PRODUCT

COSTING
(Labor and
Overhead)
01
Labor
Accounting for Labor
BASIC METHODS OF WAGE SYSTEMS (Remuneration)

1. Time Wage System – “basis of time spent” regardless of the amount of work done.
Gross Pay = Rate per Hour X # Hours Worked
Total Cost = Variable cost per unit X Cost Driver

2. Piece Wage System – “based on amount of work done or output of work”

Gross Pay = Rate per Unit X # Units Produced
Total Cost = Variable cost per unit X Cost Driver
 Procedures Departments
Recording Personnel
Analyzing
Payroll
Charging
Payroll preparation Accounting

Further Classification of Labor Costs

Idle Time

•Machine breakdowns, material shortages, power failures

•Manufacturing overhead

Overtime

•Premiums
•Manufacturing overhead

Labor Fringe Benefits

•Insurance, retirement plans, supplemental programs

•SSS employer share, Employment tax
•Direct Labor or Manufacturing Overhead
Illustrative problems - Labor
1. Mr. X is paid P50 an hour for straight-time and time and a half (P75 an hour) for
overtime. One week she worked 43 hours, which included 3 hours of overtime.

A. What is Mr. X total compensation for the week?

B. What amount of compensation would be reported as direct manufacturing labor?
C. What amount of compensation would be reported as manufacturing overhead?
A. Regular Salary (P50 x 40 hrs) P2,000
Overtime (P75 x 3 hrs) 225
Total Compensation P2,225

B. Direct Labor = P50 x 43 hrs P2,150

C. Manufacturing overhead = *P25 x 3 hrs P 75

 Illustrative problems - Labor
2. Ms. Y is paid P200 an hour for straight-time and P300 an hour for overtime. One
week she worked 46 hours, which included 6 hours of overtime, and 4 hours of idle
time caused by material shortages
A. What is Ms. Y total compensation for the week?
B. What amount of compensation would be reported as direct manufacturing labor?
C. What amount of compensation would be reported as manufacturing overhead?
A. Regular Salary (P200 x 40 hrs) P 8,000
Overtime (P300 x 6 hrs) 1,800
Total Compensation P 9,800
B. Direct Labor = P200 x 42 hrs = P 8,400
C. Manufacturing overhead:
Overtime Premium ([100 x 6 hrs) P 600
Idle time (P200 x 4 hrs) 800
P1,400
 02
Overhead
Manufacturing/Factory Overhead Account
used to record the actual overhead incurred and the amount of
overhead applied.
FOH= Predetermined OH Rate X Actual Level of Activity
.

Predetermined Overhead Rate - budgeted & constant charge per unit of activity

POHR = Estimated Total Overhead / Estimated Activity Base

Predetermined Overhead Rate
Should be used for three reasons:

to assign overhead to Work in Process to compensate for fluctuations in

during the production cycle instead of actual overhead costs that have no
at the end of the period bearing on activity levels;

to overcome problems of fluctuations

in activity levels that have no impact
on actual fixed overhead costs.
Plant Wide Overhead Rate – when a single predetermined overhead rate is used for entire factory.
Multiple Predetermined Overhead Rates - each production department may have its own
predetermined overhead rate. Overhead is applied in each department according to its own overhead rate
as a job proceeds through the department.

Underapplied and Overapplied Overhead

Applied overhead - The peso amount of overhead assigned to work-in-process inventory using a
predetermined rate.,

Underapplied Overhead - if actual overhead is greater than applied overhead

Overapplied Overhead - If applied overhead is greater than actual overhead

IMMATERIAL , it is closed directly to Cost of Goods Sold.

MATERIAL, it must be allocated among Work in Process, Finished Goods, and Cost of Goods Sold.
Illustrative problems - Overhead
A. The company estimates that its production for the coming year will be 10,000 units, which
is 80% of normal capacity, with the following unit costs: materials, P40; direct labor, P60.
Direct labor is paid at the rate of P24 per hour. The special equipment, the most expensive
piece of machinery, must be run for 20 minutes to produce one unit. Total estimated
overhead is expected to consist of 400,000 for variable overhead and P400,000 for fixed
overhead.

