The Iceberg Clothing Company manufactures various types of clothing for women. To accumulate the costs of manufacturing these products, the company’s accountants have established a computerized cost accounting system. Every Monday morning, the prior week’s production cost data are batched together and processed. One of the outputs of this processing function is a production cost report for management that compares actual production costs to standard production costs and computes variances from standard. Management focuses on the significant variances as the basis for analyzing production performance. Errors sometimes occur in processing a week’s production cost data. The cost of the reprocessing work on a week’s production cost data is estimated to average about $12,000. The company’s management is currently considering the addition of a data validation control procedure within its cost accounting system that is estimated to reduce the risk of the data errors from 16% to 2%, and this procedure is projected to cost $800 per week.
a. Using these data, perform a cost-benefit analysis of the data validation control procedure that the management is considering for its cost accounting system.
b. On the basis of your analysis, make a recommendation to the management regarding the data validation control procedure.