Analyzing Financial Performance
Reports
How variances between
actual and budgeted
data are calculated for
business units ?
How reports of these
variances are used by
senior mgt. to evaluate
business unit
performance ?
Calculating Variances
 Most companies make a monthly analysis of
the differences between actual and budgeted
revenue and expenses for each business unit
and for the whole organization (some do this
quarterly)
 Whereas, some companies merely report the
amount of these variances as…
Exhibit 10.1 Performance Report,
January (000s)
Sales
Variable costs of sales
Contribution
Fixed overhead
Gross profit
Selling exp.
Administration exp.
Profit before taxes
Actual
Budget
Actual Better
(worse) than Budget
$ 875
583
292
75
217
55
30
$132
$ 600
370
230
75
155
50
25
$ 80
$ 275
(213)
62
--62
(5)
(5)
$ 52
Variance Analysis Disaggregation
Total
variance
Nonmanufacturing
costs
Administration
Marketing
Material
Manufacturing
costs
R&D
Variable
Direct Labor
Fixed costs
Variable
overhead
Sales
Volume
Market
share
Selling
price
Industry
volume
Variance analysis incorporates the
following ideas :Identify the causal factors that affect profits.
Break down the overall profit variances by
these key causal factors.
Focus on the profit impact of variation in each
causal factors.
Try to calculate the specific, separable impact
of each causal factor by varying only that
factor while holding all other factors constant
(“spinning only one dial at a time”)
Add complexity sequentially, one layer at a
time, beginning at a very basic
“commonsense” level (“peel the onion”)
Stop the process when the added complexity
at a newly created level is not justified by
added useful insights into the causal factors
underlying the overall profit variance.
Revenue Variances
The calculation is made for each product line,
and the product line results are then
aggregated to calculate the total variance.
A positive variance is favorable, because it
indicates that actual profit exceeded budgeted
profit, and a negative variance is unfavorable.
Revenue Variances….contd
Selling Price Variance :It is calculated by multiplying the difference
between the actual price and the standard
price by the actual volume.
Product
A
B
C
Actual volume (units)
100
200
150
Actual price per unit
$ 0.90
$ 2.05
$ 2.50
Budget price per unit
1.00
2.00
3.00
Actual over/(under) budget
per unit
(0.10)
0.05
(0.50)
(10)
10
(75)
Favorable/(unfavorable) price
variance
Total
(75)
Mix and Volume Variance
= (Actual volume – Budgeted volume) X
Budgeted unit contribution
(1)
(2)
(3)
(4)
(5)
(6)
Product
Actual
Volume
Budgeted
Volume
Difference
(2-3)
Unit
Contribution
Variance
(4)*(5)
A
100
100
---
---
---
B
200
100
100
$ 0.90
$ 90
C
150
100
50
1.20
60
TOTAL
450
300
$ 150
Mix Variance
=[(Actual volume of sales) –
(Total actual volume of sales * Budgeted proportion)
* Budgeted unit contribution]
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Product
Budgeted
Proportion
Budgeted
Mix at
Actual
Volume
Actual
Sales
Difference
(4) - (3)
Unit
Contributi
on
Variance
(5) * (6)
A
1/3
150
100
(50)
$ 0.20
$ (10)
B
1/3
150
200
50
$ 0.90
45
C
1/3
150
150
---
---
---
450
450
TOTAL
$ 35
Volume Variance
= [(Total actual volume of sales)
* (Budgeted percentage)- (Budgeted sales)]
* (Budgeted unit contribution)
(1)
(2)
(3)
(4)
(5)
(6)
Product
Budgeted
Mix at
Actual
Volume
Budgeted
Volume
Difference
(2) – (3)
Unit
Contribution
Volume
Variance
A
150
100
50
$ 0.20
$ 10
B
150
100
50
0.90
45
C
150
100
50
1.20
60
TOTAL
450
300
150
$ 115