ACCOUNTING

for LABOR
and PAYROLL
ACCOUNTING
 Col 3:22 Servants, obey in all
things your masters according to
the flesh; not with eye service,
as menpleasers; but in
singleness of heart, fearing God:

 Col 3:23 And whatsoever ye do,

do it heartily, as to the Lord, and
not unto men;
 Learning Objectives

At the end of this module, the students

are expected to be able to:
 Define labor and payroll terms
 Compute payroll and prepare payroll
sheets
 Compute withholding taxes due,
SSS, Philhealth and Pag-ibig
premiums due and other deductions
 Record payroll entries
 Solve special payroll problems
Payroll accounting

 is the process of computing and

recording of disbursement for
wages and salaries and their
related statutory deductions and
other allowable deductions.
Payroll Function
 Primary responsibility is to compute
the wages and salaries earned by the
employees.
 Forms should include a payroll record
and employees’ earnings records.
 A summary of the payroll is sent to
accounting to record the payroll in the
accounting records.
 The payroll record is sent to the
treasurer’s department for making
payments to employees.
LABOR COST

 Represents the human

contribution to production

 Basic pay + other benefits

 Direct Labor

 Represents payroll costs that are

traceable to individual jobs worked on
during the period.

 Direct labor costs are debited to the

work in process account.
 Indirect Labor

 Costs are incurred for a

variety of jobs that are related
to the production process, but
are not readily identifiable
with the individual jobs
worked on during the period.

 Indirect labor costs are

charged to factory overhead.
Classification of earners
 Fixed monthly earners – are
employees with fixed monthly
basic pay as basis in
computing salary.
 Daily wages earners – are
employees with daily rate as
basis for computing wages.
The concept of “no work no
pay” applies to them.
 Type of employees
 Regular (R) - monthly salary
 Probationary (P) – monthly salary/
daily wage
 Contractual (C)– daily wage / fixed
contract fee
 Seasonal (S) – daily wage
 Apprentice (A) – with or without pay
 Learners (L) (75%)
 Types of employees

Type of employees

Regular
Probationary
Contractual
Seasonal
Learners
3 6 9 12
Time (months)
SALARY

 – is a fixed amount of
compensation for services
rendered covering a fixed period
of time usually a month.
 It generally refers to the pay of
managerial, administrative and
rank and file employees.
WAGE

 is fixed amount of
compensation for services
rendered covering fixed period
of time, usually hours, or fixed
amount of work, usually by
piece.
 It is generally given to skilled
and unskilled labor.
Hourly Rate Plan

 The employee’s wages are

calculated by multiplying the
established rate per hour by the
number of hours worked.
 This plan does not provide an
incentive for the employee to
achieve a high level of
productivity.
Piece-Rate Plan
 Employee’s wages based on the
employer’s quantity of
production.
 Number of units produced is
multiplied by a predetermined
rate.
 May be referred to as incentive
wage plan or piece-rate plan.

Quality may be sacrificed in order to

maximize quantity.
Modified Wage Plan
 Minimum hourly wage is set even if
an established quota is not attained.
 If quota is exceeded, a bonus is
added to the minimum wage level.
 On days when the quota is not met,
the difference (make-up guarantee)
would be charged to factory
overhead.
 When production work teams are
utilized, a single incentive for the
group would be appropriate.
 Minimum wage

 Includes basic plus COLA

 Regional minimum wage
(Assign. – search for the latest)
Who are exempted from Wage
Orders issued by the boards?

 distressed establishments
 deficit of >20% or with capital deficiency
 new business enterprises
 agri or <P5M total assets
 retail/service
establishments
employing not more than 10 workers
 establishments adversely affected by

natural calamities
 losses of >20% of capital
BASIC PAY
 Regular pay for work
rendered on a regular
working day within regular
working hours.
 Base rate or job rate
 monthly, or daily
 maximum working time is 8 hrs
per day (phil) @ 5 days per
week (LC#83)
 Computation of daily rate for
fixed monthly earners