Required: Compute the overhead rate for each of the following

bases, using the expected actual capacity activity level:

A. Physical output D. Direct labor hours

B. Material cost E. Machine hours
C. Direct labor cost
Illustrative problems - Overhead
A. The company estimates that its production for the coming year will be 10,000 units, which
is 805 of normal capacity, with the following unit costs: materials, P40; direct labor, P60.
Direct labor is paid at the rate of P24 per hour. The special equipment, the most expensive
piece of machinery, must be run for 20 minutes to produce one unit. Total estimated
overhead is expected to consist of 400,000 for variable overhead and P400,000 for fixed
overhead.
Required: Compute the overhead rate for each of the following
bases, using the expected actual capacity activity level:
A. Physical output
OH Rate = P800,000 / 10,000 units =P80 per unit

B. Material cost
OH Rate = P800,000 / (P40 x 10,000)
= 200% of Material Cost
Illustrative problems - Overhead
A. The company estimates that its production for the coming year will be 10,000 units, which
is 805 of normal capacity, with the following unit costs: materials, P40; direct labor, P60.
Direct labor is paid at the rate of P24 per hour. The special equipment, the most expensive
piece of machinery, must be run for 20 minutes to produce one unit. Total estimated
overhead is expected to consist of 400,000 for variable overhead and P400,000 for fixed
overhead.
C. Direct Labor Cost
OH Rate = P800,000 / (P60 x 10,000) = 133% Direct Labor Cost
D. Direct Labor Hour
OH Rate = P800,000 / (*2.5 DL Hrs x 10,000) =P32 per DL Hr.
*= P60 / P24
E. Machine Hours
OH Rate = P800,000 / (*1/3 x 10,000) = P240 per Machine Hr.
*= 20 mins. / 60 mins
Illustrative problems - Overhead
B. ABC applies overhead at the rate of 70 percent of direct labor. The corporation incurred
P450,000 of direct labor during the current year and incurred actual overhead of P367,000.
A. Compute the amount of under- or overapplied overhead for the Corporation for the
current year.
B. Prepare the necessary journal entry to dispose of the under- or overapplied overhead
(assuming that the amount is immaterial).

Solutions:
A. Applied Overhead (P450,000 x 70%) P 315,000
Actual Overhead 367,000
Underapplied Overhead 52,000

B. Cost of Goods Sold P 52,000

Manufacturing Overhead P 52,000
 Illustrative problems - Labor
Problem 2: A direct labor worker at Lang
Problem 1: a direct labor worker at Gal Corporation
Corporation is paid P16 per hour for regular time
is paid P20 per hour for regular time and time and a
and time and a half for all work in excess of 40
half for all work in excess of 40 hours per week. This
hours per week. This employee works 49 hours
employee works 44 hours during a week in which
in a given week but is idle for 4 hours during the
there was no idle time.
week due to equipment breakdowns.
Required: Determine how much of the worker’s
Required: Determine how much of the worker’s
wages for the week would be classified as direct
wages for the week would be classified as direct
labor cost and how much would be classified s
labor cost and how much would be classified as
manufacturing overhead cost.
manufacturing overhead cost.

Solution: Solution:
Direct labor: P20 x 44 hours = P880 Direct labor: P16 x 45 hours = P720
Manufacturing overhead: Manufacturing overhead:
Overtime premium P10 x 4 hours = P40 Idle time P16 x 4 hrs = P 64
Overtime premium P8 x 9 hrs = 72
Total MOH P136
 Illustrative problems - Labor
Problem 3: A direct labor worker at San Corporation is paid P22 per hour for regular time and
time and a half for all work in excess of 40 hours per week. The company’s fringe benefits cost P6
for each hour of employee time (both regular and overtime). Last week this employee worked 43
hours but was idle for 4 hours due to material shortages. The company treats all fringe benefits as
part of manufacturing overhead.
Required: Determine how much of the worker’s wages for the week would be classified as direct
labor cost and how much would be classified as manufacturing overhead cost. Show your Work.

