What is a Cause and Effect Diagram?

Definition: A cause and effect diagram in cost accounting is a worksheet used to identify source and reason for defects in products. In other words, it’s an troubleshooting tool that managerial accountants use to figure out where in the production process products are made with errors or mistakes.

What Does Cause and Effect Diagram Mean?

A typical CAE diagram uses four main categories of factors to help identify the cause of the defective products. Managers examine each of these factors ruling one out at a time in search for the reason why products are being produced improperly. The categories include: human, machine related, methods and design, and materials and component factors.


Some examples of human factors include poor employee training, new machine operators, and inadequate supervision. Each one of these factors can be identified by observing the employees producing the products and evaluating whether or not they are skilled enough for the task.

Machine related factors, on the other hand, are based solely on the performance of the machines having nothing to do with the actual operators of the machines. Some machine related factors include poor maintenance, poorly machined parts, incorrect machine speeds, and inadequate measurement tools. These factors are also easy to catch by simply examining the machines used in the manufacturing process.

Method and design factors occur before the manufacturing process altogether. For instance, the product might just be designed wrong and that’s why there are some many problems with it. Some method and design factors include flawed part designs and incorrect machining sequences.

The last factor reviewed by management is the materials and components. Obviously, if the materials are bad faulty, the end product will be as well. Some examples include variations in purchased components, mishandling of purchased parts, incorrect component specification. In order to find these errors, management typically has to examine individual orders from suppliers as well as receiving processes.

After all of these factors have been examined, management should be able to find the cause and effect of the defective parts.