The director of cost management for Odessa Company uses a statistical control ch

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.

The standard direct-labor cost during each of these months was $19,000. The controller has estimated that the firm’s monthly direct-labor variances have a standard deviation of $950.

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 6 percent of standard cost.

2-b. Based on the cutoff value, which month will have its direct-labor efficiency variance investigated?

January $ 250 F February 800 U March 700 U April 900 U May 1,050 U June 1,200 U

Explanation / Answer

Part 2(a)

Calculation of Cut off value

Cut off value =Standard Cost* Cut off percentage

= $19000 * 6%

= $1140

Part 2(b)

Only the June Variance $1200 U is equal to or greater than the cut off value. Hence, only June’s variance would be investigated.

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