CHAPTER 3 ACCOUNTING FOR LABOR
Review Summary
  1.   Direct labor, also known as “touch labor,” consists of the workers who physically convert raw materials to finished goods.  It is the portion of payroll cost traced directly to the product, and is charged to the work-in-process account. Indirect labor consists of all other labor involved in the manufacturing process and is charged to the factory overhead account. Accounting for labor involves: recording the time worked and/or the quantity of output by the employee; analyzing employees’ time to determine how time is to be charged; allocating the factory labor costs to the proper accounts; and preparing the payroll.
  2.   Under an hourly-rate wage plan the employee’s wages are computed by multiplying the established hourly rate times the hours worked. Although widely used and easy to apply, it doesn’t provide any incentive to achieve a high level of productivity. Under a piece-rate plan, earnings are based on a worker’s quantity of production. Such a plan provides an incentive for the worker to produce a high level of output, but it may encourage sacrificing quality for quantity, and it is not appropriate if machines control production speed. A modified wage plan combines some features of hourly-rate wage plans and piece-rate plans in that it may set a minimum wage that will be paid even if an established quota is not met, while an additional payment for each piece beyond the established quota is added to the minimum rate.
  3.   The timekeeping function is responsible for determining the number of labor hours that the company should pay for and the type of work that the employees performed. Automated timekeeping technology, using magnetic cards and card readers, sends labor time information to the accounting department for the preparation of the payroll and the distribution of labor costs to jobs. The payroll function is responsible for computing employee gross earnings, deductions, and net pay. Payroll maintains the payroll record and the employee earnings record. A payroll record provides information for all employees for one pay period relative to pay rate, hours worked, regular and overtime earnings, deductions, and net pay. The employee earnings record is a record of the cumulative earnings for a single employee for the entire year used to compute the amount of earnings subject to payroll taxes.  It also serves as the basis for reporting payroll information to governmental agencies and preparing W-2’s.
  4.   The labor cost summary form is prepared from the labor time records, and it is used for the preparation of a general journal entry that distributes the payroll to the proper accounts. Work in Process is debited for the regular-time wages of direct labor, Factory Overhead is debited for indirect wages and Payroll is credited for the total. The additional rate added to a direct labor employee’s regular rate for overtime worked is the overtime premium.  If the overtime work on a particular job resulted from random scheduling, then the overtime premium should be charged to Factory Overhead and spread over all jobs; whereas if the overtime resulted from the unique demands of a specific job, then the overtime premium should be charged to Work in Process and the particular job that caused its incurrence.  The regular rate is charged to the jobs on which the employee worked.
  5.   Payroll taxes imposed on employers include social security tax and federal and state unemployment taxes. The Federal Insurance Contribution Act (FICA) requires employers to pay social security and Medicare taxes on wages and salaries equal to the amount of tax withheld from employee’s earnings. The Federal Unemployment Tax Act (FUTA) requires employers to pay an established rate of tax on wages and salaries to provide for compensation to employees laid off from their jobs. Employers’ contributions are apportioned between the federal government, which administers the unemployment compensation program,

and the state governments, which actually pay out the benefits. Since payroll tax rates and wage bases frequently change, this text assumes an 8% tax rate on the first $100,000 of FICA wages, and a 4% rate for state taxes and a 1% rate for federal taxes on the first $8,000 of wages for unemployment compensation.  Theoretically, payroll taxes should be charged to accounts where the related labor was charged; however, it is usually more practical to record all factory related payroll taxes as Factory Overhead.

1. When the financial statement date does not coincide with the ending date for a payroll period, an accrual for payroll earnings and the employer’s portion of payroll taxes should be made to avoid understating the expenses and liabilities for the period.
2. Shift premiums may be paid to employees who do not work the regular day shift. Because these   premiums are paid for inconvenient hours rather than increased productivity, they should be charged to Factory Overhead and allocated to all jobs, rather than to Work in Process, to avoid distorting the cost of certain jobs. Defined benefit pension plans determine benefits based on an employee’s level of income and length of service. Defined contribution pension plans, such as 401 (k) plans, specify the maximum contribution that can be made to an employee’s account during the year, but the amount of pension benefits is based on the performance of the investment vehicles that the employee selected. Non-contributory plans are completely funded by the company, whereas contributory plans, which are more common, require a partial contribution from the employee. The company should accrue, systematically, the total estimated pension cost from the date the plan started to the date the employee retires. Current pension costs for factory employees are part of the cost of production and may be charged to Factory Overhead, or they may be charged to General Administrative Expense under the premise that the costs of pensions are beneficial to the company as a whole. Bonus pay, vacation pay, and holiday pay are considered to be earned gradually during the employee’s time on the job, and therefore a portion of this liability is accrued each payroll period that the employee is on the job.

