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Transaction Error Rate

Description: The cost of correcting an error is many times higher than the cost of doing it right the first time, so the transaction error rate should be used in concert with the number of transactions processed per person in order to ensure that efficiency improvements leading to increased volume are not also spewing out many additional errors. Also, the error rate can be used by itself as a valid measure of departmental performance, since error correction can tie up the services of a multitude of senior accounting staff, who can be better used for other activities.

Formula: To calculate the transaction error rate, summarize the total number of transactional errors and divide them by the total number of transactions processed for the same period. Be careful to match transactional errors to the same period in which the transactions occurred; it is quite common for errors not to be spotted and corrected until a later period, so that they are compared to total transaction volumes for the later period that may be quite different from the volumes in the period when they occurred.

Example: The Chillo Ice Cream Company’s accounting manager is focusing on eliminating several of the senior accounting clerks whose entire jobs consist of error correction.  He has accumulated the following information:

The accounting manager sees that the highest error rate is in the payables transactional area, with billings being a close second.  However, he knows that the time required to fix errors is twice as high for each billings transaction, so he first directs his correction efforts to the billings transactions, since this will have the largest payback in terms of time saved.

Cautions: This is an excellent measurement. However, it should not be aggregated for all types of accounting errors, since some are easier to correct than others. For example, a large number of incorrect billings that are caused by a easily fixed change to the pricing file may make the proportion of billing errors look quite large, while a smaller number of errors related to cost allocations, which can be quite difficult to spot and correct, may actually represent a larger time commitment to correct. Consequently, the measure should be subdivided into each major type of transaction, so that the impact of each error type can be more closely monitored.