MODULE IN

COST ACCOUNTING AND CONTROL

RINCIPLES AND PRACTICES
AE 212

Department of Accountancy
SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING,
AND INFORMATION STUDIES
 AE 212: COST ACCOUNTING AND CONTROL
Week Topic Learning Outcomes Activities

MODULE 4 – Accounting for Labor

Week 5-6 1. Determine labor cost •
and describe labor
cost accounting
procedure.
2. Account for labor
fringe benefits, payroll
taxes, and other
labor-related costs.
3. Prepare payroll
worksheets
4. Distribute labors cost
to direct labor an
factory overhead

Do graded activity

MODULE 4:
ACCOUNTING FOR LABOR

LABOR COST AND CONTROL

The element of labor cost in production is as important as the element of materials. An effective
control of labor cost brings about production efficiency and consequently, lower production cost.

LABOR COST CONTROL

Labor cost control refers to keeping track of labor costs in total and per unit, comparing
them with predetermined figures and adopting remedial measures in case there are variances.

Labors cost control requires [a] production planning, [b] use of labor standards and budgets,
[c] labor performance reports, and [d] appropriate compensation including wage incentive
systems.

PRODUCTION PLANNING
Production planning starts with an intensive study of the product design and the
manufacturing processes involved and scheduling production runs way ahead of time. The

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product design and the manufacturing processes involved serve a basis in determining the kind
of human resources required in production. Production schedules supported by labor hour
requirements indicate when workers would be needed and what type of skills they must have.

LABOR BUDGETS AND STANDARDS

Labor standards in terms of output per labor hour or per day are established after production
planning and after conducting time and motion studies. The standards are used in preparing
labor budgets and measuring performance.

The budgets for labor hours and labor cost are prepared based on budgeted production
volume, allowed number of hours per unit and the corresponding labor rate per hour. The
budgeted production volume, in turn is based on budgeted sales volume.

For example, the budgeted production for a month is 20,000 and the standard output per
labor hour is 5 units. The budgeted number of labor hours is computed by dividing 20,000 units by
5 units to arrive at 4,000 labor hours. Assuming an hourly rate of P40, budgeted labor cost is
P160,000. If a direct worker is able to put in 160 hours in one month, 25 workers are needed to
produce 20,000 units in one month.

LABOR PERFORMANCE REPORTS

Labor performance reports may be prepared on a daily, weekly or monthly basis depending
on the level of management to which they are submitted and the nature of the manufacturing
process involved. Labor performance is then compared with standards previously set. Variances
of performance from standards are analyzed and used for decision making.

APPROPRIATE COMPENSATION AND WAGE INCENTIVE SYSTEMS

Labor rates and fringe benefits are established based on existing labor laws, collective
bargaining agreements and prevailing rates and practices in an industry in the specified locality.
An incentive wage system is adopted to increase a worker’s pay and at the same time reduce
labor cost per unit. It works in such a way that fixed overhead is absorbed by an increased number
of units thereby resulting in a lower product unit cost. Sometimes incentives are in the form of
bonuses or in kind depending on what would motivate the workers to improve productivity.

ACCOUNTING FOR LABOR COST

Accounting for labor may be divided into three phases, namely timekeeping procedures,
payroll procedures and charging labor costs to production.

TIMEKEEPING PROCEDURES
This process involves the determination of the total number of hours worked by an employee
and how this total is accounted for.
The first step in the timekeeping process is to gather data on how many hours an employee
has worked. In a manual system, the time card or clock card is used to show the time an
employee reports for work and the time he leaves the company. It serves as evidence for labor
time purchased or that payment is being made only for man hours expended within the company.
In computerized systems, companies may use magnetic identification cards or biometrics in
recording and controlling labor hours. The total number of hours worked is used as a basis in
payroll preparation.

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 TIME CARD No.: ___________
Name of Employee: ________________________ Payroll Period: ___________________
Position: ______________________________ Department: ____________________
Rest day: _______________ Civil Status: _____________ Hourly Wage Rate: ______
A.M. P. M. OVERTIME
Date In Out In Out In Out Hours
1
2
14
15
Total Hours shown is correct
Total Regular hours __________
___________________
Overtime hours __________
Authorized Signature

Accounting for the total hours spent by an employee in the company is done with the use
of time tickets (job tickets) and the daily time report. The time ticket shows the number of hours
that a worker devotes to a certain job during a day so that it serves as a primary basis in making
charges to direct labor cost of the jobs worked on.

When the individual time ticket is used, a new ticket must be made out for each job worked
on during the day. Since this procedure leads to many tickets per employee, some firms use a
daily time report on which the worker lists jobs.

TIME TICKET No. _________

Name of Employee: _______________________ Employee No.: _____________
Date: ________________ Shift: ________ Charge Account No.: __________________
Description of work: __________________
Time Started: ______________ Job No. _______ Pieces completed ______
Time Finished: _____________ Operation No. ____________________
Hours worked: _____________
Hourly rate: ________________ ___________________
Total Earnings (Hrs worked x Hourly rate) Supervisor’s Signature

DAILY TIME REPORT No. ______

Employee No. ___________ Date: ____________________
Name of Employee: ______________________________
Description of work: ______________________________
START FINISH TIME WORKED
Job No.
Hour Min Hour Min Hour Min

__________________
Supervisor’s Approval

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 Time tickets form the basis for calculating bonuses under a wage incentive plan. When
wages are based on hours worked, the time tickets provide a means of auditing the time cards
and a source of data concerning efficient utilization of labor.

