COLLEGE OF ACCOUNTANCY

C-AE22: Cost Accounting and Control

First Semester AY 2021-2022

A. Course Code – Title : C-AE22: Cost Accounting and Control

B. Module No – Title : M06 – Accounting and Controlling Labor Cost
C. Time Frame : 1 week (Week 7) – 6 hrs

D. Overview
This learning material provides the learners information about the labor cost’s role
in the production. This module is divided into two parts: How to compute the take home
pay of workers considering the Labor Code of the Philippines and how to charge the labor
cost to the production. With this you are required to download the worker’s handbook as
part of your references.
(http://bwc.dole.gov.ph/images/Handbook/2020Handbook_20Feb20.pdf). It also provides
the learner with the knowledge and skills needed in controlling labor costs in production in
order to minimize inefficiency or idle time and other factors that may unnecessarily
increase cost. This module focuses on the role of the management in controlling the cost,
and in achieving efficiency that will contribute to the profitability of the organization.

E. Desired Learning Outcomes

At the end of the learning session, you should be able to:
1. Discuss the basic government (DOLE) requirements in computing the
take home pay of the employees, particularly the factory workers
2. Account for labor cost
3. Prepare accruals for related employer’s contributions.
4. Appreciate the need to control labor costs.
5. Specify procedures for controlling labor costs and compute gross pay
using the timesheet.

F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:

✓ Integrity
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

G. Interaction/Collaboration
You will be engaging in activities that would make use of:

✓ Google Sheets
✓ Google Forms

H. Content/Discussion

Lesson 1- Basic understanding on DOLE Workers’ Statutory Monetary Benefits

Every organization consists of people working together to achieve its objectives.

The success of organization depends to a large extent upon the number of persons working
in it and whether they are able to perform their tasks efficiently and effectively. Thus, we
can say that labor cost covers one of the major portion of the total cost of a product or job.

Faculty: Elizabeth B. Boneo 1 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Today we will discuss how to compute for the labor cost in compliance with the
government regulations. We will be able to understand the meaning of minimum wage,
how to compute for overtime pay and other benefits the workers are entitled to.

So we will go over to some parts of the DOLE manual which focuses on labor cost in
a manufacturing industry. Again you can download it for your additional references.

Minimum Wage

Minimum wages have been defined as “the minimum amount of remuneration

that an employer is required to pay wage earners for the work performed during a
given period, which cannot be reduced by collective agreement or an individual
contract.”

The purpose of minimum wage is to protect workers against unduly low pay. They
help ensure a just and equitable share of the fruits of progress to all, and a minimum living
wage to all who are employed and in need of such protection. Minimum wages can also be
one element of a policy to overcome poverty and reduce inequality, including those
between men and women, by promoting the right to equal remuneration for work of equal
value.

In our country the minimum wage will vary depending on factors like sector,
number of employees and region.

This topic will be thoroughly discussed in your law courses in the future. For
now we will just focus on the basic benefits a worker is entitled into.

Effective January 1, 2018, salaried individuals earning annual gross compensation of

₱250,000 or below per year are exempted from paying income taxes. The following income
of Minimum Wage Earners (MWEs) shall also be exempt from income tax:
1. Statutory Minimum Wage (SMW) inclusive of the cost of living allowance
(COLA);
2. Holiday pay;
3. Overtime pay;
4. Night shift differential pay; and
5. Hazard pay.

Holiday pay
Holiday pay refers to the payment of the regular daily wage for any unworked
regular holiday

Every employee covered by the Holiday Pay Rule is entitled to the minimum wage
rate (daily basic wage and COLA). This means that the employee is entitled to at least 100%
of his/her minimum wage rate even if he/she did not report for work, provided he/she is
present or is on leave of absence with pay on the work day immediately preceding the
holiday. Work performed on that day merits at least twice (200%) the daily wage of the
employee.

Illustration: Using the NCR minimum wage of P537.00 per day for the
nonagricultural sector, effective November 22, 2018 under Wage Order No. NCR-22. For
work within eight (8) hours, plus 100% of the minimum wage of 100% or a total of 200%.
Sector/Industry Rate Amount Non-agriculture P537.00 P537 x 200% = P1,074.00
Retail/Service Establishment employing less than 10 workers P500.00 Not covered or

Faculty: Elizabeth B. Boneo 2 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

exempted 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%.

When a regular holiday falls on a Sunday, the fol lowing Monday shall not be a
holiday, unless a proclamation is issued declaring it a special day.

When Araw ng Kagitingan falls on the same day as Maundy Thursday or Good
Friday, a covered employee is entitled to at least two hundred percent (200%) of his/her
daily wage even if said day is unworked. Where the employee is required to work on that
day, he/she is entitled to an additional 100% of the daily wage.

