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These employees are not categorized as direct labor workers because they are ordinarily not responsible to set up, run or maintain any production process. An entity’s total direct labor cost largely depends on skill level and motivation of its direct labor workers. Highly skilled and motivated workers exhibit enhanced efficiency and contribute towards controlling and reducing the total direct labor cost of the entity.

Conceptual Journey of Inventory & Wages Across Financial Statements

• The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales.
• While direct labor comprises work done on certain products or services, indirect labor is employee work that can’t be traced back or billed to services or goods produced.
• Assume Creative Printers is a company run by a group of students who use desktop publishing to produce specialty books and instruction manuals.
• Standard (std) hours are therefore the expected hours to make actual output.

Consulting, law, and public accounting firms use job costing to measure the costs of serving each client. Motion pictures, printing, and other industries where unique jobs are produced use job costing. Hospitals also use job costing to determine the cost of each patient’s care. For example, Job 105 had revenue of USD9,000 and costs of USD 5,500.Third, managers would compare actualoverhead on the left side of the Overhead account, with theoverhead applied to jobs on the right side.

Journal Entries to Move Direct Materials, Direct Labor, and Overhead into Work in Process

At the beginning of the year, the company used a cost formula to estimate that it would incur $\$ 4,800,000$ in manufacturing overhead cost at an activity level of 240,000 machine-hours. (3) Indirect labour costs includeindirect labour (costs of indirect labour workers), overtime premium(unless overtime is worked at the specific request of a customer), shiftpremium, sick pay and idle time. All of these indirect labour costs arecollected in the production overheads account. They are transferredthere via a credit entry out of the labour account and then debited inthe production overheads account.

Labor Cost Journal Entry

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They are either expensed in the period in which they are incurred or allocated to a cost object via a predetermined overhead rate. Ethics and the Manager LO3-4Terri Ronsin had recently been transferred to the Home Security Systems Division of National Home Products. Shortly after taking over her new position as divisional controller, she was asked to develop the division’s predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any underapplied or overapplied overhead is closed out to Cost of Goods Sold at the end of the year.

The Balance Of Factory Overhead

If the actual overheadexceeds the applied overhead, they may wish to learn why the actualoverhead is so high. Also, they may ask the accountants to increasethe overhead applied to jobs to give them a better idea of the costof jobs. If the actual is less than the applied overhead, they mayask the accountants to reduce the overhead applied to jobs. The company compares the cost of each job withthe revenue received to be sure the jobs are profitable. Sometimesthe company learns that certain jobs are too costly considering theprices they can charge.

For example, Creative Printers recentlylearned that cookbooks were not profitable. On the other hand,printing instruction manuals was quite profitable, so the companyhas focused more on the instruction manual market. To illustrate ajob costing system, this section describes the transactions for themonth of July for Creative Printers.

The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales. You only make one watch because it sells so well and with such a good gross margin (30%). The computation of inventory for the packaging department is shown in Figure 8.89.