From past experience a company operating a standard 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:

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

2. Of Category 2, corrective action has eliminated 70 percent 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 percent 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;
(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;
(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.