Payroll Accruals What am I not getting?
In my new position payroll accruals hadn't been made for a few months, so the owner can calculate bonuses for the managers of various locations, I caught them up using what I thought was standard method for determining the amounts. But it gets complicated.
I did the accruals based on unpaid days left in each month's open pay period, with 1 having more as the next payday was Aug 1 so we had a full unpaid pay period plus 4 days before payday on the 1st. That month also has 3 paydays. When I did the accruals last day of the previous month, then reversed them on the first, the month with 3 paydays (1st, 15th, 29th) still has higher wages expense than other months by 1 payroll.
(they don't do PTO accruals and estimate the wages/commissions so it's not textbook)
The boss wants me to manipulate the numbers to even things out more, which I did but since each month's accrual affects the prior/next that gets to be a snowball. He IS trying to be fair and not have a spike for the month with 3 paydays.
He is basing one bonus calculation off wage expense (including benefits) as a percent of income-the lower the better but too low is a red flag. Previous bonuses, training compensation, etc are not excluded. Staff are paid mainly on flat rate or sales commissions with some getting a management salary as well. The higher the sales, the higher the wage expenses exponentially.
There are a number of other variables that might skew the P&L for these numbers (for example an employee might move to another location mid pay period, or an error on benefits causing one payroll to appear inflated/deflated)
If one month has 3 paydays, why wouldn't the P&L reflect that? Accruals reflect the accrued pay owed at month's end, not a tool to make every month even steven, correct?
How carried away does one get with accruals for a privately held company? It seems like I could spend many hours estimating/calculating this in more detail for the 15 locations, only to reverse it a day later, doesn't this effort make more sense at year's end?
I hope I explained this sensibly! Thank you!
OK, I am not entirely clear on what's going on here, but it probably doesn't matter.
Payroll goes up and down, for whatever reason - - OT, adding (or deleting) staff. But it sounds as if there are wide, unexplained swings. Because there hadn't been accruals for the previous 3 months, there will be swings before and after starting accruals, but those should smooth out after month 2 of restarting the accruals.
Here is what I would look for in those bloated 3 payday months: What is included in a regular payroll that is NOT included in your accrual? OT? Commissions? Bonuses? If you are having swings, that (and the difference in the number of workdays in a month) is where the issue is. In fact, the number of workdays could explain part of it. After all, if there are 3 paydays, that means 3 Fridays (assuming that's payday) which means extra weekdays as opposed to extra weekend days. (Assuming, too, this is a M-F operation.)
Hi Bruce, thanks for the input. I went back and did accruals for those 3 months. There were bonuses issued in one month that weren't accrued nor do they want them accrued, so there is one swing.
August had 3 paydays and July accrued an entire pay period of 2 weeks plus 3 days as the first payday in Aug was 8/1.
It seems like they want the accruals to 'average' out payroll and was finally happy when I changed my calculations of unpaid payroll to be more of an average across the board (wages, taxes and some bennies). The number of unpaid days owing at any given month end certainly fluctuates, the end of July was 15 work days. (M-S, bi-weekly payroll Thursdays).
They like to run the P&L showing wages as a percentage of income. Forcing each month to appear similar certainly helps the managers so no harm done for them but I don't believe that is true accrual and isn't an accurate accounting. Am I off base on this? Sometimes I second guess myself based on what boss or client wants and has done for a long time.
Thank you! Kelley Cantrell
They are basically wanting standard costing of wages . . . Kind of.
The number of days accrued should not really matter as long as the amounts are being accurately reflected for actual days worked. Since they want wages to be a percentage of sales, then you have to look at variations in sales, too. Do they tend to be consistent, regardless of month or day? Do they have sales on weekends? Without knowing the business, hard to wrap my head around this. And the more you mess with the accruals, the less accurate the statements. And isn't the purpose of statements to figure out if something is going south, the sooner the better?
Can think of 2 ways to deal with this off the top of my head without knowing anything about the business. Put bonuses on separate line on the statements, even putting it "below the line" when it comes to where to put them in the statements. And/Orrrrrrrrr, show labor as a percentage of sales and then show a variance amount as a separate line item. If you labor percentage is accurate (long term) that variance will bounce up and down by month but the YTD should trend towards zero.
Your concern (and that of your clients) should be how you will determine if labor costs are out of hand. (Or, trending too low, in which case some pricing adjustment might be in order.) But simply plugging numbers to make the bosses happy is never a good idea . . .
Bruce, I think you're spot on, kind of a standard cost of labor/wages.
This is automotive service so although much of the 'wages' is flat rate commission which fluctuates with sales some managers have partial salary, some techs has a base rate + commission, etc. And yes, sales numbers fluctuate seasonally, holidays, etc.
I agree messing with accruals just stinks up the reports and I think the acrual numbers should be accurate and leave them be. They pay managers a bonus partly based on this wage to sales percentage staying within a range. If accruals are flattened out to an average the ability to spot problems, as you say. I'll marinate on your suggestions.
Your input is always appreciated!