Daily rate = Monthly Rate x 12 months

365 days
 Ans. B
A regular Illustration 1
employee is Gino, a regular employee has a monthly
being paid for salary of P9,125. Assume that the
based on his company has a five-day work week
monthly salary 1. Compute his daily rate
as per
employment
contract. Daily rate = P9125 x 12 /365
He is also paid = P300
on rest days 2. What is his salary for the month of
and holidays July?
even if he did
not work. a. P6,600 = (300 x 22 days)
b. P9,125
c. P9,300 = (300 x 31 days)
 Ans. B
A regular Illustration 2
employee is Gino, a regular employee has a monthly
being paid for salary of P9,125. Assume that the
based on his company has regular working days of
monthly salary Monday to Saturday
as per 1. Compute his daily rate
employment
contract. Daily rate = P9125 x 12
He is also paid /365
on rest days = P300
and holidays 2. What is his salary for the month of
even if he did July?
not work.
a. P7,800 = (300 x 26 days)
b. P9,125
c. P9,300 = (300 x 31 days)
 A Illustration 3
probationary Gino, a probationary employee has a
employee monthly salary of P9,125. Assume
who is a that the company has regular
fixed working days of Monday to Saturday
monthly a. Compute his daily rate

earner has b. What is his salary for the month of

the same July?
treatment
with the Solution
regular a. Daily rate = P9125 x 12 /365
employees = P300
b. P9,125
Computation of EEMR

 Estimated Equivalent Monthly

Rate
 For monthly-paid employees

 EEMR = Applicable Daily Rate x 365 days

12

298 days - Ordinary working days

52 days - Sundays/Rest days
12 days - Regular Holidays
3 days - Special days
365 days - Total equivalent no. of days in a yr.
 For daily-paid employees
a) For those who are required to works everyday including
Sundays or rest days, special days and regular holidays.

 EEMR = Applicable Daily Rate x 393.5 days

12

298.00 days - Ordinary working days

24.00 days - 12 Regular holidays x 200%
67.60 days - 52 rest days x 130%
3.90 days - 3 special days x 130%
393.50 days Total equivalent no. of days in a yr.
 For daily-paid employees
b) For those who do not work and are not considered
paid on Sundays or rest days (six-day work week).
 EEMR = Applicable Daily Rate x 313 days
12

298 days - Ordinary working days

12 days - Regular holidays
3 days - Special days
313 days - Total equivalent no. of days in a year
 For daily-paid employees
c) For those who do not work and are not considered paid on
Saturdays and Sundays or rest days (five-day work week)

 EEMR = Applicable Daily Rate x 261 days

12

246 days - Ordinary working days

12 days - Regular holidays
3 days - Special days
261 days - Total equivalent number of days
 Illustration 4
Jao, a probationary employee, has a
daily rate of P320. Assume the
“no work no company has regular working days of
pay” Monday to Saturday
concept is a. Compute his estimated equivalent
applied to a monthly rate (EEMR)
probationary b. What is his salary for the month of
employee July?
who is a
daily wage Solution
earner a. EEMR = P320 x 313/ 12
= P8,346.67
b. P320 x 26 = P8,320
 Illustration 5a

 Mikay has a daily rate of P320

Compute her estimated equivalent
monthly rate (EEMR) assume the
company has required her to work
on Mondays to Sundays and all
holidays.

EEMR = 320 x 393.5/12

EEMR = 10,493.33
 Illustration 5b

 Mikay has a daily rate of P320

Compute her estimated equivalent
monthly rate (EEMR) assume that
the company has required her to
work six times a week

EEMR = 320 x 313/12

EEMR = 8,346.67
 Illustration 5c

 Mikay has a daily rate of P320

Compute her estimated equivalent
monthly rate (EEMR) assume that
the company has required her to
work five times a week

EEMR = 320 x 261/12

EEMR = 6,960
 Time of payment (LC103)

