Labor Cost Management Overview

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Questions and Answers

What account is credited when recording the employer's payroll taxes?

Selling & Adm. Expense Control

Accrued Payroll

SSS Premiums Payable (correct)

Factory Overhead Control

Which type of labor is specifically associated with products and directly charged to production order cost sheets?

Indirect labor

Labor overhead

Piecework labor

Direct labor (correct)

What is considered idle time in labor classification?

Normal downtime not due to scheduling issues

Time spent in meetings

Non-productive hours caused by machine breakdown (correct)

Time spent on training

In the context of labor overhead, which of the following represents make-up pay?

Payments based on units produced Signup and view all the answers

How much was included in the Factory Overhead Control account for idle time in Maxine Garcia's case?

P200 Signup and view all the answers

What total amount was recorded as accrued payroll for Maxine Garcia?

P2,000 Signup and view all the answers

What is the classification of labor that benefits production generally but is not feasible to charge to specific products?

Indirect labor Signup and view all the answers

Which of the following describes the main purpose of the Factory Overhead Control account?

To record costs associated with production that cannot be directly allocated Signup and view all the answers

What is a characteristic of a modified wage plan?

It guarantees a minimum wage even if production quotas are not met. Signup and view all the answers

What is the role of the timekeeping department?

To account for the time employees spend working in the factory. Signup and view all the answers

Which of the following records is used for regular hourly employees?

Time tickets Signup and view all the answers

How do cost accountants assign labor costs?

By sorting time tickets and production reports to appropriate jobs or departments. Signup and view all the answers

What is recorded in the factory overhead ledger?

Earnings of all employees. Signup and view all the answers

What happens when the established production quota is exceeded?

An additional payment per piece produced is added. Signup and view all the answers

Which department is responsible for computing each employee's gross earnings?

Payroll department Signup and view all the answers

Which document is essential for making a general journal entry for payroll distribution?

Labor cost summary Signup and view all the answers

Which allocation base is used for supervision costs?

Number of employees Signup and view all the answers

What method allocates service department costs directly to producing departments without considering inter-service department costs?

Direct method Signup and view all the answers

Which of the following is NOT a typical allocation base for equipment maintenance costs?

Value of equipment Signup and view all the answers

Building insurance costs are allocated based on which allocation base?

Space occupied Signup and view all the answers

Which allocation method is considered more complex due to the recognition of services provided between service departments?

Step method Signup and view all the answers

Indirect materials costs are typically allocated based on which criterion?

Value of direct materials Signup and view all the answers

The allocation base for heat and air-conditioning costs typically includes which of the following?

Space occupied & volume occupied Signup and view all the answers

Which option correctly defines the role of taxation for equipment in cost allocation?

Based on value of equipment Signup and view all the answers

How is applied factory overhead computed?

By multiplying the actual factor incurred per cost sheet by the predetermined overhead rate Signup and view all the answers

What indicates underapplied overhead?

When actual overhead is more than applied overhead Signup and view all the answers

Which of the following entries correctly charges production with applied overhead?

Work in process - overhead debit, Factory overhead applied credit Signup and view all the answers

What is the definition of overapplied overhead?

The amount by which applied overhead exceeds actual overhead Signup and view all the answers

Which account reflects the actual factory overhead costs incurred?

Factory overhead control account Signup and view all the answers

Why are multiple departmental factory overhead application rates preferable?

Different products require different overhead amounts based on their processing needs. Signup and view all the answers

What is the first step in the computation of departmentalized overhead rate?

Divide the company into departments and cost centers. Signup and view all the answers

What should be done before computing the departmentalized factory overhead rate?

Ensure service department costs are allocated to producing departments. Signup and view all the answers

Which of the following is NOT a typical allocation base for common costs?

Market-based common costs Signup and view all the answers

What are producing departments primarily characterized by?

They perform direct work on goods being produced. Signup and view all the answers

Which cost category is associated with the allocation of space-related common costs?

Expenses associated with factory facilities. Signup and view all the answers

In the context of factory overhead, what role do service departments play?

They provide ancillary support for operations of producing departments. Signup and view all the answers

What should be analyzed carefully to determine the appropriate allocation base?

Common costs associated with production. Signup and view all the answers

Study Notes

Modified Wage Plan

Modified wage plans combine features of hourly rates and piece-rate plans.
Modified wage plans guarantee a minimum hourly wage, even if a production quota is not met.
An additional payment per piece is received if the established quota is exceeded.

