0840037031_209379 - CHAPTER 3 ACCOUNTING FOR LABOR Review...

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CHAPTER 3 ACCOUNTING FOR LABOR Review Summary 1. Direct labor , also known as “touch labor,” consists of the workers who physically convert raw materials to finished goods. It is the portion of payroll cost traced directly to the product, and is charged to the work-in-process account. Indirect labor consists of all other labor involved in the manufacturing process and is charged to the factory overhead account. Accounting for labor involves: recording the time worked and/or the quantity of output by the employee; analyzing employees’ time to determine how time is to be charged; allocating the factory labor costs to the proper accounts; and preparing the payroll. 2. Under an hourly-rate wage plan the employee’s wages are computed by multiplying the established hourly rate times the hours worked. Although widely used and easy to apply, it doesn’t provide any incentive to achieve a high level of productivity. Under a piece-rate plan , earnings are based on a worker’s quantity of production. Such a plan provides an incentive for the worker to produce a high level of output, but it may encourage sacrificing quality for quantity, and it is not appropriate if machines control production speed. A modified wage plan combines some features of hourly-rate wage plans and piece-rate plans in that it may set a minimum wage that will be paid even if an established quota is not met, while an additional payment for each piece beyond the established quota is added to the minimum rate. 3. The timekeeping function is responsible for determining the number of labor hours that the company should pay for and the type of work that the employees performed. Automated timekeeping technology, using magnetic cards and card readers, sends labor time information to the accounting department for the preparation of the payroll and the distribution of labor costs to jobs. The payroll function is responsible for computing employee gross earnings, deductions, and net pay. Payroll maintains the payroll record and the employee earnings record. A payroll record provides information for all employees for one pay period relative to pay rate, hours worked, regular and overtime earnings, deductions, and net pay. The employee earnings record is a record of the cumulative earnings for a single employee for the entire year used to compute the amount of earnings subject to payroll taxes. It also serves as the basis for reporting payroll information to governmental agencies and preparing W-2’s. 4. The labor cost summary form is prepared from the labor time records, and it is used for the preparation of a general journal entry that distributes the payroll to the proper accounts. Work in Process is debited for the regular-time wages of direct labor, Factory Overhead is debited for indirect wages and Payroll is credited for the total. The additional rate added to a direct labor employee’s regular rate for overtime worked is the overtime premium. If the overtime
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