PAYROLL PROCEDURES

In most manufacturing companies, workers who are on a daily wage rate basis or piece rate
basis are paid once a week. Other employees depending on their job position and nature of
work are paid biweekly (once every two weeks) or semimonthly (twice a month), or monthly.
Before the payments are made, a list of all employees entitled to receive payments with amounts
due each is prepared in a special business form called a payroll sheet.
The steps in the preparation of the payroll sheet and related procedures are given below:
1. Accumulate the number of hours worked each day by each employee as shown by the
time card.
2. Classify the hours and type of work performed each day by each employee as indicated
by the time tickets.
3. Convert labor hours into peso amounts using the regular rate and/or overtime rate of each
employee
4. At the end of the period (usually a week), summarize in a payroll sheet the gross earnings,
deductions, and net pay for each employee.
5. Prepare voucher on the basis of the totals of the payroll sheet, and enter the same in the
voucher register
6. Issue a check for the total net payment
7. Prepare recapitulation/summary sheet or a factory payroll distribution sheet. Prepare journal
voucher charging work in process for the direct labor and factory overhead for indirect
labor and other labor-related costs
8. Post direct labor costs to the individual job cost sheets. Post the indirect labor and other
labor-related costs to the factory overhead subsidiary ledger (Overhead Analysis Sheet)
9. Using the payroll sheet, post the gross earnings, deductions, and net pay for each employee
in the individual earnings record.

COMPUTING GROSS PAY

As earlier mentioned, the total number of hours in the time card is determined and multiplied
by the hourly rate of the employee. So, if an employee has worked 40 hours in a week as indicated
by his time card, the 40 hours is multiplied by his hourly rate, (let’s just assume P50/hour) to compute
the gross pay of P2,000 in that week. This example assumes that all of the 40 hours are regular
hours and were worked during ordinary working days. The computation will differ if the 40 hours
include work done on overtime or work was done on a legal holiday, a special day or a rest day.
The Labor Code of the Philippines gives us guidance on the specific rates applicable for
work done on days/hours beyond the regular day/hours of work.

HOLIDAY PAY
A. Regular Holidays
Every employee covered by the Holiday Pay Rule is entitled to his daily basic wage for
any unworked regular holiday. This means that the employee is entitled to at least 100 % of his
basic wage even if he did not report for work, provided he is present or is on leave of absence

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 with pay on the work day immediately preceding the holiday. Work performed on that day
merits at least twice (200%) the basic wage of the employee.

Illustration: Using a wage rate of P500 per day for the non-agricultural sector

For work within 8 hours:

Plus 100% of the daily basic rate of 100% or a total of 200%.
Regular rate 500.00
Add: Holiday Premium 500.00
Gross Pay 1,000.00

OR
Regular rate 500.00
Mulitply by: Holiday rate 200%
Gross Pay 1,000.00

Where the holiday falls on the scheduled rest day of the employee, work performed on
said day merits at least an additional 30% of the employee’s regular holiday rate of 200% or a
total of at least 260% (Please see Premium Pay).

There are twelve (12) regular holidays in a year:

New Year’s Day January 1
Maundy Thursday Movable Date
Good Friday Movable Date
Araw ng Kagitingan April 9
Labor Day May 1
Independence Day June 12
National Heroes Day Last Monday of August
Eidul Fitr Movable date
Id-ul-Adha Movable date
Bonifacio Day November 30
Christmas Day December 25
Rizal Day December 30

B. Special Days
RA 9492 lists down three (3) special days that shall be observed in this country:
Ninoy Aquino Day August 21
All Saints Day November 1
Last day of the year December 31
The principle of “no work, no pay” applies as well as on other special days proclaimed as
such by the President or by Congress. Workers who were not required or permitted to work on
those days are not by law entitled to any compensation.
On the other hand, work performed on those days merits an additional compensation of
not less than 30% on top of the basic pay or a total of 130% and at least 50% over and above
the basic pay or a total of 150% if the worker is permitted or suffered to work on said day falling
on his scheduled rest day (Please see III, Premium Pay)

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C. Absences
a. All covered employees shall be entitled to holiday pay when they are on leave of absence
with pay. Employees who are on leave of absence without pay on the day immediately
preceding a regular holiday may not be paid the required holiday pay if they have not
worked on such regular holiday.
b. Where the day immediately preceding the holiday is a non-working day in the
establishment of the scheduled rest day of the employee, he shall not be deemed to be
on leave of absence on the day, in which case he shall be entitled to the holiday pay if
he worked on the day immediately preceding the non-working day or rest day.

D. Holiday Pay of Certain Employees

a. Where the covered employee is paid on piece rate basis, his holiday pay shall not be less
than his average daily earnings for the last seven (7) actual working days preceding the
regular holiday. Provided, however, that in no case shall the holiday pay be less than the
applicable statutory minimum wage rate.
b. Seasonal workers may not be paid the required holiday pay during off-season when they
are not at work.
c. Workers who do not have regular working days, such as stevedores, shall be entitled to this
benefit.

OVERTIME PAY
A. Definition of Overtime Pay
Overtime pay refers to the additional compensation for work performed beyond eight (8)
hours a day.

