1

Accounting for Labor Cost

Objectives
After completing this chapter, you should be able to answer the following questions:
LO.1 What are the procedures in controlling labor cost?
LO.2 What are the three phases in accounting for labor cost?
LO.3 What are the necessary forms used in accounting for labor cost?
© SEQUARELL 2009/USED UNDER LICENSE FROM SHUTTERSTOCK.COM

LO.4 How are overtime premiums accounted for?

LO.5 What are the payroll deductions?

1
 Chapter 1 Accounting for Labor Cost 2

Introduction
Labor cost represents the human contribution to production. In many organizations it
is an important cost requiring systematic measurement, control, and analysis. Labor cost
consists of basic pay and fringe benefits. The basic pay for work performed is called the
base rate of job rate. A rate should be established for each operation in a company, and
rates should be grouped by types of operation. An equitable pay structure requires analysis,
description, and evaluation of each type of job. The value of each job should be reconciled
with wages paid for similar work elsewhere in the company, in the total community, and in
the industry. Competitive pay is s critical tool for hiring and retaining quality personnel.
Fringe benefits also form a substantial element of labor cost. Fringe benefits costs – such
as holiday pay, vacation pay, overtime premium pay, insurance benefits, and pension costs –
must be added to the base rate to arrive at the full labor cost. Although these fringe benefit
costs generally are included in overhead, they should not be overlooked in management’s
planning and control responsibilities, in decision making, or in wage negotiations. Workers’
demands for a small increase in pay can result in far greater expenditures by the company
due to the effect on fringe costs.
Wages and fringe benefits are only one element in employee relations, however. Adequate
records, easily understood and readily available, also are important for harmonious relations
between management, employees, labor unions, government agencies, and the general
public.

Labor Cost Control

Controlling labor cost effectively brings about production efficiency. Consequently, this
lowers production cost per unit. Because of economic and psychological factors such
as changes in production goals and in job specifications arising from technological and
organizational changes, the rising cost of living, wage rates and employees benefits, labor
cost control is always deemed as a challenge to management.
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.
The departments involved in labor cost control are production planning, personnel,
time and motion study, budgeting, timekeeping and accounting.

Procedures in Labor Cost Control

Labor cost control requires
(a) production planning
(b) use of labor standards and budgets
(c) labor performance reports and
(d) appropriate compensation including wage incentive systems.
3 Chapter 1 Accounting for Labor Cost

Production Planning
Production planning starts with an intensive study of the product design and the
manufacturing processes involved and scheduling production runs way ahead of time.
The product design and the nature of manufacturing processes involved serve as a basis
in determining the kind of ' human resources required in production.
Production schedules supported by labor hour requirements indicate when workers
would be needed and what type of skills they must have. The human resource department
should see to it that the required number of qualified workers is available on the dates
they are needed by the production department.

Use of Labor Budgets and Standards

Labor standards in terms of output per labor hour or per day or allowed number of
hours per unit) are established after an intensive study of the product design and the
manufacturing processes involved and after conducting time and motion studies. The
standards are used in preparing labor budgets and in measuring performance.
The budgets for labor hours and labor cost are prepared based on budgeted production
volume allowed times the number of hours per unit and the corresponding labor rate per
hour. The budgeted production is based on budgeted sales volume.
Example:
The production goal for January is 40,000 units
The standard output per labor hour is 10 units.
The budgeted number of labor hours must be 4,000 (or 40,000 units/10).
Assuming an hourly rate of P40, budgeted labor cost must be P160,000.
If a direct worker is able to put in 160 hours in one month, 25 direct workers (or
4,000 hours/160) are needed to produce 40,000 units in one month.
The number of indirect workers depends on the volume of work to be done and the
desired ratio of indirect workers to direct workers. The number of foremen depends on
the degree of supervision to be exercised over the workers.

Labor Performance Reports.

Labor performance reports may be prepared o daily, weekly or monthly basis depending on
the level of management to which they are submitted and the nature of the manufacturing
processes involved.
The factory superintendent should have production data on daily basis to be able to
direct manufacturing operations in accordance with plans.
Labor performance is generally compared with standards previously set.
Based on the example in the preceding section:
The standard output per hour is ten units, assume that one-fourth hour is allowed
per unit.
Only 4,000 hours are allowed to produce 40,000 units.
If 40,000 units are produced in 4,200 hours, the labor time (or efficiency) variance
must be unfavorable
 Chapter 1 Accounting for Labor Cost 4

Appropriate Compensation Including Wage Incentive

Systems.
Labor rates and fringe benefits are established based on existing labor laws, collective
bargaining agreement, and prevailing rates and practices in an industry in the specific
locality. An incentive wage system is adopted to increase a worker's take home pay and
at the same time reduce labor cost per unit. It works in such a way that fixed overhead
is absorbed by an increased number of units thereby resulting in a lower product unit
cost. Incentives may also be in the form of bonuses or in kind depending on what would
encourage the workers more to improve productivity.
Example:
The daily rate for each of the ten workers in a factory is P280 with standard output
at 20 units or at P14 per unit.
Fixed factory overhead per day is P600.
An incentive system pays P15.00 for every additional unit produced.
If each worker is able to produce 25 units in one day, he is paid a total of P 355.00 (or
P280 plus 5 units × P15.00).
Although the average labor cost per unit 14.20, (P355.00/25), fixed factory overhead
per unit goes down from P3.00 (or P600/200 units) to P2.40 (or P600/250 units).

