The case asks you to put yourself in the shoes of Susan Jenkins, the CFO of a web applications company called Software Associates. Your boss, software Associates' CEO, Richard Norton, is worried about the variances in the latest financial statements and has asked you to meet with him to discuss these. For purposes of our assignment, we will assume that rather than preparing for a meeting with Mr. Norton, you are preparing a memo to submit to him, addressing his questions. 

 

In the first paragraph of the case, Richard Norton has expressed a very concrete concern: "Why, with higher revenues, is our bottom line less than half of what we had budgeted?"  Your assignment for the case is to write Mr. Norton a memo answering this question. 

 

Interspersed throughout the text's case are five "Assignment Questions" each asking you to make a specific analysis. In your memo, you will include each analysis as an "exhibit" after the text of the memo. In the text of your memo, explain for each analysis: 

 

What the purpose of the analysis is 

What specific conclusions can be reached from evaluating the analysis 

What recommendations can be reached from these conclusions 

What additional questions are there that are not answered by the analysis How you would go about answering these questions. 

 

Finally, close your memo with a brief paragraph summarizing your answer to the question: ""Why, with higher revenues, is our bottom line less than half of what we had budgeted?"  and with your recommendations on how to improve the situation. 

 

 

 

1. Assignment Question: make a variance analysis report based on the information in Exhibit 1.

Would this be sufficient to explain the profit shortfall to Norton at the 8 AM meeting?

	Actual value	Budgeted Value	Variance Amount	Acceptable & unacceptable
Revenues	3264000	3231900	32100	Acceptable
Expenses	2967610	2625550	342060	unacceptable
Profits	296390	606350	-309960	unacceptable

Actual Revenue (AR) = $3264000

Budgeted Revenue (ER) = $3231900

Total Revenue Variance = AR - ER

 $3264000 - $3231900 = $32100

Actual revenue is more than budgeted, so this is a favorable scenario.

Actual Expenses (AE) = $ 29 67610

Budgeted Expenses (EE) = $ 2625550

Total Expense variance = AE - EE

 $29 67610 - $26 25550 = $342060

Actual expense is more than the expected expenses, it is an unfavorable scenario.

Actual Profits = $ 296390

Budgeted Profits = $ 606350

Total Profit variance = AP - EP

 $296390 - $606350 = ($309960)

Actual profit is way less than budgeted profit, making this an unfavorable scenario.

ANALYSIS

With the information in display 1, we need the fundamental part of expenses and encourage points of interest, which is almost how the two divisions have gone through and earned their cash. So, more than the given data is needed to discover the zone of issue. From the information in Exhibit 1, we can tell there's an increment in cost, but we cannot clarify why the cost has increased. This gives us a course where we must walk to discover the genuine root cause.

 

2. Assignment Question make  a variance analysis report based on the information in Exhibit 2. Quantity/Efficiency Variance = (Actual Quantity - Expected Quantity) * Expected Price Price/Rate Variance = (Actual Price -Expected Price) * Actual Quantity 

Quantity/Efficiency Variance = (Actual Quantity - Expected Quantity) * Expected Price Price/Rate Variance = (Actual Price -Expected Price) * Actual Quantity 

Revenue variance analysis:

	Actual quantity	Budgeted  Quantity	Expected price	Variance amount	Acceptable & unacceptable
Revenue quantity (# of hours)	39000	35910	90	278100	A
	Actual price	Expected price	Actual quantity	Variance amount	A&U
Revenue Rate (hourly Rate0	83.69	90	39000	-246090	U
Total Revenue				32010	A

The actual amount is more than the budgeted amount, so indeed, even though the introductory hourly rate is somewhat lesser than the budgeted hourly rate, the genuine add-up to income has expanded and the fluctuation in income is favorable.

Consultant expense analysis:

	Actual quantity	Budgeted quantity	Expected price	Variance amount	A&U
Consultant expense quantity	113	105	1665	133200	U
Consultant expense rate	17956.19469	16650	113	147600	U
Total consultant expense variance				280800	U

Per unit cost of specialist expense Number of consultants

Actual per unit cost of expert 2029050 /113 =17,956

Budgeted per unit price of consultant = 1748250 /105 = $16,650

Within the cost situation, the most parameter number of experts and the actual expense

rate of experts both have expanded. So, the company is paying or investing more in

consultants. The change in specialist cost is acceptable.

