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Analyzing Financial

Performance Reports
Management Control Systems
Chapter 10

August 2014

Iwan Pudjanegara, SE. MM.

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.
August 2014

Iwan Pudjanegara, SE. MM.

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.
...contd
August 2014

Iwan Pudjanegara, SE. MM.

Calculating Variances
The Analytical Framework to conduct
variances analysis : .............contd
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.
...contd
August 2014

Iwan Pudjanegara, SE. MM.

Calculating Variances
The Analytical Framework to conduct
variances analysis : .............contd
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.
August 2014

Iwan Pudjanegara, SE. MM.

Revenue Variances
A positive variance is favorable,
because it indicates that actual profit
exceeded budgeted profit.
A negative variance is unfavorable.

August 2014

Iwan Pudjanegara, SE. MM.

Revenue Variances
Selling Price Variance
Is (Actual Price Budget Price) x
Actual Volume

Mix and Volume Variance


Is (Actual Volume Budgeted Volume)
x Budgeted unit contribution
August 2014

Iwan Pudjanegara, SE. MM.

Revenue Variances
Mix Variance
Is [(Actual volume of sales) (Total actual
volume of sales x Budgeted proportion) x
Budgeted unit contribution]

Volume Variance
Is [(Total actual volume of sales) x (%
Budgeted) (Budgeted sales)] x (Budgeted
unit contribution)
August 2014

Iwan Pudjanegara, SE. MM.

Revenue Variances
Other Revenue Analysis
Classify by product
Calculated from Price variance, Mix variance, and
Volume variance.

Market Penetration/Market Share


Variance
Is [(Actual sales) (Industry volume)] x Budgeted
market penetration x Budgeted unit contribution
August 2014

Iwan Pudjanegara, SE. MM.

Revenue Variances
Industry Volume Variance
Is (Actual industry volume Budgeted
industry volume) x Budgeted market
penetration x Budgeted unit
contribution

August 2014

Iwan Pudjanegara, SE. MM.

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Expense Variances
Fixed Costs
Variances 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.

August 2014

Iwan Pudjanegara, SE. MM.

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Expense Variances
Variable Costs
Variable costs are costs that vary
directly and proportionately with
volume.
The budgeted variable manufacturing
costs must be adjusted to the actual
volume of production.
August 2014

Iwan Pudjanegara, SE. MM.

12

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.
August 2014

Iwan Pudjanegara, SE. MM.

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Variations in Practice
Time Period of the Comparison
Some 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.
August 2014

Iwan Pudjanegara, SE. MM.

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Variations in Practice
Focus on Gross 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 equations.
August 2014

Iwan Pudjanegara, SE. MM.

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Variations in Practice
Evaluation Standards
3 types of the formal standards used in
the evaluation of reports on actual
activities are :
oPredetemined Standards or Budgets
oHistorical Standards
oExternal Standards
August 2014

Iwan Pudjanegara, SE. MM.

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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)

August 2014

Iwan Pudjanegara, SE. MM.

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Variations in Practice
Full-Cost Systems
If 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.

August 2014

Iwan Pudjanegara, SE. MM.

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Variations in Practice
Engineered and Discretionary Costs
A 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.
August 2014

Iwan Pudjanegara, SE. MM.

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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.
August 2014

Iwan Pudjanegara, SE. MM.

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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

Iwan Pudjanegara, SE. MM.

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