About payroll variance and accurate financial reporting
Payroll variance is the amount calculated when the actual amount paid to a salaried employee is greater than or less than the standard cost calculated at the time of entry. Payroll variance occurs when you use standard cost
, not effective cost, to determine the cost of salaried employees. When you use effective cost, any entries that appear in Payroll Variance account are caused by rounding, not by discrepancies between salary costs.
Ajera handles payroll variance based on the payroll option you select when setting up payroll preferences (Company > Preferences > Payroll tab > Payroll type field).
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For |
Do this |
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Process Payroll |
No action is required by you. Ajera automatically calculates payroll variance and adjusts the appropriate accounts when you print checks through Manage > Payroll. |
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Payroll Service |
It is important that you run Manage > Payroll. Manage > Payroll automatically calculates the payroll variance or salary employees. Payroll variance affects only salaried employees because they receive their salary amount no matter how many hours they work. |
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None |
You have instructed Ajera not to process payroll information. You must manually calculate payroll variance for accurate Profit and Loss Statement reporting. You manually calculate the payroll variance for salary employees, based on the hours entered on the timesheet. For example, for a biweekly payroll with a standard 80 hours, if the employee entered 90 hours, you make an adjusting journal entry to debit Salaries Payable and credit Payroll Variance Expense. |
Ajera calculates the labor expense based on the employee's standard hourly rate.
Payroll variance, which is also an expense, is
calculated when the actual amount paid to a salaried employee is greater
than or less than the standard cost calculated when time is entered. If
salary employees work more than the standard hours in a pay period, the
labor expense on the Profit and Loss Statement will be overstated.
The standard cost of a salaried employee is determined by taking their salary amount per pay period and dividing it by the standard number of hours in a pay period. For example, if an employee is paid $2,400.00 every 2 weeks (80 hours), the standard cost rate is calculated as 2,400.00/80 = 30.00, which appears in the Regular pay rate on the employee setup. Ajera automatically calculates this amount for you when you specify the Pay period (weekly, biweekly, semimonthly, or monthly) and the Pay period salary amount for the employee (Setup > Employees).
Example
On the employee setup, you enter the following:
- Pay periods: Biweekly
- Pay period salary amount: 2,400.00
The employee works 90 hours in the two-week period. When time is entered, the labor expense account is debited for the standard cost of $2,700 ($30.00 x 90 hours). When you run Manage > Payroll, Ajera automatically calculates the payroll variance as $300.00 ($2,700.00 - $2,400.00). This amount is credited to the Payroll Variance account. This ensures accurate project and profit and loss financial reporting.
In project reporting, Ajera shows labor cost at a consistent hourly rate for salary employees. Because Ajera uses the standard cost rate for project reporting, you can always view up-to-date project costs, even during the middle of a pay period.
