Check your answer
Write your response and explain your reasoning.
Linden Peak and Summit Sensors manufacture sensors and promise to repair qualifying defects under warranties. Each company reports a year-end warranty liability, an estimate of the cost of its remaining repair obligations. Linden Peak's reported liability equals 2.4 percent of its annual sales; Summit's equals 1.8 percent of its annual sales.
The companies may have different year-ends, products, warranty terms, and estimation methods. Those differences have not yet been investigated.
- Identify at least three things to check before interpreting the difference, including what each percentage compares.
- Explain why comparability does not require identical percentages, and how consistency can help the comparison.
- Explain how another person could check the estimates. Distinguish inspecting records from checking the estimate through its inputs and calculation. Specify the records, assumptions, and calculations that should be retained.
Compare your reasoning with the worked answer
Both percentages compare an ending warranty liability with annual sales; neither is automatically a measure of this year's defect rate. Check the reporting dates and sales periods, covered products, warranty terms, and estimation methods. The ending liability may include obligations from earlier sales. A longer warranty or different product mix may explain a difference; do not erase those facts by forcing both companies to use the same percentage.
Consistency means using the same methods for the same items across periods or companies. Comparability means being able to identify meaningful similarities and differences.
For verification, inspect warranty agreements and repair records, then check that the estimate includes all relevant products and claims. Retain the source records, assumptions, calculation, and explanation of changes so another person can repeat the calculation and compare it with the reported liability. This is indirect verification of an estimate, not direct observation of its final cost. Correct arithmetic alone does not establish that the records or assumptions are appropriate.