 Wages shall be paid at least once every two

(2) weeks or twice a month at intervals not
exceeding sixteen (16) days.
 If on account of force majeure, the employer
shall pay the wages immediately after such
force majeure or circumstances have
ceased.
 No employer shall make payment with less
frequency than once a month.
Additional pay

 COLA (cost of living allowance)

 Holiday pay
 Overtime pay
 Fringe benefits and other
benefits
Types of holiday

1. special holiday or rest day

2. special holiday falling on a rest
day
3. regular holiday
4. regular holiday falling on a rest
day
Nationwide Special (Non-
working) Holidays
Holiday Date
Chinese New Year February 8
Edsa 1 (all schools) February 25
Black Saturday March 26
Ninoy Aquino day August 21
All Saints Day November 1
Additional Special January 2
(Non-working) October 31
Days December 24
December 31
 Regular holidays
 Jan. 1 New Years Day
 March 24 Maundy Thursday
 March 25 Good Friday
 Apr 9 Araw ng Kagitingan
 May 1 Labor Day
 June 12 Independence Day
 Movable Eid’l Fitr
 August 29 National Heroes Day
 Movable Eidul Adha
 Nov. 30 Bonifacio Day
 Dec. 25 Christmas Day
 Dec. 30 Rizal Day
Regular Holidays

 Employee did not work during

regular holidays – he shall be
paid 100% of his/her salary for
that day
(Daily rate + COLA) x 100%
 Employee worked during regular
holidays (for the first 8 hours)
(Daily rate + COLA) x 200%
 For work done in excess of 8
hours (Overtime work)
(Hourly rate of the basic daily
wage x 200% x 130% x # of hours
worked)
 For work done on a regular

holiday which is also his/her rest

day
[(Daily rate + COLA) x 200%] +
30% (Daily rate x 200%)]
 For work done in excess of 8
hours during a regular holiday
which is also his/her rest day
(Hourly rate of the basic daily
wage x 200% x 130% x130% x #
of hours worked)
Special (Non-working) Days

 If the employee did not work –

“no work, no pay” except if with
favorable company policy,
collective bargaining agreement
granting payment on a special
day
 For work done during special

holiday (for the first 8 hours)

[(Daily rate x 130%) + COLA)
 For work done in exess of 8
hours (Overtime work)
(Hourly rate of the basic daily
wage x 130% x 130% x # of hours
worked)
 For work done during a special

day that also falls on his/her rest

day [(Daily rate x 150%) +
COLA]
 For work done in excess of 8
hours (overtime work) during a
special day that also falls on
his/her rest day
(Hourly rate of the basic daily
wage x 150% x 130% x number of
hours worked)
 Basic and Holiday
Holiday Premium
pay
Regular working day 100% none
Special holiday or rest day 130% 30%
Special holiday and rest day 150% 50%
Regular holiday 200% 100%
Regular holiday and rest 260% 160%
day
Who are given holiday pay?
 Fixed monthly earners
 Work – basic + holiday premium
 No work – basic only

 Daily wage earners

 Work – basic + holiday premium
 No work – no pay
Overtime pay

 premium pay for service

rendered beyond 8 hours
 Regular rate x 125% x no. of
hours
 Overtime Pay
(In excess of 8 hours )
Regular working day Hourly rate x 125% x hours of overtime
Special holiday or rest Hourly rate x 130% x 130% x hours of
day overtime
Special holiday and Hourly rate x 150% x 130% x hours of
rest day overtime
Regular holiday Hourly rate x 200% x 130% x hours of
overtime
Regular holiday and Hourly rate x 260% x 130% x hours of
rest day overtime
Lia Ortega who worked as executive assistant of Waya
Inc. has a monthly basic pay of P13,870. She worked
2 hours overtime
Requirements:
a. Compute for her daily rate.
b. Compute for her hourly rate.
c. Compute for her overtime pay under each
independent cases
Case 1 – regular working day
Case 2 – special holiday
Case 3 – rest Day
Case 4 – special holiday falling on her rest day
Case 5 – regular holiday
Case 6 – regular holiday falling on her rest day
 SAMPLE OVERTIME PAY COMPUTATION

Day Type Sample Sample Hourly

Computation Overtime Pay
Regular Working P57.00 x 1.25 P71.25
Day
Special Holiday P57.00 x 1.69 P96.33
Rest Day P57.00 x 1.69 P96.33
Special Holiday + P57.00 x 1.95 P111.15
Rest Day
Regular Holiday P57.00 x 2.6 P148.20
Regular Holiday + P57.00 x 3.38 P192.66
Rest Day
Who are paid with overtime?

