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C HAPTER 13
The Human ResourcesManagement and Payroll
Cycle
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INTRODUCTION
Questions to be addressed in this chapterinclude: What are the basic business activities and
data processing operations that areperformed in the human resourcesmanagement (HRM)/payroll cycle?
What decisions need to be made in this cycle,
and what information is needed to make thesedecisions?
What are the major threats and the controlsthat can mitigate those threats?
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INTRODUCTION
The HRM/payroll cycle is a recurring set ofbusiness activities and related dataprocessing operations associated witheffectively managing the employeeworkforce.
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INTRODUCTION
The more important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees
Training Job assignment Compensation (payroll) Performance evaluation
Discharge of employees (voluntarily or involuntarily) Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.
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INTRODUCTION
The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or
involuntarily) Payroll costs are also allocated to products and
departments for use in product pricing and mixdecisions.
These two tasks arenormally done only
once for eachemployee.
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INTRODUCTION
The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation
Discharge of employees (voluntarily or involuntarily) Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.
These tasks are donerepeatedly as long asthe employee works
for the company.
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INTRODUCTION
The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or involuntarily)
Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.
In most companies these sixactivities are split between apayroll system and an HRM
system.
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INTRODUCTION
The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or involuntarily)
Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.
The payroll system handlescompensation and comesunder the purview of the
controller.
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INTRODUCTION
The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or
involuntarily) Payroll costs are also allocated to products and
departments for use in product pricing and mixdecisions.
The HRM system handles theother five tasks and comes
under the purview of thedirector of human resources.
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INTRODUCTION
In this chapter, well focus primarily on thepayroll system: Accountants are traditionally responsible for
its function. Must be designed to meet:
Managements needs. Government regulations.
Incomplete or erroneous payroll records: Impair decision making. Can result in fines and/or imprisonment.
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INTRODUCTION
The design of the HRM system is alsoimportant because the knowledge andskills of employees are valuable assets, soHRM systems should: Help assign these assets to appropriate tasks;
and
Help monitor their continuous development.
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INTRODUCTION
There are five major sources of input to thepayroll system: HRM department provides information about
hiring, terminations, and pay-rate changes.
Employees provide changes in discretionarydeductions (e.g., optional life insurance). Various departments provide data about the
actual hours worked by employees. Government agencies provide tax rates and
regulatory instructions. Insurance companies and other organizations
provide instructions for calculating and remittingvarious withholdings.
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INTRODUCTION
Principal outputs of the payroll system arechecks: Employees receive individual paychecks . A payroll check is sent to the bank to transfer funds
from the companys regular account to its payrollaccount.
Checks are issued to government agencies,insurance companies, etc., to remit employee and
employer taxes, insurance premiums, union dues,etc. The payroll system also produces a variety of
reports.
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INTRODUCTION
Organizational success depends on skilled andmotivated employees: Their knowledge and skills affect quality and quantity
of goods and services.
Labor costs are a major expense in generatingrevenues and a key cost driver. The traditional AIS has not measured or
reported on the status of a companys humanresources: Financial statements do not regard employees as
assets. Under GAAP, the value of human services is not
measured until they have been consumed.
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INTRODUCTION
In the 1990s companies began creatingpositions for a director of intellectual assetswith responsibilities for developing andmanaging intellectual assets.
Some may even include HR info in theirannual report, including reports on: Human capital: The knowledge employees
possess, which can be enhanced.
Intellectual capital: The knowledge thats beencaptured and implemented in decision supportsystems, expert systems, or knowledgedatabases, so that it can be shared.
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INTRODUCTION
Employee morale is also important Bad morale leads to high turnover. Employee attitudes affect customer interactions
and are positively correlated with profitability. Employees need to:
Believe they have the opportunity to do what they dobest.
Believe their opinions count. Believe their coworkers are committed to quality. Understand the connection between their jobs and the
companys mission.
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INTRODUCTION
To effectively track intellectual capitaland human resources, the AIS must domore than just record time andattendance and prepare paychecks.
Payroll should be integrated with HRM
so management can access data aboutemployee-related costs and employeeskills and knowledge.
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PAYROLL CYCLE ACTIVITIES
Lets take a look at payroll cycleactivities.
The payroll application is processed inbatch mode because: Paychecks are issued periodically.
Most employees are paid at the sametime.
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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UPDATE PAYROLL MASTER FILE
The HRM department provides information on newhires, terminations, changes in pay rates, andchanges in discretionary withholdings.
Appropriate edit checks, such as validity checks onemployee number and reasonableness tests areapplied to all change transactions.
Changes must be entered in a timely manner andreflected in the next pay period.
Records of terminated employees should not bedeleted immediately as some year-end reports (e.g.,W-2s) require data on compensation for allemployees during the year.
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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UPDATE TAX RATES AND DEDUCTIONS
The payroll department receivesnotification of changes in tax rates andother payroll deductions fromgovernment agencies, insurers,unions, etc.
These changes occur periodically.
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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VALIDATE TIME AND ATTENDANCEDATA
Information on time and attendancecomes in various forms depending onthe employees pay scheme.
