Question

The director of cost management for Odessa Company uses a statistical control chart to help management determine when to investigate variances. The critical value is 1 standard deviation. The company incurred the following direct-labor efficiency variances during the first six months of the current year.

January	$	330	F
February		880	U
March		780	U
April		980	U
May		1,130	U
June		1,390	U

  
The standard direct-labor cost during each of these months was $27,000. The controller has estimated that the firm’s monthly direct-labor variances have a standard deviation of $1,030.

Required:
2-a. Determine the cutoff value for investigation if the controller’s rule of thumb is to investigate all variances equal to or greater than 5 percent of standard cost.
2-b. Based on the cutoff value, which month will have its direct-labor efficiency variance investigated?

Answer 1

1.calculation of actual cost
Month	standard cost	variance		actual cost
January	27000	330	F	26670
February	27000	880	U	27880
March	27000	780	U	27780
April	27000	980	U	27980
May	27000	1,130	U	28130
June	27000	1,390	U	28390
2.cut of value for investigation if varianceis equal to or greater than 5% of standard cost
cut off	1350
std cost*5%
3.Based on the cutoff value, which month will have its direct-labor efficiency variance investigated
Since june month variance is more than 1350 that is 1390….it is investigated