Accounting for Labor

2 Compositions of Factory Payroll:

1. Direct labor
 Payroll costs that are allocated directly to the
product

2. Indirect labor
 Payroll costs incurred for a variety of jobs but
are considered to be too remote or insignificant
to be charged directly to production
 Wage Plans

1.Hourly-rate plan
• Employee’s wages are calculated by multiplying rate/hr
by the no. of hrs worked

2.Piece-Rate plan
• Employee’s wages are calculated by multiplying the
employee’s output by the rate per piece

3.Modified Wage plan

• Combination of hourly rate and piece-rate plans
 Controlling Labor Cost
• Brings about Production EFFICIENCY
• Consequently, lowers production cost per unit

• Labor cost control refers to keeping track of

labor costs in total and per unit, comparing
them with predetermined figures and
adopting prompt remedial measures in case
there are variances
 Controlling Labor Cost
Departments involved in Labor Cost Control:
• Production planning
• Personnel
• Time & motion study
• Budgeting
• Timekeeping
• Accounting
 Controlling Labor Cost
Procedures in Labor Cost Control:
1. Production planning
2. Use of Labor standards and budgets
3. Labor performance reports
4. Appropriate compensation including
wage incentive systems
 Production Planning
• Starts with intensive study of the product
design and the manufacturing process
• Production schedules supported by labor
hour requirements indicate when workers
would be needed
• HR department should see to it that the
required number of qualified workers is
available
 Use of Labor Budgets &
Standards
• Labor standards are established
after an intensive study of the
product design
• The budgets for labor hours and
labor cost are prepared based on the
budget
 Labor Performance
Reports

• It may be prepared daily, weekly or

monthly depending on level of
management
• Management should have production
data on a daily basis
 Appropriate Compensation
Including Wage Incentive Systems
• Labor rates and other benefits are
established based on existing labor laws
• Incentive wage plan is adopted to increase
worker’s take home pay
• It can be in the form of bonus or in kind
depending on what would encourage
workers
 Purpose of an
Incentive Wage Plan
• It induce workers to produce
more to earn higher wage,
and at the same time to
reduce unit costs
 Incentive Wage Plan
• It rewards workers in proportion to their increased
high quality output
• It must have the following:
1. Be applicable to situations in which workers can
increase output
2. Provide for proportionately more pay for output
above standard
3. Set fair standards so that extra effort will result
in bonus pay
 Types of
Incentive Wage Plan
• Straight piecework plan

• One hundred percent bonus

plan

• Group bonus plan

Straight Piecework
Plan
Simplest incentive
wage plans
Pays wages above the
base rate for production
above the standard
One Hundred Percent
Bonus Plan
It is a variation of the straight
piecework plan
It differs in that standards are
stated not in terms of money,
but in time per unit of output
Production standards of
output/hr are set by industrial
engineers
Group Bonus Plan
It is based on the
performance of the whole
department
It also contribute better
cooperation among workers
It also lead to reduction of
accidents, spoilage, wage
and absenteeism
 Organizational
Incentive Plans
Otherwise known as
“Gainsharing Plans”
All individuals have the
capacity to make valuable
contributions to an
organization
Require management to
seek workers’ participation
 Accounting for Labor
Cost
1st step: Secure an accurate time worked by
each employee
 This can be achieved by:
1. A clock/time card w/c provides evidence of the
employee’s presence in the factory/plant
2. Time tickets or job tickets to secure information as
to the type & duration of work performed

2nd step: Compute for payroll

3rd step: Distribute payroll
 Labor Productivity

• It is defined as a measure of
production performance using
expenditure of human effort as
a yardstick
• It is the amount of goods and
services a worker produces
 Labor Productivity

• It can be described as the

efficiency with which resources
are converted into commodities
and/or services
• Planning productivity should be
assigned to managers
 Measuring Productivity

• Measuring productivity provides

concise, accurate index for
comparing actual results with a
target or standard of
performance
 Measuring Productivity

• It also recognizes an individual

contributions of factors such as
employees, equipment, products and
services used, capital invested and
government services used
• Productivity efficiency ratio – measures
the output of an individual compared to
the performance standard.
Organization for Labor
Cost and Control
Personnel department
Production planning
department
Timekeeping department
Payroll department
Cost department
Personnel Department

It provides an
efficient labor force
and ensure that the
entire organization
follows appropriate
personnel policies
Personnel Department
Its function includes,
recruiting, hiring,
training, evaluation,
retirement counseling,
termination ad
outplacement
It also updates job
descriptions
Production Planning
Department
It is responsible for
scheduling work and
releasing work orders to
the producing
departments
Production schedules
should be prepared
several weeks in advance
Timekeeping
Department
Accurate timekeeping
is usually achieved by
the following:
1.Clock card or time
card
2.Time tickets or job
tickets
 Timekeeping
Department
1.Time card or Clock card
Time clock or recorder – it is
an instrument that records
employees’ time in and out of
the office or factory
It may be electronically on
line as part of computerized
system
 Timekeeping
Department
1.Clock card or time card
Clock card – It shows the
time a worker started and
stopped work on each day
or each shift
 Timekeeping
Department
2.Time tickets or job tickets
Time ticket – shows the specific use of the
time purchased, and it is comparable to a
materials requisition
Daily time report – in the absence of time
tickets, daily time report can be used
List of jobs workers did during the day
Payroll Department

2 Steps in Payroll processing:

1.Computing and preparing
payroll
2.Distributing the payroll cost to
jobs and departments
Cost Department

 It records direct labor cost on

job cost sheets or departmental
production reports
It also records indirect labor cost
on detailed departmental
overhead records
Illustrative problem:
• Pedro, an employee of Tela Mfg. Corp. is earning
P404/day plus P26 COLA for a 5-day work per week.
• He is married, with 2 qualified dependent children
• Assume the following:
1. Withholding tax, SSS/Philhealth/Pag-ibig are
based on the graduated table
2. The company’s payroll policy is that they pay their
employees on a weekly basis.
3. His total no. of overtime hours incurred during the
week was 8 hrs. The company pays a premium of
25% on overtime hours worked
Illustrative Problem 2:
 Using the same assumptions of the
previous illustrative problem, what if the
following are the employees of Tela Mfg.
Co. but pays their employees every
15th/30th of the month, assuming the 1st
day of the month falls on a Wednesday:
1. Sisa – Single, earns P410/day, no OT
2. Basilio – Married, earns P500/day, 10 hrs OT
3. Crispin – Married, 5 children, P500/day, 10 hrs
OT
4. Maria Clara – Single, 1 dependent child, earns
P410/day, 5 hrs OT