Accounting for Labor Cost

Accounting for labor may be divided into three phases, namely,
(1) timekeeping
(2) financial accounting and
(3) cost accounting.

Timekeeping
This is concerned with the determination of total cumber of hours worked by an employee
and how this total is accounted for. The total number of hour hours worked is used as basis
in payroll preparation. How this total is accounted for serves-as the basis in making the
corresponding charges to the different jobs (or processes) worked on.

Financial accounting phase

This involves payroll preparation and the keeping of records of employees’ earnings,
deductions, payment of salaries and wage and the different related liabilities.

Cost accounting phase

This is 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 Factory Overhead analysis sheet (or subsidiary
records for Manufacturing Overhead Control).
5 Chapter 1 Accounting for Labor Cost

Forms Used in Controlling Labor Cost

The following forms are used in controlling labor cost:

Clock Card (or Time Card)

This shows the time an employee reports for work and goes out and its used in payroll
preparation. It is so called because it is punched in with the use of a time clock (or time
recorder).
In companies wherein 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.

WEEKLY CLOCK CARD
  Employee No. ________
 
Name: ______________________
Position: ____________________ For the week
Department: _________________ ending: _____________
        
Date Day AM PM Overtime No. of
May In Out In Out In Out Hours
8 Mon 7:59 12:00 1:00 5:00 8
9 Tue 8:00 12:02 12:56 5:05 6:00 8:07 10
10 Wed 7:56 12:00 1:00 5:04 8
11 Thu 8:00 12:05 12:58 5:00 5:56 8:04 10
12 Fri 7:50 12:00 1:00 5:03 8
13 Sat 8:00 12:00 1:00 5:10 8
14 Sun
     Total regular hours: __________
     Overtime hours: _____________
        
Figure 1

Time Ticket (or Job Ticket)

This shows the number of hours a worker devotes to a certain job (or his accomplishment
on that job) during 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.
 Chapter 1 Accounting for Labor Cost 6

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
     
Figure 2

Daily Time Report

This shows how a worker spends the number of hours time in for a day. In other words, it
is report on which he accounts for the number of hours he is being paid.

DAILY TIME REPORT

Name: __________________ Employee No. ______
Department: _____________ Date: ______________
Nature of work: __________
    
    
JOB NO. START FINISH TIME WORKED
    
    
    
    
    
    
    
    
    
Figure 3
7 Chapter 1 Accounting for Labor Cost

Payroll Sheet.
This shows the employees net pat are arrived at. It provides columns for regular pay, overtime
pay, deductions and net pay. It may also serve as evidence for payroll payment by providing
a column for workers’ signatures upon receipt of the amount due them.

Employees’ Earnings Records

These 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 ben-
efits that the employees may be entitled 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 can not be made with such regu-
larities due to force majeure or circumstances beyond the employer’s control, in which case
the employer shall bay the wages immediately after such force majeure or circumstances.”
The timekeeping department collects ad controls clocks (or time) cards and job ticket
(or daily report). The number of hours timed in per clock (or time) cards is reconciled with
that per time ticket or daily reports.
If the clock card shows more hours than the daily reports ( or time ticket), the differ-
ence is unproductive hours the supervisor and the worker are consulted to correct the error.
The time card and daily time reports (or time ticket) are subsequently forwarded to the
accounting department for payroll preparation and for entries to cost sheets, respectively.
The accounting department prepares the payroll based on time (or clock) cards. The
number of hours devoted to jobs are posted to cost sheet.

PAYROLL SHEET
  Clock Regular Overtime Deductions    
Employee No. Pay Pay W/H Tax SSS PHIC Pag-IBIG Total Net Pay Signatures
                     
                     
                     
                     
                     
Figure 4
EMPLOYEE’S EARNINGS RECORD
Name of the Company
Employee’s Earnings Record
   
Name: ________________ Sex: _________ Home Address: _________________ SSS No. _________ Clock No. _________
Department: ___________ Occupation: ____________ Provincial Address: ______________ TIN: ____________  
   
Payroll Net
Regular Earnings Overtime Earnings Total Payroll Deductons Check
Period Amt.
W/h Pag-
    Hours Rate Amt. Hours Rate Amt. Earnings Taxes SSS PHIC IBIG Union Advances Others Total Paid No.

                   
                   
                   
                   
                                     

Figure 5
Chapter 1 Accounting for Labor Cost
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9 Chapter 1 Accounting for Labor Cost

Example:

Lucio Montano, a worker with daily rate of P320, timed in a total of 45 hours for
the week August 2-8.
His daily time reports show that during the same week, he accounted for the 45
hours as follows:

Job order 801 - 12 hours

802 – 10
803 – 5
804 – 15
waiting time - 3____
45 hours

The gross pay of Lucio Montano for the week and the corresponding charges
would be as follows:

Gross pay: 45 hours (160/8hrs) = P900

Charges:
Direct labor: 42 hours x P20 = P840
Idle time 3 hours x P20 = 60
P900

The 42 direct labor hours are entered on the corresponding job cost sheet and the
3 hour idle time is charge to factory overhead.

