5-chapter 3

Chapter 3: Payroll
CHAPTER 3
PAYROLL
Chapter Objectives
At the end of this section, you should be able to:
• Identify the uses of payroll in daily life
• Define, compare, and contrast weekly, biweekly, semimonthly, and monthly pay
periods
• Calculate gross pay with overtime on the basis of time
• Calculate gross pay for piecework, differential pay schedule, straight commission
with draw, variable commission scale and salary plus commission
3.0 Introduction
In a company, payroll is the sum of all financial records of salaries for an employee, wages,
bonuses and deductions. In accounting, payroll refers to the amount paid to employees for
services they provided during a certain period of time. Payroll plays a major role in a
company for several reasons.
Payroll is the total amount of money paid by a business to its employees over a set amount of
time. Payroll also known as the amount employers pay their employees. From an accounting
perspective, payroll is crucial because payroll and payroll taxes considerably affect the net
income of most companies and they are subject to laws and regulations (e.g. in the US payroll
is subject to federal and state regulations). From an ethics in business viewpoint payroll is a
critical department as employees are responsive to payroll errors and irregularities: good
employee morale requires payroll to be paid timely and accurately.
3.1 Malaysia Employment Act and Payroll Functions
Employment Act, 1955 is the most important piece of legislation for Malaysian employees.
The purpose of this Act is to provide a number of minimum benefits for those workers
covered by the Act and to establish certain rights for both employers and employees. The
primary mission of the payroll department is to ensure that all employees are paid accurately
and timely with the correct withholdings and deductions, and to ensure the withholdings and
deductions are remitted in a timely manner. This includes salary payments, tax withholdings,
and deductions from a pay check. Payroll professionals are also responsible for calculating
reimbursements, bonuses, overtime and holiday pay.
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Chapter 3: Payroll
3.2 Gross Earning: Wages and Salary
Gross pay refers to the amount of salary that is paid by an employer to an employee. The
amount reflects the total amount of pay before any deductions of any type are withdrawn
from the pay. Gross pay includes regular pay, overtime pay, and other taxable earnings (such
as reimbursements). Table 3.1 below shows the salary paid based on period.
Table 3.1
Salary paid
Weekly
Biweekly
Semi-monthly
Monthly
Period (based on a year)
52 times (once a week)
26 times (every two weeks)
24 times (twice a month)
12 times (once a month)
Below you will find the vocabulary for the chapter. Each day we do notes, you will see some
of these words again. You will be tested on these words at the end of the unit.
Table 3.2
Term
Hourly rate
Straight-time pay
Overtime pay
Time and a half
Double time
Weekly time card
Piecework
Salary
Commission
Commission rate
Straight commission
Graduated commission
Definition
A fixed amount of money paid for each hour of work.
The total amount of money earned for a pay period at the
regular hourly rate.
Extra pay for hours worked beyond regular hours.
An overtime pay rate of one and a half (1.5) times the
regular hourly rate.
An overtime pay rate of two times the regular hourly rate.
A record of the time you report for work and the time you
leave each day of the week.
A specified amount of money paid to an employee for each
item of work completed.
A fixed amount of money earned on a regular basis,
received weekly, biweekly, semi-monthly or monthly.
An amount of money paid to an employee for selling a
product or service.
A specified amount of money paid to each employee for
each sale made, or a per cent of the total value of the sales
made.
Pay that consists only of money earned on sales.
Pay which the commission rate is different for different
level of sales.
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Chapter 3: Payroll
3.2.1 Wages
The gross pay earned by employees who are paid by the hour is found by multiplying the pay
per hour by the hours worked.
Gross Earning = Hourly Rate × Number of Hours Worked
(3.1)
Some employees are paid a salary, which is a fixed amount of money for each time period
worked. They are referred to as salaried employees.
Gross Earning = Pay per Time Period × Number of Time Periods
(3.2)
Example 1:
Mary is an admin clerk. She earns RM7.00 per hour. Last week she worked 36 hours. What is
her gross earnings for the week?
Solution:
Since the company pay based on hours work, so;
Gross Earning = Hourly Rate × Number of Hours Worked
= RM 7.00 × 36
= RM 252
Therefore, Mary’s gross earning were RM252.
Exercise 1:
Firdaus works from 9 a.m. until 5 p.m. each day, Mon – Fri. If he is paid RM4.50 per hour,
what is his normal weekly wage?
Solution:
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Chapter 3: Payroll
Exercise 2:
Allison is a KFC crew. She is paid RM5.15 per hour. She worked 8 hours on Monday, 9
hours on Tuesday, 8 hours on Wednesday, 7 hours on Thursday and 10 hours on Saturday.
