Software Associates

Brief History:

Software Associates was founded by Richard Norton ten years ago to perform system integration
projects for clients. Initially it was set up to operate in client server environments and now it had grown
to making web applications with the pace of technological evolution. It has two types of services to offer
to clients-

1)Solutions Business-This Business helped clients rapidly develop targeted management strategies , and
then mobilized business and technology resources to deliver software solutions.

2)Contract Business- This Business offered clients experience software engineers, programmers , and
consultants, on a short term project basis ,to help the clients implement their own IT tools and
solutions.

Recently the company noticed that in spite of increase in revenue their profit is not increasing and on
the hand showed lower profit percentage than the usual 15-20% range.

With the help of below made analysis we have tried our best to acknowledge the reasons for the same.

Question 1: Prepare a variance analysis report based on the information in Exhibit 1. Would this be
sufficient to explain the profit shortfall to Norton at the 8AM Meeting?

Ans : Based on Exhibit 1:

Analysis:

Actual Revenues have exceeded budgeted revenues but still our profit has decreased drastically, from
exhibit 1 we can see that our expenses have increased significantly and hence lower profits.
Variance analysis report based on the information in exhibit 2:

 Particulars Actual Budgeted Variance

Hours billed 39000 35910  
Average billing rate 83.69 90  
Total consulting revenue variance     32010
Hours billed variance     278100
Average billing rate variance     -246090

We can see here, variance for revenue and hours billed is favorable whereas, for average billing rate
it’s unfavorable.

Sum of Hours variance and average billing rate variance is equal to Consulting Revenue variance.

Thus, $278,100 - $246,090 = $32,010.

Question 3: Prepare a spending and volume variance analysis of operating expenses based on the
additional information supplied in Exhibit 3.

From Exhibit 3 we can deduce following:

Analysis:

The case tells us that the budgeted expenses were neither entirely variable nor entirely fixed during the
quarter and based on their variance percentage we can say that major chunk of this expense is varying
for administration, information systems, dues and subscription ,education, office expense, office
supplies, postage, telephone ,travel and entertainment. These have variable percentages more than
80% which means we cannot certainly predict our budgeted expense due to this variability.

So our total actual expenses from the table=$938,560

And total budgeted expenses= $877,300

Therefore difference in expense=938,560-877,300=61,260

And, we know

Fixed Expense = Budgeted Expense – Variable Expense

Total Variable Expense = $525,000

Therefore Total Fixed Expense = $877,300-$525,000=$352,300

No of Budgeted Consultants=105

Therefore,

Variable Expense per consultant = $525000/105 = $5000

Also,

Flexible budget actual volume = Total Fixed Expense + Total Actual Variable Expense

Total Actual Variable Expense = Variable Expense per consultant * Actual consultants

= 5000*113 = $565,000

Therefore,

Flexible budget at actual volume = $352,300 + $565000 = $917,300

And,

Spending Variance = Actual indirect expenses – Flexible budget at actual volume

= $938,560 - $917,300 = $21,260 (Unfavorable)

Volume Variance = (Actual Quantity – Budgeted Quantity)*Expected variable Expense per unit

= (113-105)*5000 = $40,000 (unfavorable)

Therefore,

Total indirect expense variance = $61,260 = Spending Variance + Volume Variance

= $21,260 + $40,000 = $61,260

Analysis:

Volume variance is unfavorable for us and so is spending variance. So overall $61,260 is the extra cost
which as a part of flexible budget should have been reduced.

Question 4: Prepare an analysis of the revenue change, separating the volume effect (increase in
number of consultants) from the productivity effect(billing percentage).

Analysis of volume effect

Actual Consultant hours supplied 50850

Expected consultant hours supplied 47250
Expected billing % 76%
Expected billing rate 90
Variance 246240

Result: Favorable

Analysis of productivity effect (Billing %)

Actual consultant hours supplied 50850

Actual billing % 76.7%
Expected billing % 76%
Expected billing rate 90
Variance 31860

Result: Favorable

Analysis:

From the two tables above our volume variance is 246240 and productivity variance is 31860 so our
total revenue variance is =246240+31850=278100 which is favorable.
Question 5: Prepare an analysis of actual versus budgeted revenues consultant expenses and margins
using additional information in exhibit 4.

Actual:

Budgeted:

So we get,

  Contract   Solutions   Total  

Pure billing
rate price 48000 Favourable -121200 Unfavourable -73200 Unfavourable
variance

Mix variance -138240 Unfavourable -34560 Unfavourable -172800 Unfavourable

Revenue rate
-90240 Unfavourable -155760 Unfavourable -246000 Unfavourable
variance
   Contract   Solutions   Total  

Pure consultant cost price

172800 Unfavourable - - 172800 Unfavourable
variance

Mix variance -25200 Favourable - - -25200 Favourable

Consultant expense rate

147600 Unfavourable - - 147600 Unfavourable
variance

Conclusion:

If the company tries to improve its costing methods by reducing their expenses and aiming for
innovation and adapting to social environments it can expand and establish itself better.