QUANTITATIVE VARIANCE ANALYSIS2
iii.Fuel Efficiency Variance7
iv.Fuel Cost Variance8
v.Other Cost Variances9
5 PORTER FORCES……………………………………………………………………….......11
Luotang Power was established by American companies who was selected bidders to operate a 600 MW coal-fired power plant project. This company was located in Hubei Province, China. Although this company wholly foreign-owned but they need to use Chinese- manufactured equipment.
There are two main issues in this case study. The first issue is the positive performance of Luotang Power does not show in the financial results. Mr. Tan Min Yi was scheduled to make a presentation to the Board of Directors of his parent company, China Hua Tong Power about the results. Mr. Tan Min Yi is a general manager of the Luotang Power Company. He needs to review and investigate the financial results before presenting to the board the disappointing results.
The second issue is about the quality of the coal provided by the supplier, Pingdingshan. Sometimes, the Pingdingshan will supply some of the coal with bad quality. They will send some of the coal contain high level of moisture. They need to take time to dry it and will cause additional costs to happen like storage cost. Mr. Tan wants to use a variance analysis method to better understand plant performance compared to the previous year. So, we will help Mr. Tan to solve this problem by calculating and prepare the recommendations to improve reporting and evaluation of the plant's performance.
QUANTITATIVE VARIANCE ANALYSIS
As what have been introduced before, the Luotang Power CEO has to present the financial report to the board of director. But first he has to understand about the quantitative variance analysis. Variance Analysis is the analysis of performance by means of variances. This tool can be used to promote management action at the earliest possible stages. After a budget (based on standard costs) has been set, its usefulness lies in the review procedures which compare actual results against the budget. Variance analysis is the process of examining in detail each variance between actual and budgeted or standard costs to determine the reasons why budgeted results were not met. When the effect of variance is concerned, there are two types of variances. When the actual results are better than expected results given variance is described as favorable variance. In common use favorable variance is denoted by the letter (F). But when actual results are worse than expected results given variance is described as adverse variance, or unfavorable variance. In common it is denoted by the letter (U). There are very few plans that turn out exactly as planned. Even when the overall objectives of the plan are achieved, some, if not all components of the performance will have varied from the sub-plans or standards that make up the overall picture. So does the performance on the Luotang Power in 2011 which most of the variance is in unfavorable results. The variance analysis provides a framework for all business managers including Mr. Tan as one of Luotang Power directors to break down the overall performance of an organization, so that each individual element of the business can be isolated and analyzed in turn. The CEO facing problem with quantity variance, price variance, fuel efficiency variance, fuel cost variance and other cost variances. All these variance help him to explain about the plant performance throughout the year 2011 to the board of directors. Later, we will explain some of the variance that we have listed and all the problems related to “Luotang Power: Variance Explained” case study.
This is the calculation of all variances.
Variance | Calculation | Result|
Quantity Variance| (3427351-3937377) x 0.4219 = 215179.97| Unfavorable| Price Variance| | Unfavorable |