Murray, an architect, has an associate and a secretary. He pays the associate $30 per hour and the secretary $15 per hour. They work 40 hours, making their salaries $1,200 ($30 × 40) and $600 ($15 × 40), respectively, for a total of $1,800 per week. What is the journal entry to record their wages?

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Accepted Answer

[latex]\begin{array}{lll}& \text { Debit } & \text { Credit } \\hline \text{Payroll expense}& \$1,800\\text{Cash}&&\$1,800\end{array}[/latex]

Note that the journal entry balances, and the total of Murray’s debits balance total credits.
Of the 40 hours the associate worked, 20 hours are billable to Sam’s Bar & Grill, and 10 hours are billable to Mrs. Jones. Since Murray expects projects for these clients to continue for some time, he sets up work in process (WIP) accounts to capture project costs.

As a result, Murray reclassifies $600 (20 hours $30 per hour) of his payroll expense to Sam’s WIP account, and $300 ($30 10) to Mrs. Jones’s WIP account.

[latex]\begin{array}{lll}& \text { Debit } & \text { Credit } \\hline \text{Sam’s WIP}& \$600\\text{Mrs. Jones’s WIP}&\$300&\\text{Payroll expense}&&\$900\end{array}[/latex]

Why bother? For one thing, the WIP account data will be used to compute cost of goods sold; for another, WIP account data will be used as the basis of client billing. Billing the client is the second most important thing a company does. The most important, of course, is to get paid.
Reallocating payroll expense to clients is also important to identify and track unbilled time. Notice in the example that the associate was paid for 40 hours, but only had 30 billable hours! This unbilled, or unbillable, time is somewhat like unallocated factory overhead in that it represents waste. (In the real world, an architect’s associate, lawyer, accountant, or consulting engineer is expected to bill 50 hours for every forty they are paid!)
Two additional journal entries are usually made to close out a project. First, bill the client. Suppose Murray marks up costs by 150% for billing purposes, then the work for Sam would be billed at $1,500 ($600 + 150% × $600), and the work for Mrs. Jones would be billed at $750 ($300 + 150% × $300).

[latex]\begin{array}{lcc}& \text { Debit } & \text { Credit } \\hline \text { Accounts receivable-Sam's } & \$ 1,500 & \\text { Accounts receivable-Mrs. Jones }& \$ \quad 750&\\text { Revenue } & &\$2,250 \\end{array}[/latex]

Second, relieve (that is, zero out) the WIP accounts.

[latex]\begin{array}{lll}& \text { Debit } & \text { Credit } \\hline \text { Cost of goods (services) sold } & \$ 900 & \\text { WIP-Sam's } & & \$ 600 \\text { WIP-Mrs. Jones's } & & \$ 300\end{array}[/latex]

Why is it important for management to know this kind of detail? First, management must have some common vocabulary they can use to discuss issues with the accounting department. If you, management, are talking in Pascals, and they are talking in Newtons per meter squared, or you are talking in degrees Kelvin when they are talking in degrees Centigrade, the results could be nasty. Second, accurate job costing can influence calculations of gross profit (and bonuses) and can influence future pricing and followon sales.
Consider an example using union labor. Suppose Burlington Bridge Constructors has two projects going on simultaneously. One at Pequad Creek, and one at Hope Creek. The United Iron Workers Union has contracted 10 men, 40 hours per week for 2 weeks (800 total labor hours) at $25 per hour. Payroll is therefore $20,000, and the journal entry is

[latex]\begin{array}{lcr}& \text { Debit } & \text { Credit } \\hline \text { Payroll } & \$ 20,000 & \\text { Cash } & & \$ 20,000\end{array}[/latex]

One issue to consider when contracting for a block of time, whether from a union, consulting company, or temp company, is that productive utilization of that time is the responsibility of you the purchaser. The WIP journal entries, assuming 400 hours of union labor were allocated to Hope Creek, and 350 hours were allocated to Pequad, follow:

[latex]\begin{array}{lcr}& \text { Debit } & \text { Credit } \\hline \begin{array}{l}\text { Hope Creek WIP } \(\$ 25 \times 400)\end{array} & \$ 10,000 & \\begin{array}{l}\text { Pequad Creek WIP } \(\$ 25 \times 350)\end{array} & \$ 8,750 & \\begin{array}{l}\text { Overhead unallocated labor } \(\$ 25 \times 50)\end{array} & \$ 1,250 & \\quad \text { Payroll } & & \$ 20,000\end{array}[/latex]

Construction companies, especially those that broker union labor on cost plus fixed fee contracts, can only bill labor allocated to a project. Since 50 of the 800 labor hours are not allocated, they are unbillable under a cost plus contract. This unbillable time is usually closed out to an overhead expense account. This form of overhead is important to track because it represents a form of waste that is a measure of project management efficiency. After this entry, all labor hours are totally accounted for, and the payroll expense account is relieved (returned to zero).

Question 17.3: Murray, an architect, has an associate and a secretary. He p...

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