Ch 10 Analyzing Financial Performance Reports

Analyzing Financial Performance Reports Management Control Systems Chapter 10

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Variances/Differences •

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BU managers report their financial  performance to senior management regularly, usually monthly. The formal reports consists of a comparison of actual revenues and costs with budgeted amounts. The differences between those two amounts is called variances. t 2 01 4

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Calculating Variances The nalytical !ramewor" to conduct variances analysis # •

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$dentify the "ey factors that affect profits. Brea" down the overall profit variances  by "ey factors. !ocus on the profit impact of variation in each factor. ...cont%d t 2014

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Calculating Variances The nalytical !ramewor" to conduct variances analysis # .............cont%d •

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Try to calculate the specific, separable impact of each factor by varying only that factor while holding all other factors constant. dd comple&ity se'uentially, one layer at time, beginning at a very basic (commonsense) level. ...cont%d t 2014

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Calculating Variances The nalytical !ramewor" to conduct variances analysis # .............cont%d •

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*top the process when the added comple&ity at a newly created level is not  +ustified by added useful insights into the factors underlying the overall profit variance. t 2014

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evenue Variances  positive variance is favorable,

 because it indicates that actual profit e&ceeded budgeted profit.  negative variance is unfavorable.

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evenue Variances  Selling Price Variance $s -ctual rice  Budget rice0 &

ctual Volume  Mi an! Volume Variance $s -ctual Volume  Budgeted Volume0

& Budgeted unit contribution

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evenue Variances  Mi Variance $s 1-ctual volume of sales0  -Total actual

volume of sales & Budgeted proportion0 & Budgeted unit contribution2  Volume Variance $s 1-Total actual volume of sales0 & -3

Budgeted0  -Budgeted sales02 & -Budgeted unit contribution0 A

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evenue Variances  "ther Revenue Analysis Classify by product Calculated from rice variance, 4i& variance, and

Volume variance.  Mar#et Penetration$Mar#et Share

Variance $s 1-ctual sales0  -$ndustry volume02 & Budgeted

mar"et penetration & Budgeted unit contribution A

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evenue Variances  %n!ustry Volume Variance $s -ctual industry volume  Budgeted

industry volume0 & Budgeted mar"et  penetration & Budgeted unit contribution

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5&pense Variances  Fie! Costs Variances between actual and budgeted

fi&ed costs are obtained simply by subtraction, since these costs are not affected by either the volume of sales or the volume of production.

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5&pense Variances  Variable Costs Variable costs are costs that vary

directly and proportionately with volume. The budgeted variable manufacturing

costs must be ad+usted to the actual volume of production. A

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5&pense Variances The budgeted manufacturing e&pense is

ad+usted to the amount that should have been spent at the actual level of production (standard cost of each product & volume of  production for that product). The volume that is used to ad+ust the

 budgeted variable manufacturing e&pense is the manufacturing volume , not the sales volume. A

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Variations in ractice •

&ime Perio! of the Comparison *ome companies use performance for

the year to date as the basis for comparison. 6ther companies compare the budget for

the whole year with the current estimate of actual performance for the year. A

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Variations in ractice •

Focus on 'ross Margin Unit gross margin is the difference

between selling prices and manufacturing costs . The variance analysis is done by

substituting “gross margin” for “selling  price” in the revenue e'uations. A

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Variations in ractice •

(valuation Stan!ar!s 7 types of the formal standards used in

the evaluation of reports on actual activities are # redetemined *tandards or Budgets

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8istorical *tandards

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5&ternal *tandards

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Variations in ractice 9imitations on *tandards#

:0 The standard was not set properly. ;0 lthough it was set properly in light of conditions e&isting at the time, changed conditions have made the standard obsolete. -obsolete < usang, "uno0

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Variations in ractice •

Full)Cost Systems $f the company has a full=cost system, both

variable and fixed overhead costs are included in the inventory at the standard cost per unit. $f the ending inventory is higher than the

 beginning inventory, some of the fi&ed overhead costs incurred in the period remain in inventory rather than flowing through to cost of sales.

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Variations in ractice •

(ngineere! an! *iscretionary Costs  favorable variance in engineered costs is

usually an indication of good performance -the lower the cost, the better the performance0. The performance of a discretionary e&pense

center is usually +udged to be satisfactory if actual expenses are about equal  to the budgeted amount , neither higher or lower. A

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+imitations of Variance Analysis $t does not tell why the variance occurred or what

is being done about it. To decide whether a variance is significant. s the performance reports become more highly

aggregated, offsetting variances might mislead the reader. The reports show only what has happened. They

do not show the future effects of actions that the manager has ta"en. A

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4anagement ction  The monthly profit report should contain

no ma+or surprises.  6ne of the most important benefits of

formal reporting is that it provides the desirable pressure on subordinate managers to take corrective actions on their own initiative. A

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