Podcast
Questions and Answers
A manufacturing firm's labor costs include direct labor, indirect labor, and associated fringe benefits. How would the implementation of activity-based costing (ABC) principles most significantly alter the traditional allocation of these labor-related costs, assuming that previously, a simple plantwide overhead rate based on direct labor hours was in use?
A manufacturing firm's labor costs include direct labor, indirect labor, and associated fringe benefits. How would the implementation of activity-based costing (ABC) principles most significantly alter the traditional allocation of these labor-related costs, assuming that previously, a simple plantwide overhead rate based on direct labor hours was in use?
- ABC would simplify cost allocation, consolidating all labor-related expenses into a single cost pool to reduce administrative overhead.
- ABC would likely result in a more refined allocation of indirect labor and fringe benefits to specific activities and cost objects based on cause-and-effect relationships rather than direct labor hours. (correct)
- ABC would lead to the complete elimination of indirect labor costs from product costing, as only direct costs are relevant under this method.
- ABC would mandate the allocation of all labor costs, including direct labor, based solely on machine hours to enhance throughput efficiency.
In a manufacturing environment, an employee spends 60% of their time directly assembling a product, 20% performing machine maintenance, and 20% cleaning the factory floor. If the employee's total compensation is $50,000 annually, what amount should be classified as direct labor cost?
In a manufacturing environment, an employee spends 60% of their time directly assembling a product, 20% performing machine maintenance, and 20% cleaning the factory floor. If the employee's total compensation is $50,000 annually, what amount should be classified as direct labor cost?
- $30,000, representing the proportion of time dedicated to direct assembly. (correct)
- $50,000, assigning the entire compensation as direct labor to simplify cost accounting processes.
- $40,000, combining direct assembly and machine maintenance as direct production-related activities.
- $20,000, reflecting the time spent on machine maintenance and cleaning.
A company's compensation policy includes a guaranteed minimum wage, coupled with an incentive plan based on units produced. An employee's output fluctuates, occasionally falling below the threshold required to exceed the minimum wage. Critically analyze the accounting treatment for the difference between the minimum guaranteed wage and the earnings based solely on piece rate when the latter is lower.
A company's compensation policy includes a guaranteed minimum wage, coupled with an incentive plan based on units produced. An employee's output fluctuates, occasionally falling below the threshold required to exceed the minimum wage. Critically analyze the accounting treatment for the difference between the minimum guaranteed wage and the earnings based solely on piece rate when the latter is lower.
- The difference is expensed immediately as a period cost, reflecting a loss due to inefficient production.
- The difference is capitalized as part of the work-in-process inventory, amortized over the expected production cycle.
- The difference is accounted for as indirect labor, absorbed into factory overhead to reflect the inefficiency. (correct)
- The difference is treated as a direct labor variance, directly adjusting the cost of goods sold.
A union contract stipulates that employees receive a shift premium of 15% for work performed during the evening shift. How should this shift premium be accounted for in a job-order costing system within a highly automated manufacturing plant where both day and evening shifts are engaged in production runs for multiple, distinct client orders?
A union contract stipulates that employees receive a shift premium of 15% for work performed during the evening shift. How should this shift premium be accounted for in a job-order costing system within a highly automated manufacturing plant where both day and evening shifts are engaged in production runs for multiple, distinct client orders?
An employee works overtime due to a critical machine malfunction that halted the production line. Evaluate the appropriate accounting treatment of the overtime premium paid, considering the malfunction was caused by inadequate preventative maintenance.
An employee works overtime due to a critical machine malfunction that halted the production line. Evaluate the appropriate accounting treatment of the overtime premium paid, considering the malfunction was caused by inadequate preventative maintenance.
What is the fundamentally accepted method for accounting for vacation pay, and how does it align with the matching principle in accrual accounting, particularly in industries with significant seasonal fluctuations in production volume?
What is the fundamentally accepted method for accounting for vacation pay, and how does it align with the matching principle in accrual accounting, particularly in industries with significant seasonal fluctuations in production volume?
A manufacturing company uses both time cards and labor job tickets. What is the incremental information provided by labor job tickets, beyond that captured by time cards, and how does it enhance the precision of cost allocation in a complex production environment?