 Those with authorization to work

overtime
 Rank and file, laborers
 Ideally, positions which are
supervisory and above are not
supposed to be given overtime
pay.
 Toavoid conflict of interest
because these persons authorize
and approve OT.
Where to charge OT premium

 Rush order
 WIP - customer
 Slow production, greater volume of
work, inadequate plant capacity
 Factory Overhead
 Management’s wrong decision or
management inefficiency
 Loss
 Art. 88. Undertime not offset
by overtime
 Undertime work on any particular
day shall not be offset by overtime
work on any other day.

 Permission given to the employee to go on

leave on some other day of the week shall not
exempt the employer from paying the
additional compensation required
Night Differential

 Every employee is entitled to a

Night Differential of night shift
pay of not less than 10% of his
regular wage for each hour of
work performed between 10 pm
and 6 am.
Ordinary Day Night Shift

 Let us say that the employee’s

hourly rate is P57.00 and now
he is asked to work from 10 pm
to 6 am.
 To determine the employee

night differential pay

(Hourly Rate x 10% x 8 hours)
= P57.00 x 10% x 8 hours
= P45.60
Rest Day Night Shift
 Let us say that the employee’s hourly
rate is P57.00 and now he is asked to
work from 10 pm to 6 am.
 To determine the employee night

differential pay
(Hourly Rate x 130% x 10% x 8 hours)
= P 57.00 x 130% x 10% x 8 hours
= P 59.28
Special Holiday Night Shift
 Let us say that the employee’s hourly
rate is P57.00 and now he is asked to
work from 10 pm to 6 am.
 To determine the employee night

differential pay
(Hourly Rate x 130% x 10% x 8 hours)
= P 57.00 x 130% x 10% x 8 hours
= P 59.28
Special Holiday + Rest Day
Night Shift
 Let us say that the employee’s hourly
rate is P57.00 and now he is asked to
work from 10 pm to 6 am.
 To determine the employee night

differential pay
(Hourly Rate x 150% x 10% x 8 hours)
= P 57.00 x 150% x 10% x 8 hours
= P 68.40
Regular Holiday Night Shift
 Let us say that the employee’s hourly
rate is P57.00 and now he is asked to
work from 10 pm to 6 am.
 To determine the employee night

differential pay
(Hourly Rate x 200% x 10% x 8 hours)
= P 57.00 x 200% x 10% x 8 hours
= P 91.20
Regular Holiday + Rest Day
Night Shift
 Let us say that the employee’s hourly
rate is P57.00 and now he is asked to
work from 10 pm to 6 am.
 To determine the employee night

differential pay
(Hourly Rate x 260% x 10% x 8 hours)
= P 57.00 x 260% x 10% x 8 hours
= P 118.56
13TH MONTH PAY
 requires employers with at least 10
employees to give 13th month pay to
all employees who have rendered
service for at least a month.
 This shall be paid on or before
December 24 or ½ of the 13th month
pay before the opening of the regular
school year and the remaining ½
before December 24 of every year.
 Employees who have rendered a full
year will be given an average of a full
month pay.
 For those who rendered less than a
year will have a pro-rated average
one month pay.
Formula and Computation of
13th Month Pay
 Proportionate 13th month pay =
Total basic salary earned during
the year/12 months
Illustration: The employee has a
basic wage of P436.00 per day
and a six-day work week or an
equivalent Monthly Basic Salary
of P11,372.33, to wit:
January No absence P11,372.33
February No absence P11,372.33
March 1 day leave with pay P11,372.33
April No absence P11,372.33
May 2 days leave with pay P11,372.33
June 2 days leave with pay P11,372.33
July No absence P11,372.33
August 2 days leave with pay P11,372.33
September On Maternity Leave No salary
October On Maternity Leave No salary
November No absence P11,372.33
December 5 days leave without P 9,192.33
pay
Total Basic Salary earned for the year P111,543.33
P111,543.33/12 months = P 9,295.28 –is the proportionate
13th month pay
13TH Month vs. Bonus