Total expense analysis: Total expense variance = Consultant expense variance + Operating expense variance

	Actual operating expense	Expected operating expense	Variance	A&U
Operating expense	938560	877300	61260	U
Total expense variance			342060	U

The information in this address could be further than the one provided for the primary address. Here, one of the contributing components to the increment in cost is the increase in the number of experts and the expert cost rate. On the other hand, the unacceptable fluctuation within the working cost is more noteworthy than the budgeted or anticipated working cost.

 

3. Assignment Question make a spending and volume variance analysis of operating expenses based on the additional information supplied in Exhibit 3.

 

Number of budgeted consultants = 105

Budgeted variable expense/ Number of budgeted consultants = 525000/105=5000

Budgeted Variable expense per consultant = 5000

Spending variance = Actual Expense - Flexible Expense

 

	Actual	Flexible budget variance	Flexible	Sales volume variance	Budget	Static budget variance
Revenues	3264000	-246000	3510000	278100	3231900	32100
Less
Consultant salaries and fringes	2029050	147600	1881450	133200	1748250	280800
Operating expenses	938560	21260	917300	40000	877300	61260
Total expenses	2967610	168860	2798750	173200	2625550	342060
Operating profit	296390	-414860	711250	104900	606350	-309960
Profit%	9%		20%		19%

 

Operating statistics	Actual	Flexible	Budget
Number of consultant (FTE)	113	113	105
Hours supplied	50850	50850	47250
Hours billed	39000	39000	35910
Average billing rate	83.69230769	90	90

Flexible Budget Variance = Actual Operating Profit - Flexible Operating Profit = - 414860 (U)

Sales Volume Variance = Flexible Operating Profit - Budget Operating Profit = 104900 (A)

Static Budget Variance = Actual Operating Profit - Budget Operating Profit = -309960 (U)

Flexible budget applies budgeted cost for actual quantity. The formula for flexible

expense is below, Flexible Expense = Budgeted Cost * Actual Quantity (Units)

Since the budgeted cost has both variable and fixed component, to calculate flexible expense we use the following formula Flexible Expense = Budgeted Fixed + (Budgeted Variable per consultant * Actual number of consultants) = 352300 + (5000*113) = 9173008

Therefore, Spending Variance = 938560 - 917 300 = 21260

Typically, Unacceptable 

Volume Change Genuine number of specialists Budgeted number of specialists.

Budgeted variable per consultant= (113-105) * 5000

= 8 * 5000= 40000

This is Unacceptable

We presently have the settled and variable component of costs, so we can identify.

which component contributes to the cost. The underlying factors,

1. Increment in number of specialists Volume variance

2. Increment in investing by SA, as per the information given, investing variance

is the one causing gigantic unfavorable investment and volume changes. The genuine fixed

expense, which is essentially higher than the anticipated settled cost, is another cause for

eating up our benefits.

Flexible Operating Expense calculation:

	Actual	Budget	Flexible
Advertising and promotion	22100	15100	15100
Admin and support staff	225000	191250	202907.143
Information systems	126200	120000	127314.286
Depreciation	23400	22700	22700
Dues and subscription	11800	13100	13898.4762
Education and training	36200	38900	41271.0476
Equipment leases	23500	22440	22867.4286
Insurance	33600	32200	32200
Professionals' services	39500	34700	34700
Office expense	42100	36550	39334.7619
Office supplies	86200	89600	95061.3333
Postage	27300	24700	26205.5238
Rent- real state	117260	117260	117260
Telephone	40000	38500	41433.3333
Travel and entertainment	57800	56300	60589.5238
Utilities	26600	24000	24457.1429
Total	938560	877300	917300

 

 

4. Assignment Question make  an analysis of the revenue change, separating the volume effect (increase in number of consultants) from the productivity effect (billing percentage).

Specialist charging rate Genuine Charging Anticipated Charging Genuine consultant hours provided Anticipated charging rate.

Consultant Amount Genuine Specialist Hours Provided Anticipated Specialist Hours Supplied) Anticipated Charging Anticipated charging rate.

	Actual consultant hours supplied	Actual billing %	Expected billing %	Expected billing rate	Variance amount	A & U
Consultant billing percentage	50850	0.766961652	0.76	90	31860	A
	Actual consultant hours supplied	Expected consultant hours supplied	Expected billing %	Expected billing rate	Variance	A &U
Consultant quantity	50850	47250	0.76	90	246240	A
Revenue quantity variance					278100	A

Actual billing% = Hours billed/ Hours Supplied

39000/50850=0.766961652

Expected billing% = Hours billed/ Hours Supplied 

35910/47250 = 0.76

Efficiency Impact is centered on several expert hours charged against several consultant hours supplied.

Consultant Charging Fluctuation = (0.766961652 -0.76) *50850* 90 =31860 (A)

From the change investigation, we note that the real charging rate has gone up from the expected esteem of 76% to 76.7%. This shows that there's higher efficiency among consultants, which has increased bottom-line income.

Volume Impact centers on changes in income due to changes in the number of consultants (number of specialist hours employed. Consultant Amount Fluctuation = (50850 -47250) * 0.76 *90= 246240 (A)The examination shows that the number of specialist hours provided is higher than the budgeted number, driving favorable fluctuation.

Income Amount Change Specialist Charging Fluctuation efficiency change Consultant Amount Change volume variance.  31860 + 246240= 278100 (A). The alter in income is being ascribed to an extension in efficiency, coming about from higher billing rate and increment in the number of specialists utilized, driving higher revenue.

 

5. Assignment Question  an analysis of actual versus budgeted revenues, consultant expenses, and margins using the additional information supplied in Exhibit 4.

CONTRACT SERVICES ANALYSIS OF ACTUAL VS BUDGETED REVENUES, CONSULTANT EXPENSES AND MARGINS

 

	Actual	Budget
Billed hours	24000	20160
Billing rate	56.00	54.00
Revenues	134400000	108864000
Consultant expense	103680000	75600000
Hours supplied	28800	25200
Hourly cost/consultant	36.00	30.00
Billed %	83.33333333	80
Gross margin	30720000	33264000
Gross margins precent	22.86%	30.56%

1. Real income of the Contract line of commerce outperformed budgeted income since billed

hours, charged rate, hours provided, and set rate are higher than budgeted values or

amounts.

2. The specialist cost line thing and the hourly taken toll per specialist expense

rate) are higher in actuals than budgeted. For a critical increment in income, we must

accrue an extra toll, but in this case, the additional toll doesn't significantly affect income.

SOLUTIONS SERVICES ANALYSIS OF ACTUAL VS BUDGETED REVENUES, CONSULTANT EXPENSES AND MARGINS

	Actual	Budget
Billed hours	15000	15750
Billing rate	128.00	136.08
Revenues	192000000	214326000
Consultant expense	99225000	99225000
Hours supplied	22050	22050
Hourly cost / consultant	45.00	45.00
Billed %	6802721088	7142857143
Gross margins	92775000	115101000
Gross margins percent	48.32%	53.70%

The income line shows real incomes are lower than budgeted or anticipated revenue. However, the expert cost, hours provided, and specialist hourly rate are the same. There are two reasons for this: The actual charge is lower than the budgeted charge; the income is less. The number of hours specialists worked in Arrangement administrations has come down.

Revenue Variance analysis:

Revenue variance	Contract	Solutions	Total
Billing rate variance	48000	-121200	-73200(U)
Billing hours variance	207360	-102060	105300(A)
Total revenue variance	255360	-223260	32100(A)

Expense Variance Analysis:

Expense variance	Contract	Solutions	Total
Expense volume variance	-108000	0	-108000(U)
Expense rate variance	-172800	0	-172800(U)
Total expense variance	-280800	0	-280800

Margin Variance analysis:

Margins variance	Contract	Solutions	total
Revenue variance	255360	-223260	32100(A)
Expense variance	-280800	0	-280800(U)
Total margin variance	-25440	-223260	-248700(U)

Indeed, even though the income change is favorable, the cost and edge fluctuation are unfavorable. An overall decrease within the edge is due to a less-than-expected income increase and a more than-anticipated cost increment.