Question

1. (Classical Statistical Theory) Discuss how the calculation of the coefficient of variation (ratio of the standard deviation to the mean) can be applied in budget variance analysis and what budget models is the application best applied.

Answer 1

Coefficient of variation is the ratio of standard deviation divided by the mean. In a budgeting context, large values for a coefficient of variation indicate large control limit corridors. It means that, coefficient of variation sets control limits (upper and lower limits) for variance for a period of time. A company creates control limit corridors through this approach. Any observation value (of variance) that falls within the control limits are not investigated. However, the observation value of variance that falls outside the control limits are investigated because it may indicate something is incorrect or wrong.
Hence, coefficient of variation through control limits helps in determining the best investment.