Chapter 10

ANALYZING FINANCIAL
PERFORMANCE REPORTS

Formal Control Process

Goals
Goals
and
andstrategies
strategies
(Chp
(Chp22&&13)
13)

Rules
Rules
(Chp
(Chp3)3)

Other
Other
information
information
Reward (feedback)

Strategic
Strategic
Planning
Planning
(Chp
(Chp8)8)
Revise

Budgeting
Budgeting
(Chp
(Chp9)9)

Revise

Responsibility
Responsibility
center
center
Performance
Performance
(Chp
(Chp10
10&&11)
11)
Corrective
action

Report
Report
actual
actualvsvsplan
plan

Was
Was
performance
performance
satisfactory?
satisfactory?
(Chp
(Chp11
11&&12)
12)

Measurement
Feedback
Communication

Yes
No

Calculating Variance
Comparing actual performance with
the budget.
Needs thorough analysis.
Effective systems identify variances
down to the lowest level of
management.
Variance are hierarchical.

Variance Analysis
Disaggregation
Total
variance

Nonmanufacturing
costs

Administration

Marketing

Manufacturing
costs

R&D

Variable
costs

Total
variance

Fixed
costs

Total
variance

Total
variance

Sales

Volume

Selling
price

Total
variance

Total
variance

Revenue Variances

Selling price variance = (actual price standard price) x actual volume

Sales mix and volume variance = (actual volume Budgeted volume) x
Budgeted unit contribution
Mix variance = [(Total actual volume of sales x Budgeted proportion)
Actual
Volume of sales] x Budgeted unit contribution
Volume variance = (Total actual volume of sales x Budgeted percentage)
Budgeted sales x Budgeted unit contribution)
Market Penetration & Industry Volume

Market share variance = [Actual sales (Industry volume x Budgeted market

penetration)] x Budgeted unit contribution
Industry volume variance = [Actual industry volume (Budgeted industry volume x
budgeted market penetration)] x Budgeted unit contribution

Expense Variances
Fixed Costs (Exhibit 10.10)
Variable Costs (Exhibit 10.11)

Variations in Practice

Time Period of Comparison

Focus on Gross Margin

Gross margin = Actual selling price Standard

manufacturing cost
For marketing manager whose task is to obtain
budgeted gross margin.
Standard cost is used so that manufacturing
inefficiencies do not affect the performance of
marketing organization.

Continued

Evaluation Standards

Predetermined standard or budgets

Must be carefully prepared & coordinated.

Historical standards
Record of past actual performance.
Weaknesses:
1. Condition may have changed.
2. Prior performance may not have been acceptable.

External standards
Benchmarking

The validity of standard

Limitation of
Variance Analysis
It does not tell why the variance
occurred or what is being done about it.
2. To decide whether a variance is
significant.
3. The performance reports become more
highly aggregated, offsetting variances
might mislead the readers
4. The reports show only what has
happened, not the future affects of
action that manager has taken.
1.

Management Action

The monthly profit report should contain

no major surprises.
The importance of formal financial report:

Provide desirable pressure on subordinate

managers to take corrective actions on their
own initiative.
Provide more accurate information.
Basis for analysis.

Reports are worthless unless they lead to

action.