What is Labour Recovery Accounting?

Labour recovery is the automatic re-posting of wages from your Profit and Loss (P&L) to your job costs.

Typically, wages are posted to business expenses on your P&L. This affects your net profit, not your gross profit.

The reality is these wages, when used on jobs, production work orders and the cost of goods you sell, are often costs of goods sold (COGS).

In systems that don’t have an automated labour recover mechanism, such wages are often accounted for by a journal at End of Month (EOM). Sometimes, however, they are not accounted for at all.

In the case of the latter, your gross profit is incorrect and looks too high because the actual labour hasn’t been accounted for.

This affects overall business profitability by hindering the business’ ability to forecast finances and its ability to budget for jobs to quote.

Labour Recovery Rate

Within the production and service industries, payment for goods takes place either over an extended period or after the work has been completed.

The value of labour needs to be recovered (deducted) from your wage expenses and allocated to the job or work order to calculate the correct product wage costs.

Accentis Enterprise ensures that labour expended (either through timesheet entry or by having a labour component on a bill of materials) is automatically recovered from expenses. This is then posted to the appropriate COGS (or to stock on hand if the item is still in stock).

Job cost rates will usually be calculated as more than an employee’s standard hourly rate to cover superannuation, annual leave, payroll tax and workers compensation.

Benefits of Recovering Labour Wages?

The reasons why you want to recover wages from your Profit and Loss are:

  1. Your Cost of Sales will be accurate.
  2. Your Gross Profit Margin on Sales of Goods will be accurate. This will allow you to compare your profits on a manufactured product with a purchased version of the same. Why manufacture an item when it benefits you more to purchase and sell it?
  3. Your Wage Costs Overheads will wash out automatically. Overheads are the difference between the actual wages recorded and the wages you have recovered.

For example:

  • Your wage bill for the month is $100k.
  • $80k of that wage bill is re-posted to COGS as a result of actual labour consumed on production or jobs.
  • The $20k left over is a wage cost not used to produce goods i.e. your genuine employment overhead, which is a non-productive cost you want to minimise.

When you recover labour as a business, you can generate a better overall profit because you will be more aware of the goods and services that generate it.

Correct Timesheet Accounting

Timesheets are important for business accounting — even more so when you need to recover wages!

Knowing an employee is performing the work on a specific job allows the business to allocate the wages correctly.

Accentis Enterprise uses the timeclock and timesheet features to record the start and stop times of work performed on each job.

We integrate with Aussie Time Sheets biometric hardware for accurate and up-to-date recording of time spent working on a job.

Payroll will easily manage and account for all time worked for a job.

In Conclusion

Any business that wants to invest in its most profitable products and services should really consider labour recovery accounting.

When you attribute labour to the correct wage accounts, your P&L report will be healthier, and your business will grow.

Utilising a biometric scanner to ensure staff are logging their hours accurately will help improve recording of timesheets and minimise mistakes that occur with manual timesheet processes.

Accentis Enterprise ERP system has many features such as this to help your business grow.

For more technical information and examples, you can view the topic in the Accentis Enterprise User Guide which details how to better use this feature.

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