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You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2011. Included next are amounts from the client’s trial balance, along with comparative audited information for the prior year.
1. There has been a significant increase in the demand for Morehead’s products. The increase in sales was due to both an increase in the average selling price of 4 percent and an increase in units sold that resulted from the increased demand and an increased marketing effort.
2. Even though sales volume increased there was no addition of executives, factory supervisors, or office personnel.
3. All employees including executives, but excluding commission salespeople, received a 3 percent salary increase starting November 1, 2010. Commission salespeople receive their increased compensation through the increase in sales.
4. The increased number of factory hourly employees was accomplished by recalling employees that had been laid off. They receive the same wage rate as existing employees. Morehead does not permit overtime.
5. Commission salespeople receive a 5 percent commission on all sales on which a commission is given. Approximately 75 percent of sales earn sales commission. The other 25 percent are “call-ins”, for which no commission is given. Commissions are paid in the month following the month they are earned.
Required:
a. Use the final balances for the prior year included on the preceding page and the information in items 1 through 5 to develop an expected value for each account, except sales.
b. Calculate the difference between your expectation and the client’s recorded amount as a percentage using the formula (expected value-recorded amount)/expected value.
Audited Balance Preliminary Balance 10/31/2010 10/31/2011 Sales Executive salaries Factory hourly payroll Factory supervisors’ salaries Office salaries Sales commissions 51,316,234 546,940 0,038,877 785,825 1,990,296 2,018,149 57,474,182 615,970 11,476,319 810,588 2,055,302 2,367,962
Expert Answer
| (A) Expected value for each account except sales: | |||||
| S.No. | Particulars | Prior year figures i.e. 10/31/2010 | Expected Value for 10/31/2011 | Remarks | |
| 1 | Executive Salaries | 546,940 | 563,348 | 3% increase in Prior year | |
| 2 | Factory Hourly payroll | 10,038,877 | 11,135,193 | Refer Note-1 | |
| 3 | Factory supervisors’ salaries | 785,825 | 809,400 | 3% increase in Prior year | |
| 4 | Office Salaries | 1,990,296 | 2,050,005 | 3% increase in Prior year | |
| 5 | Commission Sales Perosn | 2,018,149 | 2,155,282 | 3.75% of Sales i.e. 57474182 | |
| Note: | |||||
| 1 | Expected Value of Factory hourly payroll | ||||
| Increase in production | Amount | ||||
| A | Sales of 10/31/2011 | 57,474,182 | |||
| B | Increase because of Selling price | 2,210,545 | |||
| (+51316234*4%) | |||||
| Remaining Sales (A-B) | 55,263,637 | ||||
| C | Prior year sales i.e. 10/31/2010 | 51,316,234 | |||
| Production increase | 3,947,403 | ||||
| Increase in production (%) | 7.69 % | ||||
| Production increase * 100 | |||||
| Sales of 10/31/2010 | |||||
| Expected Value of factory hourly payroll | |||||
| Prior year value | 10,038,877 | ||||
| Add | 3% increase | 301,166 | |||
| 10,340,043 | |||||
| Add | Because of increase in production | 795,149 | |||
| Total | 11,135,193 | ||||
| (B) Difference between expectation and clients recorded amount as a % | |||||
| S.No. | Particulars | Expected value | Recorded Amount | (Expected Value-Recorded amount)/Expected Value | |
| 1 | Executive Salaries | 563,348 | 615,970 | -9.34% | |
| 2 | Factory Hourly payroll | 11,135,193 | 11,476,319 | -3.06% | |
| 3 | Factory supervisors’ salaries | 809,400 | 810,588 | -0.15% | |
| 4 | Office Salaries | 2,050,005 | 2,055,302 | -0.26% | |
| 5 | Commission Sales Perosn | 2,155,282 | 2,367,962 | -9.87% | |
