(a) Describe and comment briefly on the basis and limitations of the control chart approach to variance investigation decisions. (6 marks)
(b) The following analysis is available for the month of April for
Department A:

(£)
Estimated cost of investigating the total
material variance 1 000
Estimated cost of correcting the total
variance if investigated and found to
be out of control 2 000
Estimated cost of permitting out-of control
material variances to continue 10 000

You are required to determine, using a payoff table, whether the variance should be investigated.
(c) You are uncertain of the estimated probability in (b). Calculate the probability estimate at which you would be indifferent between investigating and not investigating the variance.
(d) Discuss the use of mathematical models for the variance investigation decision.

Transcribed Image Text:

Standard direct material 72000 Material usage variance Material mix variance The following estimates have also been made for Department A: 4500 unfavourable 2500 unfavourable Maximum probability of a given total variance: Probability Total 0.99 0.98 0.96 0.93 0.89 0.85 0.8 0.75 Variance £000 1 23 4 5 6 7 8