Regular Holiday, Special Days

Per Executive Order No. 203 (June 30,1987), there are ten (10) regular holidays
and two special days and they are as follows:

Regular Holidays:
New Year’s Day - January 1
Maundy Thursday - Movable Date
Good Friday - Movable Date
Araw ng Kagitingan
(Bataan and Corregidor Day) - April 9
Labor Day - May 1
Independence Day - June 12
National Horoes Day - Last Sunday of August
Bonifacio Day - November 30
Christmas Day - December 25
Rizal Day - December 30
 Chapter 1 Accounting for Labor Cost 10

Nationwide Special Days:

All Saints Day - November 1
Last Day of the year - December 31

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 = Monthy rate x 12 months

365 days

Thus, the rate per day of the employee with monthly salary rate of P10,000 must
be P328.77 or [P10,000 x 12 months) / 365 days]

Premium Pay
Premium pay refer to the additional compensation for work performed with in eight (8)
hours on non working days (such as rest day and special days) as required by law. The
premium pay rates are as follows:
Rate of Pay
For work performed on Based on Daily Rate
Rest days 130%
Special days 130%
Rest day which is also a special day 150%
Regular holiday 200%
Regular which is also rest day 260% (200% x 130%)

Based on the foregoing rates, the amount earned by a worker with daily rate is P400 and
who works for eight (8) hours in one day shall be as follows:

One a rest day: P400x 130% P520.00

On a special day: P400x 130% 520.00
On rest day which is also special day:
P400x 150% 600.00
On regular holiday: P400x 200% 800.00
On regular holiday which is also a rest day:
P400x 260% 1,040.00

Normal Hours of Works, Overtime Work and Overtime Pay

The Labor Code of the Philippines (Presidential Decree No. 442, as amended) states that :
The normal hours of work of any employee shall not exceed eight (8) hours a day (Art.
83) Work performed beyond eight (8) hours in one day is considered overtime work and the
employee is entitled to overtime pay of at least 125% (Art. 87).
Thus, an employee with daily rate of P400 who works for then (10) hours on working day
is entitled to at least P525.00 computed as follows:
11 Chapter 1 Accounting for Labor Cost

For regular eight (8) hours P400.00

For overtime work of two (2) hours
P400/8hrs. x 125% x 2 hrs. 125.00
Total earned for ten (10) hours P525.00

With a daily rate of P400 the hourly rate is P50 (or P400/ 8) so that the overtime premium
per hour must be P12.50 or (P50x25%). The amount earned for ten (10) hours may be also
arrived at as follows:

Ten hours at the regular ate of P50 P500.00

Overtime premium pay (2hrs x P12.50) 25.00
Total earned for ten (10) hours P525.00

The treatment for overtime premium depends on the reason for overtime work. Refer to
the section on Accounting for Overtime Premium.
Overtime work rendered on a schedule 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.
Per labor Code of the Philippines (art. No. 87) , work performed beyond eight hours on a
holiday or rest day shall be additional compensation equivalent to the rate of the first eight
hours on a holiday or rest day plus at least thirsty percent thereof. Thus the overtime rates
maybe summarized as follows:

Work performed on Rate of pay, Based on Regular Rate

Working day 125%
Rest day (130% x 130%) 169%
Special days (130% x 130%) 169%
Rest day which is also special day
(150% x 130%) 195%
Regular holiday (200%x130%) 260%
Regular holiday which is also rest day
(260%x130%) 388%

Based on the foregoing rates, the amounted earned ten (10) hours by a worker (with daily
arte of P400) must be as follows:
Regular Amount
Worked Performed Ovetime Pay
Premium Earned
On rest day:
= P169.00 P520 P689.00
[(130%x 130%) x P25]x2 hrs.
On a special day:
= 169.00 520 689.00
[(130%x 130%) x P25] x 2 hrs
On a rest day which is also a
special day: = 195.00 600 795.00
[(150%x130%)xP25] x 2hrs.
On regular holiday:
= 260.00 800 1,060.00
[200%x130%)x P25] x 2hrs
On a regular holiday which is
also a rest day = 338.00 1,040 1,378.00
[260%x 130%) x P25] 2 hrs.
 Chapter 1 Accounting for Labor Cost 12

In accounting for labor cost, whatever amount is earned by the works undertime on
one day then work 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.
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.