Labor Cost Control

Timekeeping and payroll departments are responsible for maintaining labor records.
The timekeeping department tracks employee time spent in the factory.
The payroll department calculates gross earnings, withholdings, deductions, and net earnings.
Both departments rely on clock cards, time tickets, production reports, payroll records, employee earning records, and payroll summaries.

Accounting for Labor Costs

Time tickets are used for regular hourly employees to record hours worked.
Production reports replace time tickets for daily labor cost calculations when applicable.
Pay rates and gross earnings are sent to payroll daily.
Cost accountants analyze time tickets and production reports, allocating labor costs to jobs, departments, and factory overhead.
The accounting department records earnings in the factory overhead ledger and on the labor cost summary.
The labor cost summary is used to create a general journal entry to distribute payroll to the appropriate accounts.
This entry is posted to Work in Process, Factory Overhead, and the general ledger.

Employer Payroll Taxes

Employer payroll taxes are recorded with a journal entry debiting Factory Overhead Control and Selling & Admin. Expense Control, and crediting SSS Premiums Payable, PhilHealth Contributions Payable, and Pag-ibig Funds Contributions Payable.

Labor Classification

Direct Labor: Directly connected to products and can be easily measured and charged to specific production order cost sheets.
Indirect Labor:
- Labor connected to specific products but not easily measured and charged to specific production orders.
- Labor benefiting production in general, not specifically tied to individual products.
Labor Overhead:
- Waiting time or idle time: The cost of non-productive direct labor hours, caused by factors like lack of work, material delays, scheduling issues, machine breakdowns, and set-up.
  - This cost is charged to factory control when idleness is normal and unavoidable.
- Make-up pay: Payments based solely on the number of units produced, utilizing a "piecework" rate..

Departmentalized Overhead Rate

Multiple departmental factory overhead application rates are preferred when products:
- Do not pass through the same production departments.
- Receive different amounts of factory overhead due to varying levels of attention needed.
Steps to compute departmentalized overhead rates:
1. Divide the company into departments and cost centers.
2. Estimate factory overhead for each department.
3. Choose and estimate the base for each department.
4. Allocate service department costs to producing departments.
5. Compute the factory overhead rate by following similar steps as with the blanket rate.
Departmentalized overhead rates are used only for producing departments which include the production lines.
Service departments, including maintenance, personnel, and utilities, support the entire factory.

Typical Allocation Bases for Common Costs

Four categories of common costs:
- Labor-related
- Machine-related
- Space-related
- Service-related
The allocation base selection depends on the individual cost's nature.
Examples of common costs and their typical allocation bases:
- Labor-related:
  - Supervision: Number of employees, payroll amount of DLHrs
  - Personnel services: Number of employees
- Machine-related:
  - Insurance on equipment: Value of equipment
  - Taxes on equipment: Value of equipment
  - Equipment depreciation: Machine-hours, equipment value
  - Equipment maintenance: Number of machines, machine hours
- Space-related:
  - Building rental: Space occupied
  - Building insurance: Space occupied
  - Heat & air-conditioning: Space occupied & volume occupied
  - Concession rental: Space occupied & desirability of location
  - Interior bldg. maintenance: Space occupied
- Service-related
  - Material handling: Quantity or value of materials
  - Billing and accounting: Number of documents
  - Indirect materials: Value of direct materials

Methods of Allocating Service Costs to Producing Departments

Direct method: The most common method, allocating each service department's total cost directly to producing departments, without considering services exchanged between service departments.
Step Method: Accounts for services rendered between service departments, making it more complex due to needing a sequence of allocation.

Applied Factory Overhead

Applied factory overhead is calculated by multiplying the actual factor incurred per cost sheet by the predetermined overhead rate.
A journal entry credits Factory Overhead Applied and debits Work in Process - Overhead to charge production with applied overhead.

Factory Overhead Variance

This is the difference between actual factory overhead and applied overhead.
Underapplied overhead: When actual overhead exceeds applied overhead.
Overapplied overhead: When applied overhead exceeds actual overhead.

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Description

This quiz explores the concepts of modified wage plans, labor cost control, and accounting for labor costs. It covers the roles of timekeeping and payroll departments, the use of time tickets, and production reports in managing labor expenses. Test your understanding of these essential components in workforce management.