Assignment

River City government has a payroll department that handles the processing of payroll for all city employees. The responsibilities of the payroll department relate to full-time, part-time and contractual employees and include: obtaining information from new employees so they can be added to the payroll; having new employees complete payroll withholding and deduction forms; collecting time sheets; calculating gross pay, appropriate deductions and employer contributions for each pay period; and completing vouchers for contributions and withholdings. The annual budget of the payroll department is

Salaries and fringe benefits $117,000

Materials and supplies $ 16,000

Computer costs $ 11,000

Checks written 100,000

Square feet of office space utilized 1,000

The city charges the payroll department an indirect overhead cost rate based on the number of square feet of office space utilized. The overhead rate is currently $9 per square foot. The overhead rate is intended to cover maintenance costs, utilities, and equipment depreciation.

Recently, River City has begun to wonder if it would be more economical to contract for its payroll services. The City's budget administrator contacted a neighboring city and learned that the neighboring city was paying $1.50/check for its payroll function.

Required:

(a) Calculate River City payroll department's cost per check. Based on costs would it be cheaper to maintain the payroll department or contract out for the payroll services?

(b) Discuss what other information you would want before making a decision about retaining or contracting payroll.