What is her gross earnings for the week?
Solution:
3.2.2 Overtime
Most nations have overtime labour laws designed to dissuade or prevent employers from
forcing their employees to work excessively long hours. These laws may take into account
other considerations than the humanitarian, such as preserving the health of workers so that
they may continue to be productive, or increasing the overall level of employment in the
economy. One common approach to regulating overtime is to require employers to pay
workers at a higher hourly rate for overtime work. Companies may choose to pay workers
higher overtime pay even if not obliged to do so by law, particularly if they believe that they
face a backward bending supply curve of labour.
Overtime is the additional amounts paid to hourly employees who work more than 40 hours
in a workweek. Federal law requires that hourly employees who work more than 40 hours in
a workweek must be paid at a higher rate for the overtime hours, at a minimum of 1½ times
the employee's regular pay rate.
Overtime Pay = Overtime Rate X Overtime Hours Worked
(3.3)
Therefore,
Total Pay (or Gross Pay) = Straight - Time Pay + Overtime
Pay
(3.4)
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Chapter 3: Payroll
Example 2:
Marlissa earns RM9.80 per hour for a regular 40-hour week. Her overtime rate is paid at 1.5
times hourly pay. What is Marlissa gross pay if she worked for 48 hours this week.
Solution:
Overtime pay = Overtime rate x overtime hour worked
= (RM 9.80 ×1.5)×8hours
= RM117.60
Straight-time pay = Hourly Rate × Number of Hours Worked
= RM 9.80 × 40
= RM392
Total Pay (or Gross Pay) = Straight-Time Pay + Overtime Pay
= RM392 + RM117.60
= RM 509.60
Therefore, Marlissa’s gross pay were RM509.60.
Exercise 3:
Mr Chan, whose hourly wage is RM10.25, worked 46 hours last week. Find his gross pay for
last week if he earns time and a half for overtime. His regular work for a week are 40 hours.
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Chapter 3: Payroll
Exercise 4:
Azizan is paid RM8.50 per hour for a regular 40-hour week and double for his overtime rate.
Azizan works six days a week at Universal factory. Consult the table below and calculate his
weekly earnings.
Day Mon Tue Wed Thur Fri Sat Total
Hours 13 8.5 10 8 11.25 10.75 61.5
Solution:
3.3 Salary
Salary is a fixed amount of money or compensation paid to an employee by an employer in
return for work performed. Salary is commonly paid in fixed intervals, for example, monthly
payments of one-twelfth of the annual salary.
Salary is typically determined by comparing market pay rates for people performing similar
work in similar industries in the same region. Salary is also determined by levelling the pay
rates and salary ranges established by an individual employer. Salary is also affected by the
number of people available to perform the specific job in the employer's employment locale.
Salary can be calculated using,
(3.5)
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Chapter 3: Payroll
Example 3:
Logan is a mechanical engineer with 10 years experienced at Shell Group. His annual salary
is RM130, 550. What is his monthly salary?
Solution:
Salary per pay period =
Annualsalary
Number of
RM130550
=
12
= RM10,879.17
pay periods per year
Therefore, Logan’s monthly salary were RM10.879.17.
Exercise 5:
Fariz is a junior engineer at Yong Peng Telco Group. Fariz earns RM32,928 annually and is
paid semimonthly. Find his earnings per pay period.
Solution:
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Chapter 3: Payroll
3.4 Gross Earning: Piecework and Commission
3.4.1 Piecework
Compensation based on the number of pieces completed during a pay period. There are two
types of piecework:
(i)
Straight piecework rate
Piecework rate where the pay per piece is the same no matter how many items are
produced.
Gross pay = Number of units produced x Rate per unit
(3.6)
Example 4:
Randy produced 900 dolls. He is paid RM1.25 per doll. Calculate his gross pay.
Solution:
Gross
pay = 900 x 1.25
= RM1125
Therefore, Randy’s gross pay was RM1125.
Exercise 6:
A shirt manufacturer pays a worker RM0.65 for each acceptable shirt inspected under the
prescribed job description. If the worker had the following work record, find the gross
earnings for the week: Monday, 255 shirts; Tuesday, 270 shirts; Wednesday, 300 shirts;
Thursday; 178 shirts; Friday, 247 shirts.
Solution:
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Chapter 3: Payroll
(ii)
Differential piece rate (escalating piece rate)
Piecework rate that increases as more items are produced.