A manufacturing company uses both time cards and labor job tickets. What is the incremental information provided by labor job tickets, beyond that captured by time cards, and how does it enhance the precision of cost allocation in a complex production environment?
In the context of accounting for employer taxes and fringe benefits, critically evaluate the implications of categorizing these costs as either direct labor or factory overhead. What factors should a company consider when determining the appropriate classification, and how might this decision impact strategic pricing and profitability analysis?
In the context of accounting for employer taxes and fringe benefits, critically evaluate the implications of categorizing these costs as either direct labor or factory overhead. What factors should a company consider when determining the appropriate classification, and how might this decision impact strategic pricing and profitability analysis?
Consider a scenario where a factory employs both direct laborers and indirect laborers. Direct laborers' wages are based on piece rate, while indirect laborers are paid a fixed monthly salary. How would fluctuating production volumes affect the allocation of labor costs, and what strategies can be employed to maintain consistent and accurate cost allocation regardless of these fluctuations?
Consider a scenario where a factory employs both direct laborers and indirect laborers. Direct laborers' wages are based on piece rate, while indirect laborers are paid a fixed monthly salary. How would fluctuating production volumes affect the allocation of labor costs, and what strategies can be employed to maintain consistent and accurate cost allocation regardless of these fluctuations?
In an environment where technology facilitates real-time tracking of labor hours across various production processes, evaluate the strategic advantages and potential challenges of migrating from a traditional timekeeping system based on time cards to a more sophisticated, integrated system that captures labor data directly from the shop floor via biometric scanners and digital job tickets.
In an environment where technology facilitates real-time tracking of labor hours across various production processes, evaluate the strategic advantages and potential challenges of migrating from a traditional timekeeping system based on time cards to a more sophisticated, integrated system that captures labor data directly from the shop floor via biometric scanners and digital job tickets.
Flashcards
What is labor?
What is labor?
The physical or mental effort used in manufacturing a product.
What is labor cost?
What is labor cost?
The price paid for utilizing human resources in the production process.
What is direct labor?
What is direct labor?
Labor directly involved in the production of a finished product; easily traced.
What is indirect labor?
What is indirect labor?
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What are wages?
What are wages?
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What are salaries?
What are salaries?
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What is a time card?
What is a time card?
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What is a labor job ticket?
What is a labor job ticket?
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What is Shift premium?
What is Shift premium?
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What is premium rate?
What is premium rate?
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Study Notes
- The lecture covers Cost Accounting for Labor.
- By Dr. Mostafa I. El-Feky, Accounting Department, Faculty of Commerce - Mansoura University.
- Dr. El-Feky is also the Manager of the University Services Marketing Center and the Manager of Measurement and Assessment Unit.
Control & Accounting of Labor
- Labor represents the physical or mental effort spent in manufacturing a product.
- Labor cost represents the price paid for utilizing human resources.
- Compensation paid to employees involved in production-related activities is considered factory labor cost.
- The cost of labor can be classified into direct and indirect labor.
Direct Labor
- Directly involved in the production of a finished product.
- Easily traced to a product.
- Represents a major labor cost in producing the product.
- Considered both a prime cost and a conversion cost.
Indirect Labor
- Factory labor is not directly traceable to a product.
- Relating the cost of indirect labor to production is not worthwhile.
- Considered part of factory overhead cost.
Costs Included in Labor
- The primary labor cost is wages paid to production workers.
- Wages are payments made on an hourly, daily, or piecework basis.
- Salaries are fixed payments made regularly for managerial or clerical services.
- The terms 'wages' and 'salaries' are often incorrectly used interchangeably.
- Total labor costs are increasing rapidly, especially in areas like vacation pay, holiday pay, pensions, hospitalization, life insurance, and other fringe benefits.
Accounting for Labor
- Involves three main activities: timekeeping, computation of time payroll, and allocation of payroll costs.
Timekeeping
- The function collects the hours worked by employees.
- Two common source documents used in timekeeping are time cards and labor job tickets.
Time Card
- A record of total hours worked each day by employees.
- Provides a source for computing and recording total payroll costs.
