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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Accounting for labor may be divided into three phases, namely, timekeeping, financial
accounting and cost accounting.
Financial accounting phase – involves payroll preparation and the keeping of records of
employees’ earnings, deductions, payment of salaries and wages and the
different payroll-related liabilities.
Cost accounting phase – concerned with the allocation of the payroll charges to the
different jobs, departments or to overhead based on the nature of work done
by the employees.
Direct labor hours and their cost are entered on the respective job order cost
sheets (usually on weekly basis) and indirect labor costs are entered on the
analysis sheet (or subsidiary records for Manufacturing Overhead Control).
Clock Card ( Time Card) – shows the time an employee reports for work and goes out and is used
in payroll preparation.
- So called because it is punched in with the use of a time clock (or time recorder).
- In companies where control of man hours is computerized, the employees use their
identification cards in punching in and out. It serves as evidence for labor time purchased or
that payment is being made only for man hours expended within the company.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Time Ticket (or Job ticket) – shows the number of hours a worker devotes to a certain job (or his
accomplishment on that job) during a day so that it serves as a primary basis in making charges to
direct labor cost of the jobs worked on.
- If a worker works on four different jobs on one day, he must accomplish four time tickets
for the particular day.
TIME TICKET
Name: ____________________________ Employee No. ______________
Department: _______________________
Date: _________ Job Order: __________________
Start: _________ Nature of work: ______________
Finish: ________ Pieces completed: _____________
Hours worked: ________
Hourly rate: __________
Labor cost: __________
Account to be charged: __________ Foreman’s Approval
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Daily time report – shows how a worker spends the total number of hours timed-in for a day.
- The report on which he accounts for the number of hours he is being paid.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Payroll sheet – shows how the employees’ net pays are arrived at.
- Provides columns for regular pay, overtime pay, deductions and net pay.
- May also serve as evidence for payroll payment by providing a column for workers’
signatures upon receipt of the amounts due them.
Employees’ Earnings Records - show the periodic and accumulated earnings of each employee
aside from the payroll deductions made. The earnings records are used in the computation for
fringe benefits that the employees may be entitle to and in reporting taxes withheld.
Employees are being paid weekly (for daily wage earners) and twice a month (for those paid on
monthly rates). Per Book III Rule No. VIII, Section 3 of the Labor Code:
Wages shall be paid not less often than once every two (2) weeks or twice a month at
intervals not exceeding sixteen (16) days, unless payment cannot be made with such
regularity due to force majeure or circumstances beyond the employer’s control, in which
case the employer shall pay the wages immediately after such force majeure or
circumstances have ceased.
Timekeeping department – collects and controls clock (or time) cards and job tickets (or daily
time reports). The number of hours timed in per clock (or time) cards is reconciled with that per
time tickets or daily time reports.
- If clock card shows more hours than the daily time reports (or time tickets), the difference
is unproductive hours and is charged to factory overhead.
- If the daily time reports show more hours, the supervisor and the worker are consulter to
correct the error.
- Time cards and daily time reports (or time tickets) are subsequently forwarded to the
accounting department for payroll preparation and for entries to cost sheets, respectively.
Accounting department – prepares the payroll based on time (or clock) cards. The number of
hours devoted to jobs is posted to cost sheets.
Example:
Jose Dizon, a worker with daily rate of P 160, timed in a total of 45 hours for the week May 2-8. His
daily time reports show that during the same week, the accounted for the 45 hours as follows:
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
671 - 10
675 - 5
679 - 15
Waiting time - 3
45 hours
The gross pay of Jose Dizon for the week and the corresponding charges would be as
follows:
Gross pay: 45 hours (160/8 hrs) = P 900
Charges:
Direct labor: 42 hours x P 20 = P 840
Idle time: 3 hours x P 20 = 60
P 900
The 42 direct labor hours are entered on the corresponding job order cost sheets and the 3-hour
idle time is charged to factory overhead.
February 25, 2016 – EDSA People Power Revolution (Special non-working day by virtue
ofProclamation No. 1071, s. 2015)
August 21, 2016, Sunday – Ninoy Aquino Day (Special non-working day)
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
The pay rates for work done on regular holidays and special days differ as stated in the following
sections.
