Real-Life Math -- Solution
To determine each year's common area expenses, you need to consider all the factors:
- Mall management charges the store 2 percent of gross sales for its share of common area expenses
- The store's projected sales are $270,000 for this year, $325,000 for next year, and $390,000 for the third year
- This year, the store is being hit with a 2 percent increase; the second year there will be a 3 percent increase and the third year there will be a 4 percent increase
- The amount budgeted for your store's common area expenses is $21,000
First Year
You need to determine the store's common area expenses for the first year -- the amount you would have paid before the rate increase happened.
$275,000 gross sales x 0.02 for common area expenses = $5,500
Now, add on the 2 percent increase from mall management:
$5,500 common area expenses x 0.02 = $110
$5,500 + $110 increase = $5,610 common area expense for the first year
Second Year
You now need to determine how much your 2nd year's common area expenses will be.
Forecasted gross sales for the second year are $325,000.
$325,000 gross sales x 0.02 for common area expenses = $6,500
Now, add on the 3 percent increase to common area expenses from mall management:
$6,500 in common area expenses x 0.03 = $195
$6,500 + $195 increase = $6,695
Third Year
The next step is to determine the common area expenses for the third year.
Forecasted gross sales for the third year are $390,000.
$390,000 gross sales x 0.02 for common area expenses = $7,800
Now, add on the 4 percent increase to common area expenses from mall management:
$7,800 common area expenses x 0.04 = $312
$7,800 + $312 = $8,112
Now you can see if they fall within the budgeted amount.
Add the 3 years' common area expenses together:
$5,610 + $6,695 + $8,112 = $20,417
Because senior management budgeted $21,000 for common area expenses, the store's expenses will fall within the budgeted amount.
Determining expenses is a large part of an auditor's job. Being able to calculate these types of equations accurately is important.
"Business and statistical math are important because you need the background to be able to verify and audit calculations," says auditor John Muirhead. "A background in math is necessary so that if you have to review calculations as part of an audit, you'll have the ability to tell whether the math used was correct."