Question

Using Control Limits to Determine When to Investigate a Variance

Kavallia Company set a standard cost for one item at $328,000; allowable deviation is ± $14,500. Actual costs for the past six months are as follows:

June	$331,500		September	$314,000
July	345,000		October	331,000
August	346,800		November	324,000

Required:

1. Calculate the variance from standard for each month.

	Variance
June	$
July	$
August	$
September	$
October	$
November	$

Which months should be investigated?

June
July
August
September
October
November

2. What if the company uses a two-part rule for investigating variances? The allowable deviation is the lesser of 4 percent of the standard amount or $14,500. Now which months should be investigated?

June
July
August
September
October
November

Answer 1

1.	Calculation of variation from standard for each month:
					(in Dollars)
	Month	Standard Cost	Actual Cost	Variance		Allowable deviation	Variance to be investigated
	June	328,000	331,500	-     3,500	(A)	-                      14,500	N/A
	July	328,000	345,000	-   17,000	(A)	-                      14,500	Yes
	August	328,000	346,800	-   18,800	(A)	-                      14,500	Yes
	September	328,000	314,000	14,000	(F)	14,500	N/A
	October	328,000	331,000	-     3,000	(A)	-                      14,500	N/A
	November	328,000	324,000	4,000	(F)	14,500	N/A
	Therefore, months of July and August should be investigated.
2.	When allowable daviation is lesser of 4% of standard daviation of 14,500 Dollars:
	Month	Standard Cost	Actual Cost	Variance		Allowable deviation	Variance to be investigated
	June	328,000	331,500	-     3,500	(A)	-                      13,920	N/A
	July	328,000	345,000	-   17,000	(A)	-                      13,920	Yes
	August	328,000	346,800	-   18,800	(A)	-                      13,920	Yes
	September	328,000	314,000	14,000	(F)	13,920	Yes
	October	328,000	331,000	-     3,000	(A)	-                      13,920	N/A
	November	328,000	324,000	4,000	(F)	13,920	N/A
	Therefore, months of July, August and September should be investigated.