Sage 100

So I am again faced with trying to figure out the best place on the GL to locate an Applied Labor account for WO. I struggle with whether it should be a contra-payroll expense or a cost of sales. Those of you who are much better accountants than I'll ever hope to be, what do you suggest? This has always annoyed me every time I deal with Work Order. Now I finally have a bunch of minds to set mine at ease finally.

I have always considered it a credit against overhead , because it doesn't necessarily relate to any sales. But I'm not a CPA, so it's just another opinion. I'd be inerested to hear from an expert in the field.

I'd vote similar to Clark - it's a reduction of expense (likely payroll) and not cost of goods until it's sold. The cost sits in the item in inventory (or as WIP) and doesn't move through COGS until a sale is booked. Typically I'd probably call it ""applied labor"" and put it under the payroll expense

Traditionally it should be a contra-payroll account. However, many job shops post their Payroll wages for shop employees directly to a Cost of Sales account instead of a Payroll Expense account. So, it really depends on where the company posts their payroll to - it should be a contra account to wherever they post their payroll wages for shop/production employees.

But it's really not overhead Clark, it's a the offset to WIP for Labor absorption. It will always be a credit and is absorbed into Inventory. Hence my dislike of putting it into COGS because it seems like double dipping. I've leaned more often toward making it a contra-payroll expense since it seems to me to do just that, recognize a reduction in labor by absorbing it into Inventory.

Yep...sounds like I've been heading in the right direction this whole time, just wanted to make sure...thanks everyone!

I agree with Jane's explanation and that's where it should go, since it is related to the payroll expense.

Jane is spot on with her explanation.

When I was on the other side of the ledger, all manufacturing overhead items were included in the COGS section of the P&L (as opposed to the SG&A items that some people consider an overhead) Applied labor and applied overhead were contra accounts in that section. I didn't include them in the payroll sections because I wanted a pure expense incurred report for the plant management. Giving them a report that included contra items gave them a sense that they incurred less expenses. As far as plant management was concerned, absorbed labor and OH were ""accounting"" issues. With the wonders of FRx, Biznet and SMI, you can put them anywhere in the GL income/expense sections and the reportign module to display them whereever you want.

I was going to post something extremely similar to Jane. Good luck

Yeah, that's what i meant, a contra-payroll expense account... Didn't President Reagan have some sort of problem with those contra accounts though?

You should take a look at how demo company XYZ is setup for some insight. I believe you specify Direct Applied Labor at the Ops code level so you can look at assigned accounts there.

In my book it is a reduction of production labor to be applied to WIP. What is left is the labor variance. My take would be that the Is difference could considered COGS.

The portion of labor that is not applied to WIP is either non-job related production labor, such as machine maintenance, plant cleanup or similar non-chargeable jobs (in which case they should probably be defined as weekly or monthly jobs/wo's which are allocated to COGS), or it's just overhead - waiting around, etc.. This also should be allocated, similar to general overhead that some will allocate back to production. Depends on how general overhead is treated. My opinion is all production labor should eventually be reflected in COGS. (@JimWoodhead - I guess that was my long-winded agreement with you.)

Hi Everyone, I'm coming around to this again, but from the GL perspective. How do the Accountants in the group determine how the Applied Labor account gets cleared out monthly or yearly? That account keeps collecting costs and I have always let the client's accounting group figure out what to do with it. But I'm not always comfortable (for what reason I have no clear articulation) with the choices they make. So am obviously looking for a consistent approach to deal with the collected value in the account. Any suggestions?

I don't get involved in accounting recommendations. I view my role as to explain and support the software and the end user needs to be in charge of their accounting policies. I've learned over the years that some end users will ask me (instead of their CPA) and when year end comes if there are problems with the earlier decision it tends to be rather uncomfortable.

I will re-iterate what I stated earlier: Traditionally it should be a contra-payroll account. However, many job shops post their Payroll wages for shop employees directly to a Cost of Sales account instead of a Payroll Expense account. So, it really depends on where the company posts their payroll to - it should be a contra account to wherever they post their payroll wages for shop/production employees.

Agree with @WayneSchulz . I tell customers that whatever their CPA says to do I will show them how to make the software do it.