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Job Costing Labor

Dear Dave
Once a project has reached its contract limit, and any additional project labor charged to the project would be un-billable to the client, would it be appropriate to instead charge that additional project labor, over the budgeted amount, to general office or some other indirect labor account since the payroll will never be billable? When a salaried employee works more than forty hours in a week on projects, should only the first forty hours be charged against projects since that employee is not being paid for hours worked in excess of forty hours in any week?

Dear JK
The classification of payroll labor as being either direct or indirect has nothing whatsoever to do with whether or not that labor is actually ever billed to a client. Any and all payroll incurred on projects should always be recorded as direct labor, without regard for budget or billing status. It is never appropriate to re-classify direct payroll to indirect payroll.

To be technically correct, when a salaried individual works more than forty hours in a week each hour is charged to projects, but the hourly job cost rate for each of the hours worked that week is ratcheted down by dividing the weekly salary by the number of hours worked to spread the salary evenly over the total hours worked. For internal project management purposes, as a matter of policy, many firms prefer to skip this prorating step and continue to charge a standard fixed rate for each hour worked.

Wahby and Associates