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Accounting Information > Cost Accounting > Labor

The three basic cost elements of a manufacturing organization are direct labor, direct or raw materials, and manufacturing overhead. Payroll is one of the largest costs of practically all business organizations. For a manufacturing company, payroll expenses include wages for production workers, as well as salaries for sales employees, accounting personnel, general administrative employees, and other non-manufacturing employees.


However, the payroll costs of production workers are not normally shown on the income statement as payroll expense, since most of those workers are involved in the production of products. Wages paid to production workers get included in the cost of the products that are manufactured. For this reason, the wages do not become an expense until the product is sold. Before payroll costs can be assigned to products, the cost accountant needs to determine the cost of direct labor, figure the amount of indirect labor, and record the cost of labor in the accounts for product cost.

The cost accountant must include all of the various types of compensation when figuring direct and indirect labor to be assigned to product cost. Obviously, gross payroll is included. Also included are the employer’s share of payroll taxes, unemployment taxes, and employee benefit costs. The gross payroll for direct labor is recorded in work in process. The gross payroll for indirect labor gets recorded in manufacturing overhead. Also included in manufacturing overhead are the employer payroll taxes and employee fringe benefits. Management needs to understand the total cost of the employee compensation in order to evaluate performance and make labor decisions. To accomplish this, management normally receives reports that show detailed labor information including the labor-related overhead cost.

Cost accountants need to identify the cost of each employee’s labor with the specific products that the employee produced. Daily time tickets and job time tickets may be used to track this information. Daily time tickets, also called time cards, are completed by employees daily, detailing all the various job activities that were performed that day. The amount of time not related to manufacturing activities would also be recorded on the time card, and would be charged to manufacturing overhead. Job time tickets are completed by employees after they have completed work on a specific production job.

On a periodic basis, the time tickets get summarized on a labor distribution report, also called a labor summary or a labor recapitulation report. This report is used to identify the payroll costs to be assigned to the different products. The direct labor costs would be debited to the work in process account, while the indirect labor costs would be debited to the manufacturing overhead account.

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