The Representation and Impact of Information System Reliability on Cost Variance Decisions*

Abstract

ABSTRACTManagement does not directly observe cost variance processes from the production system; instead, management depends on a report from the cost variance information system as to whether a process is in control or out of control. Unfortunately, cost variance information systems are not always perfectly reliable. Accordingly, this paper extends the cost variance analysis model to include reliability of the cost variance information system. Reliability is introduced by distinguishing between the report from the information system and the actual cost variance.Although previous cost variance models do not include reliability, management is still likely to be aware of the lack of reliability in cost variance systems. To account for this lack of reliability, management is likely to use any of a number of heuristics. This paper demonstrates that ad hoc heuristics are unlikely to result in the same solutions suggested by the analytic model. In addition, it is shown analytically that not including reliability in cost variance models can lead to examining variances that do not require investigation and not examining variances that do require investigation.