The Wentworth Company Manufactures Modular Furniture for the Home and Uses

question 162

Essay

The Wentworth Company manufactures modular furniture for the home and uses a monthly variance system to control costs of the manufacturing departments. Edward Collins is the supervisor of the Assembly Department and is reviewing the monthly variance analysis for November, which showed a significant cost overrun (i.e., negative cost variance). Collins has gathered the following information to assist him in deciding whether or not to investigate the unfavorable cost variance for the Assembly Department: Required: Recommend whether Wentworth Company should investigate the observed unfavorable cost variance. Support your answer by:
1. Preparing a payoff table for use in making the decision.
2. Computing the expected value of the cost of each of the two actions that management can take: investigate the variance, or do not investigate the variance. (Let p = the probability that the process is out of control, that is, the probability of a nonrandom variance, and (1 - p) = the probability that the process is in control, that is, that the observed variance is due to random causes.)