I received some assistance on this last year but apparently something still isn’t working right. Our controller uses the Epicor financials statements to fill in the blanks on Excel spreadsheets that have been around for years. Starting with a fresh year we are hoping to get the numbers correct. Here is how I believe the accounts are working:
Indirect Labor: Debit Unabsorbed L & OH - Credit Applied L & OH
Direct Labor: Debit WIP - Credit Applied L & OH
Invoiced (during capture): Debit COS - Credit WIP
since we use the payroll module, payroll debits the departmental expense accounts. Doesn’t this double our labor costs on the income statement?
I’m not an accountant but I play one at work. It seems like it’s doubling but it isn’t. The Applied Labor account is what bean-counters call an absorption account. So yes, department expense is getting hit during payroll BUT you also want to keep labor in WIP until you’re ready to recognize the cost of goods. The absorption account “removes” (credits) the expense from your income statement and puts it into WIP, so you’re not double-dipping.
Thanks for the feedback Mark. It has taken me a while to get back to this as I was reformatting our Epicor income statement to match what she is using in Excel so we are at least comparing apples to apples.
So do the transactions I listed originally make sense?
Indirect Labor: Debit Unabsorbed L & OH - Credit Applied L & OH
Direct Labor: Debit WIP - Credit Applied L & OH
Invoiced (during capture): Debit COS - Credit WIP
When I look at the WIP Reconciliation report it shows those transactions being created based on the labor rate (not pay rate) in the employee’s payroll record. Should overhead be applied to these accounts too? In the GL controls for the expense code it has accounts for Applied Labor, Applied Overhead, COS Burden and COS Labor. Applied Labor and Applied Overhead are set to our Applied Labor and OH account. COS Burden and COS Labor are set to our Unabsorbed Labor and OH account.