Labor Cost Journal Entry

Overview

In accounting, labor cost journal entry will start with the period-end adjusting entry when the company needs to accrue the wages payable for the period. Later on, the company will need to assign the labor cost to appropriate manufacturing accounts.

In job order costing, the direct labor will be transferred to the working in progress account while the indirect labor will be transferred to the manufacturing overhead account. Likewise, the balance of the labor cost will become zero at the end.

Labor cost journal entry

The company can make the labor cost journal entry by debiting the labor cost account and crediting wages payable account and payroll taxes payable.

Account	Debit	Credit
Labor cost	$$$
Wages payable		$$$
Payroll taxes payable		$$$

In this journal entry, the labor cost account includes both direct labor and indirect labor. And the payroll taxes payable account is a current liability account that the company owes to the applicable governing authorities.

In job order costing, the company can transfer the cost of direct labor to the work in process inventory and the cost of indirect labor to the manufacturing overhead.

Direct labor cost

The company can make the journal entry for direct labor when it transfers the labor cost (direct) to the work in process as below:

Account	Debit	Credit
Work in process inventory	$$$
Labor cost (direct)		$$$

Indirect labor cost

The company can make the journal entry for indirect labor when it transfers the labor cost (indirect) to the manufacturing overhead as below:

Account	Debit	Credit
Manufacturing overhead	$$$
Labor cost (indirect)		$$$

Alternatively, the company can transfer the labor cost to the work in process inventory and manufacturing overhead with only one journal entry instead as below:

Account	Debit	Credit
Work in process inventory	$$$
Manufacturing overhead	$$$
Labor cost		$$$

Example

For example, the company ABC, which is a manufacturing company, has incurred the direct labor cost of $45,000 and the indirect labor cost of $5,000 during the period. Of the total amount, $42,000 is related to the wages payable and the $8,000 is related to the payroll taxes payable.

In this case, the company ABC can make the journal entry for the labor cost of $50,000 (45,000 + 5,000) as below:

Account	Debit	Credit
Labor cost	50,000
Wages payable		42,000
Payroll taxes payable		8,000

In this journal entry, the labor cost that includes both the direct labor and indirect will need to be assigned to appropriate manufacturing accounts later on.

Likewise, the company can make the journal entry to transfer the labor cost to work in process inventory and manufacturing overhead in the job order costing as below:

Direct labor cost

Account	Debit	Credit
Work in process inventory	45,000
Labor cost (direct)		45,000

Indirect labor cost

Account	Debit	Credit
Manufacturing overhead	5,000
Labor cost (indirect)		5,000

Alternatively, the company can make only one journal entry to include both work in process inventory and manufacturing overhead as below:

Account	Debit	Credit
Work in process inventory	45,000
Manufacturing overhead	5,000
Labor cost		50,000

Likewise, the $50,000 balance of labor cost that includes both direct labor and indirect labor will become zero after the journal entry.