Chapter 15

The Flexible Budget: Further Analysis of Productivity and Sales

Teaching otes for Cases
Case 15!1 "allas Consulting #roup$
This case serves as a review of sales variances. Since all costs are fixed, it is unnecessary to do a variance analysis
based on contribution. Instead, the analysis is better done based solely on revenues. The variances shown in Exhibit
1 are computed for the levels explained in the ote on !ana"in" #"ainst Expectations.
Students should reco"ni$e the followin" points%
1. &rofit was '(),))) more than expected *Total +ariance,.
-. There was a total unfavorable +olume +ariance of '(-,))) due to the decline in the actual number of billed
hours *from 1.,))) down to 1(,))),.
/. There was a favorable !ix +ariance of 0-,))) because of the shift in the product mix resultin" in a hi"her
relative percenta"e of sales of the hi"her priced product *1, than expected *and a correspondin" decrease in the
relative percenta"e sales of #,.
(. There was a favorable &rice +ariance of '1),))) due to the increase in the rate char"ed for product # *from '/)
up to '/. per hour,.
.. &roduct #%
1. +olume +ariance is unfavorable due to the decline in the actual number of hours billed.
-. !ix +ariance is unfavorable because of the decline in the number of hours billed for product # as a
percenta"e of total sales *from () percent down to 1( percent,.
/. &rice +ariance is favorable because of the increase in the rate char"ed for product # *from '/) up to '/.
per hour,.
2. &roduct 1%
1. +olume +ariance is unfavorable due to the decline in the actual number of hours billed.
-. !ix +ariance is favorable because of the increase in the number of hours billed for product 1 as a
percenta"e of total sales *from 2) percent up to 32 percent,.
/. &roduct 1 has no &rice +ariance since the actual billed rate was e4ual to the expected rate.
0. The total mar5et decline of /,))) hours *from 11.,))) hours down to 11-,))) hours, caused 678 to lose
'1.9,2)) of revenue *opportunity loss:, based on their expected mar5et share of 1) percent.
3. 1y increasin" its mar5et share form 1) percent to 1-.. percent, 678 increased revenues by '110,2)).
; This case was written and copyri"hted by <oseph 8. San !i"uel, aval &ost"raduate School.
1locher, Stout, 7o5ins, 7hen% Cost Management, 4e 1.=1 >The !c8raw=?ill 7ompanies, Inc., -))3
%&'(B(T 1
@peratin" Income +ariance%
@ri"inal 1ud"et '2/),)))
#ctual Aesults 20),)))
Total +ariance ' (),)))
Sales +olume +ariance%
@ri"inal 1ud"et '2/),)))
Blexible 1ud"et 22),)))
+olume and !ix +ariance ' /),)))
Sellin" &rice +ariance%
Blexible 1ud"et '22),)))
#ctual Aesults 20),)))
&rice +ariance ' 1),)))
Sales !ix and Sales Cuantity +ariances%
*#+ D #ctual +olume, S+ D Standard +olume,
#! D #ctual !ix, S! D Standard !ix,
#& D #ctual &rice, S& D Standard &rice,
@ri"inal 1ud"et '2/),))) *S+, S!, S&,
#dE. Blexible 1ud"et ..3,))) *#+, S!, S&,
Sales Cuantity +ariance ' (-,))) Fnfavorable
#dE. Blexible 1ud"et '..3,))) *#+, S!, S&,
Blexible 1ud"et 22),))) *#+, #!, S&,
!ix +ariance ' 0-,))) Bavorable
!ar5et Share and !ar5et Si$e +ariances%
@ri"inal 1ud"et '2/),))) *S+, S!, S&,
Borecasted !ar5et Share (0),()) *#ct. !5t., Expected Share, S!, S&,
@verall !ar5et +ariance '1.9,2)) Fnfavorable
Borecasted !ar5et Share '(0),()) *#ct. !5t., Expected Share, S!, S&,
#dE. Blexible 1ud"et .33,))) *#+, S!, S&,
!ar5et Share +ariance '110,2)) Bavorable
1y &roduct *' Thousands,G
&roduct +ol. !ix !ix &rice Total
# 1- F 1)3 F 1-) F 1) B 11) F
1 /) F 13) B 1.) B ) 1.) B
Total -( F 0- B /- B 1) B () B
1locher, Stout, 7o5ins, 7hen% Cost Management, 4e 1.=- >The !c8raw=?ill 7ompanies, Inc., -))3
Teaching Strategies for Articles
15!1 )i*ay #ovindara*an and +ohn ,- Shan.: /Profit )ariance Analysis: A Strategic Focus0
This article uses a fictitious case to demonstrate how variance analysis can be tied explicitly to the
strate"ies of the firm. It expands the Shan5 and 7hurchillHs framewor5 *explained in the article, for
variance analysis to include explicitly the strate"y and the competitive position of the firm in the analysis
and interpretation of results.