B. Overtime Pay
The minimum overtime pay rates very according to the day the overtime work is
performed, as follows:
Rate based on
Overtime Worked Performed on Computation Regular Rate
a. Regular day 100% + 25% 125%
b. Rest day 130% X 130% 169%
c. Special day 130% X 130% 169%
d. Rest day which is also Special day 150% X 130% 195%
e. Regular Holiday 200% X 130% 260%
f. Regular Holiday which is also a rest day 260% x 130% 338%

Illustration: Using P500 as basic daily rate and P62.50 as basic hourly rate
Day
Premium Rate/hr. Rate/hr
Regular (Rate/hr within 8 OT beyond
Rate/hr x %) hrs Premium 8 hrs
a. Regular day 62.50 - 62.50 15.63 78.13
b. Rest day (30%) 62.50 18.75 81.25 24.38 105.63
c. Special day (30%) 62.50 18.75 81.25 24.38 105.63
d. Rest day and Special day (50%) 62.50 31.25 93.75 28.13 121.88
e. Regular Holiday (100%) 62.50 62.50 125.00 37.50 162.50
f. Regular Holiday and rest day
(160%) 62.50 100.00 162.50 48.75 211.25

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NIGHT SHIFT PAY
A. Minimum Night Shift Pay
Every employee is entitled to a night shift differential or night shift pay of not less than ten
percent (10%) of his regular wage for each hour of work performed between ten o’clock in
the evening and six o’clock in the morning of the following day.
If overtime work or work in excess of eight (8) hours falls within the aforesaid period,
premiums for overtime work should first be integrated into the regular hourly rate of the
employee before computing night shift pay.

B. Computation of Night Shift Pay

I. Where Night Shift (10PM to 6AM) Work is Regular Work
a. On an ordinary day:
Plus 10% of the basic hourly rate or a total of 110% of the basic hourly rate

b. On a rest day, special day or regular holiday:

Plus 10% of the regular hourly rate on a rest day, special day or regular holiday or
a total of 110% of the regular hourly rate on a rest day, special day or regular
holiday.
II. Where Night Shift (10PM to 6AM) Work is Overtime Work
a. On an ordinary day:
Plus 10% of the overtime hourly rate on an ordinary day or a total of 110% of the
overtime hourly rate on an ordinary day.

b. On a rest day/special day/a regular holiday:

Plus 10% of the overtime hourly rate on a rest day/ special day/ regular holiday

III. For overtime work in the night shift:

Since overtime work is not usually 8 hours, the compensation for overtime night shift work
is likewise computed on the basis of the hourly rate:

a. On an ordinary day
Plus 10% of the 125% of basic hourly rate or a total of 110% of 125% of basic hourly rate

b. On a rest day/special day/a regular holiday:

Plus 10% of the 130% of regular hourly rate on said days or a total of 110% of 130% of
the applicable regular hourly rate

PIECE-WORK WAGES
Previous discussions have assumed that employees are on hourly rates. If piece-work rates
are paid, a modification in the time ticket must be made. Clock hours will be recorded as before
to comply with government regulations governing wages and hours and to provide management
with a record of the employee’s efficiency. In addition, space must be provided in which the
number of operations completed can be written in. Earnings, of course, are computed from the
number of completed operations.

MAKE-UP PAY
Employees who are on piece-work rate are sometimes guaranteed a minimum hourly wage,
particularly if, through no fault of their own, their output is diminished. In periods during which the
employee does not earn the guaranteed minimum, the company makes up the difference.
When payrolls are recorded, only the amount payable at the piece-work rate should be charged

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to Work in process; the amount paid as make-up pay should become part of the factory
overhead.
To illustrate, assume that employees of the assembly department are paid P12 for each unit
assembled with a guaranteed wage of P100 per hour. Actual hours worked and production for a
given week were as follows:
Employee Hours worked Units assembled
Jack 48 392
Karl 46 398
Larry 48 390
Marco 45 375
Nato 39 321
Allowance for waiting and machine delays are paid at guaranteed rate. Allowance to be
paid to Karl - ½ hour, Marco – 1 hour, and Nato – 2 hours.
The entry to record payroll for the assembly department for the week is as follows:
Work in process 22,512
Factory overhead control 614
(Make-up pay 264)
(Delay allowance 350)
Vouchers payable 23,126

Computations:
Jack Karl Larry Marco Nato
Hours worked 48 46 48 45 39
Guaranteed wage (Hrs x P100) P4,800 P4,600 P4,800 P4,500 P3,900
Piece-work earnings (units x P12) 4,704 4,776 4,680 4,500 3,852
Make-up pay P 96 -0- P 120 -0- P 48

b. Payroll sheet
Piece-work Make-up Delay Total
earnings pay allowance earnings
Jack 4,704 96 4,800
Karl 4,776 50 4,826
Larry 4,680 120 4,800
Marco 4,500 100 4,600
Nato 3,852 48 200 4,100
Totals 22,512 264 350 23,126

PAYROLL DEDUCTIONS
Payroll deductions are of two kinds, nontax and tax. Nontax deductions are made at the
request of the employee, required by union regulations or repayment of advances. Tax
deductions are those required by law. Among the deductions required by law are employee’s
withholding tax, SSS contributions, philhealth or medicare contributions, and Pag-IBIG fund
premiums.

INCOME TAX WITHHELD

Employers are required under Bureau of Internal Revenue (BIR) Regulations to make
deductions from each employee’s earnings for income taxes. The amount which the employer is
required to withhold depends on the total number of exemptions which the employee claims, the
employee’s earnings and the frequency of the payroll period. Upon being hired, the employee

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fills out BIR Form 2305 (Certificate of Update of Exemption and of Employer’s and Employee’s
Information – see appendix for a sample) to indicate the number of exemptions claimed. A new
form is filed when there is a change in the number of exemptions.

