When Should a Variance Be Investigated

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Examlex · Accepted Answer

The Answer is Random variations around the standard are expected. When variances are within this range, they are assumed to be caused by random factors. When a variance falls outside of this range, the deviation is likely to be caused by nonrandom factors, either factors that managers can control or factors they cannot control. However, investigating the cause of variances and taking corrective action have a cost associated with them. As a general principle, an investigation should be undertaken only if the anticipated benefits are greater than the expected costs. Assessing the costs and benefits of a variance investigation is not an easy task, however.
Many firms adopt the general guideline of investigating variances only if they fall outside of an acceptable range. They are not investigated unless they are large enough to be of concern. They must be large enough to be caused by something other than random factors and large enough (on average) to justify the costs of investigating and taking corrective action.

When Should a Variance Be Investigated

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