwin Slide 38
 Employer’s Payroll Contribution

These are NOT deducted from the employees’ gross

pay BUT are remitted/paid by the employer to the
respective agencies for the benefit of the employee:
Social Security System (SSS)
Philippine Health Insurance Corp. (PHILHEALTH)
Home Development Mutual Fund (HDMF)

Chapter
1-39
McGraw-Hill/Irwin Slide 39
 Employer’s Payroll Contribution
Employers are responsible for periodically
reporting and paying the taxes to the
appropriate government agencies.

Employers who fail to file require reports or

pay taxes due are subject to civil, and in
some cases, criminal penalties.

Chapter
1-40
McGraw-Hill/Irwin Slide 40
 Employer’s Payroll Contribution
The following schedule provides the information
necessary to record the employer’s payroll taxes for
the period.
SSS
Premiums PhilHealth HDMF Total
Factory
payroll 5,067 375 2,000 7,442
Selling &
Admin. 3,540 150 600 4,290

Total 8,607 525 2,600 11,732

Chapter
1-41
McGraw-Hill/Irwin Slide 41
 Employer’s Payroll Contribution
The entry to record the employer’s payroll taxes is
as follows:

Factory Overhead Control 7,442

Selling & Adm. Expense 4,290
SSS Contributions Payable 8,607
PhilHealth Contributions Payable 525
HDMF Contributions Payable 2,600

Chapter
1-42
McGraw-Hill/Irwin Slide 42
 End of the chapter

Chapter
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McGraw-Hill/Irwin Slide 43