Answer to Question #210977 in Statistics and Probability for Anisha Kumar

Question

The accountant for Lane and Company uses a statistical control chart to help management to decide when to investigate variances. The critical value is one standard deviation from the mean. The company incurred the following direct labour efficiency variances during the first six months of the year: 

January

$500 F

April

$1800 U

February

1600 U

May

2100 U

March

1400 U

June

2400 U

 The standard direct labour cost during these months was $36000.

Required

1.   Suppose that the accountant’s rule of thumb is to investigate all variances equal to or greater than 5 percent of standard direct labour cost. Which variances will be investigated?

 

Would you investigate any of the variances listed above other than those indicated by the rules discussed in requirement 1? Explain your answer.

Answer 1

Solution:

1.). The variances that will be investigated are for the months of May and June.

Cut off value for investigation = 5$\%$ of the standard cost = 36,000 $\times$ 5$\%$ = 1,800

Therefore, the months whose variances will be investigated are for the months of May and June since their variances are above the cut-off value of 1,800.

 

Yes, I would investigate any of the variances listed above other than those indicated by the rules discussed in requirement 1.

These variances to also be investigated includes the variances for the month of February, March, and April. This is because they are unfavorable and have a significant value, hence need to be investigated to ascertain their causes.