Question

SHUTTLE cal Issue 25-1 Mary Tanis Portland, Ond auditors abo sourcino all processing responsibility requires 1.5 spends ha Tan is the controller for Duck Associates, a property management company in and, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external ors about payroll accounting. This year, the auditors suggest that Tan consider urcing Duck Associates' payroll accounting to a company specializing in pay- ocessing services. This would allow Tan and her staff to focus on their primary onsibility: accounting for the properties under management. At present, payroll ires 1.5 employee positions-payroll clerk Toby Stock and a bookkeeper who ods half her time entering payroll data in the system. Tan considers this suggestion, and she lists the following items relating to out- courcing payroll accounting: The current payroll software that was purchased for $4,000 three years ago would got be needed if payroll processing were outsourced. Duck Associates's bookkeeper would spend half her time preparing the weekly pay input form that is given to the payroll processing service. She is paid 5450 per we Duck Associates would no longer need payroll clerk Toby Stock, whose annu. salary is $42,000. d. The payroll processing service would charge $2,000 per month. Requirements 1. Would outsourcing the payroll function increase or decrease Duck Associates's operating income? 2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tan's decision if she wants to do what is best for Duck Associates and act ethically?

Answer 1

1. STATEMENT SHOWING NET SAVINGS FROM OUTSOURCING PAYROLL FUNCTION.

Particulars	Amount($)	Amount($)
Savings:
Bookkeepers salary per month. ($450 x 4weeks x 1/2)	900
Clerk’s (Toby Stock) Salary per month ($42,000/12 months)	3500
Total Savings per month ($900+$3500)		4,400
Cost
Payroll Processing Cost per month		2000
Net savings, If payroll function is outsourced		2,400

It is recommended to outsource the payroll function as operating income would be increase by $2,400 per month.

Note : Cost of software is not considered above as it is historical cost and irrelevent for decision making.

2. Since the operating income increase is by $2,400, if payroll funtions are outsourced, as a prudent controller of Duck Associates she is expected to outsource the same. Keeping Stock rather than outsourcing payroll doesn't seem ethical.