A. Computerized Payroll Procedures. In connection with her examination of the financial statements

A. Computerized Payroll Procedures. In connection with her examination of the financial statements of the Olympia Manufacturing Company, a CPA is reviewing procedures for accumulating direct labor hours. She learns that all production is by job order and that all employees are paid hourly wages, with time-and-one-half for overtime hours.

Olympia's direct labor hour input process for payroll and job-cost deter- mination is summarized in the following flowchart:



L /






Steps A and C are performed in the Timekeeping Department; Step B in the factory operating departments; Step D in the Payroll Audit and Control Department; Step E in the Data Preparation (Keypunch) Department; and Step F in the Computer Operations Department.

Required: For each input processing Step A through F:

(a) List the possible errors or discrepancies that may occur.

(b) Cite the corresponding control procedure that should be in effect for each error or discrepancy.

NOTE: Limit the discussion of Olympia's procedures to the input process for direct labor hours (as shown in Steps A through F in the flowchart). Do not discuss personnel procedures for hiring, promotion, termination, and pay rate authorization. In Step F, do not discuss equipment, computer program, and general computer operational controls.

Organize your answer for each input-processing step as follows:

Step Possible Errors or Discrepancies Control Procedures

(AI CPA adapted)

B. Setting Productivity Standards. The Alton Company intends to expand its Punch Press Department with the purchase of three new presses from Presco, Inc. Mechanical studies indicate that for Alton's intended use, the output rate

for one press should be 1,000 pieces per hour. The Alton Company has similar presses now in operation that average 600 pieces per hour. This average is derived from these individ ual outputs:


Daily Output

(ill Pieces)






















A verage

daily output.



Alton's management also plans to institute a standard cost accounting system in the very near future. Alton's engineers are supporting a standard based upon 1,000 pieces per hour; the Accounting Department, a standard based upon 750 pieces per hour; and the Punch Press Department foreman, a standard based upon 600 pieces per hour.

Required: (I) Arguments used by each proponent to support his case.

(2) The alternative which best reconciles the needs of cost control and the motivation of improved performance. Explain the choice made.

(NAA adapted)

C. Controlling Hiring Practices and Payroll Procedures. The Besco Corpora- tion employs about fifty production workers and has these payroll procedures:

The factory foreman interviews applicants and on the basis of the interview either hires or rejects them. When hired, the applicant prepares a W-4 form (Employee's Withholding Exemption Certificate) and gives it to the foreman, who writes the hourly rate of pay for the new employee in the corner of the W-4 form. He then gives the form to a payroll clerk as notice that the worker has been employed. The foreman verbally advises the Payroll Department of rate adjustments.

A supply of blank time cards is kept in a box near the entrance to the factory.

Each worker takes a time card on Monday morning, fills in his name, and notes in pencil on the time card his daily arrival and departure times. At the end of the week the worker drops the time card in a box near the factory door.

The completed time cards are taken from the box on Monday morning by a payroll clerk. Two payroll clerks divide the time cards alphabetically, one taking the A to L section of the payroll and the other taking the M to Z section. Each clerk is fully responsible for his section of the payroll. He computes the gross pay, deductions, and net pay, posts the details to the employees' earnings records, and prepares and numbers the payroll checks. Employees are auto- matically removed from the payroll when they fail to turn in a time card.

The payroll checks are manually signed by the chief accountant and given to

the foreman. The foreman distributes the checks to the workers in the factory and arranges for the delivery of the checks to absent workers. The payroll bank account is reconciled by the chief accountant who also prepares the various quarterly and annual payroll tax reports.

Required: Suggestions for improving the Besco Corporation's system of internal control for factory hiring practices and payroll procedures.

D. Timesaving vs. Cost Saving. Laurel, Inc., manufacturers of a large variety of women's garments, employs one thousand female workers in its production departments.

Some time ago the management engaged the services of a CPA firm for the

purpose of making a complete analysis of the methods of production. Its

findings and recommendations were given to a committee for the purpose of studying them before instituting any changes in the existing production setup.

The committee is presently discussing a suggestion aimed at red uction of the time required for a particular operation. The operation is performed on all products and takes ten minutes or approximately 30% of total productive labor. It is claimed that, by applying a new method, twenty seconds per item could

be saved.

One committee member, although recognizing that no investment would be

necessary, believes that the proposed timesaving method is too insignificant to be worth considering.

Required: Comments on the committee member's attitude, explaining your agreement or disagreement considering the fact that the pay rate is $2.50 per hour and the standard work week is 40 hours.

E. Labor Budget and Performance Variances. The Devon Co.'s contract with the labor union guarantees a minimum wage of $500 per month to each direct labor employee having at least ten years of service. One hundred employees currently qualify. All direct labor employees are paid $5 per hour.

The direct labor budget for the current year, 19-, was based on the annual usage of 400,000 hours of direct labor at $5 or a total of $2,000,000. Of this

mance for the first three months of 19- show:




Direct labor hours worked …………




Direct labor costs budgeted ………..




Direct labor costs incurred …………




Variances (F-favorable;

U – unfavorable) ……….

$ 17,000F

$ 2,000F

$ 13,000U

amount, $50,000 (100 employees X $500 a month) or $600,000 for the year was regarded as fixed. The budget for any given month was determined by the formula $50,000 plus $3.50 X direct labor hours worked. Data on perfor-

The factory manager is perplexed by the results, which show favorable variances when production is low and unfavorable variances when production is high. He believes control over labor costs is consistently good.

Required: (1) Explanation of causes of variances and an illustration, using amounts and diagrams as appropriate.

(2) Explanation of this direct labor budget as a basis for controlling direct labor cost, indicating changes that might improve control over direct labor cost and facilitate performance evaluation of direct labor employees.

(AICPA adapted)

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