Advanced: Investigation of variances From past experience a company operating a stan¬ dard cost system has accumulated the following information in relation to variances in its monthly management accounts:

Percentage of total number of variances

(1) Its variances fall into two categories:

(2) Of Category 2, corrective action has elimi¬ nated 70% of the variances, but the remainder have continued.
(3) The cost of investigation averages £350 and that of correcting variances averages £550.
(4) The average size of any variance not corrected is £525 per month and the company’s policy is to assess the present value of such costs at 2% per month for a period of five months.
You are required to:

(a) prepare two decision trees, to represent the position if an investigation is:
(i) carried out;
(ii) not carried out; (12 marks)

(b) recommend, with supporting calculations, whether or not the company should follow a policy of investigating variances as a matter of routine;

(c) explain briefly two types of circumstance that would give rise to variances in Category 1 and two to those in Category 2; (6 marks)

(d) mention any one variation in the information used that you feel would be beneficial to the company if you wished to improve the quality of the decision-making rule recommended in

(b) above. Explain briefly why you have suggested it.

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Category 1: those which are not worth investigating Category 2: those which are worth investigating 64 36 100