Software Associates-Variance Analysis and Flexible Budgeting (1)

8/10/2019 Software Associates-Variance Analysis and Flexible Budgeting (1)

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9-101-038REV: MARCH 9, 2004

Software Associates

Susan, I have just seen the quarterly P&L. It’s great that we exceeded our billed hours and revenuetargets. But why, with higher revenues, is our botto line less than hal! o! what we had budgeted. "anwe have a eeting to orrow orning at # $% so you can ex lain this discre ancy to e'

— Richard Norton, CEO of Software Associates

Norton, the fo nder and CEO of Software Associates ca!!ed S san "en#ins, C$O of SoftwareAssociates, after s#i%%in& the second ' arter (rofit and !oss state%ent )see Exhibit 1 *+ "en#ins had

een (re(arin& to &o ho%e t now antici(ated a !on& e-enin& ahead to (re(are for the ne.t %ornin&%eetin&

Assignment Question 1: Prepare a ariance ana!"sis report base# on the information in Exhibit

1 $ %ou!# this be sufficient to exp!ain the profit shortfa!! to &orton at the 8 A' meeting(

)istor"Richard Norton had fo nded Software Associates ten /ears a&o to (erfor% s/ste% inte&ration (ro ectsfor c!ients+ 1hi!e initia!!/ set ( to o(erate in c!ient ser-er en-iron%ents, Norton had een ni% !eeno &h to %a#e the transition to we a((!ications, and his co%(an/ had contin ed to &row and (ros(er d rin& the ra(id techno!o&ica! e-o! tion of the 3990s+

Ann a! re-en es e.ceeded 32 %i!!ion, and (rofit %ar&ins were s a!!/ etween 356 and 206+C rrent!/, Software Associates offered two t/(es of ser-ices to c!ients+ 7he So! tions siness he!(edc!ients ra(id!/ de-e!o( tar&eted infor%ation %ana&e%ent strate&ies, and then %o i!i8ed siness and

techno!o&/ reso rces to de!i-er software so! tions+ 7/(ica! ser-ices inc! ded 7 strate&/ and%ana&e%ent, 7 architect re and desi&n, infor%ation %ana&e%ent, and data wareho sin&+ 7heContract siness offered c!ients e.(erienced software en&ineers, (ro&ra%%ers, and cons !tants, on ashort ter% (ro ect asis, to he!( the c!ients i%(!e%ent their own 7 too!s and so! tions+ 7his ser-iceena !ed c!ients to i%(!e%ent %a or 7 (ro ects witho t ha-in& to hire e.(ensi-e, e.(erienced software

(ersonne!+

Preparing the *u#getEach ' arter Norton and "en#ins (re(ared a detai!ed d&et for the ne.t three %onths, ased on theann a! (!an, and recent o(eratin& e.(erience and infor%ation fro% the %ar#et+ Norton #new that in hisfast (aced siness, he co !d not %ana&e with st an ann a! d&et+ He wanted to contin a!!/ scan

the en-iron%ent and ind str/ trends efore !oc#in& into a hirin& (!an, an o(eratin& (!an, and a d&etfor a (eriod+ $or the ' arter!/ d&et, "en#ins esti%ated cons !tin& re-en es / % !ti(!/in& to&ether the e.(ected n % er of f !! ti%e e' i-a!ent )$7E* cons !tants at the fir%, the n % er of ho rsa-ai!a !e )450 (er ' arter* (er $7E, the e.(ected i!!in& (ercenta&e )the ratio of ho rs i!!ed to tota!ho rs a-ai!a !e*, and the a-era&e ho r!/ i!!in& rate+ She ca!c !ated cons !tant e.(enses / % !ti(!/in&the a-era&e co%(ensation )inc! din& frin&e enefits* (er cons !tant / the n % er of $7E cons !tants+She then esti%ated o(eratin& e.(enses s ch as ad-ertisin&, ad%inistrati-e s ((ort, s/ste%s, occ (anc/,office e.(ense, (osta&e and te!eco%% nications+ Exhibit + contains the d&et and the act a! financia!res !ts for the second ' arter of 2000

