Sam's Golf Pro Shop Measure Plan Actual Number of sets of golf clubs sold 40 Number of packages of golf balls sold 1,000 1,200 Number of golf gloves sold 250 225 Number of bags of tees sold 1,500 1,600 Number of hours of private instruction 400 Number of golf classes given 65 Number of golf sweaters sold 100 50 Number of golf jackets sold 40 Number of driving range buckets of balls sold 6,500 8,000 Total revenues from merchandise $40,750.00 $23,200.00 $38,650.00 $23,750.00 Total revenues from instruction Total revenues from driving range $32,500.00 Total cost of goods sold $22.445.00 $38,580.00 $40,000.00 $27,055.00 $35,840.00 $39,505.00 Total operating costs Operating profit $35,425.00 Sam needs some help in analyzing his results. Specifically, he wants to try to separate the causes for his gains and losses in the various categories of value-creating efforts he makes for his clients. REQUIRED: a. Complete a total gap and trend analysis for Sam's business. Pay particular atten- tion to sales trends that fall in the same revenue category but move in differ- ent ways. b. What would you recommend to Sam? C. Craft a two-to three-paragraph recommendation to Sam, including your views on whether he should hire a golf pro that would cost him $60,000 a year if this golf pro could improve both individual and group class quantities and all of the related merchandise and driving range revenues. Remember, if he hires a golf pro, he will have to add more tees to his driving range at the cost of $500 per tee. Factor these tees, which last a long time, into your assessed impact on Sam's MANAGEMENT ACCOUNTING ER TWO business this year. Assume that merchandise sales will go up by 20%, number of private instruction hours will increase to 1,000, number of classes taught will increase to 250, and number of buckets of golf balls sold will increase by 40%. He will need to add six tees to the driving range if he hires the pro. CASE 2.2 DYSFUNCTIONAL CONSEQUENCES. Marty Smith recently graduated from co e has been hired by Stevenson Associates as a sales associate. Stevenson provides payroll se ra broad range of manufacturing and service companies throughout the southeastern United Marty has never set his own sales goals, but, regardless of his inexperience, management e n to do so. Specifically, he has to estimate both the number of new jobs he will attain for th y as well as the total revenue these clients will represent over a year's time frame. Unclear about what to do, Marty turns for help to Sam White, one of the younger s shares with Marty his own plan for the year, noting that he do s and then adding the minimum amou t doei.. TABLE 2.8 PERCENTAGE DIFFERENCE IN PLANNED VS. ACTUAL RESULTS Sam's Golf Pro Shop Measure Actual $38,650.00 Total revenues from merchandise % Change -5.2% 2.4% Total revenues from instruction $23,750.00 Total revenues from driving range Plan $40,750.00 $23,200.00 $32,500.00 $22,445.00 $38,580.00 $35,425.00 23.1% Total cost of goods sold $40,000.00 $27,055.00 $35,840.00 20.5% Total operating costs -7.1% Operating Profit $39,505.00 11.5% We will revisit this type of analysis in more depth in Chapter 5. For now, let us leave Sam pondering how best to grow his business without having costs spiral out of control. USING MEASUREMENTS TO ADJUST PERFORMANCE When we have completed our "check activities, it is often necessary to make adjustments to either our plans or our actions. We now need measurements to help us analyze the impact of potential changes on future performance. For instance, returning to the situation facing Easy Air, if the number of passengers flown can be increased 10% if prices are dropped 5%, will this have a positive or negative impact on the firm? What will happen to profitability and performance if Easy Air outsources its ticketing and reser- vation activities to another firm? Should Easy Air contract for its baggage-handling services at the local level, or should this continue to be a company-controlled activity? These are just a few of the possible changes that Fran might want to examine in more depth. There are several common management accounting tools we use to analyze potential changes to an organization's activities or key features: cost-volume-profit analysis, incremental analysis, and the devel- opment of a business case. We will only briefly introduce these topics at the conceptual level here, spend ing much more time on the concepts in Chapters 3 and 5. Cost-volume-profit analysis (CVP) is a tool used to analyze the impact of price, cost, or