 13th month is mandatory while

Bonus is optional
 13th Month Pay Example No. 1:
Samantha Imperial worked a full
year. Her fixed monthly salary is
P10,000 starting January up to
December. How much is her
13th month pay?
 Answer : P10,000
13th Month Pay Pro-rated

Sarah’s basic salary is P15,000

per month and she had worked
for 10 months. How much is her
13th month pay?
P15,000 x 10 months/ 12 =
P12,500
FRINGE and OTHER BENEFITS
 Other wages benefits given to employees
 Medical and Dental benefits
 Christmas bonus
 Gratuity pay - given in return for service
 Insurance Fund / Retirement Fund
 Education, Housing, etc….
 SSS/ PHIC/ HMDF employer’s share
 Vacation leave
 Personal/Emergency Leave
 Sick Leave benefits / Maternity benefits
 sick leave benefit and maternity
benefit = benefit given be SSS
 If paid for by company debit
receivable from SSS
 If not paid by company, no entry

 sick leave benefit and maternity

benefit > benefit given be SSS
 Theexcess is charge to
employees benefits
Payroll deductions

 1. Withholding tax
 2. SSS/PHIC/HMDF employee
share (see table)
 3. Union dues
 4. Undertime/ Tardiness
 5. Cash Advances
WITHHOLDING TAXES

 minimum wage earners

exempted
 Greater than minimum wage but
less than P10,000 with tax but
employer may withhold or not; if
not employee will file ITR
annually.
Tax type
 S – single
 ME – married
 S1/ME1 – single /married with one
qualified dependent child
 S2/ME2 – single /married with two
qualified dependent children
 S3/ME3 – single /married with three
qualified dependent children
 S4/ME4 – single /married with four
qualified dependent children
Personal exemptions

Each working employee single

or married is entitled to P50,000
personal exemption with an
additional P25,000 for every
qualified dependent child but not
exceeding four children
LABOR COST CONTROL
LABOR COST CONTROL

 Keeping track of labor costs in

total and per unit, comparing
them with predetermine figures
and adopting prompt remedial
measures in case there are
variances
Departments involved in
LABOR COST CONTROL
 Production planning
 Personnel
 Time and motion study
 Budgeting
 Timekeeping
 Accounting
Procedures in
LABOR COST CONTROL
 Production planning
 Use of labor standards and
budgets
 Labor performance reports
 Appropriate compensation
including wage incentive
systems
Three phases of accounting
for labor
 Timekeeping
 Financial accounting
 Cost accounting
 Payment of Net Earnings

 Accounting department sends the

payroll record to the treasurer’s office.
 The treasurer’s office is responsible
for making the payments to
employees.
Wages Payable XX

Cash XX

Entry to pay employees.

Recording Salaries and
Wages
 Labor-time records are sent to the
payroll department on a daily basis.
 The labor costs are charged to the
appropriate jobs or departments and
factory overhead.
 This analysis is recorded on a labor
cost summary, in the job cost ledger,
and in the factory overhead ledger.
 Earnings of salaried employees are
recorded in the factory overhead ledger
accounts and on the labor cost
summary.
Labor Cost Summary
 Hourly workers should be recording
their time on a labor time record.
 Labor costs are recorded on a labor
cost summary.
 This summarizes the direct labor and
indirect labor charges to a
department for the period.
 Salaried employees are often not
required to prepare labor time
records.
Illustration of Accounting for
Labor Costs
 General
 Journal
Distribution
EntryoftoPayroll
Record Payroll

