Analyzing Financial Performance Reports

Transcription

1 Analyzing Financial Performance Reports

2 Calculating Variances Effective systems identify variances down to the lowest level of management. Variances are hierarchical. As shown in Exhibit 10.2, they begin with the total business unit performance, which is divided into revenue variances and expense variances. Revenue variances are further divided into volume and price variances for the total business unit and for each marketing responsibility center within the unit.

3 Calculating Variances They can be further divided by sales area and sales district. Expense variances can be divided between manufacturing expenses and other expenses. Manufacturing expenses can be further subdivided by factories and departments within factories. It is possible to identify each variance with the individual manager who is responsible for it.

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6 Details of the budget of the business unit whose performance is reported in Exhibit 10.1.

7 Revenue Variances

8 Revenue Variances In this section, we describe how to calculate selling price, volume, and mix 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.

9 Selling Price Variance The selling price variance is calculated by multiplying the difference between the actual price and the standard price by the actual volume. The calculation is shown in Exhibit It shows that the price variance is $75,000, unfavorable.

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11 Mix and Volume Variance Often the mix and volume variances are not separated. The equation for the combined mix and volume variance is: Mix and volume variance = (Actual volume Budgeted volume) * Budgeted unit contribution The calculation of mix and volume variance is shown in Exhibit 10.5; it is $150,000 favorable.

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13 Mix and Volume Variance The volume variance results from selling more units than budgeted. The mix variance results from selling a different proportion of products from that assumed in the budget. Because products earn different contributions per unit, the sale of different proportions of products from those budgeted will result in a variance. If the business unit has a richer mix (i.e., a higher proportion of products with a high contribution margin), the actual profit will be higher than budgeted; and if it has a leaner mix, the profit will be lower.

14 Mix Variance The mix variance for each product is found from the following equation: Mix variance = [(Actual volume of sales) (Total actual volume of sales * Budgeted proportion) * Budgeted unit contribution] The calculation of the mix variance is shown in Exhibit It shows that a higher proportion of product B and a lower proportion of product A were sold.

15 Since product B has a higher unit contribution than product A, the mix variance is favorable, by $35,000

16 Volume Variance The volume variance can be calculated by subtracting the mix variance from the combined mix and volume variance. This is $150,000 minus $35,000, or $115,000. It can also be calculated for each product as follows: Volume variance = [(Total actual volume of sales) * (Budgeted percentage)-(budgeted sales)] * (Budgeted unit contribution) The calculation of the volume variance is shown in Exhibit 10.7.

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19 Market Penetration and Industry Volume One extension of revenue analysis is to separate the mix and volume variance into the amount caused by differences in market share and the amount caused by differences in industry volume. The principle is that the business unit managers are responsible for market share, but they are not responsible for the industry volume because that is largely influenced by the state of the economy

20 Market share variance The following equation is used to separate the effect of market penetration from industry volume on the mix and volume variance: Market share variance = [(Actual sales) - (Industry volume)] * Budgeted market penetration * Budgeted unit contribution

21 Market share variance The market share variance is found for each product separately, and the total variance is the algebraic sum. The calculation is shown in Section C. (Exhibit 10.9) It shows that $104,000 of the favorable mix and volume variance of $150,000 resulted from the fact that market penetration was better than budget. The remaining $46,000 resulted from the fact that actual industry dollar volume was higher than the amount assumed in the budget

22 Industry volume variance The $46,000 industry volume variance can also be calculated for each product as follows: Industry volume variance = (Actual industry volume Budgeted industry volume) * Budgeted market penetration * Budgeted unit contribution This calculation of variance due to industry volume is shown in Section D.

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24 Expense Variances

25 Fixed Costs Variances between actual and budgeted fixed costs are obtained simply by subtraction, since these costs are not affected by either the volume of sales or the volume of production. This is shown in Exhibit

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27 Variable Costs Variable costs are costs that vary directly and proportionately with volume. The budgeted variable manufacturing costs must be adjusted to the actual volume of production. Assume that the January production was as follows: product A, 150,000 units; product B, 120,000 units; product C, 200,000 units.

28 Variable Costs Assume also that the variable manufacturing costs incurred in January were as follows: material, $470,000; labor, $65,000; variable manufacturing overhead, $90,000. Exhibit 10.3 shows the standard unit variable costs

29 Variable Costs The budgeted manufacturing expense is adjusted to the amount that should have been spent at the actual level of production by multiplying each element of standard cost for each product by the volume of production for that product. This calculation is shown in Exhibit

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31 Variable Costs This exhibit shows that there was an unfavorable variance of $13,000 in January. This is called a spending variance because it results from spending $13,000 in excess of the adjusted budget. It consists of unfavorable material and labor variances of $11,000 and $12,000, respectively. These are partially offset by a favorable overhead spending variance of $10,000.

32 Variable Costs The volume that is used to adjust the budgeted variable manufacturing expenses is the manufacturing volume, not the sales volume, which was used in finding the revenue variances. In the simple example given here, we assumed that the two volumes were the same namely, that the quantity of each product manufactured in January was the same as the quantity sold in January. If production volume differed from sales volume, the cost difference would show up in changes in inventory.

33 Summary of Variances There are several ways in which the variances can be summarized in a report for management. One possibility is shown in Exhibit Another form of presentation is to show the actual amounts, as well as the variances. This gives an indication of the relative importance of each variance as a fraction of the total revenue or expense item to which it relates.

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