volume changes on company profitability. When this tool is used, attention is placed on the flow of work through the process. In other words, in CVP analysis, the structure of the company or process is left unchanged. The focus is instead placed on how much work is being done with available resources. In many ways, CVP is a "stop and go light approach to analyzing the impact of changing conditions on company performance. It can give us a general idea of whether or not we will increase profits if we make changes to price, cost, or volume sold. CVP analysis takes a simple approach to the economics of the firm, separating all costs into only one of two buckets: ones that change at an even rate with changes in volume vs. those that are the ame no matter how much work we do. As we will see in Chapter 3, we can learn a lot from CVP analysis, out it also leaves many questions unanswered. a. Using the Easy Air database templates for this problem se templates for this problem, calcune of change for each of Easy Air's performance measures b. Using the corresponding worksheet titled DB 2.3 template age change for each year. Make 20x6 your base year and C. Turn in your completed worksheets and then answer the d. What do the trend numbers suggest? Make sure magnitude and percentage change numbers in crafting e. What would you recommend to Sanjiv? Why? f. What other information would you like to have? why template, calculate the percent- year and work backward in time. swer the following three questions: ke sure to pay attention to both the in crafting your answer. Total costat Total aper Operating San causes his clie Cases REQU CASE 2.1 EVALUATING ACTUAL AND PLANNED PE ALUATING ACTUAL AND PLANNED PERFORMANCE. Returning to Sam's Golf Pro Shop in the chapter, Sam really wants to ne chapter, Sam really wants to hone in on what part of his sales package is working and what is not. In talking about it, Sam what is not. In talking about it. Sam notes, "The easiest solution would be to hire a golf pro and put in a few more tees on the driving range. But these are costs it won't be easy to y if I don't get both individual and group classes going strong. I also have to use the push these activities to make sure that I get more merchandise sales, because a pro shop with dusty, out-of-date merchandise won't help anyone out. I need a more comprehensive plan." To help do further analysis, Sam has pulled together actual unit sales in each of the categories of revenue (merchandise sales, instructional sales, driving range revenues) that he relies upon to make his business grow. These numbers are in the following table. MANAGEMENT ACCOUNTING MEASURING AND EVALUATING PERFORMANCE TARLE 2.8 PERCENTAGE DIFFERENCE IN PLANNED VS. ACTUAL RESULTS Measure Total revenues from merchandise % Change -5.2% Total revenues from instruction Sam's Golf Pro Shop Plan $40,750.00 $23,200.00 $32,500.00 $22.445.00 $38,580.00 Total revenues from driving range Actual $38,650.00 $23,750.00 $40,000.00 $27,055.00 $35,840.00 $39,505.00 2.4% 23.1% Total cost of goods sold 20.5% Total operating costs -7.1% 11.5% Operating Profit $35,425.00 We will revisit this type of analysis in more depth in Chapter 5. For now, let us leave Sam pondering how best to grow his business without having costs spiral out of control. USING MEASUREMENTS TO ADJUST PERFORMANCE When we have completed our "check activities, it is often necessary to make adjustments to either our plans or our actions. We now need measurements to help us analyze the impact of potential changes on future performance. For instance, returning to the situation facing Easy Air, if the number of passengers flown can be increased 10% if prices are dropped 5%, will this have a positive or negative impact on the firm? What will happen to profitability and performance if Easy Air outsources its ticketing and reser- vation activities to another firm? Should Easy Air contract for its baggage-handling services at the local level, or should this continue to be a company-controlled activity? These are just a few of the possible changes that Fran might want to examine in more depth. There are several common management accounting tools we use to analyze potential changes to an organization's activities or key features: cost-volume-profit analysis, incremental analysis, and the devel- opment of a business case. We will only briefly introduce these topics at the conceptual level here, spend- ing much more time on the concepts in Chapters 3 and 5. Cost-volume-profit analysis (CVP) is a