Part I

Instructions: Indicate your answer in the Answers column by writing a “T” for True or an “F” for False.

Answers

  1.   The cost of direct labor is charged to the factory overhead account............        _________
  2.   A serious limitation of a piece-rate wage plan is that no incentive is provided by the plan design to maintain a high degree of employee productivity......................................        _________
  3.   The payroll function includes completing and maintaining the payroll records and the employees’ earnings records....................................................................................        _________
  4.   The payroll accrual computation should not include the employees’ withholdings                .......................................................................................... _________
  5.   Non-contributory pension plans are completely funded by the employer.....        _________
  6.   The employee earnings record contains the earnings history for a single employee, whereas the payroll record shows the earnings data for all employees for a specific payroll period.                     .......................................................................................... _________
  7.   The debit posted to Factory Overhead for payroll costs represents the indirect labor cost recorded in the factory overhead ledger.........................................................................        _________
  8.   If the overtime hours incurred on a job were merely the result of random scheduling, the cost of the overtime premium should be charged to the specific job worked on during the overtime period.        .......................................................................................... _________
  9.   Employers and employees share equally the cost of the social security program. _________
10.   In theory, payroll taxes on factory direct labor should be charged to Work in Process as direct labor, but in practice they usually are included in Factory Overhead....................        _________
11.   The unemployment insurance program is administered by the federal government, but the individual states make claims payments..................................................................        _________
12.   Shift premiums usually are charged to Factory Overhead in order to avoid a substantial distortion of costing of jobs due to differences in worker productivity.......................        _________
13.   In a modified wage plan, a make-up guarantee is paid when an employee works fewer hours than recommended to produce the established quota........................................        _________
14.   Defined benefit pension plans specify the exact amount of retirement income that an employee will receive.................................................................................................        _________
15.   The costs of vacation pay and holiday pay should be accrued in the periods that the employees actually work....................................................................................................        _________

Part II

Instructions: In the Answers column, place the letter from the list below that identifies the term that best matches the statement. No letter should be used more than once.
a.  Payroll function                       h.   Hourly-rate plan                     o.  Federal Insurance
b.  Payroll record                           i.   Indirect labor                              Contribution Act
c.  Defined contribution plans         j.   Federal Unemployment           p.  Piece-rate plan
d.  Direct labor                                   Tax Act                                 q.  Magnetic card reader
e.  Employee earnings                   k.   Defined benefit plans               r.  Payroll taxes
record                                      l.   Non-contributory plans            s.  Bonuses, vacations,
f.  Contributory plans                   m.   Modified wage plan                     and holiday pay
g.  Bar codes                                n.   Shift premium                         t.  Timekeeping
function

Answers

_____    1.   This is the labor charged to the product by a debit to the work-in-process account.
_____    2.   This consists of all other types of labor used in the manufacturing process and is charged to the factory overhead account.
_____    3.   This is a widely accepted wage plan that is simpler to use than other plans.
_____    4.   Under this type of wage plan, earnings are based on the worker’s quantity of production.
_____    5.   An example of this type of plan would be a set minimum wage plus an additional payment per piece if the established quota is exceeded.

_____    6.   The responsibilities of this area include determining the number of hours that the company should pay for the type of work the employees performed.
_____    7.   This area is assigned the responsibility of computing each employee’s gross earnings, the amount of withholding, and the net pay.
_____    8.   These are pension plans whose retirement benefit payments are based on the performance of the investment vehicles chosen by the employees.
_____    9.   This becomes the mechanism by which timekeeping data is transferred to a remote computer terminal.
_____  10.   Even though these are received at specific times during the year, their costs are accrued throughout the year.
_____  11.   This is a summary listing of employees’ earnings for a payroll period and includes such items as FICA taxable earnings, deductions, and net amount paid.
_____  12.   This is a record of  the cumulative earnings of each employee.
_____  13.   These are symbols that can be processed electronically to identify numbers, letters, or special characters.
_____  14.   These are pension plans that require a partial contribution by the employees.
_____  15.   These are imposed on employers and include social security tax and federal and state unemployment taxes.
_____  16.   It requires employers to pay social security taxes on wages and salaries equal to the amount withheld from employee earnings.
_____  17.   This requires employers to pay an established rate of tax on wages and salaries to provide for compensation to employees if they should be laid off from their regular jobs.
_____  18.   This usually is added to the regular rate of pay for employees who do not work a normal day shift.
_____  19.   These are pension plans that specify the amount of benefits that an employee will receive based on earnings and length of service.
_____  20.   These are pension plans that are completely funded by the company.

