Examples of trend analysis in accounting and auditing

November 1, 2015

This article provides some examples of how trend analysis can be used in accounting and auditing.

1. Trend analysis of payroll expenses and headcount

When a company grows, most likely the company will hire more employees to support the growth.† It may be helpful for management (auditors, etc.) to understand how the change in payroll expenses relates to the change in headcount.† This type of analysis can provide insight as to whether the company is efficiently utilizing labor resources, whether the company is hiring employees with lower or higher salaries, etc.

Letís take a look at the example below which shows payroll expenses and headcount over five periods.

The first table shows payroll expenses and their changes by period:

 

Period 1

Period 2

Period 3

Period 4

Period 5

Payroll Expense

$1,200,000

$1,400,000

$2,000,000

$2,450,000

$3,000,000

Change ($)

 

$200,000

$600,000

$450,000

$550,000

Change (%)

 

17%

43%

23%

22%

Note: the changes in Period 1 are not shown as the table does not have the payroll expenses amount for the period prior to Period 1.

The table shows quite significant increases in payroll expenses over Periods 2-5: 17%, 43%, 23%, and 22%, respectively. †It may be necessary to understand these changes.† The first driver that can explain the expense increase is the headcount.† Letís take a look at that below.

The second table shows headcount and its changes by period:

 

Period 1

Period 2

Period 3

Period 4

Period 5

Headcount

22

25

45

58

64

Change (Count)

 

3

20

13

6

Change (%)

 

14%

80%

29%

10%

As the second table shows, headcount increased over Periods 2-5 as well.† Period 2 increases for the payroll expense and headcount are very similar: 17% and 14%, respectively.† Period 3 increases donít appear to be similar: 43% and 80%, respectively; in other words, headcount increased by almost twice as much as the payroll expenses.† Periods 4 and 5 changes in the payroll expenses and headcount are again pretty similar to each other.

One question that may be on your mind now is this: Why did the payroll expense increase less than the headcount during Period 3.† This is a reasonable question to be asked by management, auditors, etc.† There may be several explanations.† For example, during Period 3, the company may have hired a lot of employees whose positions demanded lower wages.† Another possible explanation may be that the company had to reduce salaries to existing or new employees due to certain circumstances (e.g., temporary lower demand for the companyís product).

Another useful measure to look at in this example would be the average payroll expense per employee:

 

Period 1

Period 2

Period 3

Period 4

Period 5

Average Expense

$54,545

$56,000

$44,444

$42,241

$46,875

Change ($)

 

$1,455

†($11,556)

†($2,203)

$4,634

Change (%)

 

3%

-21%

-5%

11%

As we can see, Period 3 does show a significant decrease (i.e., 21%) in the payroll expenses per employee.

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