SOCIAL SECURITY SYSTEM LAW

The law provides that employers in a covered industry deduct and withhold from the
employee’s monthly salary, wage, compensation, or earnings during the month in accordance
with the schedule of contributions (see appendix). The employer shall pay, with respect to such
covered employee, the employer’s contribution in accordance with the same schedule. The
Social Security Law specifically excludes employees in several types of work, such as agricultural
workers who are paid a regular wage or base pay, and who do not work for an uninterrupted
period of at least six months in a year, domestic services with monthly earnings of less than P1,000
a month, government employees, a variety of others.
The amount of employee’s and employer’s contribution is based on their monthly earnings,
that’s why such is deducted only from the last payroll for the month. In determining the monthly
SSS contributions, the following steps are taken:
1. Prepare an SSS contribution sheet
a. For weekly paid employees
Weekly Gross Earnings SSS ECC** Total
SSS Gross Total
Employee EE +
no. 1st 2nd 3rd 4th earnings EE* ER* ER ER
ER

*EE = EMPLOYEE; ER = EMPLOYER

** ECC – Employees Compensation Contribution (discussion on next section)

b. For monthly paid employees

SSS Monthly Gross Earnings Gross SSS ECC Total Total
Employee
no. 1st half 2nd half earnings EE ER ER ER EE + ER

2. Compute the gross salary for the month for each worker or employee
a. For weekly paid employees, add the gross earnings for the inclusive four or five
weeks terminating nearest the end of the month
b. For monthly paid employees, add the gross earnings for the first half and second
half of the months payroll
3. Using the SSS table look for the appropriate salary bracket, pick up the employee's and
employer’s contribution, and post amount in the contribution sheet.
4. Note that simultaneously, the employer’s contributions are also posted to the contribution
sheet
5. Total the contribution sheet
Employers are required to remit contributions to the nearest SSS branch or SSS-accredited
banks on or before the 10th day of the following month.

THE NEW EMPLOYEES’ COMPENSATION CONTRIBUTION

The Labor Code of the Philippines provides for the promotion and development of a tax-
exempt employees’ compensation program whereby employees and their dependents, in the
event of work-connected disability or death, may promptly secure adequate income benefit,
and medical or related benefits. The decree establishes a fund from compulsory employers’

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contributions for their employees’ compensation and state insurance. Coverage is compulsory
and automatic for all SSS- registered employers and their employees.

THE PHILIPPINE HEALTH INSURANCE CORPORATION

The employer is empowered to deduct the employee’s contribution from his monthly salary.
He remits monthly contributions in the same manner as he does contributions under the Social
Security System to the Philippine Health Insurance Corporation (PHIC). Employer and employee
contributions of equal amounts based on the employees’ salary are made monthly in
accordance with the schedule in the appendix.

THE Pag-IBIG FUND OR THE HOME DEVELOPMENT MUTUAL FUND

Pag-IBIG is the acronym for Pagtutulungan sa Kinabukasan—Ikaw, Bangko, Industriya,
Gobyerno. In effect, Pag-IBIG harnesses the four sectors of our society to provide its members with
adequate housing through an effective savings scheme. It is generated by the employees’
monthly contributions and by the employers’ counterpart. The program is a provident system
which features: housing loan assistance to employee members, double your money benefit,
dividend earnings, tax free benefit, and guarantee of government.
Covered employees and employers shall contribute to the Fund based on the monthly
compensation of covered employees as follows:
a. Employees earning not more than One thousand five hundred (P1,500) per month –
One percent (1%)
b. Employees earning more than One thousand five hundred (P1,500) per month – Two
percent (2%)
c. All employers – two percent (2%) of the monthly compensation of all covered
employees.
The maximum monthly compensation to be used in computing employee and employer
contributions shall not be more than Five thousand pesos (P5,000), that’s why the maximum
amount of contribution is One hundred pesos (P100) which is 2% of P5,000.

OTHER LABOR RELATED DEDUCTIONS

In addition to compulsory payroll deductions, a variety of other deductions may be withheld
from take-home pay with the consent of the employee.

INSURANCE
Many companies provide various benefits for their employees, such as health, accident,
hospital, and life insurance. It is common for the company and the employees to share the cost,
with the employees’ share being deducted form the wages each payroll periods or at regular
intervals. If the company paid insurance premiums in advance, including the employees’ share,
an asset account, such as Prepaid Health and Accident Insurance, will be debited at the time the
payments are made. The employer’s share will be subsequently credited to the asset account
and debited to expenses, and the asset account will be credited for the employees’ share of the
premiums when the payroll deductions are made. In this payroll deduction, as in all similar cases,
a subsidiary ledger showing the contributions of each employee is necessary, and one or more
general ledger accounts are maintained.

UNION DUES
Many enterprises employing union labor agree to a union shop and to a deduction of initiation
fees and regular membership dues from the wages of each employee. To account for these
deductions, a column is provided in the payroll journal; and a general ledger account entitled

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Union Dues Payable shows the liability for amounts withheld from the employees. At regular
intervals, the company prepares a report and remits the dues collected to the union treasurer.

PAYROLL ADVANCES
For a variety of reasons, payroll advances may be made to officers, sales representatives, and
factory workers. The advances may be in the form of cash, materials, or finished goods. To provide
control, an advance authorization form should be executed by a responsible official and should
be sent to the payroll department. The asset account debited for all advances represents a
receivable to the company and may be entitled Salary and Wage Advances.
When the advances take the form of merchandise, Materials or Finished Goods is credited. If
the merchandise is charged to the employee at a figure above cost, Sales may be credited.
When the price is above cost but substantially less than the regular sales price, an account entitled
Sales to Employees might be maintained. At the regular payroll date, the employee’s earnings
are entered in the payroll journal as usual, and the advance is deducted from ages to be paid.
The amount of the advance being deducted is credited to Salary and Wage Advances.

