University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

325

Pages:

2
Author:

stud_ice13

Flow of Labor Costs 1. Classification of Labor Costs: o Direct Labor: This is labor that can be directly traced to a specific job. For instance, an employee working directly on a custom vehicle customization job at Road Warriors. Direct labor costs flow to individual job cost sheets. o Indirect Labor: Labor that supports the manufacturing process but cannot be directly assigned to a specific job, such as supervisor salaries or factory maintenance staff. Indirect labor costs are posted to the Factory Overhead account, not to specific job cost sheets. 2. Tracking Direct Labor Using Time Tickets: o Time Tickets: Employees record the time spent on each job using time tickets, often automated via swiping badges. These tickets specify the job number, hours worked, and hourly rate, allowing the company to calculate the direct labor cost for each job. o Example: Exhibit 15.9 shows time tickets for Jobs B15, B16, and B17 at Road Warriors. The accumulated direct labor cost for March, totaling $4,200, is based on the time tickets for all jobs worked during the month. 3. Recording Direct Labor Costs: o Direct labor costs are recorded in the Work in Process (WIP) Inventory account and credited to Factory Wages Payable (or Cash if paid immediately). o Example Entry: In March, Road Warriors records $4,200 in direct labor costs for jobs in progress: Work in Process Inventory Factory Wages Payable 4,200 4,200 This journal entry reflects the addition of direct labor costs to the WIP account, which tracks production costs associated with jobs that are not yet completed. 4. Posting to Job Cost Sheets: o The recorded direct labor costs are transferred to job cost sheets for individual jobs, where they are combined with direct materials and allocated overhead costs. o Example: After posting $4,200 of direct labor to WIP Inventory, the Work in Process account balance becomes $6,000 (consisting of $1,800 of direct materials and $4,200 of direct labor for all jobs). 5. Indirect Labor: o Indirect labor is recorded in the Factory Overhead account, supporting production as a whole rather than individual jobs. This cost is allocated to jobs through a predetermined overhead rate and is not itemized on individual job cost sheets. o Example Solution For a company starting Job A1 and Job A2 in June, with 270 direct labor hours at $20 per hour: 1. Direct Labor Cost Calculation: o Job A1: 150 hours × $20 = $3,000 o Job A2: 120 hours × $20 = $2,400 2. Journal Entry to Record Direct Labor Used: Work in Process Inventory Factory Wages Payable o 5,400 5,400 This entry assigns the direct labor costs to WIP Inventory, reflecting the total direct labor incurred for the two jobs. In summary, direct labor costs are carefully tracked through time tickets and recorded on job cost sheets, while indirect labor costs are aggregated in the Factory Overhead account. This system ensures accurate costing for customized jobs and effective allocation of labor resources.