Jenny Ji, a recent business school graduate, is renegotiating her contract with her employer, Hanson Consulting Ltd., which offers business consulting services. Jenny knows it is important that she negotiate a good contract, because the amount of her raise will become a benchmark for the raises to be received by Hanson’s 14 other staff consultants. Currently, Jenny and the other consultants are receiving payroll transfers into their personal bank
Under her existing contract, Jenny is allowed to review Hanson’s annual financial statements. She is puzzled when she sees that Hanson is reporting over $900,000 in consulting salaries on its annual statement of earnings, because she knows that she and the other consultants are paid a total of $720,000 per year (that is, 15 consultants 3 $4,000 per month 3 12 months). Jenny approaches you, the company controller, to see why the consulting salaries on the statement of earnings are higher than the amounts paid to the employees. She suspects that the company may have posted other expenses to the Consulting Salaries account, in order to improve its bargaining position for the contract negotiations.
Required:
Explain to Jenny why the company’s payroll costs are significantly higher than the net amounts being received by the employees.