SOFTWARE ASSOCIATES

CASE ANALYSIS

SUBMITTED BY:

GROUP-

KANCHAN GUPTA-

MADHULIKA RAJ-

MOHIT LALCHANDANI-

VISHNU AGARWAL-

RIDDHI JAIN-183
 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:

Budget Varian
Particulars Actual ed ce
Hours billed 39000 35910
Average billing rate 83.69 90
Total consulting revenue
variance 32010
27810
Hours billed variance 0
- We can see here,
24609 variance for revenue
Average billing rate variance 0 and hours billed is
favorable whereas,
for average billing rate its 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,

Solution
Contract Total
s
Pure
billing Unfavoura - Unfavoura
48000 Favourable -121200
rate price ble 73200 ble
variance
-
Mix Unfavoura Unfavoura
-138240 Unfavourable -34560 17280
variance ble ble
0
Revenue -
Unfavoura Unfavoura
rate -90240 Unfavourable -155760 24600
ble ble
variance 0

Contrac Soluti
Total
t ons
Pure consultant Unfavourab Unfavoura
172800 - - 172800
cost price variance le ble

Mix variance -25200 Favourable - - -25200 Favourable

Consultant
Unfavourab Unfavoura
expense rate 147600 - - 147600
le ble
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.