Variance Investigation Models

Abstract

It was suggested at the end of Chapter 5 that statistical decision theory had an impact on research in the area of C-V-P analysis. Another area where decision theory had an important impact was in the investigation of variances. All business planning, whether in the form of budgets or standards, is based on estimates of prices, volumes, costs, etc., and any outcome can only be expected to approximate these estimates. Outcomes will not necessarily equal the original estimates, even if the estimates were ‘accurate’ and the process has been ‘under control’. Some variation around the estimate or expected outcome is inevitable. Thus, when a variance is reported, the manager should ask whether it represents a significant deviation from the budget or whether it is simply a random fluctuation around the expected outcome. Variance investigation models are concerned with decisions to investigate the cause of particular variances and in particular, to distinguish significant deviations from random fluctuations.