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Volume :14 Issue : 3 1986      Add To Cart                                                                    Download

Assumptions and Effectiveness of Cost Variance Investigation Approaches

Auther : El-Gharib Mohamad Bayoumy

This paper deals with cost variance investigation decisions. Current proposals have been grouped according to the nature of control into three main approaches: absolute control, range limited control, and probabilistic control. The assumptions underlying these approaches and their effectiveness have been evaluated from the points of view of theoretical soundness and applicability. Such an evaluation has resulted in the probabilistic control approach being superior to other approaches from the point of view of theoretical sophistication and acceptability in accounting literature. Yet, it has been demonstrated that, due to certain limitations, such an approach lacks justification in application and may entail certain negative implications in performance.

In the light of this evaluation conclusion, an alternative approach is being proposed for dealing with cost variance investigation decisions. It implies the use of dual criteria of investigation at source of variances. Such an approach is based on: a) dealing with cost variance as only an element of broader system of control and performance evaluation, and making use of other already available elements, and b) maintaining conformity and harmony between the information produced by the proposed approach and the way in which people use information for making decisions in the light of recent findings of current research on human information processing.

It is concluded that the proposed approach enjoys the following advantages in comparison with current approaches:

- The investigation criterion is more comprehensive.

- Input data are closely related, in nature, to the data which managers usually deal with.

- While it entails a higher degree of continuous overall self control, it avoids many dysfunctional and behavioral negative implications usually associated with systems of budgeting and accounting controls. Finally, it is expected that the applicability of the proposed approach would be higher, and the cost of application would be lower, because its application requires only minimal alteration in most common system of cost control and performance evaluation.

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