Assignment Question +: Prepare a ariance ana!"sis report base# on the information in Exhibit

2 +

Expense Ana!"sis"en#ins #new that the d&eted o(eratin& e.(enses were neither entire!/ -aria !e nor entire!/ fi.ed



d rin& the ' arter+ So%e e.(enses -aried d rin& the ' arter ased on the n % er of cons !tants hiredand wor#in&, whi!e other were fi.ed,; inde(endent of the n % er of cons !tants on oard+ O -io s!/,cons !tant e.(ense -aried with the n % er of cons !tants hired+ Occ (anc/ e.(enses, howe-er, werefi.ed thro &h the ' arter n!ess she a thori8ed the ac' isition or renta! of additiona! s(ace+ E.(ensess ch as co%( tin& and te!eco%% nications had oth fi.ed and -aria !e co%(onents+ <eca se of the

(rofit shortfa!! in =2 2000, "en#ins #new that she had etter e (re(ared to e.(!ain to Norton wh/e.(enses had e.ceeded the d&eted a%o nts+ > rin& the e-enin&, she s(ent se-era! ho rs st d/in&the o(eratin& e.(ense cate&ories, e-ent a!!/ (re(arin& Exhibit 3 , which showed d&eted o(eratin&e.(enses / cate&or/ and her d&%ent a o t their de&ree of -aria i!it/+ She a!so !isted the act a!o(eratin& e.(enses for the (eriod on the e.hi it+

Assignment Question 3: Prepare a spen#ing an# o!ume ariance ana!"sis of operating expensesbase# on the a##itiona! information supp!ie# in Exhibit 3 $

*i!!ing Percentage

"en#ins wondered wh/ if the act a! n % er of cons !tants was near!/ ?6 hi&her than d&eted )seeExhibit + *, re-en es had increased on!/ 36+ 1ere cons !tants eco%in& !ess (rod cti-e@ She #newthat a #e/ o(eratin& statistic for cons !tin& or&ani8ations was the (ercenta&e of ti%e i!!ed+

Assignment Question ,: Prepare an ana!"sis of the re enue change separating the o!ume effect.increase in number of consu!tants/ from the pro#ucti it" effect .bi!!ing percentage/$

ines of *usiness"en#ins was, / now, &ettin& ' ite tired and was !oo#in& forward to ret rnin& ho%e to catch a fewho rs of s!ee(+ As she (re(ared to !ea-e, howe-er, she rea!i8ed that E.hi its 3 and 2 on!/ re(orted onthe a&&re&ate financia! (erfor%ance of the fir%+ She #new that its two !ines of siness, Contract andSo! tions, had ' ite different o(eratin& characteristics+ 7/(ica!!/ Richard Norton didn t want to &et tooin-o!-ed in the detai!s of these different siness !ines+ < t (erha(s so%e of the dec!ine in (rofit%ar&in and !ower re-en e (er cons !tant co !d e attri ted to o(eratin& res !ts within each of the two!ines of siness+ "en#ins re! ctant!/ ret rned to her des# and started to &ather %ore detai!edinfor%ation a o t the Contractin& and So! tion siness !ines+ Se-era! ho rs !ater, she had (rod cedthe data shown in Exhibit , +

Assi&n%ent = estion 5: Bre(are an ana!/sis of act a! -ers s d&eted re-en es, cons !tant e.(enses,and %ar&ins sin& the additiona! infor%ation s ((!ied in (xhibit ) +

A##itiona! Ana!"sis

"en#ins was fina!!/ dri-in& ho%e at 2 AM+ She fe!t we!! e' i((ed for the %eetin& the ne.t %ornin& twondered a o t other for%s of ana!/sis she %i&ht ha-e done if she had %ore ti%e+ $or e.a%(!e,