CHARGING LABOR COSTS TO PRODUCTION

This is concerned with the allocation of payroll charges to the different jobs, departments or
to overhead based on the nature of work done by the employees. Direct labor hours and their
cost are entered on the respective job order cost sheets and indirect labor costs are entered on
the subsidiary record for Factory Overhead Control.
The individual time ticket or daily time report shows the use made of the time purchased from
each employee. Time tickets are sorted by jobs, departments and types of indirect labor for the
preparation or the Factory Payroll Distribution Sheet to permit the allocation of the total payroll to
Work in Process and to Factory Overhead Control. The entry to distribute payroll is as follows:
Work In Process xx
Factory Overhead Control xx
Factory Payroll xx

IDLE TIME
The timekeeping department collects and controls time cards and job tickets. The number of
hours timed in per time card is reconciled with that per job tickets or daily time report. If the total
hour in the time card is higher than that in the daily time report, the difference is idle time which is
charged to Factory Overhead Control.

OVERTIME PREMIUM
For accounting purposes, all premiums or the difference between amount earned and a
worker’s pay at regular rate are treated as overtime premiums. They may be charged either to
direct labor cost or to factory overhead control depending on the reason for overtime work.
The premium is treated as direct labor cost when overtime work is due to the rush nature of a
job. When a contract for a rush job is accepted, it is with foreknowledge that overtime would be
necessary so that the price charged to the customer should include the overtime factor in the
calculations.
The premium is treated as factory overhead when overtime work is due to greater volume of
work, slow production, or inadequate plant capacity. In these cases, it would be unfair to charge
it to a job that happens to be in process during the overtime hours.

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BONUS PAYMENTS
Bonus payments may be a fixed amount per employee or job classification, a percentage of
profits, a fraction of one month’s wages, or some other calculated amount. The amount of bonus
for each employee may be fixed and long-established tradition of the company, or the amount
may vary from year to year. Bonus payments are a production cost, a marketing expense, or an
administrative expense. If a factory worker’s average weekly earnings are P250 and the company
intends to pay two week’s pay as a bonus at the end of the year, then earnings actually amount
to P260 per week, but the additional P10 per week is paid in lump sum of P500 (P10 x 50 weeks,
assuming two weeks of vacation time) at the end of the year. To spread the bonus cost over
productions throughout the year via the predetermined factory overhead rate, the weekly entry
would be:

Work in Process 250

Factory Overhead Control (Bonus Pay) 10
Payroll 250
Liability for Bonus 10
When the bonus is paid, the liability account is debited and Cash and the withholding
accounts are credited.
In theory, this and other direct-labor-related costs are additional labor costs that should be
charged to Work in Process the same as the employees’ gross wages. In practice, such a
procedure is usually impractical, and these costs are generally included in the predetermined
factory overhead rate.

VACATION PAY
Vacation pay presents cost problems similar to those of bonus payments. When a shop
employee is entitled to a paid vacation of 2 weeks, the total wages earned during 50 weeks of
productive labor are paid over a period of 52 weeks. For example, assume than an employee has
a base wage of P200 per week and is entitled to a paid vacation of 2 weeks. The cost of labor is
P200, plus P8 per week. In 50 weeks at P8 per week, the deferred payment of P400 will equal the
expected vacation pay. The entry to set up the weekly labor cost including the provision for
vacation pay would be:

Work in Process 200

Factory Overhead Control(Vacation Pay) 8
Payroll 200
Liability for Vacation Pay 8
When the vacation is taken, the liability account is debited and Cash and the withholding
accounts are credited. Similarly, accrual should be made for employer liability pertaining to sick
leave, holidays, or other personal activities for which employees receive compensation.
Salaried employees usually receive two or more weeks of vacation. Vacation pay of salaried
workers, as well as payment for other absences, should also be considered to accrue during the
time these employees perform their duties. If it becomes necessary to hire temporary employees
to perform the duties of salaried personnel who are absent, this additional expense is rightfully
charged to the department salary accounts.

PENSION PLANS
A pension plan is an arrangement whereby a company provides retirement benefit payments
for all employees in recognition of their work contribution to the company. A pension plan is
probably the most important as well as the most complicated factor associated with labor and
labor costs. It influences personnel relations, company financing, income determination, income

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13
tax considerations, and general economic conditions. It must also comply with government
regulations.

RECORDING PAYROLL

At the end of the payroll period, the total gross earnings and the totals of each of the various
deductions are recorded as follows:

1) Factory Payroll (gross earnings) xx

Withholding Tax Payable xx
SSS Contributions Payable xx
Philhealth Contributions Payable xx
Pag-IBIG Contributions Payable xx
Vouchers Payable (net earnings) xx
To record factory payroll.

2) Vouchers Payable xx
Cash in Bank xx
To record payment of payroll.

3) Work In Process-Labor xx
Factory Overhead Control xx
Factory Payroll xx
To record payroll distribution.

4) Factory Overhead Control xx

SSS Contributions Payable xx
Phil. Health Contributions Payable xx
Pag-IBIG Contributions Payable xx
To record employer contributions.

5) Withholding Tax Payable xx

SSS Contributions Payable xx
Phil. Health Contributions Payable xx
Pag-IBIG Contributions Payable xx
Vouchers Payable xx
To prepare voucher for remittance.

6) Vouchers Payable xx
Cash in Bank xx
To record remittance.