Part III
Instructions: In the Answers column, place the letter of the choice that most correctly completes each item.

Answers

_____  1.     A modified wage plan:
a. Usually results in less total wages than an hourly- rate plan
b. Is riskier from an employee’s viewpoint than a piece-rate plan
c. Directs management’s attention to the employees unable to meet quotas
d. Has a make-up guarantee when an employee’s production exceeds the  
quota
_____   2.   The document that provides evidence of an employee’s total time in the plant is the:
a.  Labor time record                                    c.  Labor cost summary
b.  Daily performance report                        d.  Requisition
_____   3.   An example of a fringe cost is:
a.  The direct labor wage rate
b.  Withheld taxes
c.  Union dues paid by the employee
d.  The employer portion of FICA tax
_____   4.   The wage plan which most bases an employee’s earnings on the quantity of the employee’s production is termed a(n):
a.  Hourly rate plan                                      c.  Piece-rate plan
b.  Modified wage plan                                d.  None of the above
_____    5.   In job order costing, payroll taxes paid by the employer for factory employees are usually accounted for as:
a.  Direct labor                                              c.  Work in process
b.  Factory overhead                                      d.  Administrative costs
_____    6.   When a rush order is received during the week and it must be completed during an overtime shift, the overtime premium is charged to:
a.  General and Administrative Expenses
b.  Accrued Overtime Premium Receivable
c.  Factory Overhead Control
d.  The job worked on during the overtime period

_____    7.   An employee is paid a base rate of $800 per week for 52 weeks. The employee is entitled to a four-week vacation each year. Factory Overhead Control is debited each week for accrued vacation pay of:
a.  $64.00                                                     c.  $61.54
b.  $0                                                            d.  $66.67

_____    8.   To spread the cost of an annual bonus over production throughout the year, the weekly payroll entry would include a debit to which of the following accounts for the bonus portion of the entry?
a.  Work in Process
b.  Factory Overhead
c.  Payroll
d.  Liability for Bonus
_____    9.   All of the following items are included as accrued expenses when the accounting period does not correspond with the payroll date except:
a.  Indirect labor wages
b.  Overtime premium
c.  Employee withholdings
d.  Employer payroll taxes
_____  10.   Robert Nester works at Marley Manufacturing Company.  Last week, Robert, who earns $20 per hour, and time-and-a-half for overtime, worked 48 hours.  Of those hours, he spent 36 hours working on Job 325Y and the remainder doing preventive maintenance on the lathe machinery.  The amount of Robert’s pay charged to Factory Overhead last week would have been:
a.  $960
b.  $320
c.  $240
d.  $80

Part IV

Computing earnings with incentive compensation.

B. Arroyo, an employee of the Cincinnati Cabinet Co., submitted the following data for work activities last week:

                                    Day                            Units Produced Each Day

Monday.................................                     30
Tuesday.................................                     32
Wednesday.............................                     46
Thursday................................                     28
Friday....................................                     34
During the week, Arroyo worked eight hours each day. Compensation was based on a modified wage plan where an employee earns $2.50 per finished unit and is guaranteed a minimum of $10 per hour.

Instructions: Complete the schedule below. (Round labor cost per unit to the nearest whole cent.)

Monday             __________      __________      __________      __________      __________
Tuesday             __________      __________      __________      __________      __________
Wednesday         __________      __________      __________      __________      __________
Thursday            __________      __________      __________      __________      __________
Friday                __________      __________      __________      __________      __________
NOTE: Unless otherwise directed, use the following rates in the remaining parts of this chapter: FICA tax, 8%; FUTA tax, 1%; state unemployment insurance tax, 4%. Assume also that the base wage amounts, beyond which taxes are not due, have not been reached.