Question & Answer: Recording labour costs involves two interlocking double entries, reflecting two aspe…..

Concept And Meaning Of Labor And Labor Cost

Concept And Meaning Of Labor

Like materials, labor is also one of the prime inputs of production system. All manufacturing concerns require the labor for carrying out their production activities. The labor consists of workers who are essential to convert materials into finished products. The workers operate machine and perform other tasks to help convert materials into final outputs.
The labor can be either direct or indirect. The labor who is directly engaged in the conversion process is called direct labor and who is not is called indirect labor. The labor, however, should be properly utilized and satisfactorily paid in order to minimize labor turnover and labor cost. Unlike materials, labor is complex to deal with. Dissatisfied and discontented labor always results in high labor costs and low quality outputs. Therefore there should be proper planning, accounting and controlling of labor.

Concept And Meaning Of Labor cost
The payment made to the labor in exchange for its service is called labor cost, which constitutes a major part of the total cost of production. Labor cost is also commonly called wages. Labor cost or wages is one of the major elements of cost. Labor cost represents the expense incurred on both direct and indirect labor. However, labor cost is more than just wage as it includes the total amount of financial benefits given by the concern to all its workers and employees for their time and effort used in producing goods and services. It is, in fact, the financial compensation provided to the workers for their physical and mental contribution for converting raw materials into finished outputs.Labor cost includes monetary and non-monetary (fringe) benefits. Monetary benefits include basic wages, dearness allowance, employer’s contribution to provident find, production bonus, pension and gratuity. Fringe benefits include subsidized food, subsidized housing, subsidized education, medical facilities and holiday pay.
Your employees complete time tickets as unfinished goods move through the different manufacturing departments. The time tickets are a log of the hours each direct labor employee worked on the production line. These wages are earned, but remain unpaid until the pay period ends. To calculate your direct labor payroll, you gather the time tickets from the manufacturing departments. You make a journal entry to record the gross pay amount and the withholdings for each employee.

Work-in-Process Journal Entry

Direct labor costs are added to the Work-in-Process account at the end of the work week. Indirect labor costs are added to the Factory Overhead account. Direct labor costs are calculated by adding up the number of hours each employee worked and multiplying that by the pay rate. When the pay period ends, the gross pay for each direct labor employee is calculated and added together with the others. The journal entry to record the total direct labor is to debit the Work-in-Process account and credit the Salaries and Wages Payable account.

Net Pay Calculations

Before you can pay your employees, you must deduct the amounts to withhold from their gross pay. The federal tax withholding amount is based on the number of exemptions your employee claims. At the time of publication, the Social Security withholding rate is 6.2 percent and Medicare is 1.45 percent. You must withhold state income tax, wage garnishments, and the employee portion of insurance payments from the gross pay. The total amount of each withholding is calculated separately from the other withheld amounts.

Summary Journal Entry

You journalize the payroll amounts as a summary entry in your accounting records. As a manufacturing firm, you list the direct labor expense separately from your indirect labor and wages paid to other employees. The journal entry to record payroll is to debit Direct Labor Expense, debit Salaries Expense, and debit Payroll Taxes Expense. To record the payroll withholdings, you credit Cash for the net payroll amount, credit Federal Withholding Taxes Payable, credit Social Security Taxes Payable, credit Medicare Taxes Payable, and credit Federal Unemployment Taxes Payable. State withholdings or wage garnishes are additional credits to the summary journal entry.

Accrual Summary Entry

If you use an accrual accounting system, you accrue the unpaid payroll until the pay period ends. In this case, the journal entry is a debit to Direct Labor Expense and a debit to Salaries Expense. You credit Accrued Salaries and Wages, and credit Accrued Payroll Taxes. You can lump all the withholdings together in the Accrued Payroll Taxes account or list the withholdings separately. When you are ready to pay the accrued taxes, you debit Accrued Salaries and Wages, debit Accrued Payroll Taxes, and credit Cash.