ILLUSTRATIVE PROBLEM:

For the 4th-week payroll ending February 28, JC Company furnished the following data:

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14
a. Total hours worked taken from time cards
Employee Total
Gross earnings Regular Regular Overtime
Position hours
No. Name (1st – 3rd wk) Rate/hr hours hours
worked
101 Carlo Cutter 11,520.00 80 48 5 53
102 Chris Cutter 11,000.00 80 48 5 53
103 Ben Bender 12,000.00 80 45 6 51
104 Bart Bender 10,500.00 80 45 6 51
105 Willy Welder 15,400.00 90 48 10 58
106 Peter Painter 18,750.00 120 47 10 57
107 Susan Supervisor 25,920.00 180 48 6 54
108 Stella Stores clerk 11,600.00 80 40 40
109 Teresa Timekeeper 14,400.00 45 48 6 54
110 Dana Driver 12,600.00 80 48 5 53

b. The time tickets for the same payroll week were accumulated and classified as follows:
Employee Total hours Hours spent on Job Orders
Position
No. Name worked 911 912 913 914 915
101 Carlo Cutter 53 3 10 15 10 15
102 Chris Cutter 53 2 10 15 10 15
103 Ben Bender 51 2 10 10 10 16
104 Bart Bender 51 2 10 10 10 19
105 Willy Welder 58 12 12 20 10 2
106 Peter Painter 57 15 20 15 7 -

c. The overtime rate is 125% of regular rate.

The journal entries to record payroll transactions follow:

1) Factory Payroll 52,190.00

Withholding Tax Payable 1,000.49
SSS Payable 6,940.00
Philhealth Payable 2,938.20
Pag-IBIG Payable 1,000.00
Vouchers Payable 40,311.31
To record payroll.

2) Vouchers Payable 40,311.31

Cash in Bank 40,311.31
To record payment of payroll.

3) Work In Process-Labor 28,200.00

Factory Overhead Control 23,990.00
(Indirect labor 22,020.00)
(Idle time 500.00)
(Overtime Premium 1,470.00)
Factory Payroll 52,190.00
To record payroll distribution.

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transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document,
without the prior written permission of SLU, is strictly prohibited.
15
4) Factory Overhead Control 18,098.20
SSS Contributions Payable 13,880.00
EC Contributions Payable 280.00
Philhealth Contributions Payable 2,938.20
Pag-IBIG Contributions Payable 1,000.00
To record employer contributions.

5) Withholding Tax Payable 1,000.49

SSS Payable 20,820.00
EC Contributions Payable 280.00
Philhealth Payable 5,876.40
Pag-IBIG Payable 2,000.00
Vouchers Payable* 29,976.89
To prepare voucher for remittance.

6) Vouchers Payable* 29,976.89

Cash in Bank 29,976.89
To record remittance.
*In actual practice, individual vouchers are prepared for each payee.

LABOR COST SUMMARY

The Factory Payroll is a “clearing” account created for the purpose of accumulating labor
costs temporarily until they can be distributed to appropriate labor cost accounts.

When the breakdown of the job time tickets for each worker and the job order numbers as
well as the hours spent for each job is furnished, a recapitulation/summary sheet is necessary. This
sheet is the basis for posting to the various cost sheets and the journal entry to distribute the factory
payroll account. Two recapitulation sheets are prepared, namely [1] Schedule of Labor Hours
and [2] Schedule of Labor Costs.

In the preparation of the Schedule of Labor Hours, a comparison is made with the total hours
worked for the payroll period as per time cards and as per time tickets. The total hours spent on
each job will be posted to the individual cost sheets. Only the labor hours of direct labor workers
are analyzed. The actual hours spent on the jobs are considered as “Productive”. If the total hours
worked per time cards is greater than total productive hours, then the difference is considered
non-productive or idle time. An analysis of the idle time should be made if management desires
to keep a record to control the same, especially if the number of hours is substantial.

The Schedule of Labor Costs is the basis of the journal entry to record the distribution of the
factory payroll. This is completed by multiplying the regular rate of the workers with the hours spent
on the jobs (productive time in schedule of labor hours) to get the direct labor cost. The non-
productive hours is also multiplied with the regular rate to get the cost of idle time. The salaries of
workers who are not directly involved in the manufacture of the finished product shall be lumped
together under Indirect Labor. The Overtime Premium is obtained by getting the difference
between the overtime rate and regular rate, and then multiply this difference with the overtime
hours. Overtime Pay as shown in the payroll sheet is the product of overtime hours and overtime
rate, where overtime rate includes the regular rate plus overtime premium. The total per payroll
column should correspond to the gross earnings from the payroll sheet/register. The total direct
labor costs on each job orders will be posted to the individual cost sheets.

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transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document,
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16
 LABOR COST AND CONTROL 17
JC C OMPANY
PAYROLL WORKSHEET
FOR THE WEEK ENDING FEBRUARY 28, 20__