Accounting for Premium Pay and Overtime Premium

Overtime premium is defined as the additional monetary compensation given to employees
for working beyond the eight hours period set as limit by law. However, for accounting for
working purposes, all premiums (or the difference between amount earned and a worker’s pat
at regular rate) are treated as overtime premiums. They may be charged either to direct labor
cost or to factory overhead depending on the reason for the overtime work.
The premium is treated as direct labor cost when overtime work is due to the rush nature
of a job. When a contract for a rush job is accepted, it is with the foreknowledge that overtime
would be necessary so that the price charged to the customer should included the overtime
factor in the calculations.
The premium is treated as factory overhead when overtime work is due to greater volume
of work, slow production or inadequate plant capacity. In this cases, it would be unfair to charge
it to a job that happens to be in process during the overtime hours. The overtime premium
should be reflected in the predetermined factory overhead rate by including the corresponding
provision in calculating for the same.
Example: Job No. 605 for 12 days of baby dresses has been accepted and required delivery
date is May 12th.

Payroll Deductions
The deductions from gross pay or amount earned by employees are income taxes withheld
and the contribution to the Social Security System (SSS), Medicare and Pag-IBIG Fund.
Occasional deductions are labor union check off (or unions 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.
13 Chapter 1 Accounting for Labor Cost

ILLUSTRATION PROBLEM
The following information is given for the payroll period, August 8 to 14:

                Hours Timed In    
  Hourly Monthly August 8 - 14 W/H
Employees’
Name Position Rate Earnings Regular Overtime Taxes
Cuenca, Jake Foreman 55 11,500 48 240
Abrenica, Aljur Worker 45 8,500 40 180
Avelino, Paulo Worker 40 8,000 43 165
Escudero, Mart Worker 42 8,200 46 3 150
Trillo, Dennis Worker 40 7,100 45 2 150
Gil, Enrique   Worker   35   7,800   47   4   135

The time tickets, as summarized, show the following number of hours expended on the
different jobs.
JOB Number
801 802 803 804
Regular OT Regular OT Regular OT
Regular OT
Cuenca, Jake
Abrenica, Aljur 15 18 5
Avelino, Paulo 6 12 20
Escudero, Mart 18 19 3 8
Trillo, Dennis 10 12 2 11
2
Gil, Enrique 7 4 16 15 7

Avelino did some errands per request by the foreman for four (4) hours. Trillo 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 premiums for SSS, PhilHealth, and
Pag- IBIG (see schedule) are made from the second week’s payroll of each month.
The weekly job time recapitulation, the computations for gross pay, the payroll, and the
corresponding entries are shown on the succeeding pages. (Refer to figures)

Employee Regular Overtime Gross Pay

Cuenca, Jake 48 x P55 = P 2, 640     P 2, 640.00
Abrenica, Aljur 40 x P45 = 1, 800     1,800.00
Avelino,Paulo 43 x P40 = 1, 720     1,720.00
Escudero, Mart 46 x P42 = 1, 932 3 x P 52.50 = P 157.50 2,089.50
Trillo, Dennis 45 x P40 = 1, 800 2x 50.00 = 100.00 1,900.00
Gil, Enrique 47 x P35 = 1, 645 4x 43.75 = 175.00 1,820.00
    P 11, 537   P 432.50 P 11, 969.50
   Regular Overtime Gross Deductions    
Pag-
Employee Pay Pay Pay W/H Tax SSS PHIC IBIG Total Net Pay Signatures
Cuenca, Jake P 2,640.00   P 2,640.00 P 240 P 383.30 P 137.50 P100.00 P 860.80 P 1,779.20  
PAYROLL SHEET

Abrenica,
Aljur 1,800.00   1,800.00 180 283.30 100.00 100.00 663.30 1,136.70  
Avelino,
Paulo 1,720.00   1,720.00 165 266.70 100.00 100.00 631.70 1,088.30  
Escudero,
Mart 1,932.00 P 157.50 2,089.50 150 266.70 100.00 100.00 616.70 1,472.80  
Trillo,
Dennis 1,800.00 100.00 1,900.00 150 233.30 87.50 100.00 570.80 1,329.20  
Gil, Enrique 1,645.00 175.00 1,820.00 135 266.70 87.50 100.00 589.20 1,230.80  
P P
  P 11, 583.00 P 432.50 P 11, 969.50 P 1, 020.00 1,700.00 P 612.50 P 600.00 3,932.50 P 8,037.00  
Chapter 1 Accounting for Labor Cost
14
15 Chapter 1 Accounting for Labor Cost

LO.5 How are standard Entry:

costs used in a job order a. To take up the Payroll:
costing system?
Payroll P11,969.50
Withholding taxes payable P1,020.00
SSS Premium Payable 1,700.00
PhilHealth Premium Payable 612.50
Pag-ibig Premiums Payable 600.00
Cash 8,037.00

Weekly Job time Recapitulation

  Job Numbers Indirect      
Employee 801 802 803 804 DLH Labor Others Idle time Total
Cuenca,Jake       48   48
Abrenica, Aljur 15 18   5 38   2 40
Avelino,Paulo 6 12 20 38 4   1 43
Escudero,Mart 18 22 8 48   1 49
Trillo,Dennis 10 12 2 13 37 Repairs 8 2 47
Gil,Enrique 11 16 15 7 49     2 51
Payroll Charges
  Job Numbers Direct Labor Indirect     Overtime  
Employee 801 802 803 804 Cost Labor Others Idle time Premium Total