Gross pay = Number of units produced x various rates per unit
(3.7)
Example 5:
Federal Co. pays Gerald on the basis of the following schedule:
Unit Produced
Amount per unit
1 – 50 RM 0.50
51 – 150 RM 0.62
151 – 200 RM 0.75
Over 200 RM 1.25
Last week Gerald produced 300 dolls. What is Gerald’s gross pay?
Solution:
1 – 50 (50 units) : RM0.50 x 50 units = RM25.00
51 – 150 (100 units) : RM0.62 x 100 units = RM62.00
151 – 200 (50 units) : RM0.75 x 50 units = RM37.50
201 – 300 (100 units) : RM1.25 x 100 units = RM125.00
Total pay for 300 units : = RM249.50
Therefore, Gerald’s gross pay were RM249.50.
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Chapter 3: Payroll
Exercise 7:
Last week, Victor assembled 317 games boards. Find Victor’s gross errnings for the week if
the manufacturer pays at the following differential piece rates:
Boards assemble per week
First 100
Next 200
Over 300
Pay per board
RM1.82 each
RM1.92 each
RM2.08 each
Solution:
3.4.2 Commission
The payment of commission as remuneration for services rendered or products sold is a
common way to reward sales people. Payments often will be calculated on the basis of a
percentage of the goods sold. There are several key terms in commission:
o Straight commission: entire pay based on sales.
o Salary plus commission: a set amount of pay plus an additional amount based on
sales.
o Commission rate: percent of sales that are eligible for a commission.
o Quota: a minimum amount of sales that is required before a commission is
applicable.
Commission is a sum of money that is paid to an employee upon completion of a task,
usually selling a certain amount of goods or services. Commission may be paid as percentage
of the sale or as a flat dollar amount based on sales volume.
Employers often use sales commissions as incentives to increase worker productivity. A
commission may be paid in addition to a salary or instead of a salary. When commission is
paid in addition to a salary, it may be included in the employee's pay check or paid on a
separate schedule i.e. bi-monthly or monthly. There are two types of commissions:
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Chapter 3: Payroll
The formula of commission is,
Commission = Total Sales X Commission Rate
(3.8)
Net pay can be defined as the amount of money remaining after the deductions of gross pay
of an employee. These deductions include income taxes and retirement contributions, and the
trade union dues.
Net pay = gross pay – taxes – deductions
(3.9)
3.4.3 Straight commission
Example 6:
Malik sells real estate at a 7.5% straight commission. Last month his sales totalled
RM725,000. What was his commission?
Solution:
7 1
Commission rate = 2 %
100
= 0.075
Commission = Total Sales x Commission Rate
= RM 725, 000 × 0.075
= RM 54,375
Therefore, Malik’s commision were RM70,125.
Exercise 8:
Maria is a restaurant supplies salesperson and receives 10% of her total sales as commission.
Her sales totaled RM25,000 during a given week. Find her commission and what is Maria’s
gross pay?
Solution:
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Chapter 3: Payroll
Exercise 9:
Bersatu Sdn Bhd pays Jackie a straight commission of 15% on her net sales (net sales are
total sales less sales returns). In May, Jackie had net sales of RM55,000. Bersatu gave Jackie
a RM500 draw in May. What is Jackie’s gross pay?
Solution:
3.4.4 Graduated Commission Scale
Different commission rates for different levels of net sales.
Example 7:
Last month Jane’s net sales were RM160,000. What is Jane’s gross pay based on the
schedule?
Up to RM 35 000 4%
Excess of RM35 000 to RM 45 000 6%
Over RM 45 000 8%
Solution:
Up to RM35,000 : RM35,000 x 0.04 = RM1,400.00
(RM45,000 – RM35,000) x 0.06 : RM10,000 x 0.06 = RM 600.00
(RM160,000 – RM35,000 – RM10,000) : RM115,000 x 0.08 = RM9,200.00
Total Commision
= RM11,200.00
Therefore, Jane’s gross pay were RM11,200.
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Chapter 3: Payroll
Exercise 10:
Yong Peng Corporation pays their employees on a graduated commision scale: 5% on the
first RM50,000 of sales, 5.5% on sales above RM50,000 to RM75,000 and 6% on sales over
RM75,000. Dahlia’s total sales for the last month were RM192,500. What was Dahlia’s
commision?
Solution:
3.4.5 Salary + Commission
A set amount of pay plus an additional amount based on sales. The formula as follows:
Gross pay = Salary + Commission
(4.0)
Example 8:
Gallery Link pays Joe Roy a RM3,000 monthly salary plus a 4% commission for sales over
RM20,000. Last month Joe’s net sales were RM50,000. Calculate Joe’s gross pay.