Labor Job Ticket
- Prepared daily by employees for each job they worked on.
Recording Factory Labor Costs
- Record the Process:
- Work-in-process and Factory overhead control.
- Payroll payable.
- Record Withholding and Pay the Payroll:
- Payroll Payable.
- Employee Withholdings payable.
- Cash for employee payments
- Record Employer Taxes & Other Costs:
- Factory overhead control.
- Employer taxes & other employer costs.
Special Problems Relating to the Accounting for Labor
- It involves specific accounting challenges not found in material accounting.
- Problem areas include:
- Employee taxes.
- Employer taxes & fringe benefit costs.
- Shift premiums.
- Overtime.
- Minimum guaranteed wages.
- Incentive plans.
Employee Taxes
- Employers must withhold income taxes and social security taxes from employees' earnings.
Employer Taxes & Fringe Benefit Costs
- Total payroll costs generally exceed the cost of gross wages or salaries by approximately 20%.
- Most employers bear the cost of work person's compensation insurance to provide funds to employees who are injured on the job.
- The employer must pay the preceding payroll taxes.
Example Payroll Cost
- For the week ending January 2022, the factory payroll includes:
- Direct labor: $18,000
- Indirect labor: $14,400
- Other payroll costs include taxes payable:
- Employee portion (7%): $3,780
- Employer portion (7%): $3,780
- Income taxes withheld: $13,500
- Unemployment taxes: $1,296
- Employees' pension fund: $2,700
- All employer taxes & fringe benefit costs are recorded on a weekly basis.
- Fringe benefit costs are charged to Factory overhead since they are an indirect labor cost.
Vacation Time
- Factory employees are entitled to paid vacation after an initial period of employment.
- The amount of vacation time depends on the length of employment.
Vacation Pay
- Vacation pay should not be charged to work-in-process when an employee is on vacation.
- The payroll costs for the week an employee is on vacation should only include costs for those actively contributing to production to work-in-process.
- Factory overhead control should be charged instead.
Example Vacation Pay
- An employee earning $150/week is entitled to 2 weeks paid vacation ($300 in total, working 50 weeks).
- The weekly entry to record this is:
- Work-in-process: $150
- Factory overhead control: $6
- Payroll payable: $150
- Vacation pay payable: $6
Holiday Pay
- Accounting for holiday pay is handled similarly to vacation pay.
- Many companies combine vacation and holiday pay into one account.
Vacation Pay & Holiday Pay (Salaried Employees)
- Vacation, holiday or other paid leave is charged to the period when the absence occurs.
- It assumes one person will do the work of the absent employee.
- Additional labor cost is charged to factory overhead control, where a temporary worker is hired (avoiding double counting).
Holiday Pay (General)
- The amount of accrual for holiday pay is based on the labor contract or company policies.
- Vacation & holiday pay can be combined into one entry instead of two.
- The Cost of a fringe benefit is treated as direct labor cost or factory overhead accounts.
Shift Premium
- Paying a shift premium or higher hourly rate for less desirable evening shifts occurs.
- The shift premium should be charged to factory overhead control rather than work-in-process and spread over all units produced.
- Example: A company's day shift rate is $6.5/hour, and the night shift rate for the same job is $7/hour (additional $0.50 per hour); assuming they work 40 hours/week on the night shift
Overtime Premium
- Regular pay covers the total hours worked, including overtime, multiplied by the regular rate.
- Overtime premium covers the overtime hours multiplied by the premium rate.
- The premium rate for overtime is a fraction of the regular rate.
- Overtime is commonly referred to as time-and-a-half (regular rate plus a premium of one-half the regular rate).
- There are three accounting treatments for overtime:
Overtime Treatment 1
- Treat overtime like a shift premium, charged to factory overhead control. Assume that an assembler worked 45 hours in a single week. Rate of pay is $6/hour for any hours worked up to 36 hours, and $9/hour for any hours worked in excess of 36 hours per week.
Overtime Treatment 2
- If overtime results from the requirements of a specific job (rush order), the customer agreed to pay for special services.
Overtime Treatment 3
- If overtime results from negligence or poor workmanship, then the overtime premium should be charged as a loss.
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