Cuenca       48 x P55 = P2,640.00     P2,640.00

Abrenica 15 x P45 = P675.00 18 x P45 = P810.00   5 x P45 = P225.00 P 1,710.00   2 x P45 = P90.00   1,800.00
Avelino 6 x P40 = 240.00 12 x P40 = 480.00 20 x P40 = P800.00   1,520.00 4 x P40 = 160.00 1 x P40 = 40.00   1,720.00
Escudero 18 x P42 = 756.00 22 x P42 = 924.00 8 x P42 = 336.00   2,016.00   1 x P42 = 42.00 3 x P10.50 = 31.50 2,080.50
Trillo 10 x P40 = 400.00 12 x P40 = 480.00 2 x P40 = 80.00 13 x P40 = 520.00 1,480.00   8 x P40 = P320.00 2 x P40 = 80.00 2 x P10.00 = 20.00 1,900.00
Gil 11 x P35 = 385.00 16 x P35 = 525.00 15 x P35 = 525.00 7 x P35 = 245.00 1,715.00     2 x P35 = 70.00 4 x P8.75 = 35.00 1,820.00

  P2,456.00 P3,254.00 P1,741.00 P990.00 P 8,441.00 P2,800.00 P320.00 P322.00 P 86.50 P11,969.50
Chapter 1 Accounting for Labor Cost
16
17 Chapter 1 Accounting for Labor Cost

Entry:
b. To take up the payroll charges:
Work in Process - Direct Labor P8,441.00
Factory Overhead Control P3,528.50
Indirect labor P 2,800.00
Cost of Unproductive hours 322.00
Repairs 320.00
Overtime Premium 86.50
Payroll P 11,969.50

Income Taxes Withheld

These are the estimated income taxes that employees are expected to pay based on their
earnings and personal exemptions and are deducted from their pays. Schedule of taxes to be
withheld are provided by the Bureau of Internal Revenue (BIR). See Appendix A.

The Social Security System

The Social Security System was created per Social Security Law (Republic Act No.
1161). Its mission statement is to provide meaningful protection to the members and their
families against contingencies resulting in loss of income or financial burden and to contribute
to the socio-economic development of the country through a viable social insurance
program. The programs it administers and the corresponding benefits are the following:
The Social Security Program. It provides sickness, maternity, disability, retirement and death
benefits and financial assistance in the form of salary;stock investment,and privatization fund loans
The Employees' Compensation Program (EC). It provides- double compensation
to workers when the illness, death or accident occurs during work-related activities.
Coverage is compulsory for all employees not over sixty years of age and their employers
and for the self-employed. Contributions to the Social Security System are made based
on monthly salary credits and are in accordance with the schedule given on Appendix A.
For the self-employed, overseas contract workers (DCWs) and the non-working schedule
provided by the SSS. All contributions are remitted to the SSS within ten (10) days after the
covered month (per Guidebook for SSS Members as issued by the SSS,page 20).See Appendix B.

The Philhealth Program

The Philhealth program (formerly Medicare) provides for hospitalization and
medical benefits. It was originally being administered by the SSS but in 1997, it was
privatized and its administration was taken over by the Philippine Health Insurance
Corporation or PhilHealth. The schedule of deductions is given in Appendix C.

Pag-IBIG Fund Contributions

Pag-IBIG is the acronym for Pagtutulungan sa Kinabakasan: Ikaw, Bangko, Industriya
at Gobyerno. Primarily, the fund was created in 1978 (as the Home Development Mutual
Fund) to address two of the nation's basic concerns: generation of savings and provision
of shelter for workers. In effect, Pag-IBIG harnesses the four sectors of our society (as
given above) to provide its members with adequate housing through effective savings
scheme. Both employee and employer contribute to the fund with the latter's contribution
credited to the name of the employee so that the employee's savings immediately
double or triple in amount. The schedule of contributions to the fund is given below.
 Chapter 1 Accounting for Labor Cost 18

Employees’ Monthly Employee’s Employer’s

Earnings Contributions Contributions
P1,000 1% P10 2% P20
1,500 1% 15 2% 30
1,600 2% 32 2% 32
2,500 2% 50 2% 50
4,000 2% 80 2% 80
5,000 2% 100 2% 100
6,000 100 100
10,000 100 100

A member employee may withdraw his savings upon membership maturity, disability,
permanentdeparturefromthecountry,separationfromserviceordeath.Asidefromthese,members
may avail of short-term (multi-purpose or livelihood) and housing loans at low interest rate.
Membership in the fund became mandatory effective January 1,1995 for SSS and
GSIS (Government Service Insurance System) members with monthly compensation
ofP4,000 and above. The contributions are 1% for workers with monthly compensation
of not more than P 1,500 and 2% for those with monthly earnings of more than P1,500
with maximum fund salary at P5,000. The employer's counterpart contribution is fixed at
2% with maximum amount set at P100 or based on the maximum fund salary of P5,000.
19 Chapter 1 Accounting for Labor Cost

