Accoun

ting for
LAB
OR Chapter 9
 Learning Objectives
1. Distinguish between and account for direct and indirect labor as they
are used in the production process.
2. Identify the three activities involved in accounting for labor.
3. Understand the consequences of and be able to account for
employee and employer taxes and fringe benefit costs .
4. Identify the guaranteed wage and incentive plans that may be used.
 Accounting for Labor
Labor is the physical
or mental effort The principal labor cost
exerted in is wages paid to
manufacturing a production workers.
product.
The compensation paid
to employees who
Labor cost is the price engage in production
paid for using human related activities
resources. represents factory
labor.
 Inclusion to Labor costs
• Basic salaries of workers
• Overtime Pay
• Bonuses for exemplary performance
• SSS, PHIC, HDMF dues (employer share)
• Medical benefits and the like
Factory payroll costs are
divided into:
A. Direct Labor
• Represents payroll costs that are allocated
directly to the product and is debited to the
work in process account.

• Direct labor cost is known as the wage of

those workers who are engaged in production
process whose time can be efficiently and
economically traceable to units of products.
Factory payroll costs are
divided into:
B. Indirect Labor
• Indirect labor costs of labor costs
incurred for a variety of jobs that are
related to the production process but
are considered either too remote or too
insignificant to be charged directly to
production.

• Indirect labor costs are charged to the

factory overhead control account.
The accounting system of a manufacturer must include
the following procedures for recording payroll costs.

1. Recording the numbers of hours used in total

and by job.
2. Recording the 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 factory
overhead acounts.
5. Preparation of the payroll, including
computation and recording of the employees,
gross earnings, deductions and net earnings.
 Fundamentals
Step1. Compute for the gross
of Payroll
pay by getting the total of all
earnings. Step2. Compute for the taxable
income
Basic pay (basis for withholding tax)
xx.xx Gross pay
Less: Late and Absences xx.xx
(xx.xx) Less: SSS EE contribution
Add: Overtime (xx.xx)
xx.xx Less: PHIC EE contribution
Add: Other taxable income (xx.xx)
xx.xx Less: HDMF EE contribution
 Step3. Compute for the total
deductions.
Step4. Compute for the net
SSS EE contribution pay using all earnings
xx.xx deducted by all deductions
PHIC EE contribution
xx.xx
HDMF EE contribution Gross Pay
xx.xx xx.xx
Withholding Tax Less: Total Deductions
xx.xx xx.xx
Other deductions Net Pay
 Wage Plans
There are different wage plans that are being used by
companies. The plan established by management is
approved by the union and should comply with
regulations of government agencies.

• Hourly-rate plan- is a wage plan where a definite rate

.
per hour per employee is determined or computed. Total
wage is equal to the number of hours worked multiplied
by the rate per hour.

Daily rate = Monthly rate / 30 days

Rate per hour = Daily rate / 8 hours

Total Wage = Number of hours worked x Rate per hour

 Wage Plans
• Piece-rate Plan- earnings are calculated by multiplying the employee‘s
output by the rate per piece. The plan provides an incentive for the
employee to produce more.

Wage = Total output x Rate per output

• Modified wage plan- combines the features of the hourly-rate plan

and the piece-rate plan.

 If the workers did not achieve the quota, they are paid using the minimum
rate per day.
 If the established quota is achieved, the workers shall receive an
additional compensation equivalent to the excess of the quota multiplied
by the rate per piece.
 CONTROLLING FOR LABOR COST
• Maintaining labor records is the responsibility of the time-keeping and payroll departments.

• The time-keeping department accounts for the time spent by the employees in the factory. The
payroll department computes each employee‘s gross earnings, the amount of withholdings
and deductions, and the net earnings to be paid to the employee.
• The departmental responsibilities of time-keeping and payroll are carried out by completing
and maintaining the following forms and records:

Time-keeping Payroll
Clock cards Payroll records
Time tickets Employees earning records
Production reports Payroll summaries
Clock cards
A payslip is a document that explains the
components of an individual‘s pay for a
certain time period.
ACCOUNTING FOR
•LABOR COSTS
For all regular hourly employees, the hours worked
should be recorded on a time ticket or individual
production report. The time ticket shows the employee‘s
starting and stopping time on each job, the rate of pay,
and the amount of earnings.