Employee Regular Overtime Gross Deductions Net

No. Name Rate Hrs Amount Rate Hrs Amount Earnings W/Tax SSS PHIC PAG-IBIG Total Pay
101 C arlo 80.00 48.00 3,840.00 100.00 5.00 500.00 4,340.00 - 640.00 237.90 100.00 977.90 3,362.10
102 C hris 80.00 48.00 3,840.00 100.00 5.00 500.00 4,340.00 - 620.00 230.10 100.00 950.10 3,389.90
103 Ben 80.00 45.00 3,600.00 100.00 6.00 600.00 4,200.00 - 640.00 243.00 100.00 983.00 3,217.00
104 Bart 80.00 45.00 3,600.00 100.00 6.00 600.00 4,200.00 - 580.00 220.50 100.00 900.50 3,299.50
105 Willy 90.00 48.00 4,320.00 112.50 10.00 1,125.00 5,445.00 - 800.00 312.68 100.00 1,212.68 4,232.33
106 Peter 120.00 47.00 5,640.00 150.00 10.00 1,500.00 7,140.00 208.73 800.00 388.35 100.00 1,497.08 5,642.92
107 Susan 180.00 48.00 8,640.00 225.00 6.00 1,350.00 9,990.00 791.76 800.00 538.65 100.00 2,230.41 7,759.59
108 Stella 80.00 40.00 3,200.00 100.00 - - 3,200.00 - 600.00 222.00 100.00 922.00 2,278.00
109 Teresa 90.00 48.00 4,320.00 112.50 6.00 675.00 4,995.00 - 780.00 290.93 100.00 1,170.93 3,824.08
110 Dana 80.00 48.00 3,840.00 100.00 5.00 500.00 4,340.00 - 680.00 254.10 100.00 1,034.10 3,305.90
TOTAL 465.00 44,840.00 59.00 7,350.00 52,190.00 1,000.49 6,940.00 2,938.20 1,000.00 11,878.69 40,311.31

JC COMPANY
EMPLOYEE SSS, PHIC & PAG-IBIG CONTRIBUTIONS
FOR THE WEEK ENDING FEBRUARY 28, 20__

Employee WEEKLY EARNINGS MONTH

No. Name 1ST-3RD 4TH EARNINGS SSS PHIC PAG-IBIG TOTAL
101 Carlo 11,520.00 4,340.00 15,860.00 640.00 237.90 100.00 977.90
102 Chris 11,000.00 4,340.00 15,340.00 620.00 230.10 100.00 950.10
103 Ben 12,000.00 4,200.00 16,200.00 640.00 243.00 100.00 983.00
104 Bart 10,500.00 4,200.00 14,700.00 580.00 220.50 100.00 900.50
105 Willy 15,400.00 5,445.00 20,845.00 800.00 312.68 100.00 1,212.68
106 Peter 18,750.00 7,140.00 25,890.00 800.00 388.35 100.00 1,288.35
107 Susan 25,920.00 9,990.00 35,910.00 800.00 538.65 100.00 1,438.65
108 Stella 11,600.00 3,200.00 14,800.00 600.00 222.00 100.00 922.00
109 Teresa 14,400.00 4,995.00 19,395.00 780.00 290.93 100.00 1,170.93
110 Dana 12,600.00 4,340.00 16,940.00 680.00 254.10 100.00 1,034.10
TOTAL 143,690.00 52,190.00 195,880.00 6,940.00 2,938.20 1,000.00 10,878.20

17
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transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document,
without the prior written permission of SLU, is strictly prohibited.
 LABOR COST AND CONTROL 18
JC COMPANY
COMPUTATION OF TAX
FOR THE WEEK ENDING FEBRUARY 28, 20__

Employee Gross SSS, PHIC Taxable Excess Basic Total

No. Name Earnings PAG-IBIG Earnings Basic Excess Rate Tax Tax Tax
101 Carlo 4,340.00 977.90 3,362.10 4,808.00 - 0% - - -
102 Chris 4,340.00 950.10 3,389.90 4,808.00 - 0% - - -
103 Ben 4,200.00 983.00 3,217.00 4,808.00 - 0% - - -
104 Bart 4,200.00 900.50 3,299.50 4,808.00 - 0% - - -
105 Willy 5,445.00 1,212.68 4,232.33 4,808.00 - 0% - - -
106 Peter 7,140.00 1,288.35 5,851.65 4,808.00 1,043.65 20% 208.73 - 208.73
107 Susan 9,990.00 1,438.65 8,551.35 7,692.00 859.35 25% 214.84 576.92 791.76
108 Stella 3,200.00 922.00 2,278.00 4,808.00 - 0% - - -
109 Teresa 4,995.00 1,170.93 3,824.08 4,808.00 - 0% - - -
110 Dana 4,340.00 1,034.10 3,305.90 4,808.00 - 0% - - -
TOTAL 52,190.00 10,878.20 41,311.80 50,964.00 1,903.00 423.57 576.92 1,000.49

JC COMPANY
EMPLOYER SSS, PHIC & PAG-IBIG CONTRIBUTIONS
FOR THE WEEK ENDING FEBRUARY 28, 20__

Employee WEEKLY EARNINGS MONTH

No. Name 1ST-3RD 4TH EARNINGS SSS EC PHIC PAG-IBIG TOTAL
101 Carlo 11,520.00 4,340.00 15,860.00 1,280.00 30.00 237.90 100.00 1,647.90
102 Chris 11,000.00 4,340.00 15,340.00 1,240.00 30.00 230.10 100.00 1,600.10
103 Ben 12,000.00 4,200.00 16,200.00 1,280.00 30.00 243.00 100.00 1,653.00
104 Bart 10,500.00 4,200.00 14,700.00 1,160.00 10.00 220.50 100.00 1,490.50
105 Willy 15,400.00 5,445.00 20,845.00 1,600.00 30.00 312.68 100.00 2,042.68
106 Peter 18,750.00 7,140.00 25,890.00 1,600.00 30.00 388.35 100.00 2,118.35
107 Susan 25,920.00 9,990.00 35,910.00 1,600.00 30.00 538.65 100.00 2,268.65
108 Stella 11,600.00 3,200.00 14,800.00 1,200.00 30.00 222.00 100.00 1,552.00
109 Teresa 14,400.00 4,995.00 19,395.00 1,560.00 30.00 290.93 100.00 1,980.93
110 Dana 12,600.00 4,340.00 16,940.00 1,360.00 30.00 254.10 100.00 1,744.10
TOTAL 143,690.00 52,190.00 195,880.00 13,880.00 280.00 2,938.20 1,000.00 18,098.20

