Contract worker costs are also direct labor costs. See below for detailed instructions.Īdd Absorbed Costs sub-sections to your Cost of SalesĪdd the following Absorbed Costs sub-sections at the end of your Cost of Sales section.ĭirect labor costs are the actual payroll costs associated with production worker employees, including benefits, taxes, and wages, as well as their share of workmans compensation insurance. You must restructure your payroll account assignmentsĪfter you restructure your direct labor and manufacturing overhead accounts, you must change your payroll system account assignments so that production worker costs are posted to direct labor accounts and shop management and non-production worker costs are posted to manufacturing overhead accounts. To use your chart of accounts with financial transfer processes, you must restructure your direct labor and manufacturing overhead accounts to convert your generic chart of accounts into a manufacturing chart of accounts. You must restructure your labor and overhead accounts Job labor and manufacturing overhead transactions post to contra-accounts that offset actual costs and thus “absorb” labor and overhead costs into the inventory costs of the items you make. Shop-related costs are isolated from general and administrative costs. Shop and office expenses for rent, utilities, insurance, maintenance, utilities and other costs are often lumped into shared expense accounts.īy contrast, in a manufacturing chart of accounts, labor and manufacturing overhead costs are handled by Cost of Sales accounts. For example, payroll expenses for shop and office employees are often lumped together into shared expense accounts. In a generic chart of accounts, labor and manufacturing overhead costs are handled by Expense accounts and shop expenses are often blended with general expenses.
How are labor and overhead costs handled in a manufacturing company? All your manufacturing overhead cost accounts must be Cost of Sales accounts offset by an Absorbed Mfg Overhead contra-account. All your direct labor cost accounts must be Cost of Sales accounts offset by an Absorbed Labor contra-account. The Cost of Sales section in your general ledger must be structured to accommodate absorption costing.