Direct labor, also known as “touch labor,” consists of the workers who physically

CHAPTER 3 ACCOUNTING FOR LABORReview Summary1. Direct labor, also known as “touch labor,” consists of the workers who physically convertraw 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 laborinvolved 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 theemployee; analyzing employees’ time to determine how time is to be charged; allocating thefactory 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 theestablished hourly rate times the hours worked. Although widely used and easy to apply, itdoesn’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 forthe worker to produce a high level of output, but it may encourage sacrificing quality forquantity, and it is not appropriate if machines control production speed. A modified wageplan combines some features of hourly-rate wage plans and piece-rate plans in that it may seta minimum wage that will be paid even if an established quota is not met, while an additionalpayment 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 thecompany should pay for and the type of work that the employees performed. Automatedtimekeeping technology, using magnetic cards and card readers, sends labor time informationto the accounting department for the preparation of the payroll and the distribution of laborcosts to jobs. The payroll function is responsible for computing employee gross earnings,deductions, and net pay. Payroll maintains the payroll record and the employee earningsrecord. A payroll record provides information for all employees for one pay period relative topay rate, hours worked, regular and overtime earnings, deductions, and net pay. Theemployee earnings record is a record of the cumulative earnings for a single employee forthe entire year used to compute the amount of earnings subject to payroll taxes. It also servesas 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 thepreparation of a general journal entry that distributes the payroll to the proper accounts. Workin Process is debited for the regular-time wages of direct labor, Factory Overhead is debitedfor indirect wages and Payroll is credited for the total. The additional rate added to a directlabor employee’s regular rate for overtime worked is the overtime premium. If the overtimework on a particular job resulted from random scheduling, then the overtime premium shouldbe charged to Factory Overhead and spread over all jobs; whereas if the overtime resultedfrom the unique demands of a specific job, then the overtime premium should be charged toWork in Process and the particular job that caused its incurrence. The regular rate is chargedto the jobs on which the employee worked.5. Payroll taxes imposed on employers include social security tax and federal and stateunemployment taxes. The Federal Insurance Contribution Act (FICA) requiresemployers to pay social security and Medicare taxes on wages and salaries equal to theamount 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 providefor compensation to employees laid off from their jobs. Employers’ contributions areapportioned between the federal government, which administers the unemploymentcompensation program,26and the state governments, which actually pay out the benefits. Since payroll tax rates and wagebases 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 forunemployment compensation. Theoretically, payroll taxes should be charged to accounts wherethe related labor was charged; however, it is usually more practical to record all factory relatedpayroll taxes as Factory Overhead.6. When the financial statement date does not coincide with the ending date for a payroll period, anaccrual for payroll earnings and the employer’s portion of payroll taxes should be made to avoidunderstating the expenses and liabilities for the period.7. Shift premiums may be paid to employees who do not work the regular day shift. Because thesepremiums are paid for inconvenient hours rather than increased productivity, they should becharged to Factory Overhead and allocated to all jobs, rather than to Work in Process, to avoiddistorting the cost of certain jobs. Defined benefit pension plans determine benefits based on anemployee’s level of income and length of service. Defined contribution pension plans, such as401 (k) plans, specify the maximum contribution that can be made to an employee’s accountduring the year, but the amount of pension benefits is based on the performance of the investmentvehicles that the employee selected. Non-contributory plans are completely funded by thecompany, whereas contributory plans, which are more common, require a partial contributionfrom the employee. The company should accrue, systematically, the total estimated pension costfrom the date the plan started to the date the employee retires. Current pension costs for factoryemployees are part of the cost of production and may be charged to Factory Overhead, or theymay be charged to General Administrative Expense under the premise that the costs of pensionsare beneficial to the company as a whole. Bonus pay, vacation pay, and holiday pay areconsidered to be earned gradually during the employee’s time on the job, and therefore a portionof this liability is accrued each payroll period that the employee is on the job.Part IInstructions: Indicate your answer in the Answers column by writing a “T” for True or an “F”for False.Answers1. 