Final answer:
The most effective decision rule for investigating budget variances is to investigate if the variance is significant, considering both favorable and unfavorable variances based on a pre-set threshold relevant to the company's operations.
Step-by-step explanation:
The decision rule to determine which budget variances to investigate should ideally be: 3) Investigate if the variance is significant. This involves looking at both favorable and unfavorable variances, as both can provide valuable insight into the business operations. A significant variance is typically defined by a pre-set threshold (a percentage or dollar amount) that the company considers important enough to warrant further examination. This threshold will depend on the company's specific tolerance for risk and the potential impact of the variance on its operations and financial performance.
Investigating all variances could be costly and time-consuming and might not contribute to business efficiency. Similarly, ignoring favorable variances could lead to missed opportunities for further optimization. Therefore, a balanced and criteria-based approach focusing on the significance of variances is most effective for management analysis and control purposes.