tool used to analyze the impact of price, cost, or volume changes on company profitability. When this tool is used, attention is placed on the flow of work through the process. In other words, in CVP analysis, the structure of the company or process is left unchanged. The focus is instead placed on how much work is being done with available resources. In many ways, CVP is a "stop and go" light approach to analyzing the impact of changing conditions on company performance. It can give us a general idea of whether or not we will increase profits if we make changes to price, cost, or volume sold. CVP analysis takes a simple approach to the economics of the firm, separating all costs into only one of two buckets: ones that change at an even rate with changes in volume vs. those that are the same no matter how much work we do. As we will see in Chapter 3, we can learn a lot from CVP analysis, but it also leaves many questions unanswered. CEMENT ACCOUNTING MEASURING AND EVALUATING PERFORMANCE $45,000.00 $40,000.00 $35,000.00 $30,000.00 $25,000.00 $20,000.00 $15,000.00 $10,000.00 $5,000,00 PLAN ACTUAL Total revenues from merchandise Total revenues from instruction Total revenues from dreng range Total cost of goods sold Total operating costs Operating profil FIGURE 2.4 ACTUAL VS. PLANNED OUTCOMES What Sam might want to do in the future, however, is evaluate his performance using only the three venue measures to get a better understanding of how the mix of business is changing. We have done that for you in Table 2.7 and Figure 2.5. TABLE 2.7 ANALYSIS OF REVENUE TRENDS Sam's Golf Pro Shop Analysis of Revenue Trends 20x4 Measure 20x3 $42,500.00 $41,000.00 20x5 $39,500.00 $20,500.00 20x6 $38,650.00 $23,750.00 Total revenues from merchandise $18,250.00 $29,000.00 Total revenues from instruction $37,000.00 $40,000.00 $32,500.00 $35,000.00 Total revenues from driving range What we see even in absolute terms is that merchandise sales have steadily fallen while instruction and driving range revenues are on the rise. This is a problem for Sam because he is doing as many golf clinics as he has time to do. If he is to gain further increases in this area of the business, he is going to have to hire more help, which will drive up his operating costs. But if he hires a golf pro, he might be able to jump-start not only his instructional revenues, but possibly reverse the trend on merchandise (more les- sons means more golf tees and gloves, as well as more driving range time). MANAGEMENT ACCOUNTING APIER TWO enues were lower than Sam The net impact on nalysis approach to eet his goals (Table Just looking at the raw numbe expected, but instructional and driving range re profit was very favorable, but by exac see in absolute terms exactly how 2.6). By adding the terms "favorable" for situations in whi to add variance analysis logic to our and "unfavorable" where he fell short of goal, we are beginning tool kit. the raw numbers, we see that merchandise revenues were lower th tional and driving range revenues exceeded expectations. The net i Vorable, but by exactly how much? We can take a simple gap analysis approa erms exactly how much Sam has either achieved or failed to meet his goals (T tions in which Sam's results exceeded expectation TABLE 2.6 ANALYZING SAM'S RESULTS Favorable or Unfavorable Gap Measure Actual Plan Total revenues from merchandise $40,750.00 $38,650.00 $(2,100.00) Unfavorable $550.00 Total revenues from instruction $23,750.00 Favorable $23,200.00 Total revenues from driving range $32,500.00 $40,000.00 $7,500.00 Favorable Total cost of goods sold $22.445.00 $27,055.00 $4,610.00 Unfavorable Total operating costs $38,580.00 $35,840.00 $(2,740.00) Favorable Operating Profit $35,425.00 $39,505.00 $4,080.00 Favorable As we will see in Chapter 5, variance analysis is a bit more dual causes for the performance gap, but, for now, let us ooking at the "favorable" and "unfavorable tags above, we start to see something very specific about Then we are talking about revenue, profit, or unit sales metrics, if the completing the various analyses. When we are talking about revenue, profit, or unit early a good thing-we would mark this difference as "favorable. company does better than plan, this is clearly a good thing-We would mark this sation, however (remember, revenue minus costs is profit), if When we talk about the cost side of the equation, however (remember, revenu actual is greater than plan it is "unfavorable." As we will see in Chapter 5. va complicated when we start to break