• Individual production reports are used instead of time

tickets when labor costs are calculated using piece rates.
The time tickets and production reports are sent to
payroll on a daily basis. The pay rates and gross
earnings are entered, and the reports are forwarded to
accounting.
The labor cost summary is used as the source
for making a general journal entry to
distribute payroll to the appropriate accounts.
The entry is then posted to the control
accounts, Work in Process and Factory
Overhead in the general ledger.
ACCOUNTING FOR LABOR COSTS
• In preparing the labor cost summary from the tickets, it is important to separate any
overtime from an employee‘s regular time because the accounting treatment may be
different for each type of pay.

• 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.

• If an employee works beyond the regularly scheduled time but the employee is paid at
the regular hourly rate, the extra pay is called overtime pay.
• If an additional rate is allowed for the extra hours worked, the additional rate earned is
referred to as overtime premium.
• The premium rate will depend on the collective bargaining agreement (CBA) between
management and the union.
 ACCOUNTING FOR
To illustrate howLABOR
payroll is calculatedCOSTS
where overtime premium is a factor, assume an
employee regularly earns ₱30 per hour for an 8-hour day. If called upon to work
more than 8 hours in a working day, the company will have to pay overtime
premium for hours worked in excess of 8 hours. Assuming the employee works 12
hours on Monday, is paid 50% overtime premium (time-and-half) the earnings
would be calculated as follows:

Direct labor - 8 hours at ₱30 ₱240

Direct labor - 4 hours at ₱30 ₱120
Factory overhead (overtime premium - 4 x 15) 60 180
Total earnings ₱ 420
 ACCOUNTING FOR LABOR COSTS
If the previously mentioned employee is paid a premium of 100% ( double - time), the
earnings would be:

Direct labor - 8 hours at ₱30 ₱240

Direct labor - 4 hours at ₱30 ₱120
Factory overhead (overtime premium - 4 x 30) 120 240
Total earnings ₱480

With the preceding illustration, the regular rate (240 + 120) will be charged to Work in
Process while the overtime premium (60 in the first illustration and 120 in the second
illustration) will be charged to the Factory Overhead Control. By charging the overtime
premium to the factory overhead account, all jobs worked on during the period share
the cost of overtime premiums paid. If the job contract stipulated that it was a rush
contact, it would be appropriate to charge the premium pay to the job (Work in process)
instead of to a Factory Overhead account.
 EMPLOYERS
Payroll taxes imposed on employers include Social
PAYROLL
Security TAXES
premiums, Pag-Ibig fund contributions
and PhilHealth premiums. Employers are
responsible for periodically reporting and paying
the taxes to the appropriate to government
agencies.

SSS Contribution
The Social Security System requires employers to pay
social security taxes on wages and salaries equivalent to
approximately 55% of the total contribution credited to
the employee.
Let us consider the SSS contribution of an employee with a
salary of ₱10,000 per month. Per table- Appendix- the total
contribution is ₱925-₱506.70 being contributed by the
employer and ₱333.30 deducted from the employee's salary.
Of the total amount credited to the employee's name

approximately 68% (₱706.70/1040) is paid by the employer

and approximately 32% only is deducted from the
employee's salary
 PhilHealth Contribution
The amount contributed by the employer is equal to the amount deducted from the
employee’s salary or wage. The maximum deduction per table is ₱375.00 for salaries
₱30,000 and over. The contribution of the employer, maximum, is also ₱375.00.
For example: An employee with salary of ₱10,000. The deduction is ₱125.00 from the
employee’s salary and same amount is contributed by the employer. The total amount of
₱250.00 is credited to the employee’s name.

Pag-ibig Funds Contribution

The amount deducted from the employee’s salary is equivalent to 3% of basic or ₱100
whichever is lower. The contribution of the employer is also equal to the amount
deducted from the employee.
 Pag-Ibig Funds
Contribution
The Benefits:
- Educational Loan
- Salary Loan
- Housing Loan
- Calamity Loan
- Multi-purpose Loan
Note: Upon retirement, the total amount deducted from the employee’s salary plus the
contribution of the employer plus dividends earned will be returned to the employee.
 
