Elm Manufacturing Company (ELM) is a small manufacturer of back packs located in Rochelle, Illinois. They make three different types of Backpacks:
A small backpack made for school that is designed to hold books with compartments for school supplies and an outside compartment for a water bottle.This backpack is purchased throughout the year by bookstores, office supply stores, department stores and other specialty stores (e.g. school supply stores) (product number SP001).
A backpack made for hiking that is designed for individuals that want to spend the day outside.It is more sturdy then the school backpack and has compartments for clothing, food, water, and other hiking supplies.It is largely purchased by camping and sporting goods stores, although it is also carried by department stores that have sporting goods sections and other specialty stores (e.g. bicycle stores) (product number HB005).
A backpack made for camping. This backpack has a metal frame and includes compartments for various camping equipment including places to tie on a sleeping bag. It is primarily sold in specialty camping stores and sporting goods stores, but some larger department stores may carry these (product number CB008).
Some of the relevant information for these products is included below.
(wholesale in cases)
|Total Units Sold||Total Sales 2020|
All items are only sold by the case (12 per case).
Although the company sells the backpacks to retailers and wholesalers by the case, the individual product is eventually sold to consumers at a variety of retail stores, including specialty sporting goods stores, as well as online retailers.
To increase sales and improve customer satisfaction, ELM provides a full 2-year warranty on all their products. Customers must initiate a warranty claim within two years of retail purchase and must ship the backpack to the company’s Rochelle warehouse so that it is received within two weeks of initiating the claim.
Customers pay the shipping on the warranty return, ELM pays the cost of shipping the product back, and that cost is included in the cost of the warranty claim.
Upon receipt of a claim, the claim is approved by either warranty manager, Eric Stolman or by production manager Melissa Peck. ELM establishes a sequential warranty claim number (CLAIMNO). If the customer has never returned a product under warranty before, ELM also assigns a sequential customer number specifically related to claims (CLAIMCUSTNO). The CLAIMNO is unique to a single claim, but the CLAIMCUSTNO is used for all claims filed by a single customer.
ELM repairs any backpacks where the total cost of the repair (including labor costs but excluding shipping) is less than the unit cost of a replacement backpack. If the cost of the repair is estimated to exceed the cost of replacing the backpack, a new product is shipped to the customer.
ELM has negotiated shipping rates with UPS and has a fixed packaging and shipping cost for returning products on warranty:
Because ELM prides itself on excellent customer service and product workmanship, the company recognizes warranty expense as 1% of total sales. Historically, this amount has been adequate. The company indicates that all three products have approximately equal warranty claims, but the School and Hiking packs are replaced significantly more than the Camping Pack because of the higher unit cost of a replacement unit. The company redesigned their packs during the 2020 fiscal year (during June, 2019), however the company does not expect warranty claims to change significantly. For the purposes of this case, you may assume that sales occurred uniformly throughout the year.
You have access to the following data:
ELM Warranty Data file
The following is a data dictionary listing the column names, descriptions and field types in the Warranty Claim 2020 database.
|Column Name||Column description||Field type|
|CLAIMNO||Warranty claim number||Numeric|
|CLAIMCUSTNO||Customer Number, unique to claims||Numeric|
|CLAIMDATE||Date the customer warranty claim was reported||Date DD/MM/YYYY|
|SALEDATE||Date the customer purchased the product from the retail store/online||Date DD/MM/YYYY|
|RECDATE||Date the returned backpack was received by ELM||Date DD/MM/YYYY|
|PRODNO||Product Number||Date DD/MM/YYYY|
|REPLACE||1 if product is replaced, 0 if repaired||Numeric|
|WARRMAT||Warranty materials cost||Numeric (dollars)|
|WARRLAB||Warranty labor cost||Numeric (dollars)|
|FRGHTCOST||Shipping Cost||Numeric (dollars)|
|RETDATE||Date Product was returned to customer||Date DD/MM/YYYY|
|WARRAPP||Initials of manager approving warranty repair||Character|
You have been assigned to audit ELM Manufacturing Company’s Warranty Expense and Liability for the fiscal year end March 31, 2020. ELM has provided you with the following account reconciliation for Accrued Warranty Liability:
|Beginning Balance, 4/1/19||$||137,670||*|
|Warranty Expense, fiscal 2020||156,475|
|Warranty Costs, fiscal 2020||(170,619||)|
|Ending Balance, 3/31/2020||$||123,526||**|
* Agreed to 3/31/19 audited financial statements
** Agreed to 3/31/20 unaudited General Ledger
Materiality for the warranty expense account is set at $50,000.
ELM has also provided you with their Warranty Claim 2020 database.
In assessing the completeness and accuracy of the information prepared by the entity, consider the following:
a. Is warranty expense of $156,475 calculated accurately based on the information provided and the client’s warranty policy?
multiple choice 1
Yes, Warranty expense accurately displays 1% of sales for the year.
No, Warranty expense does not match the costs incurred during the year.
b. Are the Warranty Costs in the reconciliation provided by the client mathematically accurate based on the Warranty Claim 2020 database?
multiple choice 2
Yes, the total is $170,619.
No, the total is not $170,619.
c. The final CLAIMNO filed during the year ended 3/31/19 was 36,454. Based on the client’s policy and use of sequential claim numbers, how many claim numbers are missing?
d. How many duplicate CLAIMNOswere recorded during the year? Count each pair of duplicate CLAIMNOs as 1.