out individual causes for the performan follow the simple rules: . Rule #1: If revenue, sales, or profit actual results are greater than ales, or profit actual results are greater than plan, this is favo company. If they are less than plan, this is unfavorable. . Rule #2: If actual costs are greater than plan, this is unfavorable for costs are less than plan, all other things being equal, it is a favorable We might want to plot these changes on a graph, which would give us an clarify the results. This is done for Sam's business in Figure 2.4. Since Sam did ing his activities, the comparison of plan and actual is not as dramatica been less accurate. is is unfavorable for the company. When these ould give us another perspective that might Since Sam did a pretty good job of predict- ramatic as it would be if Sam's plans had MANAGEMENT ACCOUNTING *** Vent, weilight do a trend analysis, which tracks changes over time in KPIs such as net profits, revenues, number of defective units produced, on-time performance, and workforce productivity. In yet a third case, we might want to analyze the causes of any difference, which would be a variance analysis, which isolates the cause of differences in a measure by focusing on one variable at a time to better understand the reasons for performance shortfall. If the goal is to direct attention to the total change in a measure, however, gap analysis and variance analysis would yield the same result. Let us look at an example to get a better feeling for what these analyses mean. Sam Underwood runs a moderately successful golf pro shop. He has completed an MBA, so he understands how important it is to measure the activities in his pro shop if he is to steadily improve performance and profits. At the begin- ning of the year, Sam put together a plan for the business. It is now year's end and he wants to see how close he came to his projections (Table 2.5). TABLE 2.5 PLAN VS. ACTUAL Measure Actual $38,650.00 Total revenues from merchandise Sam's Golf Pro Shop Plan $40,750.00 23,200.00 32,500.00 23,750.00 Total revenues from instruction Total revenues from driving range 40,000.00 (27,055.00) Total cost of goods sold (22,445.00) (38,580.00) $35,425.00 (35,840.00) Total operating costs $39,505.00 Operating Profit Sam's Golf Pro Shop Measure Plan Actual Number of sets of golf clubs sold 40 Number of packages of golf balls sold 1,000 1,200 Number of golf gloves sold 250 225 Number of bags of tees sold 1,500 1,600 Number of hours of private instruction 400 Number of golf classes given 65 Number of golf sweaters sold 100 50 Number of golf jackets sold 40 Number of driving range buckets of balls sold 6,500 8,000 Total revenues from merchandise $40,750.00 $23,200.00 $38,650.00 $23,750.00 Total revenues from instruction Total revenues from driving range $32,500.00 Total cost of goods sold $22.445.00 $38,580.00 $40,000.00 $27,055.00 $35,840.00 $39,505.00 Total operating costs Operating profit $35,425.00 Sam needs some help in analyzing his results. Specifically, he wants to try to separate the causes for his gains and losses in the various categories of value-creating efforts he makes for his clients. REQUIRED: a. Complete a total gap and trend analysis for Sam's business. Pay particular atten- tion to sales trends that fall in the same revenue category but move in differ- ent ways. b. What would you recommend to Sam? C. Craft a two-to three-paragraph recommendation to Sam, including your views on whether he should hire a golf pro that would cost him $60,000 a year if this golf pro could improve both individual and group class quantities and all of the related merchandise and driving range revenues. Remember, if he hires a golf pro, he will have to add more tees to his driving range at the cost of $500 per tee. Factor these tees, which last a long time, into your assessed impact on Sam's MANAGEMENT ACCOUNTING ER TWO business this year. Assume that merchandise sales will go up by 20%, number of private instruction hours will increase to 1,000, number of classes taught will increase to 250, and number of buckets of golf balls sold will increase by 40%. He will need to add six tees to the driving range if he hires the pro. CASE 2.2 DYSFUNCTIONAL CONSEQUENCES. Marty Smith recently graduated from co e has been hired by Stevenson Associates as a sales associate. Stevenson provides payroll se ra broad range of manufacturing and service companies throughout the southeastern United Marty has never set his own sales goals, but, regardless of his inexperience, management