Chapter 4

Labor
A Closer Look on Cost Accounting, De Jesus, 2019
Cost Accounting, De Leon, et al, 2022
Learning Objectives

● Define labor cost and its classification

● Prepare journal entries of labor cost
● Differentiate the types of wage plans including its advantages and
disadvantages
● Know the accounting for overtime premium
● Know the different labor time losses
● Know the different overtime premiums
Labor Cost

One of the primary costs of production system. It consists of workers’ payroll who
are needed to process and convert raw materials into finished goods.
Classification:
Direct labor - payroll costs that are paid to workers who are directly engaged in the
conversion process of raw materials to finished goods. It is charged to Direct
labor (periodic/non-cost) or Work in Process (perpetual/cost).
Indirect labor - payroll costs that are paid to a worker that supports the production
process and which are not directly involved in the conversion of raw materials to
finished goods. It is charged to Factory Overhead Control account
 Payroll Entries
Transaction Periodic (Non-Cost) Perpetual (Cost)

Selling and Administrative Salaries, Selling and Administrative Salaries Selling and Administrative
P500,000; 500,000 Salaries 500,000
Salaries and wages of factory Direct Labor 1,000,000 Work in Process 1,000,000
employees were incurred as follow: Indirect Labor 450,000 FOH-Indirect Labor 450,000
Direct labor, P1,000,000; SSS Payable 37,000 SSS Payable 37,000
Indirect labor, P450,000; PH Payable 18,000 PH Payable 18,000
SSS, P37,000 Pag-ibig Payable 13,000 Pag-ibig Payable 13,000
Philhealth, P18,000 W/Tax Payable 72,000 W/.Tax Payable 72,000
Pag-ibig, P13,000 Accrued Payroll 1,810,000 Accrued Payroll 1,810,000
Withholding taxes, P72,000

Employer share: FOH - Emp. Benefits 55,500 FOH - Emp. Benefits 55,500
Factory Selling & Admin Employee Benefits 31,000 Employee Benefits 31,000
SSS 37,500 18,000 SSS Payable 55,500 SSS Payable 55,500
PH 10,000 8,000 PH Payable 18,000 PH Payable 18,000
Pag-ibig 8,000 5,000 Pag-ibig Payable 13,000 Pag-ibig Payable 13,000

Salaries and wages paid Accrued Payroll 1,810,000 Accrued Payroll 1,810,000
P1,810,000 Cash 1,810,000 Cash 1,810,000
 Types of Wage Plans
Type Advantage(s) Disadvantage(s)

Time Based Wage Plan - ● Simple and ● Production (output)

wages are determined on economical to use. can suffer because
the basis of time worked ● Give a sense of workers are not ime
spent by workers security to workers. pressured.
irrespective of the quality of ● Controls material ● No additional
work done. Hourly rate x wastages as the job is incentive for workers
time spent. not done in a hurry. to achieve production
efficiency.
● It decreases the
morale of other
workers who work
efficiently than others.
 Types of Wage Plans
Type Advantage(s) Disadvantage(s)

Piece-Based Wage Plan - ● It provides incentives ● It increases clerical

wages are determined on to workers who costs because this
the basis of output produce more. plan needs an up to
produced by the workers ● It is a fair wage plan date records of output
without considering the time because efficient produced by each
spent in performing the job. workers are rewarded worker.
Specified rate per unit x and inefficient workers ● More workers feel
the number of units get less. tired because they
produced. exerted lots of effort to
produce more so that
they will earn more.
● Quality may be
sacrificed in order to
maximize quantity.
Other types of wage plan

Modified Based Wage Plan - a combination of time wage plan and piece wage
plan. Under this plan, the work is paid based on a minimum hourly rate regardless
if an established quota of production is not met. However, workers are given a
bonus for the additional piece of output if they exceeded the established quota.
Bonus or Incentive Schemes, also known as Premium Bonus Plan - given in order
to increase production. The two (2) sub-types are
a. Individual Incentive Plan - remuneration will be based on the performance of
individual workers.
b. Group Incentive Plan - Remuneration will be based on the productivity of the
group or the entire workforce of the organization.
Labor Cost as WIP (DL) versus FOH Control

It is important to separate the regular time and overtime of each worker because
of the accounting treatment of regular time and overtime pay for workers. The
regular time pay is charged to Work in Process account and they are computed
based on the regular rate multiplied by the total number of regular hours worked,
while overtime pay may be charged to Work in Process account or Factory
Overhead Control account depending upon the conditions while overtime hours
are incurred and it is computed by multiplying overtime pay rate by the total
number of overtime hours.
Labor Cost as WIP (DL) versus FOH Control

Illustration. Assume an employee regularly earns P100 per hour for an 8-hour on
ordinary working days. If the worker is called to work more than 8 hours in a
working day, an additional pay premium computed as regular rate plus 50% in
excess of 8 hours. Also assume the employee works 10 hours in a working day.

