Laspeyers Indexes for Variance Analysis in Cost Accounting: A Comment.

Abstract In a recent note O. Bashan, Y. Goldschmidt, G. Levkowitz and L. Shashua (BGLS) developed a formulation for traditional variance analysis in cost accounting by expressing the changes in prices and quantities in percentage terms. In this article, BGLS also suggested a way to allocate the joint variance between the price and quantity factors. In summary, if one is willing to accept the convention of using the previous period's results as an appropriate basis for comparing actual results along with a continuous revision of standards, then the procedure outlined in this note provides a method of decomposing a change in total costs solely to price and quantity factors, and the consequent elimination of the joint variance. To implement this procedure in a specific application, the time paths of the unit price and usage rate over the entire period are specified. The limit is found for the price and quantity variances as the number of subperiods is made arbitrarily large, either analytically or through a computer enumeration.