Solution:
Commission = Total Sales x Commission Rate
= RM30, 000 × 0.04
= RM1, 200
Gross pay = Salary + Commission
= RM3, 000 + RM1, 200
= RM 4, 200
Therefore, Joe’s gross pay were RM4,200.
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Chapter 3: Payroll
Exercise 11:
Elias is paid on a salary-plus-commission basis. He receives RM450 weekly in salary and 3%
of all sales over RM8,000. If he sold RM20,000 worth of goods, find her gross earnings.
Exercise 12:
Gary’s straight-time salary is RM500 per week. This week his total sales were RM2,500 and
RM75 was returned merchandise (goods returned by customers). His quota is set at
RM1,700. His commission is based on 6% of sales minus his returned merchandise after he
has met his quota. Calculate Gary’s gross pay.
Solution:
END OF CHAPTER
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Chapter 3: Payroll
TUTORIAL 3
PAYROLL
1. Siti earns RM9.50 per hour and worked 35 ¼ hours last weeks. What is her straighttime
pay?
2. Jimmy has a job with the at a calculator factory. He is paid an hourly rate of RM13.00.
He usually works 10 hours a day, 4 days a week.
(a) Find his regular earnings for one week.
(b) If Jimmy works more than 40 hours a week, he is paid overtime for the extra 6.5
hours. The overtime rate is 1.5 times the regular hourly rate.
3. Mike earns RM10.50 per hour for 40 hours and double time for overtime. If he worked
6 hours overtime, what is his total pay for the week and month?
4. Mrs Chalmers is a radiographer. She works a basic 40 hour week and is paid RM9.50
per hour. Her overtime is paid at ‘time and a half’. One week she worked a total of 48
hours. What was her:
(a) basic pay
(b) overtime pay
(c) gross pay
5. Maria is a pharmacist. Her regular hourly rate is RM35.00 per hour and she receives
time and a half for overtime when she works more than 40 hours in a week. This week
she made a total of RM1,715. How many overtime hours did she work? Then, what is
her monthly salary?
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Chapter 3: Payroll
6. Al works part time at a large sports facility selling magazines. He is paid by piecework.
He earns RM15 per game plus 30 cents for each magazine he sells. Find Al’s total
earnings when he sells 113 magazines at one game.
7. Abby gets paid a differential piece rate for each shirt she sews. Consult the chart below
and calculate her weekly earnings if she sewed 352 shirts last week.
What were her earnings?
From 1-100: RM0.47 each
From 101-300: RM0.60 each
301 and above: RM0.70 each
8. Hisham works as a research assistant. He makes RM650 weekly. Hee is going to be
paid on a semi monthly basis starting next year. What will his semi-monthly salary be?
9. Katy is earning a weekly salary of RM521.60 as a payroll clerk. She has accepted a new
assignment in the tax processing department. In her new position, she will be paid an
annual salary of RM30,534. How much more will she earn per week in her new
position?
10. Nadia is an elementary school teacher working for the Al-Amin International School.
Nadia signed a contract with Al- Amin School for an annual salary of RM28, 900, to be
paid in 12 equal payments. What is Nadia’s monthly gross earnings?
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Chapter 3: Payroll
11. Veronica is paid on a salary-plus-commission basis. She receives RM356 weekly in
salary and a commission based on 5% of all weekly sales over RM2,000. If she sold
RM7,821 in merchandise in one week, find her gross earning for the week.
12. Jameela is guaranteed a minimum salary of RM246 a week, or 7 per cent of her total
sales, depending on whichever is greater. What is her gross pay for a week in which his
total sales were RM3,654?
13. Mark is paid $14 per hour for 40 hours a week. If he works more than 40 hours a week,
he is paid time and a half. His friend Marcus has a different job. Marcus is paid $12 per
hour for a 38 hour a week. If Marcus works more than 38 hours a week, he is paid time
and a half. If they both work 48 hours per week who is paid more?
14. Sam assembles computer keyboard. One day he assembles 150 computer keyboards and
is paid RM3.50 per computer keyboards.
(a) What are his earnings?
(b) If he assembles 150 computer keyboards for 20 straight days, what are his earning
during this time?
(c) Sam works 100 days a year. If he assembles the same number of computer
keyboards each day, how much will she earn in a year?
15. Johnny is paid $18 a day plus 75¢ for each item he sells. Johnny sells 244 items on
Monday. What are Johnny’s earnings for Monday?
END OF TUTORIAL QUESTIONS
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