LABOR ACCOUNTING

Control and Costing

Accounting System

Includes keeping of records of time worked by employees,

computing and recording their earnings, and charging costs to
production.

PART I Timekeeping and Payroll Procedures

PART II Charging Labor Costs to Production
PART I – TIMEKEEPING PROCEDURES

1. Accumulation of the total number of hours worked by each employee so that

earnings can be computed.

2. Determination how the labor hours were spent so that distribution can be made
in the cost records.
TIME CARDS
Use to gather data on how many hours have been
worked by each hourly rate employee.

If time card system is used, all time cards are

collected from the rack at the end of the week and
sent to timekeeping department.
PAYROLL PROCEDURES
 The number of hours worked each day of employees under the hourly rate is
transferred from the time card to the payroll register (sometimes called payroll
sheet). After all the hours worked by each employee have been entered in the
payroll register, regular earnings, overtime premium earnings, and total
earnings are computed and recorded.
Example of Payroll register
DEDUCTIONS FROM EMPLOYEE EARNINGS
INCOME TAXES – the employer must withhold income taxes from
the employees’ salaries and wages. The amount withheld is in
accordance with the table issued by the BIR and shall be remitted
monthly to the BIR. The employer act as a collection agent for the
governments.

SSS CONTRIBUTIONS – Employer must deduct a certain amount

from the employees’ salaries during the month in accordance with
the table issued by the SSS. The amount deducted is for the
protection of the employees and their families in cases of disability,
sickness, old age and death. The employer must also pay with
respect to the covered employee his corresponding share in
accordance with the same table.
DEDUCTIONS FROM EMPLOYEE EARNINGS
PHIC CONTRIBUTIONS – An amount representing health insurance
is automatically deducted from employees who are members of
SSS. The objective of this deduction is to provide the covered
employee adequate health insurance. Employer and employees pay
equal amounts monthly based on employees’ salary and in
accordance with the table issued by PHIC.

PAG-IBIG FUND or Development Mutual Fund Contribution – A

member-employee is deducted a certain percentage of his monthly
basic salary. The employer also contribute an equivalent share for
each covered employee.
Employer contribution
The employer has a corresponding share in the contributions to
SSS, Philippine Health Insurance, and PAG-IBIG fund. In addition,
the employer is obligated to contribute to the Employee’s
Compensation Commission (ECC) for its covered employee’s
compensation and government insurance.
RECORDING PAYROLL FROM THE PAYROLL
REGISTER

GENERAL JOURNAL
Month _______________

Entity Name : __________________________

Sheet No. : ________

Account Amount
Date JEV No. Particulars P
Code Debit Credit

Factory payroll (gross earnings) xx

Withholding Tax Payable xx
SSS Contributions Payable xx
Phil. Health Contributions Payable xx
Pag-Ibig Contributions Payable xx
Payroll Payable (net earnings) xx

To record payroll.

At the end of the period, the total gross earnings and the totals of each of the various
deductions are posted directly from the payroll register to the general ledger accounts.
RECORDING PAYROLL FROM THE PAYROLL
REGISTER
GENERAL JOURNAL
Month _______________

Entity Name : __________________________

Sheet No. : ________

Account Amount
Date JEV No. Particulars P
Code Debit Credit

Factory payroll (gross earnings) xx

Withholding Tax Payable xx
SSS Contributions Payable xx
Phil. Health Contributions Payable xx
Pag-Ibig Contributions Payable xx
Payroll Payable (net earnings) xx

To record payroll.
PAYING THE PAYROLL
GENERAL JOURNAL
Month _______________

Entity Name : __________________________

Sheet No. : ________

Account Amount
Date JEV No. Particulars P
Code Debit Credit

Payroll Payable xx
Vouchers Payable xx

Vouchers Payable xx
Cash in Bank xx

To record payment of factory payroll.

Payroll Entries
Data for the payroll foe the Bulacan Corporation for the week ended April 20, 2014, are shown below:

Total gross earnings ----------------------------------------- 658,150

Social security withheld ------------------------------------ 40,805
Phil. Health withheld ----------------------------------------- 9,872
Employee income taxes withheld ------------------------ 98,723
Pag-Ibig contribution ----------------------------------------- 9,800

Required:
1. An entry to record the weekly payroll.
2. An entry to record the issuance of a voucher to pay the net payroll.
3. An entry to record payment of the voucher.
Computation of Employer’s Contribution
A summary of taxable factory wages of the ETG Corporation for the month of March 2018 is shown below.
Wages Subject to:
SSS (6.2%); Phil. Health (1.5%) Income Taxes
Department Pag-Ibig (1.5%) and ECC (1%) 4.10%_____________
Factory Supply 52,800 20,130
Factory administration 53.,260 12,110
Cutting 72,380 28,640
Assembly 79,910 33,750
Finishing 84,620 30,970

Required:
1. Compute the employer’s contributions to be charged to each department.
2. Prepare an entry in general journal form to record the taxes.
Computation of Employer’s Contribution
CERTIFICATE OF COMPENSATION (BIR FORM 2316)
At the end of the year, the employer computes the
gross wages and the related tax withheld for each
employee, which are taken from the payroll
register.

