Allan Ltd manufactures gardening equipment. At a recent staff meeting, the following direct labour variance report for the past year was presented by the management accountant:
Allan Ltd’s management accountant uses the following rule of thumb: investigate all variances equal to or greater than $60 000, or 6 per cent of standard cost.
1. Which variances would have been investigated during the year? (Indicate month and type of variance.)
2. What characteristics of the variance pattern shown in the report should draw the accountant’s attention, regardless of the usual investigation rule? Explain. Given these considerations, which variances would you have investigated? Why?
3. Is it important to follow up on favourable variances, such as those shown in the report? Explain your answer.
4. The management accountant believes that the firm’s direct labour rate variance has a normal statistical probability distribution with a mean of zero and a standard deviation of $10 000. Prepare a statistical control chart, and plot the company’s direct labour rate variances for they year. The critical value is one standard deviation. Which variances would have been investigated under this approach?