Overtime pay
This refers to the additional compensation for work performed beyond eight (8)
hours a day. This may be charged to specific job (Work In Process) or to Manufacturing
Overhead Control.

1. For work in excess of eight (8) hours performed on ordinary working days:
Plus 25% of the hourly rate.
P537/8 x 125% = P67.125 x 125% x number of hours OT work
2. For work in excess of eight (8) hours performed on a scheduled rest day or a
special day: Plus 30% of the hourly rate on said days.
P537/8 x 130% x 130% = P67.125 x 130% x 130% x number of hours OT work

3. For work in excess of eight (8) hours performed on a special day which falls
on a scheduled rest day: Plus 30% of the hourly rate on said days
P537/8 x 150% x 130% = P67.125 x 150% x 130% x number of hours OT work

4. For work in excess of eight (8) hours performed on a regular holiday: Plus
30% of the hourly rate on said days.
P537/8 x 200% x 130% = P67.125 x 200% x 130% x number of hours OT work

5. For work in excess of eight (8) hours performed on a regular holiday which
falls on a scheduled rest day: Plus 30% of the hourly rate on said days.

P537/8 x 260% x 130% = P67.125 x 260% x 130% x number of hours OT work

Night Shift Differential (NSD) refers to the additional compensation of ten percent
(10%) of an employee’s regular wage for each hour of work performed between 10 p.m. and
6 a.m.

P537/8 x *110% = ₱67.125 x 110% x number of hours work

Hazard pay is a form of compensation granted to staff members who have been
requested to remain and report for work in duty stations where
very hazardous conditions, such as war or active hostilities, prevailed and where the
evacuation of families and nonessential staff had taken place.

All employees are required to be a member of Philhealth, SSS/GSIS and PagIbig.

Thus an employer will act as collecting agent for these agencies.

Now that we are able to know how to compensate a worker. We will try to compute
the take home pay of a minimum wage earner.

Faculty: Elizabeth B. Boneo 3 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Illustrative Problem

Mr. Juan Dela Cruz is a factory worker of Pinas Company. His daily minimum rate is
P420. He works from Monday through Saturday. He was required to work even on holidays.
Every day he renders 2 hours of overtime. Compute for his take home pay from July 16-31,
2020, assuming that the statutory contributions are deducted every 2 nd half of the month.

To solve this problem, we have to identify the effective monthly rate in order to
compute the employee’s share for the statutory contributions. For that we will use the
DOLE guidelines for those who do not work and are not considered paid on Sunday s or rest
days. (see DOLE’s worker’s handbook)

EEMR = Applicable Daily Rate (ADR) x 313h

12 months

= (P420*313)/12
= P10,955

For statutory contributions:

We will use the SSS table. You may check the latest SSS table here.
https://filipiknow.net/wp-content/uploads/2019/05/sss-contribution-table-2019.pdf

The employee’s monthly contribution would be P440. For Philhealth its 1.5% of
monthly rate. For PagIbig its P100.

To summarize the statutory contributions:

Then we have to compute for the total salary by counting the number of days he
worked and multiply it to his applicable daily rate.

July 16- 31 2020 = 14 days ( 13 regular days and 1 regular holiday)

 July 31, 2020 is declared as holiday

We have to identify the Overtime hours and multiply the applicable rate.
14 days x 2 hours = 28 hours
26 for regular days and 2 hours for regular holiday

Faculty: Elizabeth B. Boneo 4 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Since Mr. Juan is a minimum wage earner, he is exempted from income tax.

Mr. Juan’s pay slip would look like this.

What did you notice about the information in the pay slip? Do you think all the
information included therein is necessary? If it were up to you, what other information
you can add or how will you improve the pay slip?

Employer’s Contributions
The employer has a corresponding share in the statutory contributions
mentioned above. The computation depends on the monthly rate of the employee. These
contributions of the employer relating to factory workers are charged to Manufacturing
Overhead Control Account.

Other Labor Related Cost

Labor cost comprises not only the wages paid to employees but also the
expenditures made by the employer on behalf of the employees. These expenditures are
usually called Fringe Benefits. Example of fringe benefits are sick pay, vacation pay,
holiday pay, pension payments, health insurance, and accommodation allowance, to
mention a few. Most companies charge these costs to Manufacturing Overhead Control
account. However, few companies, charge fringe benefits related to direct labor to Work
In Process Account

Faculty: Elizabeth B. Boneo 5 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Lesson 2 – Accounting for Labor Cost

Factory payroll costs are divided into two categories: DIRECT LABOR and INDIRECT
LABOR. Direct labor, also known as “touch labor”, represents payroll cost traced directly to
an individual job. Direct labor cost includes the wags of machinists, assemblers, and other
workers who physically convert raw materials to finished goods – thus the term touch.

