Journal Entry for Direct Labor and Indirect Labor
Overview
In the job order costing, the labor cost of production during the period usually includes both direct labor cost and indirect labor cost. Likewise, the company needs to make the journal entry for direct labor and indirect labor in order to account for the labor cost incurred during the period as well as to transfer the labor cost to the individual job or individual unit of product.
Direct labor cost is the labor cost that the company can directly trace to a single job or unit of product that has been performed or produced during the period. For example, the wages of a team of workers that performs their tasks solely on the job A can be directly traced to job A.
On the other hand, the indirect labor cost is the cost that cannot be traced to a single job or a single unit of product as such cost is usually related to the production as a whole. For example, the salary of the quality control and inspection personnel usually contributes to all units of goods in the production.
In the accounting of job order costing, the labor cost account is usually used for recording the labor cost that incurs during the period including both direct labor and indirect labor. And then this cost will be transferred to the production in order to add up to the cost of units being produced which is usually called work in process.
However, while the direct labor cost can be transferred directly to the work in process, for the reason mentioned above, the indirect labor cost will need to be transferred to the cost pool of the manufacturing overhead first before further be transferred to the work in process using the predetermined overhead rates.
Journal entry for direct labor and indirect labor
Labor cost incurred during the period
The company can make the journal entry for direct labor and indirect labor that incurs during the period by debiting the labor cost account and crediting the wages payable account and the payroll taxes payable account.
| Account | Debit | Credit |
|---|---|---|
| Labor cost | 000 | |
| Wages payable | 000 | |
| Payroll taxes payable | 000 |
In this journal entry, the amount of the labor cost usually includes both direct labor cost and indirect labor cost. This is due to, during the period of the production, in addition to the cost of workforce who are directly involved in the individual job or individual unit of product, there is usually also the cost of support staff such as quality control and inspection personnel which is needed to be included in the cost of production as well.
In this case, one part of this labor cost that represents the direct labor will be transferred to the work in process while another part that represents the indirect labor will be transferred to the cost pool of manufacturing overhead before being transferred further to the work in process to include in the individual job or unit of product.
Transfer to labor cost to production
The company can make the journal entry for the direct labor and indirect labor when they are transferred to the production by debiting the work in process account and the manufacturing overhead account and crediting the labor cost account.
| Account | Debit | Credit |
|---|---|---|
| Work in process | 000 | |
| Manufacturing overhead | 000 | |
| Labor cost | 000 |
Based on these two journal entries, the balance in the labor cost account should be zero at the end of the period. This is due to the labor cost account is a temporary account that will be cleared at the end of the period.
Direct labor and indirect labor example
For example, in October, the company ABC which is a manufacturing company incurs a total labor cost of $100,000 which includes the $80,000 of direct labor and the $20,000 of indirect labor during the period. The company ABC uses the job order costing in order to trace the manufacturing costs to a specific job order as well as to measure the costs of each completed unit of product.
Of the total amount, the company needs to account for the payroll taxes of $15,000 while the rest of $85,000 will go to the wages payable.
In this case, the company ABC can make the journal entry for direct labor and indirect labor that incurs in October by recording the total amount of $100,000 in the labor cost as below:
| Account | Debit | Credit |
|---|---|---|
| Labor cost | 100,000 | |
| Wages payable | 85000 | |
| Payroll taxes payable | 15,000 |
Afterward, the company ABC can transfer the $100,000 labor cost that includes both direct labor and indirect labor into the production by recording the $80,000 and the $20,000 into the working in process account and the manufacturing overhead account respectively as in the journal entry below:
| Account | Debit | Credit |
|---|---|---|
| Work in process | 80,000 | |
| Manufacturing overhead | 20,000 | |
| Labor cost | 100,000 |
In this journal entry, the $20,000 of indirect labor cost is transferred to the manufacturing overhead account that contains all overhead costs, such as indirect materials, indirect labor, depreciation, insurance, and other overhead costs, etc. Then, these costs including the $20,000 of indirect labor will be transferred further to the working in process account using the predetermined overhead rates.
In this case, it may be useful to note that as the manufacturing overhead costs that are applied to the production are based on the predetermined overhead rates, they usually do not equal the actual manufacturing overhead costs that actually incur during the period. This usually results in the overapplied overhead or underapplied overhead that requires the company to make another adjustment to clear the remaining balance of the manufacturing overhead (i.e. the overapplied amount or underapplied amount) at the end of the period.