Q34CP - Horngren'S Financial And Managerial Accounting

Question

This problem continues the Piedmont Computer Company situation from Chapter 24. Piedmont Computer Company’s payroll accountant has submitted her resignation and will be leaving the company in two weeks. The company must decide if it will hire a replacement or outsource the payroll position. The current employee earns a salary of \(40,000. Medical insurance, employer payroll taxes, and contributions to the pension plan for this position cost \)7,600. The company has already invested \(22,000 in payroll software. Required annual updates to remain in compliance with all state and federal laws are \)495. The company also spends \(1,750 per year in professional development for this position to ensure the employee stays up-to-date with payroll changes. Piedmont Computer Company pays its employees weekly. Payroll Professionals will process the company’s weekly payroll for \)1,000 per week. This fee also includes preparing all necessary payroll tax returns, reports, and W-2s. 

Requirements 

1. Prepare a differential analysis to determine if Piedmont Computer Company should replace the employee or outsource the payroll function. 

2. What other factors should Piedmont Computer Company consider in making this decision?

 

Step-by-Step Solution

Answer

Answer

The company should replace the employee instead of outsourcing the payroll function.  

Step 1: Meaning of Outsourcing

Outsourcing refers to the process of accomplishing the business tasks and activities with the help of third parties against fixed or predetermined considerations.

Step 2: Preparation of differential analysis

Particulars	Replace employee ($)	Outsource employee ($)	Difference ($)
Salary of employee	40,000	0	40,000
Other benefits	7,600	0	7,600
Professional development cost	1,750	0	1,750
Annual update cost	495	0	495
Outsourcing cost (1000*52)		52,000	(52,000)
Total cost	$49,845	$52,000	$(2,155)

Comment:

As per the above-shown analysis, the company should replace the employee because it costs less than outsourcing.

Step 3: Consideration of other factors

The following significant factors must be considered by the company while making the decision:

• The company should consider whether the third-party/payroll processing company would provide reliable and on-time services.

• In addition, the company must ensure that outsourcing such task transfers the associated liability regarding state and federal regulations to the payroll processing company.