The Significance and Investigation of Cost Variances: Survey and Extensions

Standard cost systems can produce as many variances each period as there are accounts for which standards are set, since actual, costs for a period will rarely equal the standard or budgeted cost for any process worth controlling.' Nevertheless, no one seriously advocates taking action and investigating every cost variance that occurs each period. Managers recognize that many variances are insignificant and caused by random, noncontrollable factors. Since any investigation will involve a certain expenditure of effort and funds, managers will attempt to take action on only the most significant and correctible variances. An investigation should only be undertaken if the benefits expected from the investigation exceed the costs of searching for and correcting the source of the cost variance. Many articles have appeared in statistical and accounting journals that directly deal with determining whether a process is in or out of control and, hence, whether it is worthwhile to intervene in the process. Despite the widespread use of quality control techniques in industry, however, the application of these ideas in actual standard cost accounting settings can generously be characterized as minimal. For example, in 1968, Koehler reported that "in some general inquiry from some prominent corporations, I was unable to find a single use of statistical procedures for variance control."2 He attributes this paucity of applications not to the inherent