Flexible Budgets Software Associates Harvard Business Review

Software Associates
Harvard Business Review
by Kaplan

Report to Richard Norton, CEO of Software Associates

1. Prepare a variance analysis report based on the information in Exhibit 1. Would this be sufficient to explain the profit explain the profit shortfall to Norton at the 8 am meeting? ( see highlighted answers below exhibit 1)
2. Prepare a variance analysis report based on the information in Exhibit 2.
3. Prepare a spending and volume variance analysis of operating expenses based on the additional information supplied in Exhibit 3.
4. Prepare an analysis of the revenue change, separating the volume effect (increase in number of consultants) from the productivity effect (billing percentage).
5. Prepare an analysis of actual versus budgeted revenues, consultant expenses and margin using the additional information supplied in Exhibit 4.

Exhibit 1 Software Associations Income Statement , Q2, 2000

Actual Budget
Revenues $3,264,000 3,231,900 ( F)
Expenses $2,967,610 $2,625,550 ( U)
Operating Profit $296,390 $606,350 ( U)
Profit Percentage 9.1% 18.8%
F= Favorable, U = Unfavorable
Description | Favorable / Unfavorable |
Revenues | Favorable |
Expenses | UnFavorable |
Operating Profit | UnFavorable |
this exhibit requires the following
a) Billing hours
b) Billing rate
Exhibit 2 Budget and Actual Income Statement: Quarter 2 2000
Actual Budget
Revenues $3,264,000 3,231,900
Less:
Consultants' salaries and fringes $2,029,050 $1,748,250
Operating Expenses $938,560 $877,300
Total Expenses $2,967,610 $2,625,550
Operating Profit $296,390 $606,350
Profit% 9.1% 18.8%

Operating Statistics
Number of consultants (FTE) 113 105
Hours supplied 50,850 47,250
Hours Billed 39,000 35,910
Average billing rate $83.69 $90.00

Exhibit 3 Expense Items: Budget Q2, 2000

Actual Budget % Variable
Advertising and promotion 22,100 15,100 0%
Administrative and support staff 225,000 191,250 80
Information systems 126,200 120,000 80
Depreciation 23,400 22,700 0
Dues and subscriptions 11,800 13,100 80
Education and training 36,200 38,900 80
Equipment leases 23,500 22,440 25
Insurance 33,600 32,200 0
Professional services 39,500 34,700 0
Office expenses 42,100 36,550 100
Office supplies 86,200 89,600 80
Postage 27,300 24,700 80
Rent-real estate 117,260 117,260 0
Telephone 40,000 38,500 100
Travel and entertainment 57,800 56,300 100
Utilities 26,600 24,000 25
Total 938,560 877,300

Exhibit 4 Line of Business Budget and Actual Operating Statistics: Q2 2000
Contract Solutions Total
Actual
Number of consultants (FTE) 64 49 113
Billed hours 24,000 15,000 39,000
Billed Revenues 1,344,000 1,920,000 3,264,000

Hours supplied 28,800 22,050 50,850
Consultant Costs 1,036,800 992,250 2,029,050

Budget
Number of consultants (FTE) 56 49 105
Billed Hours 20,160 15,750 35,910
Billed Revenue 1,088,640 2,143,260 3,231,900

Hours Supplied 25,200 22,050 47,250
Consultant costs 756,000 992,250 1,748,250