Week 5 – Chapter 4 LABOUR COSTING

FNSACC507A Provide Management Accounting Information

In this lesson you will learn…

1.  About the documents used to cost and control factory labour.

2.  How to prepare accounting records from these documents (e.g. time tickets + relevant journal entries).

The Manufacturing Process

Is about converting raw materials into finished goods with the use of

direct labour and factory overhead.

The Manufacturing Process

WORK IN PROGRESS

MATERIALS

LABOUR

OVERHEADS

FINISHED GOODS

DIRECT versus INDIRECT (materials + labour)

DIRECT INDIRECT

Can be easily and conveniently traced to a particular cost object (in this case, a particular job order).

Cannot be easily and conveniently traced to a particular cost object (in this case, a particular job order).

Classified as factory overhead and allocated to production via a predetermined overhead rate.

e.g. wood used to make wooden furniture

e.g. nails & glue used to assemble wooden furniture; factory supervisor’s salary

Accounting for

LABOUR

Overview 1.  Accounting for labour 2.  Payroll procedures 3.  Enterprise agreements 4.  Labour-related costs 5.  Labour costing procedures

1. Accounting for LABOUR �  Labour is the physical and/or mental effort expended in the manufacture of a product.

�  Labour cost is the price paid for the use of human resources.

� Our focus will be on accounting for labour costs incurred to manufacture a product.

2. Payroll procedures

ACTIVITY ISSUE (usage)

1. Timekeeping To determine total no. hours spent at work by each employee to enable calculation of money earned for the period. Source document: Time card

2. Allocation Source document: Time ticket Time tickets summarise time spent at work by each employee on: * direct labour à charged to production * Indirect labour à charged to factory overhead For each employee, sum of time tickets for pay period should equal total on time card.

3. Payment Includes calculation of: •  Net wages payable to each employee •  PAYG withholding tax •  Other statutory and employee approved deductions

Accounting for labour involves three (3) main activities:"

3. Enterprise Agreements � Factory employees (excluding factory

management) usually covered by award or

enterprise agreement which sets out: �  Employment conditions e.g. hours of work per day, AL,

SL, LSL entitlements etc. �  Basic rates of pay �  Penalty rates to be paid for overtime etc.

� Award conditions and rates of pay are underpinned by 10 National Employments Standards (NES) (Fair Work Act à effective 1 Jan 2010)

4. Labour-related costs

TOTAL cost to firm =

GROSS WAGES +

LABOUR-RELATED COSTS

GROSS WAGES �  Includes: Wages earned for period + Allowances e.g. overtime, sick or holiday pay (incl. annual leave loading at 17.5% of 4 weeks wages if applicable) + Incentives e.g. bonuses or commission

LABOUR-RELATED COSTS � Additional costs incurred by employer over

and above employee earnings � e.g.

� Payroll tax �  Workers’ Compensation Insurance �  Superannuation

NET PAY (amount paid to employee)

= GROSS WAGES

- DEDUCTIONS

DEDUCTIONS �  Includes: Taxes (PAYG Withholding Tax) + Other statutory and employee approved

deductions

� Deductions are withheld in a liability account until paid to the relevant 3rd (external) party e.g. PAYG Withholding Tax is paid to ATO (via firm’s BAS).

Worked Examples

Accounting for LABOUR (WEEK 5) 3a. Fast Ferraris Ltd 3b. Pendle Hill Ltd

Worked Examples  NOTE TO STUDENTS:

Before moving on to the next slide, please open and work through the following document now:

WEEK 5_FNSACC507A_Management

Accounting_WORKED EXAMPLES_Labour Costing

This week’s homework � Read chapter 4 à Labour (p.194 to p.210) � Complete homework questions (chapter 4)

(ref. STUDENT ONLINE STUDY GUIDE)

You are now ready to start the next part of this lesson on:

CHAPTER 5

Factory Overhead