18
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 LABOR COST AND CONTROL 19

JC COMPANY
SCHEDULE OF LABOR HOURS
Employee Total hrs Hours Spent on Job Orders Non
No. Name Worked 911 912 913 914 915 Productive Productive
101 Carlo 53 3 10 15 10 15 53 -
102 Chris 53 2 10 15 10 15 52 1
103 Ben 51 2 10 10 10 16 48 3
104 Bart 51 2 10 10 10 19 51 -
105 Willy 58 12 12 20 10 2 56 2
106 Peter 57 15 20 15 7 - 57 -
TOTAL 323 36 72 85 57 67 317 6

SCHEDULE OF LABOR COST

Emplo yee Regular Direct Labor Cost on Jobs Total Indirect Idle Overtime Total Total
No. Rate 911 912 913 914 915 Direct labor Labor Time Premium Overhead Payroll
101 80 240.00 800.00 1,200.00 800.00 1,200.00 4,240.00 - 100.00 100.00 4,340.00
102 80 160.00 800.00 1,200.00 800.00 1,200.00 4,160.00 80.00 100.00 180.00 4,340.00
103 80 160.00 800.00 800.00 800.00 1,280.00 3,840.00 240.00 120.00 360.00 4,200.00
104 80 160.00 800.00 800.00 800.00 1,520.00 4,080.00 - 120.00 120.00 4,200.00
105 90 1,080.00 1,080.00 1,800.00 900.00 180.00 5,040.00 180.00 225.00 405.00 5,445.00
106 120 1,800.00 2,400.00 1,800.00 840.00 - 6,840.00 - 300.00 300.00 7,140.00
107 180 - - - - - - 9,720.00 - 270.00 9,990.00 9,990.00
108 80 - - - - - - 3,200.00 - - 3,200.00 3,200.00
109 90 - - - - - - 4,860.00 - 135.00 4,995.00 4,995.00
110 80 - - - - - - 4,240.00 - 100.00 4,340.00 4,340.00
Total 3,600.00 6,680.00 7,600.00 4,940.00 5,380.00 28,200.00 22,020.00 500.00 1,470.00 23,990.00 52,190.00

19
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 CONTRIBUTION TABLES

REVISED WITHHODING TAX TABLE

Effective January 1, 2018 to ecember 31, 2022

DAILY 1 2 3 4 5 6
Compensation P685 P685 - P1,096 – P2,192 – P5,479 – P21,918 &
Range and P1,095 P2,191 P5,478 P21,917 above
below
Prescribe 0.00 0.00 + P82.19 + P356.16 + P1,342.17 + P6,602.74 +
Withholding 20% over 25% over 30% over 32% over 35% over
Tax P685 P1,096 P2,192 P5,479 P21,918
WEEKLY 1 2 3 4 5 6
Compensation P4,808 & P4,808 – P7,692 – P15,385 – P38,462 - P153,846
Range below P7,691 P15,384 P38,461 P153,845 &above
Prescribe 0.00 0.00 + P576.92 + P2,500 + P9,423.08 + P46,346.15+
Withholding 20% over 25% over 30% over 32% over 35% over
Tax P4,808 P7,692 P15,385 P38,462 P153,846
SEMI- 1 2 3 4 5 6
MONTHLY
Compensation P10,417 P10,417- P16,667- P33,333- P83,333- P333,333 &
Range & below P16,666 P33,332 P83,332 P333,332 above
Prescribe 0.00 0.00 + P1,250 + P5,416.67 + P20,416.67 P100,416.67+
Withholding 20% over 25% over 30% over + 32% over 35% over
Tax P10,417 P16,667 P33,333 P83,333 P333,333
MONTHLY 1 2 3 4 5 6
Compensation P20,833 P20,833- P33,333- P66,667- P166,667- P666,667 &
Range & below P33,332 P66,666 P166,666 P666,666 above
Prescribe 0.00 0.00 + P2,500 + P10,833.33 P40,833.33 P200,833.33+
Withholding 20% over 25% over + 30% over + 32% over 35% over
Tax P20,833 P33,333 P66,667 P166,667 P666,667

PAG-IBIG

PERCENTAGE OF MONTHLY
COMPENSATION
MONTHLY
COMPENSATION EMPLOYEE SHARE EMPLOYER SHARE
1,500 and below 1% 2%
1,501 - 5,000 2% 2%
• Maximum employer contribution is P100 however, the employee may choose to contribute
2% of his/her monthly salary.

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 PHIC
MONTHLY BASIC MONTHLY
YEAR SALARY PREMIUM PREMIUM
MIN MAX RATE MIN MAX

2019 10,000.00 50,000.00 2.75% 275.00 1,375.00

2020 10,000.00 60,000.00 3.00% 300.00 1,800.00

2021 10,000.00 70,000.00 3.50% 350.00 2,450.00

2022 10,000.00 80,000.00 4.00% 400.00 3,200.00

2023 10,000.00 90,000.00 4.50% 450.00 4,050.00

2024 10,000.00 100,000.00 5.00% 500.00 5,000.00

2025 10,000.00 100,000.00 5.00% 500.00 5,000.00

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