Due to data errors occurring from time to time in processing the Albert Company's payroll,the company's management is considering the addition of a data validation control procedure that is projected to reduce the risk of these data errors from 13% to 2%.The cost of the payroll reprocessing is estimated to be $11,000.The cost of implementing the data validation control procedure is expected to be $700.Which of the following statements is true?
A) The data validation control procedure should be implemented because its net estimated benefit is $510.
B) The data validation control procedure should be implemented because its cost of $700 is less than the payroll reprocessing cost of $1,430.
C) The data validation control procedure should not be implemented because its cost of $700 exceeds the expected benefit by $480.
D) The data validation control procedure should not be implemented because its net estimated benefit is a negative $1,210.

Question

Quizplus · Accepted Answer

The benefit of implementing the data validation control procedure can be calculated as follows:

Benefit = (reduction in risk x cost of reprocessing) - cost of implementation
Benefit = (0.13-0.02) x $11,000 - $700
Benefit = $1,210 - $700
Benefit = $510

Since the net estimated benefit of implementing the data validation control procedure is positive, it should be implemented. Therefore, option A is the correct answer. Option B is not entirely correct as it only considers the cost comparison between the two options, but not the net benefit. Option C and D are incorrect as they do not consider the reduction in risk of data errors, which is an important consideration for the company.

Due to Data Errors Occurring from Time to Time in Processing