Problem: Assume that the budgeted cost for a department is $10,000 per week and the standard deviation is $500.00. The decision to investigate a variance requires a comparison of expected benefits with expected costs. Suppose an unfavorable variance of $1,000 is observed. The normal distribution indicates the probability of observing this variance is 0.0228 if the system is in control. Furthermore, assume that the benefits would be $50% of the variance and that investigation costs are $200. Should this variance be investigated? Assume that the variance is still $1,000, but it is favorable. Should it still be investigated?
Q1. What is the difference between favorable and unfavorable variances and how do you calculate them?
Q2. What if $1,000 difference is unfavorable and should that be investigated?
Q3. What if $1,000 difference is favorable and should that be investigated?