 Pag-Ibig Funds Contribution
● To compute your Pag-Ibig monthly contribution, follow this formula:
Monthly compensation amount x Employee or Employer share.

● For example, if you’re earning ₱4,000 per month, your Pag-Ibig monthly contribution is
₱80 (4,000 x 0.02 = 80), with your employer also paying ₱80.

● If you’re earning ₱10,000 per month, your Pag-Ibig monthly contribution is

₱100, which is the maximum currently allowed. Your employer’s share is ₱100.
• Illustrative Problem I
The Ingrid Manufacturing Company pays employees every two weeks.
Monday, May 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:
  Payroll Summary
For the period May 1-14
 
  Factory Worker Sales & Adm. Total
Employees
Gross Earnings ₱10,000 ₱20,000 ₱30,000
Withholdings & deductions      
Income Tax ₱ 1,979.25 ₱2,833.33 ₱4,812.58
SSS Premiums 333.33 500.00 833.30
PhilHealth 125.00 250.00 375.00
Contributions
Pag-ibig Contributions 100.00 100.00 200.00
Total deductions ₱2,537.55 ₱3,683.33 ₱6,220.88
Net Earnings ₱7,462.45 ₱16,316.67 ₱23,779.12
•After the data are verified, a payroll voucher is authorized and recorded as follows:
May 14 Payroll ₱30,000
Withholding Tax Payable ₱4,812.58
SSS Premium Payable 833.30
PhilHealth Contributions Payable 375.00
Pag-ibig Funds Contribution Payable 200.00
Vouchers Payable 23,779.12
#
•To record the Payment of the net earnings to employees, the following entry is required:
May 14 Vouchers Payable ₱23,779.12
Cash ₱23,779.12
#
• Assuming that of the total factory payroll of ₱10,000-3,000 is indirect
labor, the entry to record the distribution of the payroll is:

Work in process ₱7,000

Factory Overhead 3,000
Selling & Adm. Expense Control 20,000
Payroll ₱30,000
#
The following schedule provides the information necessary to record the employer’s payroll
taxes for the period.
    SSS PhilHealth Pag-ibig Total
Premiums
Factory 706.70 125 100 931.70
Payroll
Selling & 1,060.00 125 100 1,285.00
Adm.
Total 1,766.70 250 200 2,216.70
 Pag-Ibig Funds
The entry Contribution
to record the employer’s payrollcont.
taxes is as follows
Factory Overhead Control ₱931.70
Selling & Adm. Expense Control 1,285.00
SSS Premiums Payable ₱1,766.70
PhilHealth Contributions Payable 250.00
Pag-Ibig Funds Contributions Payable 200.00
#
 Classification for Labor
1.Direct Labor- labor identified with particular products which is
considered feasible to be measured and charged to specific production
order cost sheet.

2.Indirect labor
a. Labor identified with particular products but which is not
considered feasible to measure and charge to a specific production
order.
b. Labor expected for the benefit of production in general and not
identified with particular products.
3.Labor Overhead
a. Waiting time or idle time- cost of non-productive hours of direct
labor caused by lack of work, waiting for materials delays from
scheduling machine breakdown and machine set-up.
 Waiting time or idle time
• For example, when a new job is being set-up for production, some workers may
temporarily have nothing to do. If their idleness is normal for the production and cannot
be avoided the cost idle time should be charged to factory control.

• Let us assume Nervie Fuentes spent 36 hours on Job 101 and was idle for 4 hours
during the week. Nervie‘s rate is ₱50.00 per hour for a 40-hour week, as per union
contract. The following entry should be made to record Nervie‘s total wages.
Work in process Job 101 ₱ 1,800
Factory overhead control-Idle time 200
Accrued Payroll ₱2,000
#
 B. Make-up Pay
• When payments to an employee are based solely on the number of units produced, the
employee is said to be paid at a “piecework” rate. Many companies will pay employees
a minimum wage but they can earn more if they produced.
• If the output multiplied by the piece rate results in an amount less than the guaranteed wage, the
difference is charged to factory overhead control.

