The accountant for Lane and Company uses a statistical control chart to help management to decide when to investigate variances. The critical value is one standard deviation from the mean. The company incurred the following direct labour efficiency variances during the second half of the year:
The standard direct labour cost during each of these months was $80 000. The accountant has estimated that the firm’s monthly direct labour efficiency variances have a standard deviation of $3500.
Required:
1. (a) Draw a statistical control chart and plot the variance data given above.
(b) Which variances should be investigated? Explain why.
2. Suppose that the accountant’s rule of thumb is to investigate all variances equal to or greater than 5 per cent of standard cost. Which variances will be investigated?
3. Would you investigate any of the variances listed above other than those indicated by the rules discussed in requirements l and 2? Explain your answer.
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