 Work in Process
Payroll xx
  FICA
Factory Tax Payable
Overhead xx xx
 Sales Salaries Income Tax Payable
 Employees xx xx

 Health Insurance
Administrative SalariesPremiums Payable xx xx

 Wages
Payroll Payable xx
xx

Record PaymentPayroll
of Net Taxes
Earnings

Employer’s
 to Employees
 Factory Overhead xx

 Wages
Payroll Payable
Tax Expense – Sales Salaries xx
xx
PayrollCash xx xx

 Tax Expense – Admin Salaries
 FICA Tax Payable xx
 Federal Unemployment Tax Payable xx
 State Unemployment Tax Payable xx
 Flow of Costs from Subsidiary
Records to General Ledger

Labor – Time
Records

Labor Cost
Factory Overhead
Job Cost Sheets Summary
Sheets
(Direct Labor) (Direct and Indirect
(Indirect Labor)
Labor)

General Journal and

General Ledger
(WIP-Direct Labor
FOH-Indirect Labor)
 Job-Order Costing Document Flow

An employee’s
time may be either Direct Job Cost
direct or indirect. Labor Sheets

Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account
Job Cost Sheets – Direct Labor
Forms used

 Clock card (time card)

 Time ticket (job ticket)
 Daily time report
 Payroll sheet
 Employees’ earnings records
 Time Ticket
 A document that indicates the employee,
the hours worked, the account and the job
to be charged, and the total labor cost.

Bob Kadler M.Cher

LABOR SPECIAL TOPICS
 Learning curve
 Time and motion study
 Accrual of vacation leave,
bonus, and pension (c/o finacc3)
LEARNING CURVE
- Is a function that
measures how labor-hours
per unit decline as units of
production increase
because workers are
learning and becoming
better at their jobs.

10-94
EXPERIENCE CURVE

measures the decline in the

cost per unit of various
business functions as the
amount of these activities
increases. It is a broader
application of the learning
curve that extends to other
business functions in the
value chain such as
marketing, distribution and
customer service.
 Types of Learning Curves
 Cumulative average-time
learning model—cumulative
average time per unit declines by
a constant percentage each time
the cumulative quantity of units
produced doubles.
 Incremental unit-time learning
model—incremental time needed
to produce the last unit declines
by a constant percentage each
time the cumulative quantity of
units produced doubles. 10-96
Illustration:
 Rayburn Corp has an 80% learning
curve. The 80% means that when
the quantity of units produced is
doubled from X to 2X, cumulative
average time per unit for 2X units is
80% of cumulative average time per
unit for X units. Average time per unit
has dropped by 20% (100%-80%).
Sample Cumulative
Average-Time Model

10-98
Illustration:
 Rayburn Corp. has an 80% learning
curve. The 80% here means that
when quantity of units produced is
doubled from X to 2X, the time
needed to produce the last unit when
2X total units are produced is 80% of
the time needed to produce the last
unit when X total units are produced.
Sample Incremental Unit-Time
learning Model

10-100
TIME AND MOTION STUDY
 Is a method for establishing
employee productivity standards in
which:
1. A complex task is broken into small,
simple steps,
2. The sequence of movements taken
by the employee in performing
those steps is carefully observed to
detect and eliminate redundant or
wasteful motion, and
3. Precise time taken for each correct
movement is measured.
TIME AND MOTION STUDY

 From these measurements,

production and delivery times
and prices can be computed
and incentive schemes can be
devised.
 Generally appropriate only for
repetitive tasks.
 Accounting for Bonuses,
Vacations, and Holiday Pay
Work in Process XX
Factory Overhead (Bonus) XX
Factory Overhead (Vacation) XX
Factory Overhead (Holiday) XX
Payroll XX
Bonus Liability XX
Vacation Pay Liability XX
Holiday Pay Liability XX
Incurred payroll and bonus, vacation, and holiday pay.