Since labor cost is one of the major cost elements in a manufacturing operation,
accounting system for labor costs includes timekeeping. What is timekeeping? This is the
manner of accumulating the total number or working hours by each employee and
determining how the working hours were spent.

Labor costs are to be allocated between direct and indirect labor. Direct labor costs
are charged to Work In Process while indirect labor cost are charged to Manufacturing
Overheard Control Account.

Recording Labor Cost.

Initially when the payroll is prepared, an entry made will look like this:

At the end of the month, a summary of factory wages is prepared from the job cost
sheets and departmental overhead analysis sheets. The summary will show total direct
labor cost and total indirect cost incurred during the month. These cost are transferred to
production by the making this entry:

The overtime premium maybe charged to specific job or Manufacturing Overhead

Control Account.

To illustrate the journal entry, we will use the example above of Mr. Juan Dela Cruz of
Pinas Company.

Faculty: Elizabeth B. Boneo 6 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Entry to record the payroll.

Entry to distribute the Factory Payroll account

1. Overtime pay as Specific Job. The job is taken as a rush order with the
knowledge that overtime will be necessary:

Note that the Holiday pay is treated as Manufacturing Overhead.

2. Overtime pay as Manufacturing Overhead. If the job is a regular order which

cannot be completed in the regular working hours, the overtime premium
should be charged to Overhead.

The Overtime Pay of Mr. Dela Cruz breakdown is illustrated below:

Again the holiday pay is treated as Manufacturing Overhead, we will just add the
overtime premium computed above.

Faculty: Elizabeth B. Boneo 7 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Lesson 3 Employer’s Contribution

As mentioned above, the employer has a corresponding share in the statutory

contributions. Such contributions are charged to Overhead Control Account. Using the same
illustration above for Mr. Juan Dela Cruz, the employer’s share for the statutory
contributions are as follows:

The entry to record the above employer’s share is:

The entry to distribute the payroll account to production:

Lesson 4- The Need to Control Labor Costs

Labor cost or wages is a main element of cost.  Labor refers to

any remuneration paid to the employees by the organization in the form of wages,
salary bonus, allowances etc., for their time and effort used in producing goods or
services.

In its operations, the organization uses makes use of many resources, like
physical resources, financial resources, technology and human resources. Among
these, it is the human resources that require utmost planning and care in dealing
with. It poses a difficult task for the management, because it deals with human
beings. Human beings, because of individual personalities, differences, and emotions,
pose quite a challenge as far as management is concerned. Management tries to
make the best use of available human resources and minimize the total labor cost by
increasing their productivity. On the other hand, workers usually demand higher
wages. Due to these contradicting interests, the task of labor management has
become difficult. Management uses various methods of payment of wages to keep
the labor cost under control and also to account for it properly so as to
calculate labor cost of production.

A significant expenditure has to be incurred to keep the employees in the

organization and also to keep them satisfied so that they will contribute their best.
Faculty: Elizabeth B. Boneo 8 | Page
 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

But can we satisfy the needs of human beings? Even after spending a
significant amount to keep the employees to do their best at work, still without
proper control mechanisms, employees may always find ways to ask for more or
may have the tendency to become inefficient at work.

Labor costs may become unduly high due to inefficiency of labor, wastage of
materials due to improper supervision, idle time and unusual overtime work,
inclusion of dummy name in the payroll and other related factors. Inefficient use
of labor not only increased the cost of production but also adversely affects the
quantity of products. The primary objective of the management, therefore, is to
utilize the labor as economically as possible. It is therefore necessary for the
management to device a proper system of labor cost control.

Relating this topic with the events that happen in real life, you may have
heard of some people or workers going on strike or protest rallies. Can you identify
some reasons, why people or workers go on strike or protest rallies?

Before things go out of hand, it is important that as future accountants, you

will be aware of these issues so that you can better prepare for the tasks that you
will perform relative to the control of labor costs.

Lesson 5- Controlling Costs

The management is torn between maximizing the working hours of its

employees to minimize the cost of its products and satisfying the needs of workers
as human beings.

To avoid future misunderstandings between the employer and employee,

rules and policies are to be formulated to control the behavior of the employees. At
the same time accounting procedures must be implemented in order to properly
account, monitor and charge the labor costs.

The objective of labor cost control is achieved through the intensive and
coordinated efforts of various departments. These departments are:
1. Human Resource Department
2. Engineering Department
3. Time- Keeping Department
4. Payroll Department
5. Cost Accounting Department.

I will just give you an overview what each department contributes in

controlling the labor cost but I will focus more on the last two departments.

