LABOR COST ACCOUNTING

By definition, labor cost refers to the amount of salaries, wages, benefits and other incentives
of an employee. The amount also includes the payroll taxes that have been paid by the employer
of the employee. Cost of labor functions as an important role in constituting a large part of
operating cost. This means that management accounting provides a specific analysis of labor
cost to business owners. These business owners benefitted from the use of cost accounting in
order to allocate the cost of labor of the goods and services. There are four types of labor cost
that are identified in order to complete various business functions namely direct labor, indirect
labor, fixed labor and variable labor.

Direct Labor

In direct labor concept, the costs are allocated to each goods or services that are produced by
the company. It includes all the business entities that hold accountable for producing goods or
services for their consumers. Production supervisors, assembly line workers, quality control
inspectors and delivery truck drivers are examples of the individuals responsible for the
production. Normally, business owners manage their business operations using the concept of
direct labor through the use of specific time clock codes. The codes is then can be directly
traced to individual production departments.

Indirect Labor

An indirect labor refers to the cost for all workers that work in the administrative or general
position in a company. These workers include supervisors, administrative assistants,
accountants, salesmen and maintenance personnel. The concept also adds to the indirect
manufacturing overhead of the company. However, the labor cost is not allocated to the
companys goods and services. This means that the business owners are to pay for the labor
cost through gross profit obtained from product sales.

Fixed Labor

Basically, fixed labor cost is the cost of labor that remains the same regardless of the production
output of the company. The common types of fixed labor in business are directors, managers,
supervisors and owners. For business owners, they avoid paying overtime for supervisors and
managers so they use fixed salaries. Supervisors and managers provide more benefits to small
businesses and they, typically, work on extra amount of hours than that of a regular employee.
One thing in common between these business individuals is that they earn a fixed amount of
salary despite of the hours worked.

Variable Labor

The variable labor cost has the tendency to fluctuate depending on the amount of production
output. The most common type of variable labor is hourly employees. Business owners are able
to hire hourly employees directly or they can use a short-term employment agency as a way to
increase variable labor employees. These types of employees are most useful for businesses
such as manufacturers, restaurants, retail stores and repair companies. In small businesses, they
often opted for variable labor so that business costs do not exceed their approximated revenues.
Thus, business owners do not usually guarantee hours to these types of employees, as a way to
save money when production and sales output decrease.

ALLOCATION OF COSTS TO JOB

Allocation of costs to job can be similar to job costing which involves the accumulation of the
costs of materials, labor, and overhead for a specific job. This approach is an excellent tool for
tracing specific costs to individual jobs and examining them to see if the costs can be reduced
in later jobs. An alternative use is to see if any excess costs incurred can be billed to a customer.
Job costing is used to accumulate costs at a small-unit level. For instance, job costing is
appropriate for deriving the cost of constructing a custom machine, designing a software
program, constructing a building, or manufacturing a small batch of products. Job costing
involves materials, labor and overhead.

I Job Costing Allocation of Materials

It is basically the cost of components and then assigns these costs to a product or project once
the components are used. The materials that be used on a product or project first enter the
facility and are stored in the warehouse which they are picked from stock and issued to a
specific job. A mistake such as scraped or spoiled may happens and the normal amounts are
charged to an overhead cost pool for allocation. So, abnormal amounts are charged directly to
the cost of goods sold and once work is completed on a job, the cost of the entire job is shifted
from work-in-process inventory to finished goods inventory. The goods are sold and the cost
of the asset is removed from the inventory account and shifted into the cost of goods sold, while
the company also records a sale transaction.
II Job Costing Allocation of Labor

Employees charge their time to specific jobs, which are then assigned to the jobs based on the
labor cost of the employees. Labor may be charged directly to individual jobs, if the labor is
directly traceable to those jobs. All other manufacturing-related labor is recorded in an
overhead cost pool and is then allocated to the various open jobs. The first type of labor is
called direct labor, and the second type is known as indirect labor. Once a job is completed, it
is then shifted into a finished goods inventory account. Lastly, the step will go the same as job
costing allocation of materials.

