Question

Assume you are a new employee at Payroll Inc. a company which process payroll, advises small businesses on payroll issues, and remits all withheld funds to the government along with payroll forms required. Processing payroll and completing forms is a routine process which is repeated for each client and payroll period. Payroll advising is unique to each client.

In your initial post discuss the aspects of Payroll Inc.'s processes that lend themselves to process costing and which processes would more closely align with job order costing. How would you set up Payroll Inc.'s accounting system? Would you use job order or process costing? Or some other type of system? Why?

Answer 1

Clients of PAyroll Inc are small businesses who are outsourcing their payroll operations to them for further processing. Here, we can break down the services provided to clients in three major heads 1. Processing of payrolls 2. Remittance of taxes and fulfilling forms 3. Advise on payroll management to clients. These heads may be further divided into sub heads involving processes like

a) Maintenance of employee database involving headcount showing additions or termination during the period and consequent changes in Salaries and wages and other perquisites.

b) Keeping track of deductions and manual claims made by employees

c) Adherence to local and state laws while calculating taxes to be remitted

d) Devising error-free mechanisms for report generation, secure data back ups and issuance of payments.

e) Advising on payroll management further requires deep research and analysis of patterns of employee related data of each client for e.g. Bonus and remuneration cycles, severance pay structure and timings, Tax deduction timings etc.

The processes leading up to unique advise for payroll management are usually the same for each client and are repetitive in nature. Therefore, one can safely justify for using process costing for these processes. (e.g. a) to d above). The output from the processes remains the same for each client i.e. Time sheets and standard deductions applied towards final payment. Therefore, apportionment of production costs of payroll processing can be best done using process costing.

Here, Advisory services for payroll management are unique towards each client so it can be considered as a separate job order item. Costs involved in analysis behind each client may differ as per client requirement which makes use of process cost accounting unfair for the clientele.

In order to set up Payroll Inc's Accounting system, we need to amalgamate the procedures of process costing and Job order costing. In it, we can apportion the common production costs of processes leading to the uniform output using Process costing and then allocate specific costs for advisory services on job order basis to the specific client. The rationale behind this system would be fair,efficient and effective way of applying costs to the clients and ensuring accurate reporting for Payroll Inc.