Chapter 5 - Labor Accounting – Control and Costing

Timekeeping Procedures

According to Pedro P. Guerrero, the timekeeping function involves two major procedures in labor
costing:

1. Accumulation of the total number of hours worked by each employee so that their earnings can
be computed.¹
2. Determination how the labor hours were spent so that distribution can be made in the cost
records.¹

Time Cards

The first step in the timekeeping process is to gather data on how many hours have been worked by
each hourly rate employee. In a manual system, this can be done by preparing time card ,sometimes
called clock card, for each employee. The time cards are usually placed on a rack near the time clock.
When employees enter or leave plant, they get their cards and insert or punch them in the time clock to
record their time in and time out.¹

In practice, most of the companies use an electronic system to record time worked. Employees are
issued magnetic cards which they swipe through a magnetic card reader as they enter and leave the
company.¹

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.¹

Weekly Factory Payroll Register

After computing the gross earnings of each employee, appropriate deductions are made and entered in
the proper columns, and the net pay for each employee is determined.¹

Semimonthly Factory Payroll

A separate semimonthly payroll register is used to record salaries of some factory supervisors and
managers. These employees earn fixed monthly salaries payable in two installments on the fifteenth
and last day of the month. The semimonthly payroll register is similar to the weekly payroll register.¹

¹Pedro P. Guerrero, Cost Accounting – Principles and Procedural Applications, 2018 Edition
Deductions from Employees’ Earnings

Following are the usual payroll deductions as prescribed by the government.

Income Taxes

The employer must withhold income taxes from the employees’ salaries and wages. The amount
withheld is in accordance with a table issued by the Bureau of Internal Revenue (BIR) and shall be
remitted monthly to the BIR. The employer acts as a collection agent for the government.¹

Social Security System Contributions

Employer must deduct a certain amount from the employees’ salaries during the month in accordance
with the table issued by the Social Security System (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. Remittance of the amount deducted is made monthly to SSS.¹

Philippine Health Insurance Corporation (Phil. Health) 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 a table issued by Philippine Health Insurance Corporation.¹

PAG-IBIG Fund or Development Mutual Fund Contributions

A member-employee is deducted a certain percentage of his monthly basic salary. The employer also
contributes an equivalent share for each covered employee, which is remitted monthly together with
the employee’s share.¹

Employer’s Contributions

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, depending
upon the specified compensation paid to each employee every month. These contributions of the
employer are expenses of the company.¹

Recording the Payroll from the Payroll Register

At the end of the payroll 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.
The effect of this posting is the journal entry to record the payroll as follows:

Factory Payroll (gross earnings) xxx

Withholding Tax Payable xxx

SSS Contributions Payable xxx

Phil. Health Contributions Payable xxx

Pag-ibig Contributions Payable xxx

Payroll Payable (net earnings) xxx

To record payroll.

Paying the Payroll

In practice, companies use a special bank account for payroll payments. The payroll clerk prepares a
voucher for the net amount of the payroll which is forwarded to the voucher clerk, who records it in the
voucher register. The voucher then goes to the treasurer of the cash department, who issues a check on
the regular bank account for the amount of the voucher and enters it in the check register. This check is
deposited to the special payroll bank account. The payroll liabilities are paid with checks drawn on the
regular bank account.¹

The journal entries to record payment of the payroll are as follows:

Payroll Payable xxx

Vouchers Payable xxx

Vouchers Payable xxx

Cash in Bank xxx

To record payment of factory payroll.

Computerized Payroll

A company can either have its own computerized payroll system or contract it with an outside payroll
service provider (outsourcing).¹

Outsourcing the payroll function has several advantages as follows:

a. For a medium or small company, it may be less expensive and more convenient to handle the
payroll.¹
 b. Confidentiality of payroll is more likely to be maintained when the payroll function is performed
outside the company.¹

c. Since the outside provider are into the payroll business, it is easier for them to stay up to date
about the changes in tax rates and reportorial requirements.¹

Summary Principles and Procedures – Timekeeping and Payroll Accounting

The procedures of timekeeping are as follows:

a. The data from the time cards are transferred to the payroll register.¹

b. From the Voucher Register, journal entry is prepared to record payroll. Total gross earnings are
debited to Factory Payroll account with offsetting credits to various liability accounts.¹

c. Most companies pay their employees by special payroll checks. Under this system, a voucher is
prepared and a check is issued to cover the net payroll. The check is then deposited in a
separate payroll bank account. The check is then deposited in a separate payroll bank account,
and payroll checks are drawn against the balance.¹

Charging Labor Costs Into Production

Labor costs are to be allocated between direct labor and indirect labor costs. Direct labor costs are
charged to Work in Process while indirect labor costs are charged to Manufacturing Overhead Control
account.¹

Time Tickets

To facilitate the allocation of labor costs between direct and indirect labor, a time ticket is prepared by
each employee. Time tickets, sometimes called job time cards, are used to show how time was used on
specific jobs.¹

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. All the data in the
time tickets are entered in the company’s computer. The computer is programmed to process the data
and generate on a weekly basis, a summary of time tickets.¹

Summary of Time Tickets

Each week a summary of time tickets is prepared to show the direct labor costs incurred on each job as
well as the indirect labor. Postings are made from this summary to the job cost sheets (for direct labor)
and to the departmental overhead analysis sheets (for indirect labor)¹
Semimonthly Payroll

This payroll shows the wages earned by employees who are on a fixed monthly salary. Their earnings
are classified as indirect labor and entered in the departmental overhead analysis sheets.¹

Unpaid Wages

At the end of the month, time tickets are analyzed to determine labor costs that have been incurred
since the last payroll date but have not yet been paid. This labor costs are to be accrued , so that
production is charged with all labor costs in the month in which they are incurred.¹

Recording Labor Costs

At the end of the month, a summary of factory wages is prepared from the job cost sheets and
departmental overhead analysis sheets. The summary shows total direct labor costs and total indirect
labor costs incurred during the month. These costs are transferred to production by the following
journal entry:

Work in Process xxx

Manufacturing Overhead Control xxx

Factory Payroll xxx

To charge labor costs to production for the month.

Flow of Labor Costs¹

1. Record the number of hours worked each day by each employee on a time card.¹

2. Record the hours and type of work performed each day by each employee on a time ticket.¹

3. Record the total earnings, deductions and net pay of all employees for a payroll period in the
payroll register. Post the totals from the payroll register to the appropriate ledger accounts.¹

4. Post the earnings, deductions, and net pay for each employee to an individual earnings record.¹

5. Record direct labor costs to the individual job cost sheets. Enter indirect labor costs on the
departmental overhead analysis sheets¹.

6. Prepare summary of factory wages, prepare journal entry to charge labor costs to production.
Post the amounts to Work in Process account, Manufacturing Overhead Control account, and
Factory Payroll account.¹
SOURCE AND REFERENCE:

Pedro P. Guerrero, Cost Accounting – Principles and Procedural Applications, 2018 Edition