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Labour Costing and Control

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					ACCG304 Lecture 5:

Labour Costing and Control

Lecture Objectives
Having completed this lecture, students will gain an understanding of labour costing and control procedures and the administrative functions of timekeeping, allocation and payment of the human effort associated with a production and /or service business situation.

Lecture Outline 5.0 5.1 5.2 5.3 5.4
Labour Costing Payroll Procedures Labour Costing Procedures Labour Related Costs Labour Charge Rate • Accounting for Labour Costs • Accounting for Periodic Payroll

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5.0 Labour Costing
Labour is the physical and/or mental effort expended in the manufacture of a product or provision of a service. Labour cost is the price paid for the use of human resources. Labour may be classified into two broad categories:

Direct Labour
Includes all labour that is directly related to, or easily traceable to, the finished product and represents a major labour cost in the production of the product. Direct labour is considered both a Prime Cost and a Conversion Cost.

Indirect Labour
Includes labour costs that cannot be traced directly to units of production and therefore needs to be allocated to production via the predetermined overhead rate. Indirect labour is classified as factory overhead and includes foreman's salary, factory manager's salary and storeperson's wages.

Materials

INDIRECT

DIRECT

Factory Overhead
INDIRECT

Work in Progress

Finished Goods

Cost of Goods Sold

DIRECT

Labour

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5.1 Payroll Procedures
Accounting for labour in a manufacturing organisation usually involves three activities, namely:

Timekeeping
To determine the total number of hours spent at work by each employee to enable the calculation of periodic earnings, be it weekly, fortnightly etc. The source document used to record hours spent at work by employees is referred to as either a time card, clock card or bundy card. This source record is used to calculate the pay due to employees based upon their attendance.

Allocation
Analysis of the labour costs enabling: • direct labour to be charged to production • indirect labour to be charged to factory overhead The source document used to enable the allocation of labour time and costs to production or overhead is referred to as either a time ticket or labour job ticket which summarises the time spent on direct labour and indirect labour during the hours spent at work by each employee. For each employee, the sum of the time tickets for a pay period should equal the total of the time card (see ‘timekeeping’ above).

Payment
Being the implementation of controls over the payment of wages to determine net wages payable to employees, withholdings for PAYE (Pay As You Earn) Tax and other statutory and employee approved deductions. In a manufacturing situation, factory employees (excluding factory management) are usually covered by a pay award or enterprise agreement which sets out: • employment conditions including hours of work per day, annual leave, sick leave, long service leave entitlements. • basic rates of pay, and • penalty rates to be paid for overtime and shift allowances.

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LABOUR - PAYROLL AND TIMEKEEPING

TIME KEEPING Time Card

EMPLOYEE DETAILS Personnel Records

ALLOCATION Time Ticket

PAYROLL

5.2 Labour Costing Procedures
The operation of a labour costing system requires the completion of the following steps: 1. 2. 3. 4. 5. Calculation of the PAY due to each employee The breakdown of the total payroll into DIRECT and INDIRECT labour classifications. The treatment of overtime premiums – whether it is charged to WIP or FACTORY OVERHEAD. The costing and accounting for labour “on” costs or labour “related” costs. The PAYMENT of wages and the treatment of withholdings from the employees’ pay.

Journal Entries to support Labour Costing
Debit Debit Credit Work In Process Factory Overhead Control Accrued Payroll To record the INCURRENCE of labour costs. Accrued Payroll PAYE Tax Withheld Cash To record the PAYMENT of wages and tax withholding.

Debit Credit Credit

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Lecture Demonstration Problem 1:
The payroll summary for Bermuda Manufacturing Company is made up from the following time tickets: Employee name Addams, M. Connery, D. Fleming, W Peters, M. Vernon, J. Hourly Rate $12.00 $14.00 $10.00 $15.00 $8.00 Direct Labour Hours 38 40 36 40 Indirect Labour Hours 5 6 7 40 Total Hours 43 46 43 40 40

Overtime (hours worked in excess of 40 hours per week) is payable at one and one half times the regular rate of pay. All overtime premium is charged to factory overhead. (a) Prepare the General Journal entry showing the accrual and distribution of wages for the week, clearly showing the amount charged to Work In Progress and the amount charged to factory overhead. All employee wages are paid on Friday afternoon. The PAYE tax rate applicable to earnings is 35%. All employees have authorised the pay office to deduct and remit $5.00 per week for Union Fees.

(b)

Prepare the Journal entry to record the payment of wages to employees for the week. Clearly show all deductions.

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5.3 Labour Related Costs
Labour costs are made up of direct employee earnings, which include: • • • • • Employee Earnings comprising: The gross pay for direct labour The gross pay for indirect labour Overtime and shift allowances paid to employees Annual Leave, Public Holidays and Sick Leave.

