Auditors for the Internal Revenue Service (IRS) scrutinize income tax returns after they have been prescreened with the help of computer tests for normal ranges of deductions claimed by taxpayers. The IRS uses an expected cost of $5 per tax return, based on measurement studies that allow 15 minutes per return. Each agent has a workweek of 5 days of 8 hours per day. Eighteen auditors are employed at a salary of $790 each per week.

The audit supervisor has the following data regarding performance for the most recent 4-week period, when 8,300 returns were processed:

1. Compute the expected cost and the variance.

2. The supervisor believes that audit work should be conducted more productively and that superfluous personnel should be transferred to field audits. If the foregoing data are representative, how many auditors should be transferred?

3. List some possible reasons for the variance.

4. Describe some alternative cost drivers for processing income tax returns.

Transcribed Image Text:

Actual Cost xpected Cost for Difference or of Auditors Processing Returns Variance $56,880