Analyzing Financial Performance Reports

Calculating Variances
Optimum achievement of budget of kaizen, mentality A thorough analysis identifies the causes of the variances and the responsibility center responsible for causing it. Effective systems identify variances down to the lowest level of management. Variances are hierarchical.

Variance Analysis Disaggregation

Total Variance

Non-mfg. costs

Mfg. costs
R&D
Variable costs Fixed costs

Sales
Volume Selling Price

Admn

Mktg

Material

Dir.Labour

Variable Overheads

Mkt. Share

Indy. Volume

Analytical framework to conduct variance analysis

Incorporate the following ideas:
Identify the key causal factors that affect profits Break down the overall profit variances by these key causal factor. Focus on the profit impact of variation in each causal factor Try to calculate the specific, separable impact of each causal factor by varying only that factor while holding all other factors constant Add complexity sequentially, one layer at a time, beginning at a very basic commonsense level Stop the process when the added complexity at a newly created level is not justified by added useful insights into the causal factors underlying the overall profit variance.

Performance and Details of budget

Performance Report, January 2012
Actual Budget

(in 000s)
Variance

Sales Variable Costs of sales

Contribution Fixed Overhead Gross Profit Selling Expenses Administration Expense Profit Before Taxes

875 583
292 75 217 55 30 132

600 370
230 75 155 50 25 80

275 (213)
62 62 (5) (5) 52

Budget for January 2012

Product A 100 * Product B 100* Product C 100* Total Budget

Sales Std. Variable Cost: Material Labour Variable Overhead Total Variable Cost

1.00 0.50 0.10 0.20 0.80

100 50 10 20 80

2.00 0.70 0.15 0.25 1.10

200 70 15 25 110

3.00 1.50 0.10 0.20 1.80

300 150 10 20 180

600 270 35 65 370

Contribution Fixed Costs:

Fixed Overhead Selling Expense Admn., Expense Total Fixed Costs PBT

0.20

20
25 17 8 50 (30)

0.90

90
25 17 8 50 40

1.20

120
25 17 8 50 70

230
75 50 25 150 80

Variance Analysis
Revenue Variances Selling Price Variance, Mix and Volume Variance(= ]Actual Vol Budgeted]*Budgeted unit contribution Mix Variance = {(Actual Volume of sales)-(Total Actual Volume of sales * Budgeted proportion)*Budgeted unit contribution} Volume Variance = [(Total actual volume of sales)*(Budgeted %age) (Budgeted sales)]*(Budgeted Unit Contribution) Other Revelue Analyses Market Penetration and Industry Volume Expense Variances Fixed Costs, Variable Costs, etc.,

Limitations of Variance Analysis

Identifies where it occurs but not tell why it occurs. Decision on whether the variance is significant or not. Performance reports become more highly aggregated, offsetting variances might mislead the reader. When variances become more highly aggregated, managers become more dependent on the accompanying explanations and forecasts. Finally, the reports show only what has happened. They do not show the future effects of actions that the manager has taken.

To sum up
Business Unit managers report their financial performance to senior management regularly, usually, monthly. This formal report consists of a comparison of actual revenues and costs with budgeted amounts. The differences, or variances, between these two amounts can be analyzed at several levels of detail. This analysis identifies the causes of the variance from budgeted profit and the amount attributable to each cause.

End of Session