MANAGEMENT ACCOUNTING - II

[Document subtitle]

SOFTWARE ASSOCIATES

SUBMITTED TO: -
PROF A. KANAGARAJ

SUBMITTED BY: -
ARINDAM SAIN B19128
SHSHANK PANDEY B19169
FURQAN B19136
MALLIKA JAIN B19146
EXECUTIVE SUMMARY
Software Associates was founded by Richard Norton and was primarily involved in
providing 2 types of services to the clients: Solutions Business: This involved helping
clients rapidly develop IT architecture and design, information management and data
warehousing. Contract Business: This involved offering clients with consultants to
execute personalized IT solutions and tools. During rapid technological growth of 90s
the company grew exponentially. The annual revenues exceeded $12 million, and the
profit margin was between 15-20%.

The CFO, Jenkins, works on accumulating information to forecast the impact of the
quantity of billed hours, billing rates, consultant expenses, and operating expenses
between two types of services provided.

Jenkins calculated the quarterly consultant revenues and expense as below:

Revenues = No. of FTE × Number of hours(450)×Ratio of hours billed to Total hours
×Avg. Hourly Billing Rate
Expenses = Avg. Compensation per Consultant × No. of FTE
Then she estimated the operating expenses taking various parameters such as
advertising, admin support, office expense etc. into consideration.

The point of concern for Norton was the declining profit of the firm. Though the
change in revenue was favourable, i.e., the budgeted revenue was $32,100 less than
the actual revenue, but the there was unfavourable decline in Budgeted Profit to
Actual Profit amounting to $309,960.

There was also an unfavourable increase in the operating expense as well.

Apart from that, the analysis of Exhibits also explained that there were 8 more
consultants hired than forecasted. Also, the increase in consultant did not increase the
billing hours proportionally, thus reducing the billing rate.

PROBLEM STATEMENT
As the revenue of company increased by $12 million, its bottomline decreased by a
considerable amount compared to the forecasted numbers. The task-in-hand is to
analyse the forecasted reports and the actual reports and to compare them by variance
analysis to have a detailed knowledge of the reason for discrepancy between the two
reports.
ANALYSIS
I)
Variance Analysis Report based on Exhibit 1
ACTUAL BUDGET VARIANCE FAVOURABLE/
UN-
FAVOURABLE
REVENUE $3,264,000 $3,231,900 $32,100 FAVOURABLE
CONSULTANT UNFAVOURAB
EXPENSES $2,029,050 $ 1,748,250 $ 280,800 LE
OPERATING UNFAVOURAB
EXPENSES $ 938,560 $ 877,300 $ 61,260 LE
PROFIT UNFAVOURAB
$ 296,390 $ 606,350 $ 309,960 LE
PROFIT 9.1% 18.8%
PERCENTAGE

The data given does not provide clear information and is not sufficient to
explain profit shortfall to Norton at the 8 AM meeting.
Favourable means the numbers are better than what they had budgeted and
unfavourable means that the actual numbers are worse than expected.

II)
Variance Analysis Report Based on Exhibit 2
ACTUAL BUDGETED
Billing Rate $83.69/hr $90/hr
Hours Billed 39000 35910
Revenue 3264000 3231900

a) Total Consulting Revenue Variance = Actual Revenue –Budgeted

Revenue
= (Actual hours*Avg billing rate) – (Budgeted hours*Budgeted billing rate)
= 39000*83.69 – 35910*90 = $32,010 (Favourable)

b) Hours billed variance = (Actual – Budgeted hours billed) *budgeted average

billing rate
= (39000 – 35910)*90 = 3090*90 = $278,100 (Favourable)

c) Average billing rate variance = (Actual – Budgeted average billing

rate)*Actual hours billed
= (83.69-90)*39000 = $246090 (Unfavourable)
Hours Billed variance and Average billing rate variance is equal to Consulting
Revenue variance. Thus, $278,100 - $246,090 = $32,100
III)
Spending and Volume Variance analysis of operating expenses based on
additional information as given in Exhibit 3

As we can see in this case there are some fixed costs such as the occupancy
costs as well as variable costs depending on the number of consultants and
then there are mixed costs with both fixed and variable parts. Thus, flexible
budgeting is required to account for these factors.

Total Actual Expenses=$938,560

Total Budgeted Expenses = $877,300

Total indirect expense variance = $938,560 - $877,300 = $61,260

Variable Fixed
Expense Items Actual Budget %Vari Expense Expen
able se
Advertising and 22100 15100 0 0 15100
Promotion
Administrative and 225000 191250 80 153000 38250
support staff
Information Systems 126200 120000 80 96000 24000
Depreciation 23400 22700 0 0 22700
Dues and subscriptions 11800 13100 80 10480 2620
Education and training 36200 38900 80 31120 7780
Equipment leases 23500 22440 25 5610 16830
Insurance 33600 32200 0 0 32200
Professional services 39500 34700 0 0 34700
Office expenses 42100 36550 100 36550 0
Office supplies 86200 89600 80 71680 17920
Postage 27300 24700 80 19760 4940
Rent - real estate 117260 117260 0 0 117260
Telephone 40000 38500 100 38500 0
Travel and entertainment 57800 56300 100 56300 0
Utilities 26600 24000 25 6000 18000
Total 938560 877300 525000 352300

In the above table,

Variable Expense = (Budget Expense) * ( %Variable/100)

Fixed Expense = Budget Expense – Variable Expense

Total Variable Expense = $525,000 and Total Fixed Expense = $352,300

If the Total Variable Expense is for the budgeted number of consultants i.e.

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

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

Variable Expense

Total Actual Variable Expense = Variable Expense per consultant * Actual

consultants

= 5000*113 = $565,000

Flexible budget at actual volume = $352,300 + $565,000 = $917,300

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)

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

Variance

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

IV)
Analysis of actual versus budgeted revenues, consultant expenses, and
margins

Actual

Contract Solutions Total

Billed hours 24000 15000 39000
Billing rate 56 128 83.69
Billed revenues 1344000 1920000 3264000
Hours supplies 28800 22050 50850
Consultant costs 1036800 992250 2029050
Consultant 36 45 39.90
costs/hour
Billed % 83.3% 68% 76.7%
Gross margin 307200 927750 1234950
Gross margin % 22.9 48.3 37.8

Budget

Contract Solutions Total

Billed hours 20160 15750 35910
Billing rate 54 136.08 90
Billed revenues 1088640 2143260 3231900
Hours supplies 25200 22050 47250
Consultant cost 756000 992250 1748250
Consultant 30 45 37
costs/hour
Billed % 80 71.4 76
Gross margin 322640 1151010 1483650
Gross margin % 30.6 53.7 45.9