Variance Analysis Procedures as Motivational Devices

Traditional standard cost variance analysis procedures are examined as motivational devices in a principal-agent model. The reexpressing of a cost realization into components (such as individual factor price and quantity variances) is shown to be useful if an incentive problem exists and if the separate components are differentially correlated with the agent's behavior. Similarly, the investigation of selected variances is shown to have desirable motivational effects. However, the optimal variance investigation policy is shown to be far more subtle than those found in single-person analyses.