Accrued Direct Labor Costs vs. Accrued Wages

CFA Level I
#1
  1. My earlier question on Accrued Direct Labor Costs was solved as: DR Inventory & CR Wages Payable

See: http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91353775

  1. But now I see a question stating that Accrued Wages should be: DR Wage Expense & CR Wages Payable

What’s really the difference between the two & when do I use either one? So if I see the word “labor” I go with the first option, and the word “wage” then go with the second option?

Thank you!

#2

Direct labor – labor directly contributing to the value of goods that you will sell – is added to the inventory value and expensed as the inventory is sold: matching principle.

Indirect labor – labor that doesn’t directly contribute to the value of goods that you will sell – is expenses as it is incurred.

Suppose that you manufacture and sell tennis balls. The wages for the people who operate the machines that make the tennis balls are direct labor: finished tennis balls are more valuable than a pile of rubber, fuzz, glue, ink, and nitrogen. The wages for the receptionist, the human resources manager, and the driver of the forklift in the warehouse are indirect labor: nothing they do directly increases the value of the tennis balls that you’re selling.

#3

Amazing explanation! Much appreciated as always :slight_smile:

#4

Glad to help.