Software Associates was founded by Richard Norton in 1990 in order to perform system integration projects for clients. During the rapid technological growth of the 1990’s the company grew and prospered. Annual revenues exceeded $12 million, and profit margins were generally between 15%-20%. Their services include a contract business which offers clients experienced consultants to implement personalized IT tools and solutions. However, in 2000, founder and CEO of Software Associates, Richard Norton, had an urgent and tough question to answer; with higher than forecasted revenues, why is their bottom line less than half of what they had budgeted?
Variance Analysis Report
In order to perform a variance analysis report Jenkins calculated the actual revenues and expenses and found the difference which was $296,610 in profits. Then Jenkins did the same with budgeted values and found the budgeted profits to be $606,350. The variance amount in turn is $309,960 under budget. Also, the variance amount for revenues is $32,100. This number is favorable due to the fact that they made more than what they had budgeted for. But on the contrary, the variance amount for expenses was $342,060, which was unfavorable because they spent far more than what they had budgeted for.
This information would not be sufficient in order to explain to Norton why their profit percentage is nearly half of what they budgeted. This variance analysis report only shows the raw numbers and not any details to why they spent more on expenses than what they budgeted. Jenkins would have a difficult time explaining details to why they went over budget. She would need to show him a detailed expense report of the budgeted items and the actual amount they spent on the items. Then she would have to clearly define which items went over budget and why. This variance analysis report would not help Jenkins in the 8 am meeting she has would need to provide more information.
Preparing the Budget: Variance Analysis Report
In order to provide more information to Norton, Jenkins will need to perform a variance analysis report. Jenkins would be required to use the numbers provided in Exhibit 2. She will use the numbers on the budget and actual income statement to identify revenue quantity, which is provided in number of hours. She will then identify actual and expected quantity. The actual number of consultant hours exceeded the expected number of consultant hours. Then Jenkins subtracted the actual amount of hours from the expected amount of hours and then multiplied by the expected labor price of $90. Jenkins found that Software Associates made a total of $278,100 when providing the extra amount of hours billed. This is favorable for Software Associates if the billing rate was $90 as expected; however the average rate per consultant amounted to $83.69.
Next, Jenkins determined the average billing rate variance by subtracting the actual price from the expected price. She then multiplied the difference in price and the quantity of work done. Jenkins found that they had a deficit of $246,090. This is unfavorable because Software Associates is losing money due to the actual rate drop from $90 to $83.69.
When Jenkins compared the variance of both quantity of hours and hourly rate, this gave her the total revenue variance of $32,100. The total revenue variance is also the difference between the actual revenue and expected revenue. Over all, it is favorable that Software Associates created more revenue. Jenkins then determined whether or not the additional revenue would cover the additional costs incurred for the excess consultants.
Jenkins used the same method for consultant expenses. By subtracting the actual number of hours supplied (50,850) from the budgeted number of hours supplied (47,250) and multiplying the expected costs, $37, Jenkins found a cost of $133,200. $133,200 is the amount they paid over the expected...