The employee will receive the gross pay less any deductions. In addition, there are employer related labour costs comprising, payroll tax, workers compensation, superannuation etc., which are not payable to the employee but need to be considered as they are costs which must be incurred and accounted for in the costing of production. • Labour Related Costs - which are referred to as employer related payroll costs as they are an additional cost incurred over and above the employee earnings. Labour related costs include: • Annual Leave Loading which is a bonus paid to employees usually amounting to 17.5% of 4 weeks wages. • Payroll tax (being a statutory charge) • Workers Compensation Insurance • Superannuation • Long Service leave The full cost of labour includes both Employee Earnings and Labour Related Costs. From a cost accounting viewpoint it is important that where labour costs are to be assigned to different products or cost centres a correct charge is made for the FULL COST of labour. As such it may be charged to overhead as a separate rate or included in the LABOUR CHARGE RATE.

5.4 Labour Charge Rate
The cost of labour includes both employee earnings as well as labour related costs. To enable greater accuracy in costing labour charged to production and / or cost centres it is recommended that a labour charge rate be calculated for each class of labour which includes: • Employee Earnings • Labour Related Costs, which are then recovered during the time the employee spends at work. This will result in the determination of a labour cost that is considerably higher than the wage actually paid to the employee. The following example will be used to illustrate the calculation of the full cost of labour. The objective is to calculate a labour charge rate (cost per hour) so as to enable the recovery of the full cost of labour which includes both employee earnings as well as labour related costs.

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Lecture Demonstration Problem 1:
Labour Charge Rate - Employee Earnings
An employee is paid $2.50 per hour and the usual working week is 40 hours. The Gross Weekly Wages is $100.00.

Conditions of employment include: • 4 weeks annual leave with 17.5% leave loading • 2 weeks (10 working days) paid public holidays per annum • 2 weeks (10 working days) paid sick leave per annum Labour Related Costs include: • Superannuation equal to 10% of gross wages (excluding leave loading) • Payroll tax equal to 5% of gross wages (including leave loading) • Workers Compensation Insurance equal to 5% of gross wages (including leave loading)

Required:

Calculate the Labour Charge Rate using Employee Earnings.

Normal Time Base Rate Annual Leave Annual Leave Loading Public Holidays Sick Leave Superannuation Workers' Compensation Insurance Payroll Tax Charge Rates Less Normal Rate Overtime Premium

Overtime

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Lecture Exercises:
Question 1:
The Gregory Foundation pays each of its eight employees the award wage of $ 380.00 for a thirty-seven and a half hour, five day week. The labour charge rate is calculated using the following information: * * * * * * * * Required : (a) Based on the above information, calculate the labour charge rate for employees using the following template : Normal Time Base Rate Annual Leave Annual Leave Loading Public Holidays Sick Leave Superannuation Workers' Compensation Insurance Payroll Tax Charge Rates Less Normal Rate Overtime Premium Overtime 4 weeks annual leave per year 17.5% annual leave loading 10 days paid sick leave per year 10 days paid public holidays per year Workers' Compensation insurance is 6% of gross wages Payroll tax is 8% of gross wages Employer's superannuation contribution is 3% of gross wages excluding overtime and annual leave loading Overtime is paid at 1.5 times the normal rate

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Question 2:
The accountant at MAS Manufacturing is concerned that his charge rates for labour costs do not take into account employee leave entitlements. He asks you to calculate a single charge rate for labour which incorporates these and provides the following information. All employees work 40 hours per week for the remaining 48 weeks. Ordinary Rate Annual Leave Annual Leave Loading Sick Leave Public Holidays $9.00 per hour 4 weeks 17.5% 1 week 2 weeks

Payroll tax and workers' compensation insurance each amount to 5% of gross wages, employer superannuation contributions amount to 10% of normal wages (excluding annual leave loading).

Normal Time Base Rate Annual Leave Annual Leave Loading Public Holidays Sick Leave Superannuation Workers' Compensation Insurance Payroll Tax Charge Rates Less Normal Rate Overtime Premium

Overtime

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Question 3:
The factory employees of Consumer Appliances Pty Ltd are paid $8.00 per hour. They are entitled to : 4 weeks annual leave per annum with 17.5% Loading. 2 weeks paid sick leave per annum 10 days public holidays per annum Payroll tax and workers' compensation insurance each amount to 5% of gross wages, employer superannuation contributions amount to 10% of normal wages (excluding annual leave loading). Required : (i) (ii) Calculate the labour charge rate. Calculate the overtime charge rate if employees are paid double time for overtime.

Normal Time Base Rate Annual Leave Annual Leave Loading Public Holidays Sick Leave Superannuation Workers' Compensation Insurance Payroll Tax Charge Rates Less Normal Rate Overtime Premium

Overtime


				
DOCUMENT INFO
Description: Lecture Objectives Having completed this lecture, students will gain an understanding of labour costing and control procedures and the administrative functions of timekeeping, allocation and payment of the human effort associated with a production and /or service business situation. Lecture Outline 5.0 Labour Costing 5.1 Payroll Procedures 5.2 Labour Costing Procedures 5.3 Labour Related Costs 5.4 Labour Charge Rate • Accounting for Labour Costs • Accounting for Periodic Payroll