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 providedby the plan design to maintain a high degree of employee productivity….._________3. The payroll function includes completing and maintaining the payroll recordsand 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 singleemployee, whereas the payroll record shows the earnings data for allemployees for a specific payroll period…………………………………………………………………………………………………………………………………………._________27Chapter ThreeName ________________________________________7. The debit posted to Factory Overhead for payroll costs represents the indirectlabor cost recorded in the factory overhead ledger………………………………………………………………………………………………………………………….._________8. If the overtime hours incurred on a job were merely the result of randomscheduling, the cost of the overtime premium should be charged to thespecific job worked on during the overtime period…………………………………………………………………………………………………………………………._________9. Employers and employees share equally the cost of the social securityprogram……………………………………………………………………………_________10. In theory, payroll taxes on factory direct labor should be charged to Work inProcess as direct labor, but in practice they usually are included in FactoryOverhead………………………………………………………………………………………….._________11. The unemployment insurance program is administered by the federalgovernment, but the individual states make claims payments…………………_________12. Shift premiums usually are charged to Factory Overhead in order to avoida substantial distortion of costing of jobs due to differences in workerproductivity………………………………………………………………………………………._________13. In a modified wage plan, a make-up guarantee is paid when an employeeworks fewer hours than recommended to produce the established quota.. ._________14. Defined benefit pension plans specify the exact amount of retirement incomethat an employee will receive…………………………………………………………….._________15. The costs of vacation pay and holiday pay should be accrued in the periodsthat the employees actually work……………………………………………………….._________Part IIInstructions: In the Answers column, place the letter from the list below that identifies the termthat best matches the statement. No letter should be used more than once.a.b.c.d.e.Payroll functionPayroll recordDefined contribution plansDirect laborEmployee earningsrecordf. Contributory plansg. Bar codesh. Hourly-rate plani. Indirect laborj. Federal UnemploymentTax Actk. Defined benefit plansl. Non-contributory plansm. Modified wage plann. Shift premiumo. Federal InsuranceContribution Actp. Piece-rate planq. Magnetic card readerr. Payroll taxess. Bonuses, vacations,and holiday payt. TimekeepingfunctionAnswers_____1. This is the labor charged to the product by a debit to the work-in-process account.28_____2. This consists of all other types of labor used in the manufacturing process and ischarged 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 ofproduction._____5. An example of this type of plan would be a set minimum wage plus an additionalpayment per piece if the established quota is exceeded.29Chapter ThreeName _____________________________________________6. The responsibilities of this area include determining the number of hours that thecompany 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 theperformance of the investment vehicles chosen by the employees._____9. This becomes the mechanism by which timekeeping data is transferred to a remotecomputer terminal._____ 10. Even though these are received at specific times during the year, their costs areaccrued throughout the year._____ 11. This is a summary listing of employees’ earnings for a payroll period and includessuch 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 stateunemployment taxes._____ 16. It requires employers to pay social security taxes on wages and salaries equal to theamount withheld from employee earnings._____ 17. This requires employers to pay an established rate of tax on wages and salaries toprovide for compensation to employees if they should be laid off from their regularjobs._____ 18. This usually is added to the regular rate of pay for employees who do not work anormal day shift._____ 19. These are pension plans that specify the amount of benefits that an employee willreceive based on earnings and length of service._____ 20. These are pension plans that are completely funded by the company.30Part IIIInstructions: In the Answers column, place the letter of the choice that most correctly completeseach item.Answers_____ 1.A modified wage plan:a. Usually results in less total wages than an hourly- rate planb. Is riskier from an employee’s viewpoint than a piece-rate planc. Directs management’s attention to the employees unable to meet quotasd. Has a make-up guarantee when an employee’s production exceeds thequota_____ 2. The document that provides evidence of an employee’s total time in the plant isthe:a. Labor time recordc. Labor cost summaryb. Daily performance reportd. Requisition_____ 3. An example of a fringe cost is:a. The direct labor wage rateb. Withheld taxesc. Union dues paid by the employeed. The employer portion of FICA tax_____ 4. The wage plan which most bases an employee’s earnings on the quantity of theemployee’s production is termed a(n):a. Hourly rate planc. Piece-rate planb. Modified wage pland. None of the above_____5. In job order costing, payroll taxes paid by the employer