____________________________________________

APPENDIX A
Revised Withholding Tax Tables Effective January 1,2009

Table 1- Daily
A. Table for employees without qualified dependent

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 1.65 8.25 28.05 74.26 165.02 412.54
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
1. Z 0.0 1 0 33 99 231 462 825 1,650
2. S/ME 50.0 1 165 198 264 396 627 990 1,815

Legend: Z- zero exemption; Single; ME- Married; 1,2,3,4- Number of qualified dependent children

B. Table for single/ married employees with qualified dependent children

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 1.65 8.25 28.05 74.26 165.02 412.54
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
1. ME1/S1 75.0 1 248 347 479 710 710 1,073 1,898
2. ME2/S2 100.0 1 330 429 561 792 792 1,155 1,980
3. ME3/S3 125.0 1 413 512 644 875 875 1,238 2,063
4. ME4/S4 150.0 1 495 594 726 957 957 1,320 2,145

Legend: Z- Zero exemption; S- Single; ME- Married; 1,2,3,4- Number of qualified dependent children

Table 2
A. Table for employees without qualified dependent

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 9.62 48.08 163.46 432.69 961.54 2,403.85
Status (‘000) +0% +5% +10% +15% +20% +25% +30% +32%
P over over over over over over over over
1. Z 0.0 1 0 192 1,346 1,346 2,692 4,808 9,615
2. S/ ME 50.0 1 962 1,154 1,538 2,308 3,654 5,769 10,577

Legend: Z-zero exemption; S- Single; ME- Married; 1,2,3,4- Number o qualified dependent
 Chapter 1 Accounting for Labor Cost 20

B. Table for single/ married employees with qualified dependents children.

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 9.62 48.08 163.46 432.69 961.54 2,403.85
Status (‘000) +0% +5% +10% +15% +20% +25% +30% +32%
P over over over over over over over over
ME1/S1 75.0 1 1,442 1,653 2,019 2,788 4,135 6,250 11,058
ME2/ S2 100.0 1 1,923 2,115 2,500 3,269 4,615 6,731 11,538
ME 3/ S3 125.0 1 2,404 2,596 2,981 3,750 5,096 7,212 12,019
ME4 / S4 150.0 1 2,885 3,077 3,462 4,231 5,577 7,692 12,500
Legend: Z- Zero exemption; S- Single; ME- Married; 1,2,3,4- number of qualified dependent children

Table 3- Semi-monthly
A. Table for employees without qualified dependent

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 20.83 104.17 354.17 937.50 2,083.33 5,208.33
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
Z 0.0 1 0 417 1,250 2,917 5,833 10,417 20,833
S/ME 50.0 1 2,083 2,500 3,333 5,000 7,917 15,500 22,917

Legend: Z- Zero exemption; S-single; ME- Married; 1,2,3,4- Nu,ber of qualified dependent childred

B. Table for single/ married employees with qualified dependent children

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 20.83 104.17 354.17 937.50 2,083.33 5,208.33
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
ME1/S1 75.0 1 3,215 3,542 4,375 6,042 8,985 13,542 23,950
ME2/S2 100.0 1 4,167 4,583 5,417 7,083 10,000 14,583 25,000
ME3/S3 125.0 1 5,208 5,625 6,458 8,125 11,042 15,625 26,042
ME4/S4 150.0 1 6,250 6,667 7,500 9,167 12,083 16,667 27,083

Legend: Z-Zero exemption; S-Single ; ME- Married; 1,2,3,4- Number of qualified dependent children
21 Chapter 1 Accounting for Labor Cost

Table 3- Semi-monthly
A. Table for employees without qualified dependent

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 41.67 208.33 708.33 1,875 4,166.67 10,416.67
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
Z 0.0 1 0 833 2,500 5,833 11,667 20,833 41,667
S/ME 50.0 1 4,167 5,000 6,667 10,000 15,833 25,000 45,833

Legend: Z-Zero exemption; S-Single ; ME- Married; 1,2,3,4- Number of qualified dependent children

B. Table for single/ married employees with qualified dependent children

1 2 3 4 5 6 7 8
Exemption 0.0 0.0 41.67 208.33 708.33 1,875 4,166.67 10,416.67
Status (‘000)P +0% +5% +10% +15% +20% +25% +30% +32%
over over over over over over over over
ME1/S1 75.0 1 6,250 7,083 8,750 12,083 17,917 27,083 47,917
ME2/S2 100.0 1 8,333 9,167 10,833 14,167 20,000 29,167 50,000
ME3/S3 125.0 1 10,417 11,250 12,917 16,250 22,083 31,250 52,083
ME4/S4 150.0 1 12,500 13,333 15,800 18,333 24,167 33,333 54,167

Legend: Z-Zero exemption; S-Single ; ME- Married; 1,2,3,4- Number of qualified dependent children
 Chapter 1 Accounting for Labor Cost 22

APPENDIX B

Schedule of SSS Contributions

Pursuant to the approval of the 1% increase in monthly contribution rate effective
January 1, 2007 by the President of the Philippines as recommended by the Social
Security Commission under Resolution No. 382-s.2006 dated September 21, 2006,
and the Employees’ Compensation Commission under Resolution No. 06-08-70 dated
August 31, 2006, the following revised schedule of contributions is hereby issued:

The minimum monthly salary credit of OFW-member is P5,000.00.

