Using Control Limits to Determine When to Investigate a Variance Kavallia Compan
ID: 2569863 • Letter: U
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:
Required:
1. Calculate the variance from standard for each month.
Which months should be investigated?
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 $330,500 September $314,000 July 343,000 October 332,000 August 346,800 November 323,000Explanation / Answer
1. variance from standard for each month
Month Actual Cost(A) Standard Cost(B) Variance(A-B) Favorable if ± $14,500 Investigated
June $330,500 $328,000 $2500 Favorable No
July $ 343,000 $328,000 $15,000 Not Favorable Yes
August $ 346,800 $328,000 $18,800 Not Favorable Yes
September $314,000 $328,000 $14,000 Favorable No
October $ 332,000 $328,000 $4,000 Favorable No
November $ 323,000 $328,000 $5,000 Favorable No
2. two-part rule for investigating variances - The allowable deviation is the lesser of 4 percent of the standard amount i.e. $13,120 or $14,500
Month Actual Cost(A) Standard Cost(B) Variance(A-B) Favorable Investigated
June $330,500 $328,000 $2500 Favorable No
July $ 343,000 $328,000 $15,000 Not Favorable Yes
August $ 346,800 $328,000 $18,800 Not Favorable Yes
September $314,000 $328,000 $14,000 Not Favorable Yes
October $ 332,000 $328,000 $4,000 Favorable No
November $ 323,000 $328,000 $5,000 Favorable No
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