for factory employees areusually accounted for as:a. Direct laborc. Work in processb. Factory overheadd. Administrative costs_____6. When a rush order is received during the week and it must be completed during anovertime shift, the overtime premium is charged to:a. General and Administrative Expensesb. Accrued Overtime Premium Receivablec. Factory Overhead Controld. The job worked on during the overtime period31Chapter ThreeName _____________________________________________7. An employee is paid a base rate of $800 per week for 52 weeks. The employee isentitled to a four-week vacation each year. Factory Overhead Control is debited eachweek for accrued vacation pay of:a. $64.00c. $61.54b. $0d. $66.67_____8. To spread the cost of an annual bonus over production throughout the year, the weeklypayroll entry would include a debit to which of the following accounts for the bonusportion of the entry?a. Work in Processb. Factory Overheadc. Payrolld. Liability for Bonus_____9. All of the following items are included as accrued expenses when the accountingperiod does not correspond with the payroll date except:a. Indirect labor wagesb. Overtime premiumc. Employee withholdingsd. Employer payroll taxes_____ 10. Robert Nester works at Marley Manufacturing Company. Last week, Robert, whoearns $20 per hour, and time-and-a-half for overtime, worked 48 hours. Of thosehours, he spent 36 hours working on Job 325Y and the remainder doing preventivemaintenance on the lathe machinery. The amount of Robert’s pay charged to FactoryOverhead last week would have been:a. $960b. $320c. $240d. $80Part IVComputing earnings with incentive compensation.B. Arroyo, an employee of the Cincinnati Cabinet Co., submitted the following data for workactivities last week:DayMonday……………………………….Tuesday……………………………….Wednesday…………………………..Thursday……………………………..Friday………………………………….Units Produced Each Day3032462834During the week, Arroyo worked eight hours each day. Compensation was based on a modi fiedwage plan where an employee earns $2.50 per finished unit and is guaranteed a minimum of $10per hour.Instructions: Complete the schedule below. (Round labor cost per unit to the nearest wholecent.)32DayEarnings at$10 per HourPiece-rateEarningsMake-upGuaranteeDailyEarningsLabor Costper UnitMonday__________________________________________________Tuesday__________________________________________________Wednesday__________________________________________________Thursday__________________________________________________Friday__________________________________________________33Chapter ThreeName ________________________________________NOTE: Unless otherwise directed, use the following rates in the remaining parts of this chapter:FICA tax, 8%; FUTA tax, 1%; state unemployment insurance tax, 4%. Assume also that the basewage amounts, beyond which taxes are not due, have not been reached.Part VComputing and journalizing payroll.The information below, taken from the daily time tickets of Musketeer Manufacturing, Inc.,summarizes time and piecework for the week ended January 30.EmployeeFrease, K……………Redford, B………….McLean, J…………..Love, J……………….ClockNo.37383940JobNo.347–343–HoursWorked40404640ProductionPieces780–––HourlyRate–$ 7.00  8.80 12.20PieceRate$.50–––The company operates on a 40-hour week and pays time and a half for overtime. FICA taxdeductions should be made for each employee. A 3% deduction is to be made from each employee’swage for health insurance. Redford works as a forklift operator; Love is the supervisor; the otherswork directly on the jobs. Use 15% in computing income tax withheld.Instructions:1. Using the form provided below, determine each employee’s gross pay, deductions, and netpay.FreaseRedfordMcLeanLoveTotalHours worked………………Piecework……………………Rate (hourly/piece)……….Direct labor………………….Indirect labor………………..Overtime premium………..Gross pay…………………….$$$$$Income tax (15%)…………$$$$$$$$$$FICA tax (8%)……………..Health insurance (3%)…..Total deductions……………Net pay………………………..342. Prepare journal entries to (a) set up the accrued payroll and other liabilities, (b) pay thepayroll, (c) distribute the payroll, and (d) record the employer’s payroll taxes.Account(a)(b)(c)(d)35DebitCreditChapter ThreeName ________________________________________Part VIAccounting for overtime pay.An employee of the Assembly Department is paid $20 per hour for a regular week of 40 hours. Duringthe week ended July 15, the employee worked 50 hours and earned time and a half for the overtimehours.Instructions:1. Prepare the entry to distribute the labor cost if the job worked on during overtime was a rushorder, the contract price of which included the overtime premium.AccountDebitCredit2. Prepare the entry to distribute the labor cost if the job worked on during overtime was theresult of random scheduling.AccountDebitCredit36Part VIIA production worker earns $4,400 per month and the company pays the worker a year-end bonusequal to one month’s wages. The worker receives a one-month paid vacation per year and 10 paidholidays per year. Bonus, vacation benefits, and holiday pay are treated as indirect costs andaccrued during the 11 months that the employee is at work.Instructions: Prepare the journal entry to distribute the payroll and the costs and liabilitiesassociated with the bonus, vacation pay, and holiday pay of the production worker for a month.Account37DebitCredit

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