Computation for Daily Rate. The daily rate, for employees whose rates are stated on monthly
basis, is computed as follows:
Daily rate = Monthly rate x 12 months
365 days
Thus the rate per day of an employee with monthly salary rate of P 5,000 must be P 164. 38.
Daily rate = P 5,000 x 12 months
365 days
= P 164. 38
PREMIUM PAY
- Refers to the additional compensation for work performed within eight (8) hours on non-
working days (such as rest days and special days) as required by law.
- The premium pay rates are as follows:
For work performed on Rate of Pay, Based on Daily
Rate
Rest days 130%
Special days 130%
Rest day which is also a special day 150%
Regular holiday 200%
Regular holiday which is also a rest day (200% x 130%) 260%
- Based on the foregoing rates, the amount earned by a worker with daily rate of P 200 and
who works for eight (8) hours only in one day shall be as follows:
On a rest day: P 200 x 130% = P 260.00
On a special day: P 200 x 130% = P 260.00
On a rest day which is also a special day: P 200 x 150% = P 300.00
On a regular holiday: P 200 x 200% = P 400.00
On a regular holiday which is also a rest day: P 200 x 260%= P 520.00
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
- Example:
An employee with daily rate of P 200 who works for ten (10) hours on a working
day is entitled to at least P 262. 50 computed as follows:
For regular eight (8) hours P 200.00
For overtime work of two (2) hours (P 200/8 hrs. X 125% x 2 hrs.) 62.50
Total earned for ten (10) hours P 262.50
With a daily rate of P 200, the hourly rate is P 25 (P 200/8 hrs) so that the overtime
premium per hour must be P 6.25 (or P 25 x 25%). The amount earned for ten (10)
hours may also be arrived at as follows:
Ten hours at the regular rate of P 25 P 250.00
Overtime premium pay (2 hrs x P 6.25) 12.50
Total earned for ten (10) hours P 262.50
- The treatment for overtime premium depends on the reason for overtime work.
- Overtime work rendered on a scheduled rest day, a special day or a regular holiday is
entitled to overtime premium of 30% based on the hourly rate he is entitled to on that
particular day.
o Per Labor Code of the Philippines (Art No. 87), work performed beyond eight
hours on a holiday or rest day shall be paid an additional compensation equivalent
to the rate of the first eight hours on a holiday or rest day plus at least thirty percent
thereof.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
- In accounting for labor cost, whatever amount is earned by the worker for ten (10) hours
minus his pay at regular rate of P 250 (or 10 hours x P 200/8 hrs.) is treated as overtime
premium.
- Undertime not offset by overtime. When an employee works undertime on one day and
then works on overtime on another day, he is entitled to overtime pay for the latter.
Undertime work on any particular day shall not be offset by overtime work on any other day. (
Art 88)
- Absence before a Regular Holiday. The Labor Code (Book III Rule IV, Section 6) states:
o Employees who are on leave of absence without pay on the day immediately preceding
a regular holiday may not be paid the required holiday pay if he has not worked on
such regular holiday.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
PAYROLL DEDUCTIONS
- The deductions from gross pay or amount earned by employees are:
o Income taxes withheld
o Contributions to the Social Security System (SSS)
o Medicare
o Pag-IBIG Fund (HDMF)
o Occasional deductions like labor union check-offs (union dues) and collection of
receivables and advances.
PAYROLL PREPARATION
- The payroll is prepared based on clock (or time) cards, authority granted to work on
overtime, and required payroll deductions.
ILLUSTRATIVE PROBLEM
The following information is given for the payroll period, May 8 to 14:
Hourly Monthly Hours Timed In
Rate Earnings May 8-14
Regular Overtime W/H Taxes
Carpio Benin did some errands per request by the foreman for four (4) hours. Mario Khan did some
repair work for eight (8) hours.
Overtime pay is 125% of regular time pay and overtime work is due to the greater volume of work.
Deductions are for withholding taxes and the premium for SSS, PhilHealth and Pag-ibig are made
from the second week’s payroll of each month.