Charged to Specific Job (Rush Orders) Charged to Manufacturing Overhead Control

Work in Process 1,100 Work in Process 1,000

Payroll 1,100 Factory Overhead Control 100*
Payroll 1,100

* 50% of P100 hourly rate x 2 hours = P100

Labor Time Losses (Charged to FOH Control)

a. Idle time
b. Machine set-up time
c. Labor cost of reworking defective units
Other labor related costs charged to FOH Control

● Overtime premium and night-shift premium

● Employer share on SSS, Philhealth and Pag-ibig contributions
● Fringe benefits such as vacation/sick leave with pay, life/health insurance
premiums, pension payments, etc.
● Incentive plan
 Overtime Premium Rates
Without Night Differential Premium With 10% Night Differential Premium
(6 am - 10 pm) (10 pm - 6 am)

1st 8 hours Excess of 8 hrs 1st 8 hours Excess of 8 hrs

Regular Day 100% 125% 110% 137.5%

Rest Day / Special 130% 169% 143% 185.9%

Holiday

Rest Day & Special 150% 195% 165% 214.5%

Holiday

Regular Holiday 200% 260% 220% 286.0%

Regular Holiday & 260% 338% 286% 371.8%

Rest Day

Two (2) Regular 300% 390% 330% 429.0%

Holidays

Two (2) Regular 390% 507% 429% 557.7%

Holiday and RD
What to do on the activities?
● Create a shared drive “Cost Accounting BSA 1__ 2020-2021” and subdrive
“Chapter 4”
● Make every member of the class able to access, write/edit on the shared drive.
● The class mayor will assign persons (1-2) who will answer each activity and
another person (1-2) to edit/review the answers. By the end of the semester,
everyone must contribute to at least an activity. Class mayor to do the monitoring.
● Copy the activities on subdrive. One filename (use company name as filename)
for every activity. For every activity, the answer(s) follow.
● Inform your instructor your answers are ready for checking and putting grade. Per
activity: 5 points with correct answer; three points with almost correct answer; 1
point for mostly incorrect answer. No point for no answer.
● The grade earned in the activities will be grade in the project.
● Everyone can view/use the answers on the shared drive for studying.
Activity 1 Garden Grove Corp. (De Jesus, MC 37, Chap 4)
The following are the data for the month of September of Garden Grove Corporation.

Emp. Hourly Sun Mon Tue Wed Thu Fri Sat Total
Name Rate

P 100 1 8 7 8 8 8 8 48

Q 150 2 8 8 10 9 7 8 52

R 100 2 8 7 8 10 9 8 52

S 200 0 8 9 8 8 9 8 50

T 275 3 8 10 6 7 10 8 52
Activity 1 Garden Grove Corp. (De Jesus, MC 37, Chap 4)
Garden Grove pays its employee one and one-half times the regular rate for hours worked over 40
hours and the rate for hours worked on Sunday is twice the regular rate. The following are
deductions from gross earnings: SSS 8%; Philhealth 2%; Pag-ibig 2% and Income tax 25%.

Required: Compute the total amount to be charged to (a) Work in Process and (b) Factory
Overhead. Compute for the net pay.
Activity 2 - Self-made
BSA Company is in manufacturing of animal feeds. Currently he has 3 employees in the maintenance
section. The regular shift is 7am to 4pm, with one-hour lunch break. For the pay period Feb 1 - 15, 2021,
the summary of hours worked is as follows:

Name / Hourly Rest Sun Mon Tues Wed Thu Fri Sat
Week Rate Day

Feb 1-6 1 2 3 4 5 6

An 100 Wed 11 11 11 11 11

Tho 150 Thu 11 11 11 11 11

Nie 150 Fri 11 11 11 11 11

Activity 2 - Self-made
BSA Company is in manufacturing of animal feeds. Currently he has 3 employees in the maintenance
section. The regular shift is 7am to 4pm, with one-hour lunch break. For the pay period Feb 1 - 15, 2021,
the summary of work is as follows:

Name / Hourly Rest Sun Mon Tues Wed Thu Fri Sat
Week Rate Day

Feb 7 8 9 10 11 12 13
7-13

An 100 Wed 8 11 11 11 11 11

Tho 150 Thu 8 11 11 11 11 11

Nie 150 Fri 8 11 11 11 11 11

Activity 2 - Self-made
BSA Company is in manufacturing of animal feeds. Currently he has 3 employees in the maintenance
section. The regular shift is 7am to 4pm, with one-hour lunch break. For the pay period Feb 1 - 15, 2021,
the summary of work is as follows:

Name / Hourly Rest Sun Mon Tues Wed Thu Fri Sat
Week Rate Day

Feb 14 15
14-15

An 100 Wed 8 11

Tho 150 Thu 8 11

Nie 150 Fri 8 11

Activity 2 - Self-made
February 3, 2021 is a special working holiday while February 12, 2021, Chinese New Year, is a
special non-working holiday.

Use the overtime premium rates given (see slide no. 12) to compute the gross pay.

Required: Compute the (a) amount of gross pay per employee and the amount to be charged
to (b) work in process account and (c) factory overhead account.
Activity 3 Self-made
CBA Company provided the list of employees, position and monthly gross compensation as follows:

Name Position Gross Name Position Gross Name Position Gross

Pay Pay Pay

Dela Cruz General P100,000 Fred Sales 30,000 Noli Laborer 12,000
Manager Assistant

Allan Finance 45,000 Gill Sales 29,000 Orly Laborer 12,000

Supervisor Assistant

Bill A/R Staff 25,000 Hall Production 47,000 Pete Laborer 12,000
Supervisor

Carl A/P Staff 23,000 Jack Laborer 15,000 Rocky Electrical 30,000
Maintenance

Dom Inventory 20,000 Larry Laborer 14,000 Steph Electrical 28,000

Staff Maintenance

Eric S&M 50,000 Mark Laborer 13,000 Troy Mechanical 27,000

Supervisor Maintenance
Activity 3 Self-made
CBA Company pays the general manager every 15th of the month and all other
employees twice a month (15th and end of the month). Use the corresponding
SSS, Philhealth, Pag-ibig and Withholding Tax Tables applicable for 2024.
Required: Prepare the payroll register for 15th and end of the month with
corresponding payroll entries including employer share and remittances.