6iscussion 4uestions%
1. Ihy is it inade4uate and may even be misleadin" to rely only on the analysis reported in Table /:
The analysis in Table / is intended to provide auditable information of use to investors. It is not
intended to provide a timely and relevant base of information for mana"ement decision=ma5in" or
strate"ic analysis. The deficiencies of the analysis include not only lac5 of timeliness and relevance,
but also lac5 of necessary detail. !oreover, the analysis is not desi"ned to address the 5ey issues
facin" the mana"ement accountant as well as top mana"ement, that is, how to plan, control and
evaluate so as to achieve the firmHs strate"ic competitive advanta"e. That is, what is needed is
strate"ic cost mana"ement rather than financial reportin".
-. 6oes a favorable variance imply favorable performance:
The variances in Table / can mislead. 7ompare Tables / and ( to see how different are the
variances and interpretations "iven the same set of information, analy$ed differently. The misleadin"
nature of standard cost variances is also illustrated in the article for 7hapter 12 above, @verhead
7ontrol Implications of #ctivity 7ostin".
/. Table ( shows a rather elaborate and detailed analysis of variances of operatin" results. The analysis
provides us information on the effect of variations of relevant operatin" factors on the operatin" result.
The analysis includes relevant and important operatin" factors such as total mar5et si$e, mar5et share
of the firm, sales mix, sellin" price, and costs. The analysis considers almost all, if not all, the factors
that are of interest and important to mana"ement. Ihy is the analysis incomplete:
The analysis in Table ( is incomplete because it focuses only on what 8ovindaraEan and Shan5
call phase two thin5in", that is, a concern only with the factors that drive profits. In contrast, the
phase three analysis in Tables 2 and 0 provide a fundamentally complete analysis. The analysis in
Tables 2 and 0 directly address the strate"ic issues facin" the firm. @nly the analysis in these latter
two tables addresses the critical success factors of the firm, and thus measures performance in terms of
factors that contribute to strate"ic "oals. !oreover, the lin5in" of these strate"ic performance
measures in Table 0 to mana"ement compensation will effectively close the loop in coordinatin" and
motivatin" all within the firm to achieve the firmHs strate"ic "oals.
1locher, Stout, 7o5ins, 7hen% Cost Management,4e 1.=/ >The !c8raw=?ill 7ompanies, Inc., -))3
15!1 Anthony +- 'ay2en and +a3es 4- 5eeve: /%xa3ining the 5elationships in Productivity
Accounting0
7han"e in profit of a firm or business unit can be analy$ed in terms of a chan"e in productivity and a
chan"e in price recovery. 7han"e in product 4uantities and chan"e in resource 4uantity drive the chan"e
in productivity. 7han"e in product prices and chan"e in resource prices drive the chan"e in price recovery.
These relationships can be displayed to provide an instant visual analysis of the causes of profit chan"e.
Such visuali$ation can provide a robust method for analy$in" strate"y and sta5eholder relationships.
"iscussion 6uestions:
1. Ihat is productivity accountin":
&roductivity accountin" measures the chan"e in total resource productivity and the effects of
these chan"es on the correspondin" chan"e in business profitability.
-. ?ow can productivity accountin" "uide the overall strate"y of the firm:
&roductivity accountin" decomposes chan"e in profit into chan"e in process execution and
chan"e in structural position. &rocess execution and structural position are two sources of
competitiveness that "uide the overall strate"y of the firm.
/. 8ive an example showin" that a traditional business performance indicator may "ive conflictin"
si"nals on a firmJs performance.
