The Human Resources

Management and
Payroll Cycle
 Describe the major business activities, key
decisions, and information needs in the
HRM/payroll cycle, the general threats to those
activities, and the controls that can mitigate those
threats.

Explain the payroll cycle activities, key decisions and

Learning Objectives information needs, the threats to those activities,

and the controls that can mitigate those threats.

Discuss and evaluate the options for outsourcing

HRM/payroll cycle activities.
 Introduction
 The HRM/payroll cycle is a recurring set
of business activities and related data
processing operations associated with
effectively managing the employee work
force.

 This chapter focuses primarily on the

payroll system.
 Introduction
Some of the more important activities include
the following tasks:
 Recruit and hire new employees

 Training

 Job assignment

 Compensation (payroll)

 Performance evaluation

 Discharge of employees (voluntary

or involuntary)
Integration of HRM & Payroll
Functions in Typical ERP System
Portion of ERP System That
Supports HRM & Payroll
 Introduction
The three basic functions the AIS provides in the
HRM/payroll cycle are:
1. Processing transactional data about
employee activities
2. Safeguarding the organization’s
assets
3. Providing information for decision-
making
 Annual Employer Turnover Cost
 Experts have determined that the cost of
replacing employees is 1.2 times that of an
employee’s annual salary. Company A and B
both have 100 employees that earn
Rp120.000.000 each on the average. Company
A has an employee turnover rate of 1 percent
and Company B has a 6 percent turnover rate.
 What is the difference between Company A’s
and Company B’s annual employer turnover
cost?
 Answer
Compan Compan
yA yB
Total Employees (persons) 100 100
Turnover rate (%) 1% 6%
Numbers of replacing employee (person) ? ?
The average earning/employee 120.00 120.00
0.000 0.000
The cost of replacing employees compared to an 1,20 1,20
employee’s annual salary
Replacing cost = The average earning/employee * The ? ?
cost of replacing employees compared
Annual employer turnover cost=Numbers of replacing ? ?
employee*Replacing cost
The difference between Company A’s & Company B’s ?
Context Diagram of the
Payroll Portion of the
HRM/Payroll Cycle
Level 0 Data Flow Diagram
for the Payroll Cycle
Flowchart Prosedur Penggajian

12
 Payroll Cycle Activities
1.Update payroll master data
 Update tax rates and deductions
2. Validate time and attendance data
 Source document: time sheets
3. Prepare payroll
 Payrollregister and deduction register
 Calculate employer-paid benefits and taxes

4. Disburse payroll
5.Disburse taxes and miscellaneous
deductions
Update Master Payroll File
(Activity 1)
 The first activity in the HRM/payroll cycle involves
updating the payroll master file to reflect payroll
changes such as new hires, terminations, changes
in pay rates, or changes in discretionary
withholdings.
 It is important that all payroll changes are entered i
a timely manner and are properly reflected in the
next pay period.
Update Tax Rates and Deductions
 This activity in the HRM/payroll
cycle involves updating
information about tax rates and
other withholdings.
 These changes happen whenever
updates about changes in tax
rates and other payroll deductions
are received from various
government units and insurance
companies.
Validate Time and
Attendance Data (Activity 2)
 The second activity in the payroll cycle
is to validate each employee’s time and
attendance data.
 This information comes in various

forms, depending on an employee’s

status.
Validate Time and Attendance Dat
 What are some pay schemes?
– time cards for those paid on an
hourly basis
– self report for professionals
– straight commission or salary plus
commission
– incentives and bonuses
Validate Time and Attendance Dat
Procedures:
 The payroll department is

responsible for validating

employee time records.
 For factory workers, validation

involves comparing the total

time worked with the time spent
on each job.
Validate Time and Attendance Dat
 The payroll clerk calculates batch totals
and enters them along with the time data.
 The batch totals are recalculated by the
computer after subsequent processing
steps.
 Payroll transaction data are entered
through online terminals.
 Edit checks are performed on each time
and attendance record.
Validate Time and Attendance Data: Opportunities fo
Using Information Technology

 What are some opportunities of using

information technology to validate
time and attendance data (Activity
2)?
– collecting employee time and
attendance data electronically, instead
of on paper documents
– using badge readers
– using electronic time clocks
Example of Data Entry
Screen to Track Time (Time
Sheet)
Example of Supervisory
Approval of Time Worked
Screen
Prepare Payroll (Activity 3)
 The third activity in the payroll cycle involves
preparing payroll.
 Data about the hours worked are provided by
the department in which the employee works.
 Pay rate information is obtained from the
payroll master file.
 The person responsible for preparing
paychecks cannot add new records to this file.
Prepare Payroll
 Procedures:
 Payroll processing is performed in

the computer operations department.

 The payroll transaction file is

sorted by employee number.

 The sorted time data file is used to

prepare employee paychecks.

