Encumbrance calculation involves several steps and factors that are considered to determine the amount to be released. Here is a detailed explanation of how encumbrance is calculated:
1. Determine the Pay Period: Encumbrance release is calculated for each pay period, which is typically a specific time period in which employees are paid, such as weekly, bi-weekly, or monthly.
2. Identify the Employee Paygroups: The calculation is performed for the employee paygroups included in the particular payroll being processed. Paygroups refer to groups of employees who share similar pay structures, such as hourly or salaried employees.
3. Calculate Standard Hours: The first step in the encumbrance calculation is determining the standard hours for each employee in the paygroup. Standard hours represent the expected number of hours an employee is scheduled to work in a given pay period.
4. Determine Hourly Rate: Next, the hourly rate for each employee is considered. This rate is the amount paid per hour worked by the employee.
5. Calculate Annual Salary: To calculate the encumbrance, the annual salary is derived by multiplying the standard hours by the hourly rate, and then multiplying the result by the number of weeks in a year (52 weeks).
6. Adjust for Fiscal Year: The encumbrance calculation is further adjusted based on the number of days left in the fiscal year. This adjustment ensures that the encumbrance reflects the remaining period for which the funds need to be allocated.
7. Final Encumbrance Release: The final encumbrance release amount is obtained by dividing the annual salary by the total number of days in a year (365 days) and then multiplying it by the number of days remaining in the fiscal year.
To illustrate this further, let’s consider an example:
Suppose an employee’s standard hours are 40 hours per week, with an hourly rate of $15. The fiscal year has 365 days, and the current date is 100 days into the fiscal year.
1. Calculate annual salary: 40 hours * $15 * 52 weeks = $31,200.
2. Adjust for fiscal year: $31,200 / 365 days * 265 remaining days = $22,986.30.
In this example, the encumbrance release for the employee would be $22,986.30. This amount represents the portion of the annual salary that is allocated for the remaining days of the fiscal year.
It is important to note that the encumbrance calculation may vary based on the specific policies and practices of an organization. The example provided serves as a general illustration of the calculation process.