III Job Costing Allocation of Overhead

It accumulates overhead costs in cost pools, and then allocates these costs to jobs. Non-direct
costs are accumulated into one or more overhead cost pools, from which it is used to allocate
costs to open jobs based upon some measure of cost usage. Allocating a costs to job simply can
be means or its purpose is allocating a overhead costs to job. The flow is by applying overhead
to consistently charge the same types of costs to overhead in all reporting periods, and to
consistently apply these costs to jobs. Otherwise, it can be extremely difficult explain why
overhead cost allocations vary from one month to the next. The overhead costs are needed to
be fairly absorbed by each product to ensuring the match income to costs by the process of
allocating the overhead costs to products and services. The accumulation of actual costs into
overhead pools and their allocation to jobs can be a time-consuming process that interferes
with closing the books on a reporting period. Historical cost can be an alternative way to
allocate standard costs. These standard costs will never be exactly the same as actual costs, but
can be easily calculated and allocated.

The overhead allocation process for standard costs is to use historical cost information to arrive
at a standard rate per unit of activity, and then allocate this standard amount to jobs based on
their units of activity. Subtract the total amount allocated from the overhead cost pool which
contains actual overhead costs, and dispose of any remaining amount in the overhead cost pool.
These are the list of method in which a company can use to dispose the overhead cost pool.

Charge to cost of goods sold. Charge the entire variance to the cost of goods sold. This
is the simplest method.
 Allocate the variance. Allocate the variance to the accounts for finished goods, work-
in-process, and cost of goods sold, based on the ending balances in these accounts. This
approach is slightly more time-consuming, but is the most theoretically correct method under
generally accepted accounting principles.

Charge to jobs. Allocate the variance to those jobs that were open during the reporting
period. This approach is the most time-consuming.

OVERHEAD ACCOUNTS

Overhead is an accounting term that refers to all ongoing business expenses not including or
related to direct labor, direct materials or third-party expenses that are billed directly to
customers. A company must pay overhead on an ongoing basis, regardless of whether the
company is doing a high or low volume of business. It is important not just for budgeting
purposes but for determining how much a company must charge for its products or services to
make a profit. For example, a service-based business that operates in a traditional white-collar
office setting has overhead expenses such as rent, utilities and insurance.

Overhead expenses can be fixed, meaning they are the same from month to month, or variable,
meaning they increase or decrease depending on the business's activity level. For example, a
businesss rent payment may be fixed while shipping and mailing may be variable.

Overhead expenses can also be semi-variable, meaning that the company incurs some portion
of the expense no matter what, and some portion depends on the level of business activity. For
example, many utility costs are actually semi-variable with a component existing as a base
charge and the remainder of the charges being based on usage.

Overhead can also be general, referred to as company overhead, meaning that it applies to the
company's operations as a whole. A company can allocate overhead to a specific project or
department as well. For example, a service-based business that operates in a traditional white-
collar office setting has general overhead expenses, such as rent, utilities and insurance, while
it may have allocated overhead based on the activities completed within each department, such
as printing or office supplies.
Categorizing Overhead Expenses

Overhead expenses may apply to a variety of operational categories. Administrative overhead

most traditionally includes costs related to basic administration and general business
operations, such as the need for accountants or receptionists. Selling overhead relates to
activities involved in marketing. This can include printed materials, television commercials, as
well as the salaries of sales staff and their corresponding administrative-support professionals.

Depending on the nature of the business, other categories may be appropriate, such as research
overhead, maintenance overhead or transportation overhead.

Typical examples of overhead in cost accounting include indirect labor, indirect materials,
utilities and depreciation. A large number of overhead categories centre around manufacturing,
such as the expenses incurred to set up equipment, inspect products, clean factories or perform
record-keeping.
CONCLUSION

Accounting for labor costs can be divided into the following distinct phrases which are
allocation of costs to jobs, overhead account and capital accounts. Labor costing systems are
methods of resource allocation to both pay employees and ensure a business achieves the
highest profit possible from wages paid. The labor costing system can use process cost systems
or job order cost systems as means of allocating financial resources to individual business
projects or large production assignments. A smaller business may find job order cost methods
more useful to keep individual costs low, whereas larger companies may prefer process cost
methods. Overall, it allows managers to calculate the profit earned on individual jobs, helping
them to better as certain whether specific jobs are desirable to pursue in the future. In addition,
it is a cost system that monitoring mechanism to oversee company finances to ensure the
business remains within its operational budget for the given financial quarter or fiscal year.