The Accounting Review Vol. 36 No. 3 1961
A USE OF PROBABILITY AND STATISTICS IN PERFORMANCE EVALUATION.
Abstract
There is a need in cost and budgetary control for information on the significance of cost variances. The conventional tests of absolute or relative dollar magnitudes are inadequate. The probability of a variance resulting from random, non-controllable causes is also important. By using the properties of a normal probability distribution it is possible to devise a method for computing the probability significance of cost variances. By combining the costs and rewards of investigation with the associated probabilities, a model can he constructed to aid in the decision of when a variance should be investigated. In the illustrative model, presented in this article, the formal distribution has been used. In some cases, the cost characteristic may make the assumption of normality unrealistic. There is no reason why the analysis could not be modified to accommodate some other probability distribution and also some other budget philosophy. However, the normal distribution is easy to work with and in most cases it is probably a reasonable approximation, particularly if the budget philosophy is not one of selecting the lowest possible budgeted amount (highest possible efficiency). Given any definite budget philosophy, a reasonable probability distribution could be chosen and the remaining analysis would he much the same as that suggested above. Such analysis should facilitate management by exception as applied to cost control.
- DOI
- 10.2308/tar-7096330
- Volume
- 36
- Issue
- 3
- Pages
- 409-417
- Language
- en
- Sources
- openalex crossref