Solution:
Direct labor: P22 x 39 hours = P858 100% rate x Actual Hrs NOI
Manufacturing overhead:
100% rate x Idle Hrs Idle time 00P22 x 4 hrs = P 88
Overtime premium P11 x 3 hrs = 33 Premium rate x (Actual Hrs – Regular Hrs)
Premium rate x Actual Hrs Fringe benefits 00P6 x 43 hrs = 258
Total MOH P 379
 Illustrative problems - Labor
Problem 4: A direct labor worker at Vor Corporation is paid P14 per hour for regular time and time
and a half for all work in excess of 40 hours per week. The company’s fringe benefits cost P6 for
each hour of employee time (both regular and overtime). Last week this employee worked 43
hours but was idle for 4 hours due to material shortages. The company treats all fringe benefits
relating to direct labor as added direct labor cost and the remainder as part of manufacturing
overhead
Required: Determine how much of the worker’s wages for the week would be classified as direct
labor cost and how much would be classified as manufacturing overhead cost.

Solution:
Illustrative problems - Overhead
Problem 7: Dnd Corp. estimates that its production for the coming year will be 10,000 widgets,
which is 80% of normal capacity, with the following unit costs: materials, P40; direct labor, P60.
Direct labor is paid at the rate of P24 per hour. The widget shaper, the most expensive piece of
machinery, must be run for 20 minutes to produce one widget. Total estimated overhead is
expected to consist of P400,000 for variable overhead and P400,000 for fixed overhead.
Required: Compute the overhead rate
for each of the following base, using the
normal capacity activity level:

A. Physical output
B. Material cost
C. Direct labor cost
D. Direct labor hours
E. Machine hours
 Illustrative problems - Overhead
Problem 8: Louis Inc. manufacturers sound equipment. The company estimates the following
costs at normal capacity and other items for the coming period:
Direct materials P300,000
Direct labor 520,000
Factory overhead (fixed) 300,000
Factory overhead (variable) 240,000
Normal capacity 100,000 direct labor hours
Expected production 80,000 direct labor hours

Required: Compute the

overhead application rate for
fixed, variable, and total
overhead per direct labor hour,
using both the normal capacity
and the expected actual
capacity activity levels.
Illustrative problems - Overhead
Problem 9: The management of the Corporation would like to investigate the
possibility of basing its predetermined overhead rate on activity at capacity rather
than on the estimated amount of activity for the year. The company’s controller has
provided an example to illustrate how this new system would work. In this example,
the allocation base is machine-hours and the estimated amount of the allocation
base for the upcoming year is 71,000 machine hours. In addition, capacity is
86,000 machine-hours and the actual activity for the year is 64,000 machine-hours.
All of the manufacturing overhead is fixed and is P4,579,500 per year. For
simplicity, it is assumed that this is the estimated manufacturing overhead for the
year as well as the manufacturing overhead at capacity and the actual amount of
manufacturing overhead for the year.
Illustrative problems - Overhead
Problem 9 Required:
A. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on
the estimated amount of the allocation base.

Calculation of the predetermined overhead rate:

Estimated total manufacturing overhead P 4,579,500
Estimated total amount of the allocation base 71,000 MHrs
Predetermined OH rate P64.50 per MHr

Calculation of overhead underapplied or overapplied:

Actual manufacturing overhead cost P 4,579,500
Manufacturing overhead applied:
Predetermined overhead rate P 64.50
Actual Hours 64,100 4,134,450
Underapplied manufacturing overhead P 445,050 underapplied
Illustrative problems - Overhead
Problem 9 Required:
B. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on
the estimated amount of the allocation base.

Calculation of the predetermined overhead rate:

Estimated total manufacturing overhead P 4,579,500
Estimated total amount of the allocation base 86,000 MHrs
Predetermined OH rate P53.25 per MHr

Calculation of overhead underapplied or overapplied:

Actual manufacturing overhead cost P 4,579,500 Manufacturing overhead
applied:
Predetermined overhead rate P 53.25
Actual Hours 64,100 3,413,325
Underapplied manufacturing overhead P 1,166,175 underapplied