e n to do so. Specifically, he has to estimate both the number of new jobs he will attain for th y as well as the total revenue these clients will represent over a year's time frame. Unclear about what to do, Marty turns for help to Sam White, one of the younger s shares with Marty his own plan for the year, noting that he do s and then adding the minimum amou t doei.. TABLE 2.8 PERCENTAGE DIFFERENCE IN PLANNED VS. ACTUAL RESULTS Sam's Golf Pro Shop Measure Actual $38,650.00 Total revenues from merchandise % Change -5.2% 2.4% Total revenues from instruction $23,750.00 Total revenues from driving range Plan $40,750.00 $23,200.00 $32,500.00 $22,445.00 $38,580.00 $35,425.00 23.1% Total cost of goods sold $40,000.00 $27,055.00 $35,840.00 20.5% Total operating costs -7.1% Operating Profit $39,505.00 11.5% We will revisit this type of analysis in more depth in Chapter 5. For now, let us leave Sam pondering how best to grow his business without having costs spiral out of control. USING MEASUREMENTS TO ADJUST PERFORMANCE When we have completed our "check activities, it is often necessary to make adjustments to either our plans or our actions. We now need measurements to help us analyze the impact of potential changes on future performance. For instance, returning to the situation facing Easy Air, if the number of passengers flown can be increased 10% if prices are dropped 5%, will this have a positive or negative impact on the firm? What will happen to profitability and performance if Easy Air outsources its ticketing and reser- vation activities to another firm? Should Easy Air contract for its baggage-handling services at the local level, or should this continue to be a company-controlled activity? These are just a few of the possible changes that Fran might want to examine in more depth. There are several common management accounting tools we use to analyze potential changes to an organization's activities or key features: cost-volume-profit analysis, incremental analysis, and the devel- opment of a business case. We will only briefly introduce these topics at the conceptual level here, spend ing much more time on the concepts in Chapters 3 and 5. Cost-volume-profit analysis (CVP) is a tool used to analyze the impact of price, cost, or volume changes on company profitability. When this tool is used, attention is placed on the flow of work through the process. In other words, in CVP analysis, the structure of the company or process is left unchanged. The focus is instead placed on how much work is being done with available resources. In many ways, CVP is a "stop and go light approach to analyzing the impact of changing conditions on company performance. It can give us a general idea of whether or not we will increase profits if we make changes to price, cost, or volume sold. CVP analysis takes a simple approach to the economics of the firm, separating all costs into only one of two buckets: ones that change at an even rate with changes in volume vs. those that are the ame no matter how much work we do. As we will see in Chapter 3, we can learn a lot from CVP analysis, out it also leaves many questions unanswered. a. Using the Easy Air database templates for this problem se templates for this problem, calcune of change for each of Easy Air's performance measures b. Using the corresponding worksheet titled DB 2.3 template age change for each year. Make 20x6 your base year and C. Turn in your completed worksheets and then answer the d. What do the trend numbers suggest? Make sure magnitude and percentage change numbers in crafting e. What would you recommend to Sanjiv? Why? f. What other information would you like to have? why template, calculate the percent- year and work backward in time. swer the following three questions: ke sure to pay attention to both the in crafting your answer. Total costat Total aper Operating San causes his clie Cases REQU CASE 2.1 EVALUATING ACTUAL AND PLANNED PE ALUATING ACTUAL AND PLANNED PERFORMANCE. Returning to Sam's Golf Pro Shop in the chapter, Sam really wants to ne chapter, Sam really wants to hone in on what part of his sales package is working and what is not. In talking about it, Sam what is not. In talking about it. Sam notes, "The easiest solution would be to hire a golf pro and put in a few more tees on the driving range. But these are costs it won't be easy to y if I don't get both individual and group classes going strong. I also have to use the push these activities to make sure that I get more merchandise sales, because