Question 1: Prepare 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? Variance Analysis: Actual Results
Budget
Favorable / UnFavorable
Variance
Revenues
3264000
3231900
32100
F
Expenses
2967610
2625550
342060
U
296390
606350
-309960
U
9.08%
18.76%
-9.7%
U
Operating profit Profit percentage
This information would not be sufficient in order to explain to Norton why their profit percentage is nearly half of what they budgeted. This variance analysis report not provide any details to why they spent more on expenses than what they budgeted.
Question 2: Prepare a variance analysis report based on the information in
Revenue Less: Consultant’s salaries and fringes
Operating expenses Total expenses Operating profit Profit % Operating Statistics Number of consultants (FTE) Hours supplied Hours billed Average billing rate
. Exhibit 2
Actual $3,264,000
Budget $3,231,900
Variance 32,100
$2,029,050
$1,748,250
280,800
938,560
877,300
62,260
$2,967,610
$2,625,550
342,060
$ 296,390
$ 606,350
309,960
9.1%
18.8%
113 50,850 39,000 $83.69
105 47,250 35,910 $90.00
9.7 8 (F) 3600(F) 3090(F) 6.31
of hours billed has increased. Key observation: Actual billing rate has decreased, though no. of We can also calculate 1. Billing variance (equivalent to price variance) = ($ 83.69 - $ 90.00) *39,000 = $ -246 ,090 (U) 2. Quantity Variance = (39,000 – 35910) * 90 = $278100 (F)
Question 3: Prepare a spending and volume variance analysis of operating expenses based on the additional information supplied in Exhibit 3 . Exhibit 3 Expense Items: Budget Q2 2000 Actual FIXED
Advertising and promotion Administrative and support staff Information systems Depreciation Dues and subscriptions ` Education and training Equipment leases Insurance Professional services Office expenses Office supplies Postage Rent- real estate Telephone Travel and entertainment Utilities Total
$22,100 45,000 25,240 23,400 2360 7240 17625 33,600 39,500 0 17240 5460 17,260 0 0 19950 $375975
Budget VARIABLE FIXED
0 80,000 100,960 0 9440 28,960 5875 0 0 42,100 68960 21840 0 40,000 57,800 6650 $562585
$15,100 38250 24,000 22,700 2620 7780 16830 32,200 34,700 0 17920 4940 117,260 0 0 18000 $352300
% Variable VARIABLE
0 153000 96000 0 10480 31120 5610 0 0 36,550 71680 19760 0 38,500 56,300 6000 $525000
0% 80 80 0 80 80 25 0 0 100 80 80 0 100 100 25
Variable OH Spending Variance = ($ 562585 - $ 525000)= $ 37585 Fixed OH Volume Variance = ($ 375975 - $ 352300)= $ 23675
Both Spending and Volume variance for the overhead expenses has gone beyond the budgeted amount as not only the variable expenses have increased but there is a considerable increase in the fixed expenses
Question 4: Prepare an analysis of the revenue change, separating the volume effect (increase in number of consultants) from the productivity effect (billing percentage). . 50,850 * 0.76 = 38,646 Revenue = No. of Consultants * 450 * Hours billed / Hours available * Average billing rate 113 * 450 * 38,646/50850 * 90 = 3,478,140 113 * 450 * 39000/50850 * 90 = 3,510,000
Variance = 3,510,000 - 3,478,140 = 31860
Question 5: Prepare an analysis of actual versus budgeted revenues, consultant expenses, and margins using the additional information supplied in Exhibit 4 . Contract
Solutions
Total
Actual
Number of consultants (FTE)
64
49
113
Billed hours
24,000
15,000
39,000
Billed revenues
1,344,000
1,920,000
3,264,000
Hours supplied
28,800
22,050
50,850
Consultant costs
1,036,800
992,250
2,029,050
Number of consultants (FTE)
56
49
105
Billed hours
20,160
15,750
35,910
Billed revenues
1,088,640
2,143,260
3,231,900
Hours supplied
25,200
22,050
47,250
Consultant costs
756,000
992,250
1,748,250
Budget
SOLUTION:
