Software Associates – Variance

Analysis

Prof. Shailesh Gandhi

IIM, Ahmedabad

Prof. Shailesh Gandhi

Introduction
 Every organization has a strategic plan/long
range plan/vision document covering several
years. Consistent with such a plan, it
formulates and executes corporate strategies.
 Performance measurement system (like a
balanced scorecard) helps in executing
strategies such that it leads to achieving
desired level of performance.
 PMS requires comparison of actual
performance on selected performance metrics
with the target values.
Prof. Shailesh Gandhi
Introduction (Contd.)
 A budget/plan is a 1-year slice of the long
range/strategic plan.
 Comparison of actual performance with the
budgeted one results into variance analysis.
 Analysis of variance includes: computation of
variance, the organizational unit responsible
for such a variance, reasons for variance –
controllable or uncontrollable, and taking
corrective actions.

Prof. Shailesh Gandhi

Software Associates
 Two lines of businesses – Contract and
solutions
 The budget covers various parameters like:
resource planning, billable hours, hourly rate,
consultant costs, and variable and fixed
expenses. The cost driver for variable
expenses is the number of consultants.
 The data covers one quarter of a particular
year.

Prof. Shailesh Gandhi

Summary of variances
 Revenue variance = 32,100 (Favorable, Actual
> budget)
 Expenses variance = -342,060 (Unfavorable,
A>B)
 Operating profit variance = -309,960
(Unfavorable, A>B)

Prof. Shailesh Gandhi

Analysis of Revenue Variance
 Factors that can cause variance:
 Changes in billable hours (quantity variance)

 Changes in billing rates (rate variance)

 Quantity variance = (Actual hours billed – budgeted

hours billed) * Budgeted billing rate = (39000-35910)
* 90 = 278,100 (Favorable)
 Rate variance = (Actual rate - budget rate)*actual
hours billed = (83.69-90)*39000 = -246,090
(Unfavorable)
 Therefore, total revenue variance = QV+RV = 32,100
(F)
Prof. Shailesh Gandhi
Quantity variance analysis
 Can we further break-down changes in billable hours?
 (a) Hours billed as % of hours supplied (productivity)

 (b) Changes in total supplied hours (more work, low

efficiency/productivity)
 (a) Variance due to changes in billing % (Data in Ex.2):
 Actual % billed =39000/50850 = 76.7%
 Budget % billed = 35910/47250 = 76%

 Actual hours supplied = 50,850

 Variance = 50850*(0.767-0.76)* 90 = 31,860 (F)

Prof. Shailesh Gandhi

Qty Variance (Contd.)
 (b) Variance due to supplied hours: By retaining
budgeted % billed and budgeted rate, if hours
supplied are more then it would cause variance.
 Changes in total supplied hours = 50850-47250
 Budget % billed = 76%, budget rate = 90/hr
 Variance = (50850-47250)*0.76*90 = 246,240 (Favorable)
 Hence, quantity variance of 278,100 (F) is caused
because % billable hours increased and supplied hours
also increased.
 278,100 (F) = 31,860 (F) + 246,240 (F)

Prof. Shailesh Gandhi

Billing Rate Variance
 We have rate variance = -246,090 (U)
 Why? Two business segments causing
variance as is evident from Exhibit 4.
 Software Associates - soln.xlsx

Prof. Shailesh Gandhi

Consultant Expense Variance
 Now, we move to variance in consultant expenses.
Exhibit 2 provides aggregate details and Ex. 4
provides segment-wise details.
 Total variance in consultant salaries & fringes =
2,029,050 – 1,748,250 = - 280,800 (U)
 Reasons? = More hours supplied (50850 vs. 47250),
differences in payment rates (actual 39.90 vs. budget
=37).
 Quantity variance = (50850-47250)*37 = 133,200 (U)
 Payment rate variance = (39.9-37)*50850 = 147,600 (U)
 As we did for billing rate variance, we can also
further analyse reasons for payment rate variance in
two segments of the business.
Prof. Shailesh Gandhi
Consultant expense variance (Contd)
 Two product segments with different payment rates,
spending more in one segment
 Software Associates - soln.xlsx

Prof. Shailesh Gandhi

Analysis of other expenses variance

 Software Associates - soln.xlsx

Prof. Shailesh Gandhi

Thank you