23 Chapter 1 Accounting for Labor Cost

APPENDIX C

PHILHEATH Premium Contribution Schedule for the

Employed Sector (Effective January 2007)

Total
Salary Salary Salary Employee Employer
Monthly
Bracket Range Base Share Share
Premium
1 4,999.99 and below 4,000.00 100.00 50.00 50.00
2 5,000.00 - 5,999.99 5,000.00 125.00 62.50 62.50
3 6,000.00 - 6,999.99 6,000.00 150.00 75.00 75.00
4 7,000.00 - 7,999.99 7,000.00 175.00 87.50 87.50
5 8,000.00 - 8,999.99 8,000.00 200.00 100.00 100.00
6 9,000.00 - 9,999.99 9,000.00 225.00 112.50 112.50
7 10,000.00 - 10,999.99 10,000.00 250.00 125.00 125.00
8 11,000.00 - 11,999.99 11,000.00 275.00 137.50 137.50
9 12,000.00 - 12,999.99 12,000.00 300.00 150.00 150.00
10 13,000.00 - 13,999.99 13,000.00 325.00 162.50 162.50
11 14,000.00 - 14,999.99 14,000.00 350.00 175.00 175.00
12 15,000.00 - 15,999.99 15,000.00 375.00 187.50 187.50
13 16,000.00 - 16,999.99 16,000.00 400.00 200.00 200.00
14 17,000.00 - 17,999.99 17,000.00 425.00 212.50 212.50
15 18,000.00 - 18,999.99 18,000.00 450.00 225.00 225.00
16 19,000.00 - 19,999.99 19,000.00 475.00 237.50 237.50
17 20,000.00 - 20,999.99 20,000.00 500.00 250.00 250.00
18 21,000.00 - 21,999.99 21,000.00 525.00 262.50 262.50
19 22,000.00 - 22,999.99 22,000.00 550.00 275.00 275.00
20 23,000.00 - 23,999.99 23,000.00 575.00 287.50 287.50
21 24,000.00 - 24,999.99 24,000.00 600.00 300.00 300.00
22 25,000.00 - 25,999.99 25,000.00 625.00 312.50 312.50
23 26,000.00 - 26,999.99 26,000.00 650.00 325.00 325.00
24 27,000.00 - 27,999.99 27,000.00 675.00 337.50 337.50
25 28,000.00 - 28,999.99 28,000.00 700.00 350.00 350.00
26 29,000.00 - 29,999.99 29,000.00 725.00 362.50 362.50
27 30,000.00 and up 30,000.00 750.00 375.00 375.00
*Employee share represents half of the total monthly premium while the other half is
shouldered by the employer.
 Chapter 1 Accounting for Labor Cost 24

EXERCISES

Exercise 1:
Match the following terms with the phrases given below:

Time and motion study Time ticket

Financial accounting phase Daily time report
in labor cost control Payroll sheet
Timekeeping Earnings record
Cost accounting phase Payroll check
in labor cost control Incentive system
Clock card

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 sheets 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.

Exercise 2:
Estimated Labor Hours and Required No. of Workers Five hours of labor are allowed
per unit of a product at the rate of P30 per hour. Budgeted production volume for June is
25,000 units. Total regular working hours for June is 160 per worker.
What is the estimated number of labor hours required to produce 25,000 units? How
many workers must be made available for the production in June? How much must be the
budgeted labor cost for June?
25 Chapter 1 Accounting for Labor Cost

Exercise 3:
Effect of Wage Incentive System on Fixed Factory Overhead per Unit
Sycip Corp. pays its workers at the rate of P400 per day plus P42 for every unit pro-
duced in excess of 10 units during each working day. The production report for two days
show:

No. of Units Completed

Worker Monday Tuesday
Ang 8 units 9 units
Bang 10 12
Co 10 15
Dee 10 10
Enchong 10 11

An analysis of overhead shows that fixed overhead per day is more or less P1,200.00.

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.

Exercise 4:
Determine whether each of the following statements is true or false.
a. The control process begins with product design and continues as a cooperative
activity until the product is sold.
b. A clock card is a record of labor time purchased while a time ticket or daily time
report is a record of performance received.
c. When the number of hours per daily time report is less than the number of hours
timed in (per clock card), the difference is treated as unproductive time and is
charged to .factory overhead.
d. Overtime premium is treated as a direct charge to a job when overtime work is due
to greater volume of, or slow production,
e. The excess of the number of hours per time tickets over the number of hours per time
cards is treated as factory overhead.
f. The rate per day of an employee with monthly salary of P9,030 must be P360.
 Chapter 1 Accounting for Labor Cost 26

Exercise 5:
Gross Pay with Overtime Premium and Payroll Charges
Thefollowinginformationisgivenbasedonthecontentsofclockcardsandtimeticketsforaweek.
Rate Hours Time In Jobs Worked On Others
Per hr. regular Overtime 101 102 103 104 Nature Hrs.
A P35 P48
B 20 40 3 16 12 10 Inspection 4
C 25 50 25 16 7
D 20 45 15 12 11 Oiling 4
E 28 48 5 10 20 20
F 20 46 21 8 15

A is the foreman with the others as his workers. Overtime premium is 30%.

