Despite the advantages just noted for some applications of standard costing, there are substantially more situations where
Cambridge Education Ltd provides HR/Payroll and Education services to schools within the Local Authorities. The company specialises mainly in the education sector and has been supporting HR and Payroll services and Education services to schools since 2000.
Assisting with timely and accurate payments to employees are key objectives of the payroll department. In addition, the company ensures that the employees pay are applied under the Local Authority terms and conditions and also all statutory and required payroll legislations are applied.
As the company is working with the public sector, the payroll documents and processes are accessed by internal auditors, external auditors and HMRC auditors. To be able to carry out the audit test, the auditors must understand the payroll process and the payroll manager is available to provide payroll information in the auditors need.
One very significant factor that applies to any size of organisation is the HR and Payroll functions are mandatory and the information is integral links. Therefore, the company integrated HR and Payroll system is able to provide reliable output to internal and external customers efficiently.
Total Quality Management is a management process which is applied within the company and improves internal processes and increase customer satisfaction. To be able to run a successful business, every employee is responsible for quality. The quality must be measurable, managed and reviewed with a low cost.
Pay Methods and Procedures
As per Employment Rights Act 1996, an employee would normally be required to work in accordance with contract of employment and the employee is entitled to be paid by employer an amount in respect of that day. Therefore, it is crucial for payroll department to ensure employees must be paid accurately and on time.
In addition, pay frequency and method are very important objectives for payroll department. It is normal for most organisations to keep fixed day of a week or month or a calendar date. Failure to meet the objectives can lead to not only problems in employee and employer relationships but also damaging industrial relationship (IPPM.Pay Frequency.2003).
Therefore, the payroll department has Pay Schedule to meet objectives. The schedule normally includes pay day, payroll input and output deadlines, BACs processing dates and pay method. The dates must be agreed by employer, clients and payroll manager.
Payment by Cash
Under the Truck Acts 1831-1940 and the Payment Wages Act 1960 gave all manual workers the right to insist on wages being paid in cash. However, the Wage Act 1986 has enforced towards cashless pay (CIPP.Pay Methods.2012).
Due to high risk in security both inside and outside the organisation, expensive task and time limitation, the company do not use cash payment to employees.
Payment by Cheque
The company avoid using uncrossed cheque or crossed cheque payments due to high security risk internally and externally. Due to decline in use of cheque payment, the Payments Council was announced to phase out the cheque by 2018 if a viable alternative had been developed.
However, the announcement had to cancel as small business, many charities and some pensioners are still depending on cheques. Therefore, the Payment Council has agreed to continue focus on security and efficiency (CIPP.News Letter.2011).
Direct Bank Credit – Automated Credit Transfers – BACS System
BACS system is a United Kingdom scheme for the electronic funds transfer between the banks. BACS transactions take approximately 36 and half hours to credit. That is the fund is entered into the system on the first day, processed on the second day, and cleared on the third day (IPPM.Pay Methods.2003). .
Not only Cambridge Education company use BACS system to pay their employees but also majority of the UK companies pays their employees via BACS system. One of the main reasons company prefers to use BACS system is time efficient and cost effective. In addition, it is widely accepted as modern approach and secures funds transfers.
All employers are encouraged to use the BACS system by 2014 in order to meet the HMRC’s preferred channel for Real Time Information (CIPP.News Letter.2011).
Faster Payments and CHAPS
Faster payment is an enhanced electronic payment in the UK. The company do not use the faster payment system to pay salary and wages, due to delay in existing clearing cycle and value limits by some banks. However, some corporates use this payment to pay a large number of employee expenses.
CHAPS is a same day electronic transfer of money from one bank to another. The payment is guaranteed to credit to payees account on the same working day provided instructions are received before 3.15 pm. However, there will be a charge due to payer for the payment request. The company use this payment for emergency payments such as underpayments or late new starters.
International Money Transfers
This is a way of electronically transferring money to overseas bank account for employees and pensioners in overseas countries (CIPP.Pay Methods.2012)
Firstly, overseas banks has to agree with employers to able to process the payment, however employee usually has to incur the cost.
Payroll Audit Requirements
Main audit objectives for the payroll department are to ensure adequate segregation of payroll duties are in place, to identify potential payroll fraud, to review methods of internal control to deter any attempts of fraud to the company and to assess the payment of salaries and related expenditure are made in accordance with statutory legislation and company terms and conditions (IPPM.Obligation to Audit.2003).
2.1 Internal Auditor
In 2007, the company integrated a new HR and Payroll system. During the set-up process, the payroll department ensured that various audit trails (appendix2.1.1) are followed up according to companies’ internal audit requirement.
Over the years, the internal auditors (appendix 2.1.2) ensure only bona fide employees are on the payroll system. In addition, the internal auditors test the payroll system complies with statutory legislations and company procedures and controls are effective.