Human Resource Department

Generally, every business organization has a recruitment policy of its own.
The main functions of this department are recruitment and selection, training,
transfer, discharge, promotion and fixation of wages and salaries of employees.

Engineering Department
This department helps in maintaining control over working conditions and
production method for each job, departments or process. Sometimes, this

Faculty: Elizabeth B. Boneo 9 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

department is also tasked of making of time and motion studies of labor and plant
operations, job analysis and setting wages.

Time-Keeping Department
For efficient labor organization, it is necessary that all workers including
those who are paid on piecework basis should be punctual. Late arrival or early
departure of a worker causes disturbance even as regards to the work of others. It
is, therefore, necessary to have a good system of recording the time of arrival and
departure of workers whether they are paid on the basis of time or piece work.

Payroll Department
The payroll department is set up for computation and disbursement of
wages in a business concern. Payroll department is concerned with the computation
of gross wages of the workers and making necessary adjustments with a view to
ascertain the net amount of wages payable to them. It is concerned with how much
employees have earned during a period and involves computation of gross and net
amount payable to each employee.

The major functions are:

a) To maintain the record of the job classification, department and wages rate for
each worker.
b) To verify and summaries the time of each worker as shows by the daily time
card taken from the Time-Keeping Department.
c) To calculate and prepare the pay roll or wages sheet for each department
showing:
 The total amount of wages earned by each worker during a given period.
 The deduction made from the gross wages.
 The net amount of wages payable to each worker.
d) To maintain permanent pay roll records for each worker.
e) To make the disbursement of wages and salaries to the workers.

Cost Accounting Department

Cost accounting department is responsible for the accumulation,

classification and analysis of cost data in a business concern following the cost
accounting system. Labor cost is one of the important elements of total cost. In a
large business concern, representatives of the cost accounting department are
involved in production department in order to make proper accumulation,
classification and analysis of labor cost. These representatives work under the
direct supervision and control of the cost accountant. They assist the cost
accountant in computing the labor cost of production by departments, processes,
operations, production orders, and jobs.

The major functions are:

a) To collect all types of information about cost and reporting to management with
analysis.
b) To determine the cost of each work.
c) To calculate labor cost by using the time card, job card and payroll.

If you notice in our module 6, there are many journals entries to recognize
the labor cost. The information needed to make such entry will come from payroll
department and from cost accounting department.

Faculty: Elizabeth B. Boneo 10 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

The information to make this entry comes from payroll department.

While the information to make this entry comes from cost accounting department:

FORMS RELATED WITH LABOR COST CONTROL

 Piece card

In a factory where the workers are paid on the basis of piece work, a piece
work card is issued to each worker. On the piecework card, a worker gets recorded
the quantity of output done and the time spent upon it. The piecework inspector
puts his signature on the piecework card. The specimen of such card is given below.

 Time card
The card that aims to record the incoming and outgoing time of the workers
Is called time card. Such card is prepared on weekly or monthly or monthly
basis as per requirement. The personal of time keeping department maintain
such card.

Maintaining internal control over labor cost is necessary for a cost accounting
system. What are the internal control procedures regarding the charge to work in
process account and credit the payroll account?

Illustrative Problem
Below is the weekly timesheet of Mr. Dela Cruz. Compute for his total hours of work
and his gross pay.

Faculty: Elizabeth B. Boneo 11 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Faculty: Elizabeth B. Boneo 12 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Solution:

I. Assessment of Learning/ Progress Check

1. Using the timesheet of Mr. Pogi, compute his gross compensation.

Faculty: Elizabeth B. Boneo 13 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

2. Mr. Cee worked 46 hours in one week at a rate of P55 per hour. His regular working
hours a week is 40 hours. The overtime premium is paid at a rate of 25%.

What is the gross earnings of Mr. Cee?

How much is his overtime premium?

What amount should be charged to Work In Process if the overtime premium is

charged to Specific Job?

What amount should be charged to Work In Process if the overtime premium is

charged to Manufacturing Overhead Control?

J. References
Guerrero, Pedro P., (2018) Cost Accounting: Principles and Procedural Application,
2018 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

De Leon, Norma D., De Leon, Ellery D., & De Leon, Guillermo M, Jr., (2019) Cost
Accounting and Control 2019 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

Vanderbeck, Edward J. & Mitchell, Maria R., Principles of Cost Accounting 17 th Edition,
Taguig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).

(http://bwc.dole.gov.ph/images/Handbook/2020Handbook_20Feb20.pdf).

Modules prepared by : Elizabeth B. Boneo

Reviewed/updated by : Elizabeth B. Boneo

Faculty: Elizabeth B. Boneo 14 | Page