Norton had een ' ite (!eased with the &rowth in re-en es and i!!ed ho rs+ < t was that d e to &oodwor# / the fir%, or had the o-era!! cons !tin& ind str/ &rown faster than e.(ected d rin& the ' arter+

n other words, was Software Associates increasin& or decreasin& its share of software cons !tin& siness@ A!so, "en#ins had ass %ed that o(eratin& e.(enses -aried on!/ with the n % er of cons !tants+ She (ondered whether the cons !tants fro% the So! tions siness re' ired %ore s ((ortthan did the cons !tants in the Contract siness+ A!so, did s ((ort e.(enses -ar/ with the n % er of cons !tants, of either t/(e, or with the n % er of ho rs the/ wor#ed or i!!ed@ 1ithin each siness!ine, she had sed an a-era&e i!!in& and cost rate (er cons !tant+ 1o !d she &et additiona! insi&hts /!oo#in& at the %i. of cons !tants sed within each siness or e-en on each o to nderstand etter the econo%ics of the siness+ She reso!-ed to thin# %ore a o t these iss es in the (co%in& ' arter,

t her %ost r&ent tas# was to &et so%e s!ee( efore (resentin& her ana!/sis to Richard Norton in afew ho rs+



Exhibit 1 Software Associates nco%e State%ent, =2, 2000

Actua! *u#getRe-en e ,2D4,000 ,2 3,900E.(enses 2,9D ,D30 2,D25,550

O(eratin& (rofit 29D, 90 D0D, 50Brofit (ercenta&e 9+36 3?+?6

Exhibit + < d&et and Act a! nco%e State%ent: = arter 2 2000

Actua! *u#getRe-en e ,2D4,000 ,2 3,900Fess: Cons !tant s sa!aries and frin&es 2,029,050 3, 4?,250

O(eratin& e.(enses 9 ?,5D0 ? , 007ota! e.(enses 2,9D ,D30 2,D25,550

O(eratin& (rofit 29D, 90 D0D, 50

Brofit 6 9+36 3?+?6

perating Statistics N % er of cons !tants )$7E* 33 305Ho rs s ((!ied 50,?50 4 ,250Ho rs i!!ed 9,000 5,930A-era&e i!!in& rate ? +D9 90+00

Exhibit 3 E.(ense te%s: < d&et =2 2000Actua! *u#get 2 ariab!e

Ad-ertisin& and (ro%otion 22,300 35,300 06Ad%inistrati-e and s ((ort staff 225,000 393,250 ?0

nfor%ation s/ste%s 32D,200 320,000 ?0>e(reciation 2 ,400 22, 00 0> es and s scri(tions 33,?00 3 ,300 ?0Ed cation and trainin& D,200 ?,900 ?0E' i(%ent !eases 2 ,500 22,440 25

ns rance ,D00 2,200 0

Brofessiona! ser-ices 9,500 4, 00 0Office e.(enses 42,300 D,550 300Office s ((!ies ?D,200 ?9,D00 ?0Bosta&e 2 , 00 24, 00 ?0Rent rea! estate 33 ,2D0 33 ,2D0 07e!e(hone 40,000 ?,500 3007ra-e! and entertain%ent 5 ,?00 5D, 00 300Gti!ities 2D,D00 24,000 25

7ota! 9 ?,5D0 ? , 00

Exhibit , Fine of < siness < d&et and Act a! O(eratin& Statistics: =2 2000



4ontract So!utions 5ota!Actua!

N % er of cons !tants )$7E* D4 49 33<i!!ed ho rs 24,000 35,000 9,000<i!!ed re-en es 3, 44,000 3,920,000 ,2D4,000

Ho rs s ((!ied 2?,?00 22,050 50,?50Cons !tant costs 3,0 D,?00 992,250 2,029,050

*u#get N % er of cons !tants )$7E* 5D 49 305<i!!ed ho rs 20,3D0 35, 50 5,930<i!!ed re-en es 3,0??,D40 2,34 ,2D0 ,2 3,900

Ho rs s ((!ied 25,200 22,050 4 ,250Cons !tant costs 5D,000 992,250 3, 4?,25 0

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Software Associates-Variance Analysis and Flexible Budgeting (1)