Prepare Payroll
 All payroll deductions are summed
and the total is subtracted from gross
pay to obtain net pay.
 What are types of payroll

deductions?
– withholdings
– voluntary deductions
 Finally, the payroll register and
employee paychecks are
printed.
Prepare Payroll: Opportunities for Using
Information Technology
 What are some opportunities of using
information technology to prepare
payroll (Activity 3)?
– produce and distribute payroll reports
electronically rather than on paper
– online terminals
– corporate intranets
Flowchart of
Payroll
Batch
Processing
Examples of Payroll and
Deduction Registers
Disburse Payroll (Activity 4)
 The fourth activity is actual
disbursement of paychecks
to employees.
 Most employees are paid either by

check or by direct deposit of the

net pay amount into the employee’s
bank account.
Disburse Payroll
 Procedures:
 Once paychecks have been prepared, the
payroll register is sent to the accounts
payable department for review and
approval.
 A disbursement voucher is then prepared.
 The disbursement voucher and payroll
register are then sent to the cashier.
Disburse Payroll: Opportunities for
Using Information Technology
 What are some opportunities of using
information technology to disburse
payroll (Activity 4)?
– direct deposit
– outsourcing to a payroll service
bureau
Calculate Employer-Paid Benefits and
Taxes
 Some payroll taxes and employee benefits
are paid directly by the employer.
 Federal and state laws require employers
to contribute a specified percentage of
each employee’s gross pay to federal and
state unemployment compensation
insurance funds.
 Employers often contribute to health,
disability, and insurance premiums.
Calculate Employer-Paid Benefits and
Taxes
 Many companies also offer their
employees flexible benefit plans.
 Many employees are offered and
contribute toward a choice of retirement
savings plans.
Disburse Payroll Taxes and
Other Deductions (Activity 5)
 The final activity in the payroll
process involves paying the payroll
tax liability and the other voluntary
deductions of each employee.
 An organization must

periodically prepare checks or

use electronic transfer to pay the
various tax liabilities incurred.
Disburse Payroll Taxes and
Other Deductions
 The timing of these payments is
specified by the respective
government agencies.
 The funds voluntarily withheld from

each employee’s paycheck for

various benefits must be disbursed to
the appropriate organizations.
 Control: Objectives, Threats, and
Procedures
 The second function of the AIS in the
HRM/payroll cycle is to provide adequate
internal controls to ensure meeting the
following objectives:
1. Payroll transactions are properly
authorized
2. Recorded payroll transactions
are valid
3. Authorized payroll transactions are
recorded
4. Payroll transactions are accurately
 Control: Objectives, Threats, and
Procedures
5. Applicable government regulations
regarding remittance of taxes and
filing of payroll and HRM reports are
met
6. Assets (both cash and data) are
safeguarded from loss or theft
7. HRM/payroll cycle activities are
performed efficiently and effectively
General Threats
 inaccurate or invalid master data.
 unauthorized disclosure of sensitive information,

such as salary and performance evaluations for

individual employees.
 the loss or destruction of master data.

 hiring unqualified or larcenous employees.

 violation of applicable laws and regulations

concerning the proper hiring and dismissal of

employees.
Threats and Controls in the
Payroll/HRM Cycle (1)
Threats and Controls in the
Payroll/HRM Cycle (2)
 Control: Objectives, Threats, and
Procedures
 What are some control procedures?
– sound hiring practices (verification of job
applicant’s skills, references, and
employment history)
– thorough documentation of hiring
procedures
– segregation of duties
– batch totals and other application
controls
 Control: Objectives, Threats, and
Procedures
– direct deposit
– paycheck distribution by someone
independent of payroll process
– investigation of all unclaimed
paychecks
– separate payroll checking account
– access control
– backup procedures
– encryption
 2. Validate Time and Attendance Data
1. Update Master Payroll Data
3. Prepare Payroll
Threats Controls
1. Unauthorized changes 1 a. Access controls
to payroll master data and segregation of
2. Inaccurate updating of duties
master data 2 a. Data processing
3. Inaccurate time and integrity controls
attendance data 3 a. Supervisory review
b. Source data automation
4. Errors in processing
for data capture
payroll
4 a. Data processing
integrity controls
b. Supervisory review
 5. Disburse
4. Disburse Payroll
Payroll Taxes
Threats Controls
1. Theft or fraudulent 1 a. Restrict access to
distribution of blank payroll checks and
paychecks check signing machine
2. Failure to make b. Use separate account
required payments (imprest fund)
3. Untimely 2a. Configure system to make
payments automatic payments on time
3a. Configure system to make
4. Inaccurate
automatic payments on time
payments
4 a. Process integrity controls
b. Supervisory review
Information Needs
and Procedures
 The third function of the AIS is to provide information useful for
decision making.
 The payroll system must be designed to collect and integrate cos
data with other types of information in order to enable
management to make the following kinds of decisions:
Information Needs
and Procedures
1 Future work force staffing needs
2 Employee performance
3 Employee morale
4 Payroll processing
efficiency and effectiveness
 Information Needs
and Procedures
 Some of the information has traditionally
been provided by the payroll system.
 Other information, such as data about

employee skills, had normally been provided

and maintained by the HRM system.
 Other information, such as data about

employee morale, has traditionally not been

collected.
 Payroll Cycle Data Model
Skills Applicants
N)
(1, N)
(1,
Recruiting
applicants
(1, N)

(1, 1)
For Recruiting
Payroll Cycle Data Model
 What is the relationship between
skills and recruiting?
– one-to-many
 It reflects the fact that each

advertisement seeks a specific

skill and that, over time, there may
be several advertisements for a
given skill.
Payroll Cycle Data Model
 What is the relationship between the
recruiting event and job applicants?
– many-to-many
 Why?
 Many people typically apply for each
job opening.
 A given individual may also respond to
more than one recruiting event.
Reasons to Outsource Payroll
 Reduce costs
 Cost of processing and minimize
errors
 Broader range of benefits
 Administration of benefits
 Free up computer resources
 Key Terms
 Human resource  Deduction register
 Earnings statement
management (HRM)/payroll
cycle  Payroll clearing account
 Knowledge  Flexible benefits plan
 management  Payroll service bureau

systems  Professional employer

 Time card organization (PEO)
 Time sheet
 Payroll register
End of Chapter