To minimise potential fraud, the auditor ensures the payroll manager and departments are responsible to control and monitor employee costs and the number of employees paid each month (appendix 2.1.3). That is the auditor check starters, leavers and the details on the personal file agree to the payroll system (IPPM.Obligation to Audit.2003).
Not only the company internal auditors test the company process and payments but also the auditors randomly or in person test the schools payroll reports such as costing, pensions, overpayments, payroll documentation, correct expenditures to ensure adequate financial control mechanisms are set up and maintained.
During the audit process, the payroll manager has an obligation to ensure that acceptable documentations are available for the auditors. In addition, the payments are correctly authorised and payroll documentations and procedures are up to date.
2.2 External/ Statutory Audits
As the company is working with the Local Authority, all their financial affairs are required to be audited externally. The payroll manager must be involved in assessing and testing the payroll cost and expenditure by external auditors (appendix 2.2.1).
The payroll department has to ensure all relevant payroll documentations such as overtime hours claim, allowances, expense, pension forms (Opt in/out forms) and associated procedures are in place so that the auditor could access as and when required.
In the future, some companies will be exempt from a statutory audit based on the company size as the government has decided to reduce unnecessary burdens and make the UK one of the best places in the world to start, finance and grow a business (CIPP.News Letter.2012)
2.3 HM Revenue External Audit
The HMRC auditor (appendix 2.3.1) will review assurance processes and actions in relation to payroll legislations such as income tax, national insurance contribution, student loan deductions, pension, maternity/paternity/adoption pay, statutory sick pay and minimum wage are applied within the law (IPPM.Obligation to Audit.2003).
The HMRC auditors do random testing of the company. This is due to the low numbers of temporary and part-time staff, the limited remuneration packages and the small number of expenses claimed within the company.
Design and Distribution of Payroll Outputs
The payroll department has a responsibility to provide payroll outputs to relevant internal and external departments such as HMRC, Courts, Trade Union, Pensions Providers, GAYE, and Credit Union. To be able to produce the required outputs and employees are paid on time, employers should have a reliable payroll system (IPPM.Data Output.2003).
Data Output For Employees
One of the main data output for employees is pay advice slip. As per Employment Rights Act 1996, all employees (excluding pensioners) are lawfully entitled to a payslip, which should include the statutory and compulsory information such as gross amount, tax, NI, pensions, AEO’s, net amount, employee name/number, overtime hours, allowances, absence deduction, pay grade, work location (IPPM.Data Output.2003). .
As the company is working with the Local Authority, the payroll system operate a standard type payslip in narrative style. That is pay information is printed either in full text or an acceptable abbreviation. This type of payslip is adapted in large workforce with very different pay structures. In addition, the payroll manager ensures that payslips are accurate, informative, neat and clear.
The payroll department also provide to employees P60s, P9D or P11D at the end of each tax year and P45 when employee left from employment. The payroll staffs are responsible to provide outputs to employees at AD-HOC basis such as notification of pay changes, tax changes, current personal information, and certification of various documents (IPPM.Data Output.2003).
Data Output for Employers
The cost of employment is a crucial part of the company budget. The payroll manager is responsible to provide employee costing reports regularly to the finance and relevant managers such as HR manager, HR Officers, auditor and departmental managers (CIPP.Payroll Outputs.2012).
In addition, the payroll manager provide payroll reports such as pension, absence, over time, expense claim, and fixed term contract reports securely to all schools, departments and internal auditors to monitor the wage bill for their departments.
Providing unnecessary reports will affect potential costs to payroll department and provide no benefits to other departments. Therefore, the payroll manager regularly reviews the effectiveness and actual use of the reports. In some cases, the payroll manager consults with other end users of the department to improve the effectives of the reports (CIPP.Payroll Outputs.2012).
Most importantly, regardless of the payroll system in use, financial outputs will always be required by every department including payroll department.
Data Output for External Organisations
As rapid improvement in technology, the computer based payroll systems are designed to produce statutory requirements outputs to appropriate government departments such as administration of Court Orders/Attachment of Earnings Orders, Child Support Agency and other Local Authorities within timescale (IPPM.Data Output.2003).
The Inland Revenue department is one of the government departments for whom payroll must produce payroll output on time. From tax year 2004/2005, the Inland Revenue made mandatory to employers to submit statutory output such as annual returns, P14, P35, P6, P9, P46 (Car), P11D, P45(1), P45(3),P46 via Electronic Data Interchange (EDI) (appendix 3.3.1).
From April 2013, most employers will be required to start reporting PAYE in real time information (RTI). To avoid liabilities, the payroll department must send data output to HMRC on time and accurate payment and deductions are made to employees as per statutory obligations. Therefore, the payroll manager ensures the payroll software is updating with the new specification and requirements reports are produced.