a pro shop with dusty, out-of-date merchandise won't help anyone out. I need a more comprehensive plan." To help do further analysis, Sam has pulled together actual unit sales in each of the categories of revenue (merchandise sales, instructional sales, driving range revenues) that he relies upon to make his business grow. These numbers are in the following table. MANAGEMENT ACCOUNTING MEASURING AND EVALUATING PERFORMANCE TARLE 2.8 PERCENTAGE DIFFERENCE IN PLANNED VS. ACTUAL RESULTS Measure Total revenues from merchandise % Change -5.2% Total revenues from instruction Sam's Golf Pro Shop Plan $40,750.00 $23,200.00 $32,500.00 $22.445.00 $38,580.00 Total revenues from driving range Actual $38,650.00 $23,750.00 $40,000.00 $27,055.00 $35,840.00 $39,505.00 2.4% 23.1% Total cost of goods sold 20.5% Total operating costs -7.1% 11.5% Operating Profit $35,425.00 We will revisit this type of analysis in more depth in Chapter 5. For now, let us leave Sam pondering how best to grow his business without having costs spiral out of control. USING MEASUREMENTS TO ADJUST PERFORMANCE When we have completed our "check activities, it is often necessary to make adjustments to either our plans or our actions. We now need measurements to help us analyze the impact of potential changes on future performance. For instance, returning to the situation facing Easy Air, if the number of passengers flown can be increased 10% if prices are dropped 5%, will this have a positive or negative impact on the firm? What will happen to profitability and performance if Easy Air outsources its ticketing and reser- vation activities to another firm? Should Easy Air contract for its baggage-handling services at the local level, or should this continue to be a company-controlled activity? These are just a few of the possible changes that Fran might want to examine in more depth. There are several common management accounting tools we use to analyze potential changes to an organization's activities or key features: cost-volume-profit analysis, incremental analysis, and the devel- opment of a business case. We will only briefly introduce these topics at the conceptual level here, spend- ing much more time on the concepts in Chapters 3 and 5. Cost-volume-profit analysis (CVP) is a tool used to analyze the impact of price, cost, or volume changes on company profitability. When this tool is used, attention is placed on the flow of work through the process. In other words, in CVP analysis, the structure of the company or process is left unchanged. The focus is instead placed on how much work is being done with available resources. In many ways, CVP is a "stop and go" light approach to analyzing the impact of changing conditions on company performance. It can give us a general idea of whether or not we will increase profits if we make changes to price, cost, or volume sold. CVP analysis takes a simple approach to the economics of the firm, separating all costs into only one of two buckets: ones that change at an even rate with changes in volume vs. those that are the same no matter how much work we do. As we will see in Chapter 3, we can learn a lot from CVP analysis, but it also leaves many questions unanswered. CEMENT ACCOUNTING MEASURING AND EVALUATING PERFORMANCE $45,000.00 $40,000.00 $35,000.00 $30,000.00 $25,000.00 $20,000.00 $15,000.00 $10,000.00 $5,000,00 PLAN ACTUAL Total revenues from merchandise Total revenues from instruction Total revenues from dreng range Total cost of goods sold Total operating costs Operating profil FIGURE 2.4 ACTUAL VS. PLANNED OUTCOMES What Sam might want to do in the future, however, is evaluate his performance using only the three venue measures to get a better understanding of how the mix of business is changing. We have done that for you in Table 2.7 and Figure 2.5. TABLE 2.7 ANALYSIS OF REVENUE TRENDS Sam's Golf Pro Shop Analysis of Revenue Trends 20x4 Measure 20x3 $42,500.00 $41,000.00 20x5 $39,500.00 $20,500.00 20x6 $38,650.00 $23,750.00 Total revenues from merchandise $18,250.00 $29,000.00 Total revenues from instruction $37,000.00 $40,000.00 $32,500.00 $35,000.00 Total revenues from driving range What we see even in absolute terms is that merchandise sales have steadily fallen while instruction and driving range revenues are on the rise. This is a problem for Sam because he is doing as many golf clinics as he has time to do. If he is to gain further increases in this area of the business, he is going to have to hire more help, which will drive up his operating costs. But if he hires a golf pro, he might be able to jump-start not only his instructional revenues, but possibly reverse the trend on merchandise (more les- sons means more golf tees and gloves, as well as more driving range time). MANAGEMENT ACCOUNTING APIER TWO enues were lower than Sam The net impact on nalysis approach to eet his goals (Table Just looking at the raw numbe expected, but instructional and driving range re profit was very favorable, but by exac see in absolute terms exactly how 2.6). By adding the terms "favorable" for situations in whi to add variance analysis logic to our and "unfavorable" where he fell short of goal, we are beginning tool kit. the raw numbers, we see that merchandise revenues were lower th tional and driving range revenues exceeded expectations. The net i Vorable, but by exactly how much? We can take a simple gap analysis approa erms exactly how much Sam has either achieved or failed to meet his goals (T tions in which Sam's results exceeded expectation TABLE 2.6 ANALYZING SAM'S RESULTS Favorable or Unfavorable Gap Measure Actual Plan Total revenues from merchandise $40,750.00 $38,650.00 $(2,100.00) Unfavorable $550.00 Total revenues from instruction $23,750.00 Favorable $23,200.00 Total revenues from driving range $32,500.00 $40,000.00 $7,500.00 Favorable Total cost of goods sold $22.445.00 $27,055.00 $4,610.00 Unfavorable Total operating costs $38,580.00 $35,840.00 $(2,740.00) Favorable Operating Profit $35,425.00 $39,505.00 $4,080.00 Favorable As we will see in Chapter 5, variance analysis is a bit more dual causes for the performance gap, but, for now, let us ooking at the "favorable" and "unfavorable tags above, we start to see something very specific about Then we are talking about revenue, profit, or unit sales metrics, if the completing the various analyses. When we are talking about revenue, profit, or unit early a good thing-we would mark this difference as "favorable. company does better than plan, this is clearly a good thing-We would mark this sation, however (remember, revenue minus costs is profit), if When we talk about the cost side of the equation, however (remember, revenu actual is greater than plan it is "unfavorable." As we will see in Chapter 5. va complicated when we start to break out individual causes for the performan follow the simple rules: . Rule #1: If revenue, sales, or profit actual results are greater than ales, or profit actual results are greater than plan, this is favo company. If they are less than plan, this is unfavorable. . Rule #2: If actual costs are greater than plan, this is unfavorable for costs are less than plan, all other things being equal, it is a favorable We might want to plot these changes on a graph, which would give us an clarify the results. This is done for Sam's business in Figure 2.4. Since Sam did ing his activities, the comparison of plan and actual is not as dramatica been less accurate. is is unfavorable for the company. When these ould give us another perspective that might Since Sam did a pretty good job of predict- ramatic as it would be if Sam's plans had MANAGEMENT ACCOUNTING *** Vent, weilight do a trend analysis, which tracks changes over time in KPIs such as net profits, revenues, number of defective units produced, on-time performance, and workforce productivity. In yet a third case, we might want to analyze the causes of any difference, which would be a variance analysis, which isolates the cause of differences in a measure by focusing on one variable at a time to better understand the reasons for performance shortfall. If the goal is to direct attention to the total change in a measure, however, gap analysis and variance analysis would yield the same result. Let us look at an example to get a better feeling for what these analyses mean. Sam Underwood runs a moderately successful golf pro shop. He has completed an MBA, so he understands how important it is to measure the activities in his pro shop if he is to steadily improve performance and profits. At the begin- ning of the year, Sam put together a plan for the business. It is now year's end and he wants to see how close he came to his projections (Table 2.5). TABLE 2.5 PLAN VS. ACTUAL Measure Actual $38,650.00 Total revenues from merchandise Sam's Golf Pro Shop Plan $40,750.00 23,200.00 32,500.00 23,750.00 Total revenues from instruction Total revenues from driving range 40,000.00 (27,055.00) Total cost of goods sold (22,445.00) (38,580.00) $35,425.00 (35,840.00) Total operating costs $39,505.00 Operating Profit