Traditional business measures for performance include such measures as profit and sales per
s4uare yard. KetHs assume that, in -))1, #lice sold 1)) units at '3) each, paid '() per unit to 1obby
for the merchandise and '-,))) to 7entry &roperties to rent .) s4uare yards of retail space. #lice also
sold 1)) units in -))-. ?owever, in -))-, 1obby increased the price to '(3, 7entry &roperties
increased the rent to '/,))), and #lice raised the retail price to '92 per unit.
-))1 -))-
Sales '3,))) '9,2))
7ost of 8oods Sold (,))) (,3))
7ontribution !ar"in '(,))) '(,3))
Aent -,))) /,)))
@peratin" Income '-,))) '1,3))
Sales per s4uare yard '12) '19-
Sales per s4uare yard increased from '12) to '19- while the operatin" income decreased from '-,)))
to '1,3)).
(. Ihat are the elements in usin" productivity accountin" to evaluate chan"es in profits:
&roductivity accountin" explains chan"es in profit as a function of chan"es in productivity and
chan"es in price recovery as shown below.
7han"e in &rofit D 7han"e in &roductivity L 7han"e in &rice Aecovery
Ihere% 7han"e in &roductivity D @utput CuantityMInput Cuantity, and
&rice Aecovery D @utput &riceMInput &rice
These relationships are depicted in a nine=box dia"ram%
1locher, Stout, 7o5ins, 7hen% Cost Management,4e 1.=( >The !c8raw=?ill 7ompanies, Inc., -))3
Traditional !easure
&roductivity
#ccountin"
.. Ihat "rid dia"rams are needed in order to have an overall picture of the businessJs performance:
# firm is li5ely to need four "rid dia"rams to explain a chan"e in it performance. These four "rids
are 1, profit "rid that explains profit chan"es in terms of productivity variance and price recovery
variance, -, productivity "rid, which accounts for chan"e in productivity by loo5in" at capacity
utili$ation variance and efficiency in usin" variance resources, /, 4uantity "rid, which accounts for
4uantity chan"es in product and resource, and (, price "rid, which examines percenta"e chan"e in
product price and percenta"e chan"e in resource price.
1locher, Stout, 7o5ins, 7hen% Cost Management,4e 1.=. >The !c8raw=?ill 7ompanies, Inc., -))3
7han"e in
&roduct
Cuantity
7han"e
In
Aevenue
7han"e in
&roduct
&rice
7han"e
In
&roductivity
7han"e in
&rice
Aecovery
7han"e in
Aesource
Cuantity
7han"e
In
7ost
7han"e in
Aesource
&rice
7han"e
In
&rofit
15!7: /8ean Accounting: 9hat:s it All About;0
This article provides and introduction and illustration of the concept of lean accountin". # 5ey ideas is
the role of value streams. The illustration is based on an actual company, which is "iven the dis"uised
name !I&.
"iscussion <uestions:
1. Ihy lean accountin":
The move to lean accountin" at !I& was motivated by three main concerns. @ne, the variance
data created by the accountants was dated and therefore of limited usefulness to mana"ers. Two, the
information from the accountants provided the wron" incentives for mana"ers. Three, the accountin"
information, usin" full costin", penali$ed mana"ersH inventory reduction efforts, because of the effect of
fixed cost in inventory *this is explained in the section on full versus variable costin" in chapter 10,.
Kean accountin" was adopted to address these three problem areas.
-. Ihat are the five steps of the lean thin5in" model:
1. define value, especially with respect to customer value
-. identify the value stream, how value is produced for customers
/. ma5e the value stream flow
(. implement a pull system
.. strive for perfection
/. Ihat is a value stream and what role does it play in lean accountin":
# value stream is a value chain of activities that are necessary in producin" the desired value for
the customer
(. Ihat four areas did !I& address in implementin" lean accountin":
1. performance measurement, in lin5in" strate"y to compensation and performance measurement
-. transaction elimination
/. calculatin" and reportin" lean accountin" results
(. tar"et costin", in which the customer needs are identified and the most cost effective means to
deliver customer value is determined
.. ?ow is waste defined in lean accountin":
Iaste is defined, much as it is in the Toyota &roduction System, as%
overproduction, waitin", defects, transportation, unnecessary inventory, unnecessary motion, and
inappropriate *non=value=added, processes.
1locher, Stout, 7o5ins, 7hen% Cost Management,4e 1.=2 >The !c8raw=?ill 7ompanies, Inc., -))3