Most importantly, the payroll manager ensures to provide the payroll reports to customers at their need. This is because customers view their payroll performance on the quality of the reports they receive. Therefore, the reports must be clear, correct, concise and contains only the information required (CIPP.Payroll Outputs.2012).
4. Total Quality Management (TQM)
TQM is a management approach for any size of organization. They focus on quality based on the participation of all its members and customers and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to society. In other words, TQM is a process for managing quality to meet customer requirements every time (CIPP.Quality Managment.2012).
All organisation have a management structure, however to able to run a successful business, all employees must be aware of business objectives. Moreover, all members of staff have responsibilities and authority to carry out different tasks to achieve the organisational goals.
One of the main objectives for the payroll department is to ensure all employees are paid on time and accurately. To achieve the objective, not only the payroll department as whole but also other departments have committed to customer satisfaction through a continuous process of improvement and the contribution to meet the objective.
The successful organisations are constantly seeking opportunities to improve the quality of its products and services and processes. Under the Japanese concept, Kaizen (appendix 4.2.1), all employees must know their own responsibility and work together to improve the process without capital investments (L Mullin.2005).
In a payroll environment, many employers accept the idea that errors and defects are bound to happen and it is an avoidable cost to the organisation. To reduce the errors, the payroll manager set a zero defect (appendix 4.2.2) target to reduce error and defects rate.
TQM also underlines the importance of internal and external customers such as organisation’s staff, clients and HMRC. Internal and external suppliers such as HR department, CIPP are also the keys to quality. Therefore, the payroll manager ensures they receive feedback from customers and suppliers by using the methodology of “Plan-Do-Check-Act” (appendix4.2.3) (CIPP.Quality Managment.2012).
In addition, the payroll manager review types of payroll queries from internal and external customers on a monthly basis. To be able to improve service, the payroll staff will be trained and inter check the payroll input. Moreover, the payroll staff must be constantly informed changes, errors or achievements.
Some organisations comply with Quality Management System ISO: 9001(2008) as it “demonstrates that a business can provide a consistent standard of quality” (CIPP.Quality Management.2012). The company also set the payroll performance standards to improve customer service. Quality audit test are carried out by internal or external auditor to ensure the standard are met.
“Management is active, not theoretical. It is about changing behaviour and making things happen. It is about developing people, working with them, reaching objectives and achieving results”. (L Mullin.2005).
Management responsibility includes planning, organising, leading, decision making and reviewing. Most organisations are set up with a structured organisational setting with prescribed roles. To be able to run a successful business, the top management must apply effective administrative management. That is effective management of information and communication and people.
In addition, the top management should monitor and review the Quality Systems at regular basis to ensure continuing improvement in quality.
Cambridge Education Ltd has been ensured the internal and external customers are paid on time and accurately. The payroll managers and staffs ensures all payments and deductions are applied with statutory legislation.
Auditors check the payroll procedures are up to date and legislations are applied as accordingly. The payroll department ensure the effective and efficient payroll output has been provided to customers and suppliers. The quality of service has been reviewed by the company top management on regular basis.
CIPP. (2012).Provision of Effective and Efficient Administration. Pay Methods and Pay Distribution Arrangements.
CIPP.(2012).Provision of Effective and Efficient Administration. Obligations For Audit.
CIPP.(2012).Provision of Effective and Efficient Administration. The Management, Design and Distribution of Payroll Outputs.
CIPP.(2012).Provision of Effective and Efficient Administration. Total Quality Management.
IPPM.(2003).Payroll Obligations. Contracts of Employment.
IPPM(2003).Payroll Obligations. Pay Frequency, Pay Day and Pay Schedules.
IPPM(2003).Payroll Obligations. Pay Methods and Pay Distribution Arrangements.
IPPM(2003).Payroll Obligations. Obligations For/To Audit.
IPPM(2003).Payroll Systems and Practices. Data Output For Employees and Pensioners.
IPPM(2003).Payroll Systems and Practices. Data Output For Employers.
IPPM(2003).Payroll Systems and Practices. Data Output For External Organisations/Services.
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Mullin, L. J.(2005). Management and Organisational Behaviour.7th edn. Harlow, Prentice Hall.
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Pay Methods, Available at: http://www.fasterpayments.org.uk/faster_payments/about_faster_payments/-/page/1940/
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[Accessed: 12 July,2011]
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it is not a viable costing system. Here are some problem areas:
Cost-plus contracts. If you have a contract with a customer under which the customer pays you for your costs incurred, plus a profit (known as a cost-plus contract), then you must use actual costs, as per the terms of the contract. Standard costing is not allowed.
