Written by Yao Yang, 1453634

Case 10-1 Variance Analysis Problems

I do not why my variance of the actual profit and budgeted profit (see the summary
performance report) are not equal to the sum of the revenue variance, variable-cost
variances and fixed-cost variances. So my analysis can only be based on the not exact
number. I am sorry for that.

Analysis:
Total variance:
Total variance is (21), which is the variance of the actual profit and budgeted profit. It
illustrates that the whole actual profit can not meet the budget, which is unfavorable.

Revenue variance:
Net revenue variances is 42, which shows that the company above the budget for
sales, which is favorable. Price variance is (49), which means that the selling price
falls behind the budget. It is unfavorable. However, mix and volume variance are
14.33 and 76.67 respectively, which shows they meet the budget and are favorable for
the company.

Variable-cost variances:
Labor and variable are (3) and (5) respectively, meaning they are not favorable.
However, the material has a positive number of 98, which means that the actual
expense does not over the budget expense and hence favorable. Net variable-cost
variances are 90, meaning the overall variance are favorable.

Fixed-cost variances:
Fixed overhead, Selling expense, and Administrative expense are all negative, having
the number of (5), (7), and (8) respectively. They show that the actual fixed-cost
expense exceeds the budgeted expense, which are unfavorable.

Case from blackboard: Profit Variance Analysis: A Strategic Focus

1. The first limitation for the Phase Ⅲ Approach is that it only focus on the profit
while neglect the importance of cash flow.
If we tie the variance analysis to strategic objectives and separate our variance
analysis with different products, I think the favorable variances can not show the real
good performance. The profit is not the most significant thing for the company.
Steady and continuous cash flow sometimes are more important than high profit. If
we suppose that the marketing managers sell a lot of goods but the goods are
uncollectable or will be collected for a long time(because the customers are not high
quality customers who may have low debt-paying ability) in order to meet the budget,
it may leads to higher revenue and profit, and then a favorable profit. Does it mean a
good performance under this situation? This answer is definitely not. Although the
marketing department can bring the favorable profit to the company, it may get the
company into trouble with so many accounts receivables. Consequently, I suggest we
can use the variance analysis of statement of cash flow to reflect the real performance

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 Written by Yao Yang, 1453634

of the marketing department together with the profit analysis. Besides, we can also
extend the variance analysis into the balance sheet and statement of stockholder’s
equity. In a word, we can not only rely on the profit variance analysis to reach the
final conclusion about the actual performance of the company.

2. The second limitation: the profit analysis will become useless when evaluating
the performance of the products which have long-term manufacturing and selling
cycle.
Since my previous company did international trade about selling big ships to India, so
I knew something about the manufacturers from the shipbuilding industry. In the
shipbuilding industry, the manufacturing and selling cycle is much longer. It means
that the manufacturer often incurs expense in the first or second year and then
recognizes the revenue in the following second or third years. In this case, last-year
profit variance analysis may include the profit information which was not generated
by the current sales team. It might be the revenue which was generated by the
previous sales team several years ago. So it becomes useless to offer the feedback to
the sales team to get it improved. Based on the above example, I think the profit
variance analysis is more suitable to the companies which have much short
manufacturing and selling cycle, such as retail industry.

3. The third limitation: the Phase Ⅲ Approach can not give us the performance
evaluation of each marketing team in the company.
Why we use the profit variance analysis? I think it is because the top management
wants to know the actual performance of all the teams of the company To be specific,
the top management wants to see whether all the teams under the marketing
department or manufacturing department did a good job or bad job. So I think it is
necessary to offer the more detail profit variance analysis by each team, so that we
can know which team can get bonus and which team needs to be improved further.