Question

McKeag Corporation manufactures agricultural machinery. At a recent staff meeting, the following direct-labor variance report for the year just ended was presented by the controller.


McKeag’s controller uses the following rule of thumb: Investigate all variances equal to or greater than $ 60,000, which is 6 percent of standard cost.

Required:
1. Which variances would have been investigated during the year? (Indicate month and type of variance.)
2. What characteristics of the variance pattern shown in the report should draw the controller’s attention, regardless of the usual investigation rule? Explain. Given these considerations, which variances would you have investigated? Why?
3. Is it important to follow up on favorable variances, such as those shown in the report? Why?
4. The controller believes that the firm’s direct- labor rate variance has a normal probability distribution with a mean of zero and a standard deviation of $ 10,000. Prepare a statistical control chart, and plot the company’s direct- labor rate variances for each month. The critical value is 1 standard deviation. Which variances would have been investigated under thisapproach?


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  • CreatedApril 22, 2014
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