Question

The gross earnings of the factory workers for Larkin Company during the month of January are $72,000. The employer’s payroll taxes for the factory payroll are $7,600. The fringe benefits to be paid by the employer on this payroll are $5,400. Of the total accumulated cost of factory labor, 83% is related to direct labor and 17% is attributable to indirect labor.

(a)		Prepare the entry to record the factory labor costs for the month of January.
(b)		Prepare the entry to assign factory labor to production.

Answer 1

a.

Date	Account title	Post Ref	Debit	Credit
	Factory labor cost		$85,000
	Wages payable			$72,000
	Payroll taxes payable			$7,600
	Fringe benefits payable			$5,400
	(Record factory labor cost)

Factory labor expenses are debited as expenses are debited. Expenses payable are credited as increase in liability is credited.

b.

Date	Account title	Post Ref	Debit	Credit
	Work In Process Inventory		$70,550
	Overhead		$14,450
	Factory labor			$85,000
	(Record assignment of direct and indirect cost of labor to production)

Direct labor is assigned to work in process inventory and indirect is assigned to overhead (factory). Indirect expenses are charged to overhead as amount of indirect material in each job is not tracked by companies. So, they are charged to overheads.

83% of labor cost is related to direct labor which comes out to be $70,550 (0.83 * 85,000)

17% of labor cost is related to indirect labor which comes out to be $14,450 (0.17 * 85,000)