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Assume that the budgeted cost for a department is $10,000 per week and the standard deviation is $500. 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 .0228 if the system is in control. Furthermore, assume that the benefits would be 50 percent of the variance and the investigation costs are $200. Should this variance be investigated? Assume that the vairance is still $1,000, but it is favorable. Should it still be investigated?
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