The employer then prepares BIR Form 2316. (3

copies)
FLOW OF PAYROLL COSTS
CHARGING LABOR COSTS INTO PRODUCTION

DIRECT LABOR WORK IN PROCESS

LABOR
COSTS

INDIRECT LABOR MANUFACTURING

OVERHEAD
CONTROL
 TIME TICKETS
- Also called job time cards, are used to show
how time was used on specific jobs.

- Both direct and indirect workers paid on

hourly wage rate (weekly payroll) are
required to prepare daily time tickets
indicating their activities.

- Workers receiving fixed monthly salary

(semimonthly payroll) are not required to
prepare time tickets. Their earnings are
classified as indirect labor.
RECORDING LABOR COSTS

Work in process XX
Manufacturing Overhead Control XX
Factory Payroll XX
To charge labor costs to production for the month.
Employer Contributions

These contributions of the employer relating to factory workers are charged to

manufacturing overhead control account. Employer’s
contribution relating to other employees are charged to expense.
LABOR Related Costs

Fringe benefits – sick pay, vacation and holiday pay, health insurance,
pension payments, and hospitalization benefits.

Most companies charge these costs to manufacturing overhead control account.

Few companies, however treat fringe benefits related to direct labor as part of
direct labor cost rather than as manufacturing overhead.
Accounting for fringe benefits
Alex Reyes, a production worker earns P27,600 per month and the company pay the worker a year-
end bonus equivalent to one month’s wages. Reyes is also entitled to a half-month paid vacation
per year. Company policy provides that bonus and vacation payments be treated as indirect costs
and accrued during the 11 ½ months the employee is at work.

Required. The journal entry to record and distribute the labor cost of the production for the
month.
Accounting for fringe benefits
LABOR Related Deductions

In addition to the deductions as required by the government

(compulsory), other deductions may be withheld from the salaries upon
the request and with the consent of the employees. Common
examples are union dues, insurance and payroll advances.
Overtime premium

Gross earnings of employees are divided into two parts, earnings at regular rate,
and overtime premium. Earnings at regular rate are computed by multiplying the
total hours (usually 8 hours) by the regular pay rate. The overtime premium is
calculated by multiplying the overtime hours by the overtime pay rate as
determined by the Labor Code.

The overtime premium may be charged to:

1. Specific Job. If the job is taken as a rush order with the knowledge that
overtime will be necessary, the entry would be:
Work in Process xx
Factory payroll xx
Overtime premium
2. Manufacturing Overhead Control. If the job is a regular order
which cannot be completed in the regular working hours, the overtime premium
should be charged to Manufacturing Overhead Control account.

Work in Process xx
Manufacturing Overhead Control xx
Factory Payroll xx
Computation of gross earnings (regular and overtime)
From the following data, compute the regular earnings (for regular and overtime hours),
overtime premium earnings and gross earnings of each employee at Highland Flooring, for the
week ended May 7, 2018. All employees are paid at the regular hourly rate for the first 40 hours
worked during the week. The rate for hours worked in excess of 40 is one and half times
the regular rate. The rate for hours worked on Sunday is twice the regular rate.

Hours Worked
Employee Su M Tu W Th F Sa Hourly rate
J. Sy 0 8 8 7 9 8 0 46.8
F. Lim 4 8 8 8 8 10 0 37
H. Ong 0 8 8 10 8 8 4 31.6
W. Tao 0 8 8 8 8 9 4 26.4
Computation of gross earnings
Accounting for overtime premium
Pablo Sy, an employee of the Pool Company is paid P200 per hour for a regular
week for 40 hours. During the week ended November 14, the employee worked
for 48 hours and earned a half (0.5) for overtime hours.

Required: Prepare
1. Journal entry to record the labor cost if the overtime premium is charged to
the jobs worked on during the overtime hours.
2. Journal entry to record the labor cost if the overtime premium is not charged
to specific jobs.
Accounting for Payroll
The general ledger of the JG manufacturing company showed these balances at the end of July; Factory
labor of P480,000 which includes P288,000 of direct labor; P66,000 of indirect labor; sales salaries of
P72,000 and office salaries of P54,000.

The following rates are available for payroll distribution.

Withholding Tax 1%
SSS Contribution 10% (40% employee and 60% Employer)
Employees Compensation
Contribution 2% (employer only)
Phil. Health Contribution 2% (50% employee and 50% employer)
PAG-IBIG Contributions 3% (50% employee and 50% employer)
Required: Prepare
1. The journal entry to record labor incurrence.
2. The journal entry to record labor distribution and the related employer’s contribution
Accounting for Incurrence and Distribution of Payroll
end
ROLDAN P. CARBONEL, CPA, MBA
Problem 2 Accounting for incurrence and distribution
of Payroll
MD Company is preparing its monthly payroll for October. The following data apply to Jean Go, the chief
accountant:
a. Year to date, through September
Gross payroll P144,000
SSS premium withheld 9,360
Income tax withheld 19,200
Take home pay 115,440
b. Jean’s October earnings were P18,000. Income tax to be withheld is P2,400.

Required: (Use the same table rates in Problem 1)

1. The journal entry to record labor incurrence for October.
2. The journal entry to record labor distribution and the related employer’s contribution.