Drives inappropriate activities. A number of the variances reported under a standard costing system will drive management to take incorrect actions to create favorable variances. For example, they may buy raw materials in larger quantities in order to improve the purchase price variance, even though this increases the investment in inventory. Similarly, management may schedule longer production runs in order to improve the labor efficiency variance, even though it is better to produce in smaller quantities and accept less labor efficiency in exchange.
Fast-paced environment. A standard costing system assumes that costs do not change much in the near term, so that you can rely on standards for a number of months or even a year, before updating the costs. However, in an environment where product lives are short or continuous improvement is driving down costs, a standard
The Chartered Institute Of Payroll Professionals Accounting Essay
cost may become out-of-date within a month or two.
Slow feedback. A complex system of variance calculations are an integral part of a standard costing system, which the accounting staff completes at the end of each reporting period. If the production department is focused on immediate feedback of problems for instant correction, the reporting of these variances is much too late to be useful.
Unit-level information. The variance calculations that typically accompany a standard costing report are accumulated in aggregate for a company’s entire production department, and so are unable to provide information about discrepancies at a lower level, such as the individual work cell, batch, or unit.
The foregoing list shows that there are a multitude of situations occur where standard costing is not useful, and may even result in incorrect management actions. Nonetheless, as long as you are aware of these issues, it is usually possible to profitably adapt standard costing into some aspects of a company’s operations.
Advantages of Standard Costing
Though most companies do not use standard costing in its original application of calculating the cost of ending inventory, it is still useful for a number of other applications. In most cases, users are probably not even aware that they are using standard costing, only that they are using an guesstimate of actual costs. Here are some potential uses:
Inventory costing. It is extremely easy to print a report showing the period-end inventory balances (if you are using a perpetual inventory system), multiply it by the standard cost of each item, and instantly generate an culmination inventory valuation. The result does not exactly match the actual cost of inventory, but it is close. However, it may be necessary to update standard costs frequently, if actual costs are continually changing. It is easiest to update costs for the highest-dollar mechanisms of inventory on a frequent basis, and leave lower-value items for intermittent cost reviews.
Overhead application. If it takes too long to aggregate actual costs into cost pools for allocation to inventory, then you may use a standard overhead application rate instead, and adjust this rate every few months to keep it close to actual costs.
production costs at different volume levels, since this may call for the use of longer production runs that are less expensive.
Budgeting. A budget is always composed of standard costs, since it would be impossible to include in it the exact actual cost of an item on the day the budget is finalized. Also, since a key application of the budget is to compare it to actual results in subsequent periods, the standards used within it continue to appear in financial reports through the budget period.
Price formulation. If a company deals with custom products, then it uses standard costs to compile the projected cost of a customer’s requirements, after which it adds on a margin. This may be quite a complex system, where the sales department uses a database of component costs that change depending upon the unit quantity that the customer wants to order. This system may also account for changes in the company’s
Nearly all companies have budgets and many use standard cost calculations to derive product prices, so it is apparent that standard costing will find some uses for the foreseeable future. In particular, standard costing provides a benchmark against which management can compare actual performance.
Following through all the arithmetic’s of variances I have pin pointed reasons for the Material Price Variance, Material Usage Variance, Labour Efficiency Variance, and Labour Rate Variance.
Material Price Variance occurs a failure to purchase the standard quality, thereby resulting in a difference price paid. This will lead into bad purchasing, in which is very discomforting the company’s interest such as a rush purchase for an uneconomical markets, and also pushes a purchase of a substitute material on account of non-availability of the material specified by the company. This all are related to the interdependence at variances when it ensues an event has a favorable impact on one variance but an adverse impact on another variance. For example, the purchase of inferior quality materials may account for a favorable price variance but it may also have a negative impact on the material usage & labor efficiency variance due to the quality causing an increase in usage. The adverse may also be affected by inflation and general increase in the market price. In such circumstances the selling price should be altered to refract the current market.
Material Usage Variances may be affected by a whole lot of reasons such as carelessness in the use of material also affect the reason of material usage in resulting excessive consumption. Which brings us to the use of defective or sub-standard material that will cause spoilage to the material. Other reasons such as a change in t plant and machinery who also results to excessive consumption of material. The adverse on the variances is due to excess issues. Managers should check the stock are securely locked away & that only the standard quantity is issued each day. And it’s not just that, There are a few more such as :
Faulty material processing
Pilferage of materials
Use of material mixture, rather than standard mixture
Labour Efficiency Variance is affected because of the actual hours used is greater than the standard hours, and it adverse is due to the use of an inappropriate standard that should be changed. Alternatively, there may have been idletime, ten working time should be synchronized.
Bridget, C. (2012). Standard Costing. Available: http://www.accountingtools.com/standard-costing. Last accessed 28th Oct 2012.