Step 5: Labor Distribution (preview)

meets the following DCAA Requirement:

  • A labor distribution system that charges direct and indirect labor to objectives.

Synopsis

I start by reviewing payroll systems and discuss the differences between Quickbooks Desktop payroll and an outside payroll services.  The differences between a payroll register and a labor distribution is reviewed.  If an outside payroll service is used, I show how to create of a “mock” payroll and the labor distribution report and discuss the need for the payroll journal entry.  If Quickbooks payroll is used, I discuss the need for a month-end journal entry for accrued wages and a sample is provided.  I demonstrate how to create the Labor Distribution Report.  Finally, I show you how to reconciled the labor distribution to your payroll register.

Payroll Systems

Labor distribution is the process by which labor costs are allocated to all time that is recorded on time sheets.  The distribution of labor costs must be allocated fairly among all cost objectives so that no customer or contract receives favorable treatment by receiving a cost subsidy.  DCAA will especially want to ensure that the labor costs are fairly distributed between commercial work and federal work, and between cost plus contracts and fixed price contracts.  The reason for DCAA's concern is that if the labor distribution system allocates labor costs in a manner that would unfairly reduce costs applied to commercial work or fixed price contracts, it would also unfairly increase costs on federal contracts and cost plus work.  The unfair share of labor costs then allocated to federal work and cost plus contracts would be incorrectly reimbursed by the federal contract, something the DCAA auditors are tasked to prevent.

Quickbooks handles the labor distribution when it runs a payroll.  When a payroll is posted in Quickbooks, it creates a paycheck, which contains payroll items.  Linked to the general ledger accounts for the various types of labor, the payroll items on the paycheck function to post the labor costs to the appropriate general ledger accounts.

If you are running payroll using Quickbooks Desktop Payroll, and using time sheets to create the payroll run, then you are also automatically creating the labor distribution.

If you run your payroll using an outside, third-party payroll provider such as ADP, you'll need to run a "mock" payroll in Quickbooks to create the labor distribution.

Mock Payroll

To run a mock payroll in Quickbooks, you'll need to first enter or import time sheets into Quickbooks.  Ensure that all time has been entered for the pay period; this may require 2 or 3 weekly time sheets, depending on your payroll cycle.

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