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Iwan Pudjanegara, SE. MM. 1
Analyzing FinancialPerformance ReportsManagement Control Systems
Chapter 10
August 2014
Iwan Pudjanegara, SE. MM. 2
Variances/Differences
• 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.
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Calculating Variances
The Analytical Framework to conduct variances analysis :• Identify the key factors that affect profits.• Break down the overall profit variances
by key factors.• Focus on the profit impact of variation in
each factor. ...cont’d
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Calculating Variances
The Analytical Framework to conduct variances analysis : .............cont’d
• Try to calculate the specific, separable impact of each factor by varying only that factor while holding all other factors constant.
• Add complexity sequentially, one layer at time, beginning at a very basic “commonsense” level. ...cont’d
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Calculating Variances
The Analytical Framework to conduct variances analysis : .............cont’d
• Stop the process when the added complexity at a newly created level is not justified by added useful insights into the factors underlying the overall profit variance.
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Revenue Variances
A positive variance is favorable, because it indicates that actual profit exceeded budgeted profit.
A negative variance is unfavorable.
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Revenue Variances
Selling Price VarianceIs (Actual Price – Budget Price) x
Actual Volume Mix and Volume Variance
Is (Actual Volume – Budgeted Volume) x Budgeted unit contribution
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Revenue Variances
Mix VarianceIs [(Actual volume of sales) – (Total
actual volume of sales x Budgeted proportion) x Budgeted unit contribution]
Volume VarianceIs [(Total actual volume of sales) x (%
Budgeted) – (Budgeted sales)] x (Budgeted unit contribution)
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Revenue Variances
Other Revenue AnalysisClassify by productCalculated from Price variance, Mix variance, and
Volume variance.
Market Penetration/Market Share VarianceIs [(Actual sales) – (Industry volume)] x
Budgeted market penetration x Budgeted unit contribution
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Revenue Variances
Industry Volume VarianceIs (Actual industry volume – Budgeted
industry volume) x Budgeted market penetration x Budgeted unit contribution
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Expense Variances
Fixed CostsVariances between actual and budgeted
fixed 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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Expense Variances
Variable CostsVariable costs are costs that vary
directly and proportionately with volume.
The budgeted variable manufacturing costs must be adjusted to the actual volume of production.
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Expense Variances
The budgeted manufacturing expense is adjusted to the amount that should have been spent at the actual level of production (standard cost of each product x volume of production for that product).
The volume that is used to adjust the budgeted variable manufacturing expense is the manufacturing volume, not the sales volume.
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Variations in Practice
• Time Period of the ComparisonSome companies use performance for
the year to date as the basis for comparison.
Other companies compare the budget for the whole year with the current estimate of actual performance for the year.
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Variations in Practice
• Focus on Gross MarginUnit 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 equations.
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Variations in Practice
• Evaluation Standards3 types of the formal standards used in
the evaluation of reports on actual activities are :oPredetemined Standards or BudgetsoHistorical StandardsoExternal Standards
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Variations in Practice
Limitations on Standards:
1) The standard was not set properly.
2) Although it was set properly in light of conditions existing at the time, changed conditions have made the standard obsolete. (obsolete =
usang, kuno)
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Variations in Practice
• Full-Cost SystemsIf the company has a full-cost system, both
variable and fixed overhead costs are included in the inventory at the standard cost per unit.
If the ending inventory is higher than the beginning inventory, some of the fixed overhead costs incurred in the period remain in inventory rather than flowing through to cost of sales.
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Variations in Practice
• Engineered and Discretionary CostsA favorable variance in engineered costs is
usually an indication of good performance (the lower the cost, the better the performance).
The performance of a discretionary expense center is usually judged to be satisfactory if actual expenses are about equal to the budgeted amount, neither higher or lower.
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Limitations of Variance Analysis
It does not tell why the variance occurred or what is being done about it.
To decide whether a variance is significant.As 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 taken.
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Management Action
The monthly profit report should contain no major surprises.
One 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.
August 2014