The weekly job time recapitulation, the computation for gross pay, the payroll and the
corresponding entries are:
GROSS PAY COMPUTATION
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Entries:
a. To take up the payroll:
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Payroll P 8,503.00
Withholding Taxes Payable P 680.00
SSS Premiums Payable 1,183.30
Medicare Premiums Payable 375.00
Pagibig Premiums Payable 600.00
Cash 5,664.70
1. Use of withholding tax table. The use of the Revised Withholding Tax Tables is the
general method used for computing tax withheld on compensation. The following are the
four withholding tax tables prescribed by BIR: (see page for the Revised Withholding tax
Table)
a. Monthly tax table – to be used by employers using the monthly payroll period
b. Semi-monthly tax table – to be used by employers using the semi-monthly payroll period
c. Weekly tax table – to be used by employers using the weekly payroll period
d. Daily tax table – to be used by employers using the daily payroll period
2. Cumulative average method. This is used if (a) the employee’s regular compensation is
exempt from withholding tax because it is below the compensation level, but additional
compensation is paid during the calendar year or the additional compensation is equal to or
more than the regular compensation to be paid; or (b) the employee was newly hired and
had a previous employer/s within the calendar year, other than the present employer doing
this cumulative computation.
3. Annualized withholding tax method. This is used (a) when the employer-employee
relationship is terminated before the end of the calendar year; and (b) when computing for
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
the year-end adjustment (the employer shall determine the amount to be withheld from the
compensation on the last month of employment or in December of the current calendar
year).
In most cases, the first method is used and the employer needs to use the Revised
Withholding Tax Tables as prescribed in Annex C of Revenue Regulations No. 10-2008 for
the computation of tax to be withheld on the compensation income of employees.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
The birth of the Home Development Mutual Fund (HDMF), more popularly known as the Pag-IBIG
Fund, was an answer to the need for a national savings program and an affordable shelter financing
for the Filipino worker. The Fund was established on 11 June 1978 by virtue of Presidential Decree
No. 1530 primarily to address these two basic yet equally important needs. Under the said law,
there were two agencies that administered the Fund. The Social Security System handled the funds
of private employees, while the Government Service Insurance System handled the savings of
government workers.
Less than a year after on 1 March 1979, Executive Order No. 527 was signed. The order directed
transferring the administration of the Fund to the National Home Mortgage Finance Corporation,
which was one of the operating agencies of the then Ministry of Human Settlements.
Seeing the need to further strengthen the stability and viability of the two funds, Executive Order
No. 538 was issued on 4 June 1979, merging the funds for private and government personnel into
what is now known as the Pag-IBIG Fund. However, It was only on 14 December 1980 when Pag-
IBIG was made independent from the NHMFC with the signing of PD 1752, which amended PD
1530. With the improved law in effect, the Fund's rule-making power was vested in its own Board
of Trustees. Likewise, PD 1752 made Pag-IBIG membership mandatory for all SSS and GSIS
member-employees.
Recognizing HDMF's contributions through the years and the need to further strengthen its
capability as the biggest source of housing finance in the country to date, President Gloria
Macapagal-Arroyo signed into law Republic Act No. 9679 or the Home Development Mutual Fund
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Law of 2009. The law was signed on 21 July 2009. Under the new HDMF law, membership to the
Pag-IBIG Fund is made mandatory for all SSS- and GSIS-covered employees; uniformed members of
the AFP, BFP, BJMP and PNP; as well as Filipinos employed by foreign-based employers. Now more
than ever, Filipino workers will enjoy the benefits that are available only to Pag-IBIG members.
Likewise, the law grants the HDMF exemption from tax payments like other government provident
institutions. With its tax-exempt status reinstated, Pag-IBIG will have more funds to finance housing
and short-term loans as well as investments in government securities. Income from these
endeavors is distributed exclusively to Pag-IBIG members in the form of dividends.
The HDMF Law of 2009 also gives the Board of Trustees the authority to set the contribution rates,
thereby paving the way for members to save more for their future. Similarly, this will bolster the
Fund's resources for home financing.
Pag-IBIG is an acronym which stands for Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industria at
Gobyerno. To this day, the Pag-IBIG Fund continues to harness these four sectors of the society to
work together towards providing Fund members with adequate housing through an effective
savings scheme. (http://www.pagibigfund.gov.ph/abouthdmf.aspx)
- Both the employee and his employer contribute to the fund with the latter’s contributions
credited to the name of the employee so that the employee’s savings immediately double or
triple in amount.
- A member may withdraw his savings upon membership maturity, disability, permanent
departure from the country, separation fr om service or death. Aside from these, members
may avail of short-term (multi-purpose or livelihood) and housing loans at low interest rate.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Exercises:
Exercise 1: Theory
a It is concerned with the total number of hours worked by each employee and what a worker does each
hour he is being paid.
b It provides for additional financial compensation to workers and at the same time reduces the fixed
overhead cost per unit.
c It shows how each employee’s net pay is arrived at by providing columns for gross pay and deductions
aside from net pay .
d It shows the number of hours a worker has devoted to a job during a day.
e It is concerned with the determination of the breakdown of the payroll and the making of labor cost entries
on cost sheet s or production reports..
f It is concerned with the determination of how much to pay each employee and the keeping of the earnings
records.
g Different tasks are observed and analyzed to eliminate unnecessary motions and set the standard time for
the performance of each task.
h It shows when the worker reports for work and when he goes out and is used as basis in the computation
of his gross pay.
i It is used by a worker in accounting for the total number of hours timed in for a day.
j It shows the different amounts earned by an employee for a period and the deductions made there from.
a. What is the estimated number of labor hours required to produce 25,000 units?
b. How many workers must be made available for the production in June?
Exercise 3: Effect of Wage Incentive System on Fixed Factory Overhead per Unit
ABC Corp. pays its workers at the rate of P 200 per day plus P 21 for every unit produced in excess of 10
units during each working day. The production report for two days show:
Worker No. of Units Completed
Monday Tuesday
A 8 Units 9 units
B 10 12
C 10 15
D 10 10
E 10 11
An analysis of overhead shows that fixed overhead per day is more or less P800.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Required:
a. The amount to be paid to each worker and the average labor cost per unit for each day.
b. Fixed overhead per unit for each day.
L is the foreman with the others as his workers. Overtime premium is 25%.
The time tickets show that overtime work was done on job no. 25 and the corresponding hours are included
already in the tabulation given above.
How much must be the gross pay of each worker?
Determine what accounts are to be debited for the payroll under each of the following assumptions:
a. Overtime work is due to the seasonal changes in the demand for the product.
b. Overtime work is due to the rush nature of the job.
Jobs Worked On
39 42 45 46 Others Hrs.
Abe, Mario 15 19 7 10
Boni, Carlos 12 17 10 3 Oiling 5
Pantig, Jose 13 20 20
Tonio, Ben 9 10 25
Yasay, Dante 19 12 16 Inspection 4
Required:
a. Computation for gross pay.
b. Weekly job time recapitulation.
c. Payroll.
d. Journal entries.
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COST ACCOUNTING
ACCOUNTING FOR LABOR COST
Items 3 and 4:
The following data are given for the period August 12 to 18, 2014:
Total
Jobs Worked On Others
Hours
Regular Overtime 21 22 23 Nature Hrs.
Pete Tuazon 48 48
Jose Carlos 46 43 3 12 20 9 Delivery 4
Mario Farela 50 48 2 15 25 9
Ben Gomez 53 46 7 16 30 5
Lucio Lim 53 45 8 17 15 20
Gem Tinio 51 45 6 10 18 17 Repairs 5
Pete Tuazon is the foreman with hourly rate of P 30. All the workers under him receive P 25 per hour. Overtime
work was rendered on working days on job 23, based on a rush order. Accordingly, overtime premium is 25%.
3. How much must the total charge to direct labor for the week?
5. Lucena Manufacturing Co. charges factory overhead toproduction at 80% of direct labor cost. Jobs 842 and
843 were completed and sold in July, 2014. Total direct materials cost and prime cost for Job 842 were P
9,000 and P 14,000, respectively. Production cost of Job 843 amounted to P 31,200 with factory overhead
equal to 48% of direct materials cost. How much were the direct labor costs of Jobs 842 and 843?
Items 6 and 7
Each of the five (5) workers in a factory is being paid P 250 per day. For every unit produced in excess of 25
units in one day, a worker is paid P 12. Fixed factory overhead per annum is P 198,000 and there are
approximately 330 working days in one year.
Production data for January 6 and 7, 2014 shows the following number of units produced by each worker:
January 6 January 7
Abdon 25 26
Belleza 27 26
Cortes 24 28
Drillon 24 27
Emilio 28 26
6. What is the average direct labor cost per unit for the two day period?
7. How much savings in fixed factory overhead per unit was affected assuming that additional output is due to
the incentive given?
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