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VALIDATE TIME AND ATTENDANCEDATA
Most employees are paid either on anhourly basis or a fixed salary. Many companies use a t im e card to record
their arrival and departure time. This document typically includes total hours
worked during a pay period.
Manufacturing companies may use job timetickets to record not only time present but alsotime dedicated to each job.
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VALIDATE TIME AND ATTENDANCEDATA
Sales staff are often paid on a straightcommission or base salary pluscommission.
Some may also receive bonuses forsurpassing sales targets.
Requires careful recording of their sales.
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VALIDATE TIME AND ATTENDANCEDATA
Increasingly, laborers may be paidpartly on productivity.
Some management and employeesmay receive stock to motivate them tocut costs and improve service.
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VALIDATE TIME AND ATTENDANCEDATA
The payroll system needs to link to therevenue cycle and other cycles to calculatethese payments.
Its also important to design bonus schemeswith realistic, attainable goals that: Can be measured Are congruent with corporate objectives Are monitored by management for continued
appropriateness Are legal
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VALIDATE TIME AND ATTENDANCEDATA
Accountants and compensationpolicies Recent corporate scandals have led to
scrutiny and criticism of executivecompensation plans:
FASB issued new rules requiring that stockoptions be expensed.
Major U.S. stock exchanges now requirecompanies to obtain shareholder approvalof stock compensation.
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VALIDATE TIME AND ATTENDANCEDATA
Compensation boards are being created todesign compensation plans, rather thanhaving executives create their own.
Accountants can help by: Advising on financial and tax effects of proposals. Identifying appropriate metrics to measure
performance.
Enabling compliance with legal and regulatoryrequirements.
Suggesting appropriate public disclosures.
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VALIDATE TIME AND ATTENDANCEDATA
How can information technology help? Collecting time and attendance data
electronically, e.g.: Badge readers Electronic time clocks Data entered on terminals Touch-tone telephone logs
Using edit checks to verify accuracy andreasonableness when the data are entered.
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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PREPARE PAYROLL
The employees department providesdata about hours worked.
A supervisor confirms the data. Pay rate information is obtained from
the payroll master file.
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PREPARE PAYROLL
Procedures: The payroll transaction file is sorted by
employee number (same sequence as master
file). For each transaction, the payroll master file isread for pay rates, etc., and gross pay iscalculated.
Hourly employees: Gross pay = (hours worked xwage rate) + Overtime + Bonuses Salaried employees: Gross pay = Annual salary x
Fraction of year worked
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PREPARE PAYROLL
Payroll deductions are summed andsubtracted from gross pay to obtain netpay. There are two types of deductions:
Payroll tax withholdings Voluntary deductions
Year-to-date totals for gross pay,deductions, and net pay are calculated,and the master file is updated. Cumulativerecords are important because:
Social Security and other deductions cease ordecline at certain levels.
The information will be needed for tax reports.
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PREPARE PAYROLL
The following are printed: Paychecks for employees often accompanied
by an earning s s tatem ent , which lists pay
detail, current and year-to-date. A payrol l reg is ter , which lists each employeesgross pay, deductions, and net pay in a multi-column format:
Is used to authorize the transfer of funds to thecompanys payroll bank account. May be accompanied by a deduc t ion reg i s te r ,
listing miscellaneous voluntary deductions for eachemployee .
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PREPARE PAYROLL
As payroll transactions are processed,labor costs are accumulated by generalledger accounts based on codes on the job
time tickets. The totals for each account are used as the
basis for a summary journal entry to be postedto the general ledger.
Other payroll reports and governmentreports are produced.
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DISBURSE PAYROLL
Most employees are paid either by: Check
Direct deposit In some industries, such as
construction, cash payments may still be
made, but does not provide gooddocumentation
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DISBURSE PAYROLL
Procedures: When paychecks have been prepared, the
payroll register is sent to accounts payable forreview and approval.
A disbursement voucher is prepared toauthorize transfer of funds from checking tothe payroll bank account.
For control purposes, checks should not be drawn on thecompanys regular bank account
A separate account is created for this purpose. Limits the companys loss exposure. Makes it easier to reconcile payroll and detect paycheck
forgeries.
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DISBURSE PAYROLL
The approved disbursement voucher and payrollregister are sent to the cashier. The cashier:
Reviews the documents. Prepares and signs the payroll check to transfer the
funds. Reviews, signs, and distributes employee
paychecks (which separates authorization andrecording from distribution of checks).
Re- deposits unclaimed checks in the companysbank account. Sends a list of these paychecks to internal audit for
investigation.
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DISBURSE PAYROLL
Returns the payroll register to payroll department,where it is filed with time cards and job time tickets.
Sends the disbursement voucher to accountingclerk to update general ledger.
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DISBURSE PAYROLL
Efficiency opportunity: Direct deposit Direct deposit can improve efficiency and
reduce costs of payroll processing. Employee receives a copy of the check and an
earnings statement. Each bank receives a record of the payroll deposits for
that bank via EDI. The record includes:
Employee number Social security number Bank account number Net pay amount
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DISBURSE PAYROLL
Savings occur because: While the cashier does authorize release of
funds, he/she does not sign each check.
