Payroll mistakes can happen faster than you think.

For a moment, think about the employees for

whom monthly salary is the only source of income. Imagine what if the salary is not paid accurately
or there is a delay in releasing salary. Such irregularities can take a toll on the morale of the
employees and ultimately affect the business productivity.

What is Payroll?

Payroll is a list of employees who get paid by the company. Payroll also refers to the total amount
of money employer pays to the employees. As a business function, it involves:

1. Developing organization pay policy including flexible benefits, leave encashment policy, etc.
2. Defining pay slip components like basic, variable pay, HRA, and LTA
3. Gathering other payroll inputs (e.g., organization’s food vendor may supply information about
the amount to be recovered from the employees for meals consumed)
4. The actual calculation of gross salary, statutory as well as non-statutory deductions, and
arriving at the net pay
5. Releasing employee salary
6. Depositing dues like TDS, PF, etc. with appropriate authorities and filing returns

In short, we can say that payroll process involves arriving at what is due to the employees also
called as ‘net pay’ after adjusting necessary taxes and other deductions.
The equation for calculating the net pay
Net pay = Gross income- gross deduction

Where,

Gross income or salary = All types of regular income + allowances + any one-time payment or
benefit
Gross deduction = All types of regular deductions + statutory deductions + any one-time
deductions

What are the stages to processing payroll?

A payroll officer needs to do careful planning. There are always ongoing tasks that need attention
and a constant need to monitor changes to withholdings, contribution to social security funds, etc.
The entire process can be split into three stages, pre-payroll, actual payroll and post payroll
activities.
Pre-payroll activities

Defining payroll policy

The net amount to be paid is affected by multiple factors. The company's various policies such as
pay policy, leave and benefits policy, attendance policy, etc. come into play at that time. As a first
step, such policies need to be well defined and get approved by the management to ensure standard
payroll processing.

Gathering inputs

Payroll process involves interacting with multiple departments and personnel. There can be
information like mid-year salary revision data, attendance data, etc.

In smaller organizations, these inputs are received from a consolidated source or fewer teams.
However, in a larger organization, the task of gathering data may look overwhelming. If you are
using a smart payroll software having integrated features like leave and attendance management,
employee self-service portal, etc. inputs collection process does not remain a problem.
Various methods available to do payroll for your business

The possible options for running payroll can be

 Excel based payroll management

 Payroll outsourcing
 Using payroll software

Excel based payroll management

Many businesses who are at an initial stage of operations and have a handful of employees usually
go for excel based payroll management.

Excel based payroll management involves doing payroll calculation on excel sheets using standard
payroll calculation template. The mathematical formulas are set that help the payroll officer do the
computation. While this method does not involve any cost, but it has its inherent limitations like

 High chances of clerical and mathematical errors as data is entered manually

 Difficulty in adding and removing employees from payroll list
 Chances of duplicate data and omission of entries at times
 Need to monitor tax updates and other statutory changes like PF, PT etc.

Payroll outsourcing

Outsourcing payroll means you want an external agency to take care of your payroll function.
Many organizations who do not have a dedicated person for payroll go for this option. Based on
their pay cycle, every month they provide employee salary information and other data such as
attendance, leaves, reimbursement details, etc. to the payroll service provider. The service provider
then computes payroll and also takes care of statutory compliance. Since payroll is a crucial
function and businesses want to have full transparency and control over it, they often hesitate in
outsourcing payroll.

Payroll software

As discussed above, for running successful payroll, you need to ensure that payroll inputs are
coming from every source in a timely and seamless manner. The intent of using software is to
reduce the friction in getting the inputs. There are advanced payroll management software
available in the market that not only automates payroll computation but also serve as a holistic
leave and attendance management, HR management and employee self-service portal. Depending
on the size of your business and use cases you can opt for an appropriate payroll software for your
business.
Problem-1: In a factory bonus system, bonus hours are credited to the employee in the production
of time taken which time saved bears to time allowed. Jobs carried forward from one week to
another. No overtime is worked and payment is made in full for all units worked on, including
those subsequently rejected.

From the following, you are required to calculate for each employee:

(a) The bonus hours and amount of bonus earned;

(b) Total wage cost;

(c) The wage cost of each good unit produced.

Problem 2: Cost Accounting Problems on Labour Hour Rate (3 Problems):

Calcutta Engineering Co. has three production departments X, Y and Z and one service department
S.
From the following particulars calculate Labour Hour Rate of each of the departments X, Y
and Z:

There were 125 working days of 8 hours each. Services rendered by the Service Department are
to be apportioned to the production departments X 50%, Y 25%, and Z 25%.
Solution:

Working Notes:
1. Labour hours worked = No. of working days × hours of daily work × No. of workers
X: 125 × 8 × 7 = 7,000
Y: 125 × 8 × 5 = 5,000
Z: 125 × 8 × 5 = 5,000
2. Labour hour rates = Expenses/Labour hours worked
Problem 3: Moonlight Engineering Company has three production departments, A, B and C and
one service department S. Following are the particulars of a month of 25 working days of 8 hours
each.

Calculate the Labour hour rate for each of the production departments:

Service rendered by the service department to production departments A, B and C is in the ratio
of 2: 2: 1, respectively.
Solution:

Working Notes:
1. Total Assets value = Rs. 5,000 + Rs. 6,000 + Rs. 6,000 + Rs. 3,000 = Rs. 20,000

... Depreciation = 12% of Rs. 20,000 = Rs. 2,400

2. Labour hours worked = No. of working days × Hours of daily work × No. of workers:
X: 25 × 8 × 20 = 4,000
Y: 25 × 8 × 25 = 5,000
Z: 25 × 8 × 30 = 6,000
Problem 4: A machine was purchased for Rs. 55,000. It was installed in a shop over ⅕th of its
floor area at an additional cost of Rs. 5,000. The working life of the machine as also the scrap
value was estimated at 10 yrs and Rs. 5,000, respectively.

From the following details compute the Machine Hour Rate:

It is estimated that the supervisor devotes one-fourth of his time for the machine, the cost of power
is Rs. 20 per 100 units and the machine consumed 10 units per hour.

Normal working hours of the machine is estimated at 1,200 but during the year it actually worked
for 1,000 hrs.

Solution:
 Cost Accounting Problems on Incentive Schemes (2 Problems):

Problem 5: A worker takes 12 hours to complete a work on daily wages and 8 hours on a scheme
of payment by results. The worker’s day rate is Rs. 6.00 per hour. The cost of material of the
product is Rs. 20 and the overheads are recovered at 200% of the total wages.

Calculate the factory works cost of the product under:

(i) Rowan Plan and

(ii) Halsey Scheme.

Solution:
Problem 6: Production department of a company pays its workers standard wages @ Rs. 2.00 per
hour plus a bonus under the Rowan Premium Bonus Scheme and Dearness Allowance of Rs. 50
per week of 55 hours.
At the end of a particular week the time sheet of a worker is summarized below:

Calculate the gross wages (including bonus and D.A.) of the worker of the week.

Solution:

Working Notes:
(i) Time Saved
Job No. 205 = (30 – 25) hours = 5 hours
Job No. 108 = (25 – 20) hours = 5 hours
Job No. 12 = (5 – 3) hours = 2 hours
 Cost Accounting Problems on Idle Capacity Cost (1 Problem)

Problem-7: A manufacturing company has two production departments X and Y and three service
departments: Store, Maintenance and Time Keeping.

The departmental distribution summary showed the following expenses for June 2019:
Production Departments:

Solution: