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Dhruv Menon 2310110106

Manan Sharma 2310110521
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Software Associates Courseware
Harvard Business School Case 9-101-038
Courseware 9-107-710

This courseware was prepared by Professor Robert S. Kaplan solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management. Copyright © 2007 President and Fellows of
Harvard College. No part of this product may be reproduced, stored in a retrieval system, used in
a spreadsheet or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording or otherwise—without the permission of Harvard Business School.
 EXERCISE 1
Software
Variance Associates
Analysis Courseware
and Flexible Budgeting INTRODUCTION TO
VARIANCE ANALYSIS

Exhibit 1: Norton Associates, Income Statement, Q2 2000

Actual Budget
Revenues $ 3,264,000 $ 3,231,900
Expenses 2,967,610 2,625,550
Operating Profit $ 296,390 $ 606,350
Profit Percentage 9.1% 18.8%

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 8 AM meeting?

Formulas and approach:

Variance analysis formula: Total revenue variance = AR - ER
Use this formula to conduct a variance analysis on Revenues below. Do the same for Expenses and Profits.

Your Solution:
Actual Value Budgeted Value Variance Amount Favorable/Unfavorable?
Revenues $ 3,264,000 $ 3,231,900 $ 32,100 Favorable
Expenses 2,967,610 2,625,550 342,060 Unfavorable
Profits $ 296,390 $ 606,350 $ (309,960) Unfavorable

Copyright © 2001 President and Fellows of Harvard College

 EXERCISE 2
REVENUE AND EXPENSE
Software Associates Courseware DECOMPOSITION -
QUANTITY/EFFICIENCY &
PRICE/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

Question 2:
Prepare a variance analysis report based on the information in Exhibit 2.

Formulas and approach:

Variance analysis formula: Total revenue variance = AR - ER
Revenue decomposition: Revenue = Price per unit * Quantity of units sold (R = P * Q)
Quantity/Efficiency variance: variance = (AQ - EQ) * EP
Price/Rate variance: variance = (AP - EP) * AQ
Decompose the information above into Revenue Quantity & Rate, Consultant Quantity and Rate,
and Billing %. Conduct a variance for each to determine which factors were Favorable or Unfavorable.

Your Solution:
Favorable/
Actual Quantity Budgeted Quantity Expected Price Variance Amount Unfavorable?
Revenue Quantity (# Hours) 39,000 35,910 90.00 278,100 Favorable
Favorable/
Actual Price Expected Price Actual Quantity Variance Amount Unfavorable?
Revenue Rate (Hourly Rate) 83.69 90.00 39,000 (246,000) Unfavorable
Total Revenue Variance 32,100 Favorable

Favorable/
Actual Quantity Budgeted Quantity Expected Price Variance Amount Unfavorable?
Consultant Expense Quantity 50,850 47,250 37.00 133,200 Unfavourable
Favorable/
Actual Price Expected Price Actual Quantity Variance Amount Unfavorable?
Consultant Expense Rate 39.90 37.00 50,850 147,600 Unfavourable
Total Consultant Expense Variance 280,800 Unfavourable

Actual Operating Expected Operating Favorable/

Expenses Expenses Variance Amount Unfavorable?
Operating Expense 938,560 877,300 61,260 Unfavorable
Total Expense Variance 342,060 Unfavorable

Copyright © 2001 President and Fellows of Harvard College

$ 500 $11,000.00
$ -
 EXERCISE 3
Software Associates Courseware FLEXIBLE BUDGET
DECOMPOSITION

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 Expense 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

Question 3:
Prepare a variance analysis of expenses based on the additional information supplied in Exhibit 3.

Formulas and approach:

Variance analysis formula: Total revenue variance = AR - ER
Flexible budget: Fixed expenses + variable expenses
Volume variance: (AQ-EQ)*cost per unit
Prepare a flexible budget to display the spending variance attributable to fixed (committed) and
variable expenses. Calculate the volume variance for the difference in number of consultants

Your Solution:
Budgeted Budgeted
Actual Budget % Variable Variable Fixed
Advertising and promotion 22,100 15,100 0% - 15,100
Admin. and support staff 225,000 191,250 80% 153,000 38,250
Information systems 126,200 120,000 80% 96,000 24,000
Depreciation 23,400 22,700 0% - 22,700
Dues and subscriptions 11,800 13,100 80% 10,480 2,620
Education and training 36,200 38,900 80% 31,120 7,780
Equipment leases 23,500 22,440 25% 5,610 16,830
Insurance 33,600 32,200 0% - 32,200
Professional services 39,500 34,700 0% - 34,700
Office expense 42,100 36,550 100% 36,550 -
Office supplies 86,200 89,600 80% 71,680 17,920
Postage 27,300 24,700 80% 19,760 4,940
Rent - real estate 117,260 117,260 0% - 117,260
Telephone 40,000 38,500 100% 38,500 -
Travel and entertainment 57,800 56,300 100% 56,300 -
Utilities 26,600 24,000 25% 6,000 18,000
Total 938,560 877,300 525,000 352,300
Number of consultants 105
Budgeted variable/consultant 5,000

Budgeted Actual
Calculate spending variance from Actual Budgeted Variable per Number of Flexible Spending Favorable/
flexible budget Expenses Fixed Consultant Consultants Budget Variance Unfavorable?
565,000 352,300 105 113 917,300 21,260 Unfavorable

Actual Budgeted Budgeted

Number of Number of Variable per Volume Favorable/
Calculate volume variance Consultants Consultants Consultant Variance Unfavorable?
113 105 5,000 40,000 Unfavorable

Copyright © 2001 President and Fellows of Harvard College

 EXERCISE 4
REVENUE AND

Software Associates Courseware EXPENSE

DECOMPOSITION -
QUANTITY/EFFICIENCY
& PRICE/RATE

Exhibit 4: 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

Question 4:
Prepare an analysis of the revenue change, separating the productivity effect (billing percentage)
from the volume effect (increase in number of consultants).

Your Solution:

Actual Consultant Hours Expected Billing Variance Favorable/

Supplied Actual Billing % Expected Billing % Rate Amount Unfavorable?
Consultant Billing Percentage 50,850 76.70% 76% 90 31,860 Favorable

Actual Consultant Hours Expected Consultant Expected Billing Variance Favorable/

Supplied Hours Supplied Expected Billing % Rate Amount Unfavorable?
Consultant Quantity 50,850 47,250 1 90 246,240 Favorable
Revenue Quantity Variance 278,100 Favorable

Copyright © 2001 President and Fellows of Harvard College

$ 500 $11,000.00
$ -
 EXERCISE 5
Software Associates Courseware LINE OF BUSINESS BUDGET &
OPERATING STATISTICS

Exhibit 5: Line of Business Budget and Actual Operating Statistics: Q2 2000

ACTUAL BUDGET
Contract Solutions Total Contract Solutions Total
Number of Consultants(FTE) 64 49 113 56 49 105
Billed Hours 24,000 15,000 39,000 20,160 15,750 35,910
Billed Revenues 1,344,000 1,920,000 3,264,000 1,088,640 2,143,260 3,231,900

Hours Supplied 28,800 22,050 50,850 25,200 22,050 47,250

Consultant Costs 1,036,800 992,250 2,029,050 756,000 992,250 1,748,250

Question 5:
Prepare an analysis of actual versus budgeted revenues, consultant expenses, and margins using the additional
information supplied in Exhibit 5.

Formulas and approach:

Price variance: variance = (AP - EP) * AQ
Mix variance: variance = (AQ-EQ)*(EP-EASP)

Decompose the information above into Revenue Rate, Consultant Quantity and Rate, and Billing % for
both Contract and Solutions. Conduct a variance for each to determine which factors were Favorable or Unfavorable.

Your Solution:

ACTUAL BUDGET
Contract Solutions Total Contract Solutions Total
Billed Hours 24,000 15,000 39,000 20,160 15,750 35,910
Billing Rate 56 128 84 54 136 90
Revenues 1,344,000 1,920,000 3,264,000 1,088,640 2,143,260 3,231,900
Consultant expense 1,036,800 992,250 2,029,050 756,000 992,250 1,748,250
Hours Supplied 28,800 22,050 50,850 25,200 22,050 47,250
Hourly cost/consultant 36 45 40 30 45 37
Billed % 83.33% 68.03% 76.70% 80.00% 71.43% 76.00%
Gross Margin 307,200 927,750 1,234,950 332,640 1,151,010 1,483,650
Gross Margin Percent 22.86% 48.32% 37.84% 30.56% 53.70% 45.91%

Contract F/U Solutions F/U Total Favorable/Unfavorable

Decomposition Pure billing rate price variance 48,000 F (121,200) U (73,200) Unfavorable
Mix variance (138,240) U (34,560) U (172,800) Unfavorable
Revenue rate variance (90,240) U (155,760) U (246,000) Unfavorable

Pure consultant cost price variance 172,800 U - 172,800 Unfavorable

Mix variance (25,200) F - (25,200) Favorable
Consultant expense rate variance 147,600 U - 147,600 Unfavorable

Copyright © 2001 President and Fellows of Harvard College

 Introduction to Statistics Using Excel

Exercise 5: Data Representation - Scatter Diagrams

This exercise presents a data set with two residential real-estate variables: selling price and
size in square feet.

The Excel Tools covered in this exercise:

Tool 10 Using Chart Wizard to create a Scatter Diagram

Creating Scatter Diagrams using Excel

A Scatter Diagram (also called a scatter plot, scatter chart, or scattergram) shows an
approximate straight-line relationship between the points in a data set. In Scatter
Diagrams the horizontal axis (the x axis) is labeled with one variable (in our example
we use Square Feet) and the vertical axis (the y axis) is labeled with the other variable
(in this case Selling Price). For each observation, a point is plotted whose
coordinates are that observation's values on both x and y.

This, like the Histogram demonstrated in Exercise 2, is another method of graphically

representing a set of data. In this case, it is the relationship between two variables in a
two-variable data set.

To generate a Scatter Diagram based on the data table below:

Step 1: Select Chart Wizard from the top toolbar (or select Chart from the Insert menu)
Step 2: Select the XY (scatter) chart type, Click the Next Button
Step 3: Place your cursor in the Data Range cell
Step 4: Highlight the entire contents of the table, including labels, Click the Next button
Step 5: Use the default values to show the legend at the right of the graph
Note: You can label the X and Y axes if you wish
Step 6: Select the option to place the chart as an Object in Ex.5, Click the Finish button

Square Feet Selling Price

1500 $100,000
1600 $110,000
1700 $150,000
1800 $185,000
1900 $187,000
2000 $188,000
2100 $192,000
2200 $195,000
2300 $197,000
2400 $200,000
2500 $210,000
2600 $215,000

Your Scatter Diagram should match the one at the bottom of this page.
 Introduction to Statistics Using Excel

Note: You may need to click on the chart and drag it into this space.

Answer 10:

Selling Price

$250,000

$200,000

$150,000
Selling Price
$100,000

$50,000

$0
This concludes Exercise 5: Data Representation - Scatter Diagrams
1400 1600 1800 2000 2200 2400 2600 2800
Exercise 6: Simple Forecasting - Adding Trendlines to your Scatter Diagrams will guide you through adding
a trendline to your scatter diagram.

Copyright © 1999 President and Fellows of Harvard College

 29190
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 EXERCISE 6
Introduction to Statistics Using Excel SIMPLE FORECASTING
TRENDLINES

Exercise 6: Simple Forecasting - Adding Trendlines to your Scatter Diagrams

This exercise will walk you through adding a forward-looking and a backward looking trendline to the scatter
diagram we created in exercise 5.

The Excel Tools covered in this exercise:

Tool 11 Adding a Trendline to a Scatter Diagram

Trendlines

Now that you have identified the straight-line relationship between the x and y points in the
data set, you may want to extrapolate to determine what possible values are above or below
the end-points of your scatter diagram. Trendlines are used to analyze problems of
prediction. You can extend a trendline in a chart forward or backward beyond the actual data
to show a trend. For example, since the maximum house size for which we have data is
2600 square feet, to forecast the price at 3000 square feet we will add a trendline of 400 units
to our scatter diagram. We might also be interested in what a 1000 square foot house would
sell for based on our sample data.

Note: Although beyond the scope of this workbook. The add trendline feature uses a
concepts known as regression to add the trendline (also known as a regression line) and
extend it beyond the points for which we have data in our data set. For more information
about regression and trendlines, consult the Introduction to Regression Using Excel
Workbook that is part of the HBS Toolkit.

To add a trendline to the scatter diagram you created in exercise 5 follow these steps (a copy of the graph is
located below):

Step 1: Use the right mouse buton to click on any data point in the graph
Step 2: Select Add Trendline from the menu
Step 3: Under the Type tab select Linear
Step 4: Under the 0ptions tab in the Forecast section place your cursor the Forward box
Step 5: Enter 400 units (3000 sq. ft. - 2600 sq. ft.)
Step 6: Now place your curson in the Backward box
Step 7: Enter 500 units (1500 sq. ft. - 1000 sq. ft.), Click OK

Selling Price

$250,000

$200,000

$150,000
Selling Price
$100,000

$50,000

$0
1400 1600 1800 2000 2200 2400 2600 2800
 EXERCISE 6
Introduction to Statistics Using Excel SIMPLE FORECASTING
TRENDLINES

This is what the data entry dialog box should look like:
 EXERCISE 6
Introduction to Statistics Using Excel SIMPLE FORECASTING
TRENDLINES

Answer 11:
Selling Price

$250,000

$200,000

$150,000
Selling
Price
$100,000

$50,000

$0
1000 1500 2000 2500 3000

This concludes Exercise 6: Simple Forecasting - Adding Trendlines to your Scatter Diagrams
This concludes the Introduction to Statistics Using Excel Workbook

Copyright © 1999 President and Fellows of Harvard College

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