The time ticket shows that overtime work was done on job no. 101 and the corresponding
hours are included already in the tabulation given above.
How much must be gross pay each worker?
Determine what accounts are to be debited fro 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 wok is due to the rush nature of the job.

Exercise 6: Payroll Preparation and Charges

Prepare the payroll and the corresponding entries based on the following information
     Hours Timed In
Check Hourly Aug 8-14 Monthly W/H
No. Rate Regular OT Earnings Taxes
Guevarra, Carlo 355 Foreman P58 48 P12,000 P300
Agustin, Marvin 322 Worker 43 48 5 9,000 250
Bautista, Mark 323 Worker 41 46 3 8,500 300
Dantes, Dong 329 Worker 44 48 6 9,200 320
De Guzman, JM 332 Worker 42 45 2 8,800 300
Marudo, Zanjoe 339 Worker 38 48 5 8,000 250

Hours Timed In

Overtime premium is 30%. Dong Dantes worked for four hours on holiday because
of the rush nature of job no. 145. Otherwise work is due to the greater volume of work
for the month. Payroll deduction include union dues of P50 from each worker aside
from income taxes withheld and the contribution for SSS, Philhealth and Pagibig.
27 Chapter 1 Accounting for Labor Cost

The time tickets for the week show the following:


     Jobs Worked on
139 142 145 146 Others Hrs.
Agustin 15 19 7 10
Bautista 12 17 10 3 Shipping 5
Dantes 13 20 20
De Guzman 9 10 25
Marudo 19 12 16 Repairs 4

Exercise 7:
The following date are given for 2011

Budget production volume 70,000 units

Allowance number of hours per unit 1/5 hr
Labor rate per hour P50
No. of regular hours in August
Per worker 192 hours

1. How many workers are required for the August production?

2. How much must be the budgeted labor cost for August?

Exercise 8
The following data are given for the period August 15 to 21, 2011:

    Total Jobs Worked on

Hrs. Regular OT 521 522 523 Others
Gonzales, Erich 48 48
Chiu, Kim 46 43 3 12 20 9 Repair 4
Ricks, Melissa 50 48 2 15 25 9
Rivera, Marian 53 46 7 16 30 5
Evangelista, Heart 53 45 8 17 15 20
Poe, Lovi 51 45 6 10 18 17 Delivery 5

Gonzales is the foreman with hourly rate of P60. All the workers under him receive P50
per hour. Overtime work was rendered on working days on job 523, based on a rush order.
Accordingly, overtime premium is 25%.

1. How much must be the total charge to direct labor for the week?
2. How much must be the total payroll for the week?
 Chapter 1 Accounting for Labor Cost 28

Exercise 9
Kapamilya Manufacturing Co. charges factory overhead to production at 80% of direct
labor cost. Job 1042 and 1043 were completed and sold in January 1,2011. Total direct materials
cost and prime cost for Job 1042 were P18,000 and P28,000, respectively. Production cost of
Job 1043 amounted to P62,400 with factory overhead equal to 48% of direct materials cost.
How much were the direct labor costs of Jobs 1042 and 1043, respectively?

Exercise 10
Each of the five (5) workers in a factory is being paid P250 per day. For every unit produced
in excess of 25 units in one day, a worker is paid P12. Fixed factory overhead per annum id
P198,000 and there are approximately 330 working days in one year.
Production data for December 6 and 7, 2011 shows the following number of units produce
by each worker:
December 6 December 7
Aunor 25 26
Cuneta 27 26
Santos 24 28
Soriano 24 27
Tolentiano 28 26
1. What is the average direct labor cost per unit for the two day period?
2. How much savings in fixed factory overhead per unit was effected assuming that additional
output is due to the incentive given?

Exercise 11
Rafael Rossel earns P10,000 per month on the average and produces 50 units per day.
Accordingly, the employer’s monthly contributions for SSS, Philhealth, Pag-IBIG and EC
premium are P456, P37.50, P100 and P10 respectively. Fringe benefits such as meal and
uniform subsidies amount to P9,900 per annum. Assuming that there are 330 working days in
one year, what is the effective labor cost per unit?

Exercise 12
The regular working days in a factory are Monday to Friday, Jan and Pol (who are
being paid P50 and P54 per hour, respectively) worked on Jobs 631 and 632 for the period
September 12-18, 2011.
The weekly time records and summary of the job tickets show the following
Jan Pol
Total number of hours time in 45 43
Overtime 6 5
Expended on the jobs:
No. 631 26 17
No. 632 20 21
Jan was authorized to work on overtime on job no. 631 because of its rush nature; Pol
had to work on overtime on job no. 632 to make up for a machine breakdown during the
week. Overtime premium is 25%.
Factory overhead is 60% of direct labor cost and materials cost comprises 80% of total
production cost.
What should be the respective production costs of jobs nos. 631 and 632?