Advanced: Investigation of variances From past experience a company operating a standard cost system has accumulated the
Question:
Advanced: Investigation of variances From past experience a company operating a standard cost system has accumulated the following information in relation to variances in its monthly management accounts
(2) Of Category 2, corrective action has eliminated 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; (3 marks)
(c) explain briefly rwo 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.(2) Of Category 2, corrective action has eliminated 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; (3 marks)
(c) explain briefly rwo 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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