• If the output multiplied by the piece rate results in an amount greater than the guaranteed wage, the
employee is paid the amount earned.

• Let us assumed Ramsill Enriquez is paid ₱15.00 per piece produced and during the
week he produced 80 pieces. If the guaranteed weekly pay is ₱1,500, then the difference
between ₱1,500 the guaranteed pay and ₱1,200 the actual pay is charged to the factory
overhead control. The entry to record Ramsill‘s pay is
Work in Process-Job101 ₱1,200
Factory overhead control- Make-up pay 300
Accrued Payroll ₱1,500
#
 B. Make-up Pay cont.
● If Ramsill, in the previous illustration is guaranteed a weekly pay of
₱1,000, then the entry will be

Work in Process-Job 101 ₱1,200

Accrued Payroll ₱1,200
#
C. Overtime premium
● Represents amount paid, in excess of regular rate, to employees working in excess of
8 hours in a day, or working during holidays or their rest day. Regular earnings
represent the total hours worked, including overtime hours, by the regular rate.
● Represents the overtime hours multiplied by the premium rate. The premium rate for
overtime is usually some fraction of the regular rate.
 C. Overtime premium
•
cont.
For example if Jaehan 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 ₱50) ₱2,250
Factory overhead control(5 hours x ₱25) 125
Accrued payroll ₱2,375
#

• If overtime results from the requirements of a specific job and not from
random scheduling the overtime premium should be charged to the
specific job that caused the overtime. For example, if the overtime
worked by Jaehan 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.
 D. Shift premium
• Extra pay to work during less desirable evening shift (2pm-10pm) or night
shift (10pm-6am). This shift premium, or shift differential, should be charged
to Factory Overhead control rather than Work in Process.

• Assume that Mariz is assigned to night shift and is paid a shift premium of
₱20 per hour, the entry for her pay will be:
Work in Process (40 hours x ₱50) ₱ 2,000
Factory Overhead control (40 hours x ₱20) 800
Accrued Payroll ₱
2,800
#
 Shift Premium and Night Shift Premium
• Marites company's regular working days are Monday to Friday with 8
working hours per day at a rate of 80 per hour. 10 laborers on morning shift
are paid 10% premium while another 10 laborers on night shift are paid
20% premium. Marites company has 30 laborers in its factory.

The entry will be:

Work in Process (40 hrs. x 80 x 30 laborers) ₱96,000
Factory Overhead control 9,600
(40 hrs. x 80 x 10% x 10 laborers)
(40 hrs. x 80 x 20% x 10 laborers)
Accrued Payroll
₱ 105,600
#
 E. Employers‘ payroll
taxes PhilHealth contributions, and Pag-ibig
• Amounts remitted to different government agencies for SSS
premiums,
contributions.

GROSS EARNINGS OF
1. EMPLOYEES
Wages- gross earnings of an employee who is paid by the hour for only the actual hours
worked.

2. Salaries- gross earnings of an employee who is paid a flat amount per week or month
regardless of the hours worked in a period.

3. Gross earnings- the compensation of an employee and includes regular pay and overtime
premiums.
 PAYROLL
1.Employees income tax- the amount of tax to be withheld each
DEDUCTIONS
period depends on the following:
a. Amount of the employees earnings.
b. Frequency of the payroll , and
c. Classification of the taxpayer and number of qualified
dependents.

2. Social Security System premiums- levied against both the

employer snd the employee (based on table provided).

3. PhilHealth Contributions- levied against both the employer

and the employee in equal amounts (based on table provided).

4. Pag-Ibig Contributions- levied against both the employer and

the employee in equal amounts (based on table provided).
THANK YOU FOR
Dimol, Fathema K.
LISTENING!!!!
Carillo, Mariz G.
Maglinte, Jaehan O.
Lastimosa, Angelyn
Fuentes, Nervie Mae L.
Enriquez, Ramsill Mark D.
Moner, Naemah
Navarro, Emelou Kate S.