INTERNAL ACCOUNTING ENGINEERING
Allocation of Direct Labor
2. DIRECT LABOR TRANSACTIONS
Basically, Class 2 mirrors Direct Labor wages recorded in Class 1. (A minor exception is when a calendar period disagrees with another definition of month-end, since there will be a days overlap on a calendar. This must be noted.) Class 2 recognizes the total payment as Direct Labor. Class 3 then awaits a detailed allocation of Direct Labor wages to the various departments. The External procedure to record Direct Labor payroll is:
Credit: Accounts Payable -- Payroll (Class 0) Debit :
Expenditure -- Direct Labor wages (Class 1).
In A/P one general account suffices for both salaries and wages. But to support Internal Accounting, an Expenditure Main-Account should be developed especially for Direct Labor wages. By structuring Payroll by departments, we isolate Direct Labor wages from other payroll and provide a more accurate cost accounting.
The Internal procedure to record Direct Labor payroll is.
Credit : Cost Elements -- Direct Labor wages (Class 2).
Debit : Direct Production Department (Class 3).
Direct Cost Allocation Procedure
Direct labor wages are normally Variable costs, charged directly to the Production Cost Account, what is commonly called
WIP. It is commonly held that direct labor wages change proportionally to the
changes of the production level.
Internal Accounting automatically allocates direct labor costs to direct
Production departments, and re-allocates indirect labor costs to direct
Production departments, and provides the option to treat direct wages
as fixed rather than variable to production (based on the premise that piece wages are the only
true variable wages). When products absorb costs of direct labor hours this way,
Internal Accounting can report absorbed direct labor cost as a standard cost.
Internal Accounting variance reporting is more accurate and meaningful in reporting
variable costs of direct production.