Eliminates costs of buying, processing, anddistributing paper checks. Eliminates postage.
Additional costs:
Elimination of float between when check isdistributed and when it is deposited byemployee.
Savings typically outweigh costs.
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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CALCULATE EMPLOYER-PAIDBENEFITS AND TAXES
The employer pays some payroll taxesand employee benefits directly. The employer withholds federal and state
taxes from employee paycheck, along withMedicare tax, and the employees share ofSocial Security.
May also withhold voluntary deductions suchas union dues, United Way contributions,credit union savings, retirement contributions,etc.
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CALCULATE EMPLOYER-PAIDBENEFITS AND TAXES
In addition, the employer pays: A matching amount of Social Security. Federal and state unemployment taxes.
The employer share of health, disability, andlife insurance premiums, as well as pensioncontributions.
Some companies offer flexible benefitplans, sometimes called cafeteria-stylebenefit plans. These plans offer a menu of options.
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CALCULATE EMPLOYER-PAIDBENEFITS AND TAXES
Benefit programs increase the demandson the HRM/payroll system for gatheringemployee data, disbursing payments andinformation, etc.
Providing access to payroll/HRMinformation through a company intranet
can help reduce costs.
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PAYROLL CYCLE ACTIVITIES
The seven basic activities in the payroll cycleare: Update payroll master file
Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous
deductions
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DISBURSE PAYROLL TAXES ANDMISCELLANEOUS DEDUCTIONS
The company must periodically preparechecks or EFT to pay tax and otherliabilities.
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OUTSOURCING OPTIONS
Many entities outsource payroll and HRMto: Payroll service bureaus
Maintain the payroll master file and perform payrollprocessing activities. Professional employer organizations (PEOs)
Perform the services of the payroll service bureau.
Also administer and design employee benefitplans. Generally, more expensive than payroll service
bureaus.
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OUTSOURCING OPTIONS
When organizations outsource payrollprocessing, they send the service bureauor PEO at the end of each period: Personnel changes. Employee time and attendance data.
The service bureau or PEO then: Prepares paychecks, earnings statements,
and a payroll register. Periodically produces tax documents.
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OUTSOURCING OPTIONS
Outsourcing is especially attractive to small andmid-size businesses because: Its often cheaper for smaller companies. The bureau or PEO may provide a wider range of
benefits. It frees up the companys computer resources for
other areas. However, companies must carefully monitor
service quality to ensure that these systemsintegrate HRM and payroll data in a manner thatsupports effective management of employees.
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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES
In the HRM/payroll cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that thefollowing objectives are met: All transactions are properly authorized
All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft
Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and
regulations All disclosures are full and fair
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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES
There are several actions a company can takewith respect to any cycle to reduce threats oferrors or irregularities. These include: Using simple, easy-to-complete documents with
clear instructions (enhances accuracy andreliability).
Using appropriate application controls, such asvalidity checks and field checks (enhances
accuracy and reliability). Providing space on forms to record who completed
and who reviewed the form (encourages properauthorizations and accountability).
CONTROL OBJECTIVES THREATS
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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES
Pre-numbering documents (encouragesrecording of valid and only validtransactions).
Restricting access to blank documents(reduces risk of unauthorized transaction).
CONTROL OBJECTIVES THREATS
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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES
Following is a discussion of threats to theHRM/payroll system, organized aroundthree areas: Employment practices Payroll processing General control issues
THREATS IN EMPLOYMENT
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THREATS IN EMPLOYMENTPRACTICES
Objective: Effectively hire, retain, and dismiss
employees.
The major threats in the employmentpractices area are: THREAT 1: Hiring unqualified or larcenous
employees THREAT 2: Violation of employment law
You can click on any of the threats below to getmore information on: The types of problems posed by each threat The controls that can mitigate the threats.
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You can click on any of the threats below to get
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GENERAL THREATS
Two general objectives pertain to activitiesin every cycle: Accurate data should be available when
needed. Activities should be performed efficiently andeffectively.
The general threats are: THREAT 7: Loss, alteration, or unauthorized
disclosure of data THREAT 8: Poor performance
You can click on any of the threats below to getmore information on: The types of problems posed by each threat. The controls that can mitigate the threats.
KEY DECISIONS AND
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KEY DECISIONS ANDINFORMATION NEEDS
The payroll system should be integratedwith cost data and HR information somanagement can make decisions with
respect to the following types of issues: Future work force staffing needs Employee performance
Employee morale Payroll processing efficiency and
effectiveness
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SUMMARY
Youve learned about the basic businessactivities and data processing operations thatare performed in the HRM/payroll cycle,
including recruiting, hiring, training, assigning,compensating, evaluating, and dischargingemployees.
Youve also learned about key procedures in
payroll processing. Youve learned how IT can improve the
efficiency and effectiveness of these processes.
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SUMMARY
Youve learned about decisions that needto be made in the HRM/payroll cycle andwhat information is required to make these
decisions. Youve also learned about the major
threats that present themselves in the
HRM/payroll cycle and the controls thatcan be instigated to mitigate those threats.
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