Cost and

Management
Accounting
INSIGHT REPORT GENERATED AFTER ANALYSING THE
VARIANCE AND THE PERFORMANCE OF THE BOTH THE
BUSINESSES OF SOFTWARE ASSOCIATES

Dated: 19th November, 2018

Submitted By:
Vaibhav Gupta B021
Submitted to: Dr. Chandan Dasgupta Amandeep Kaur B029
Mainak Mitra B039
(PROFESSOR & PROGRAMME CHAIPERSON FINANCE) Pooja Motwani B042
Harshit Tayal B064
 About the Software Associates case:

Richard Norton founded the Software Associates in 1994 to perform system

integration projects for the clients. It offered two types of services to the clients.
The Solutions Business helped clients rapidly targeted information management
strategies and mobilized technology and resources to develop software
solutions. The contract business offered clients software engineers,
programmers and consultants on a short-term project basis to help the clients to
implement their own IT tools and solutions.

They prepare a detailed budget for every three-month based on the annual plans
and the recent operating experience and information from the market.
This case study revolves around the question of why even after exceeding the
billing hours and revenue targets the bottom line of the business remains less
than half of what had been budgeted.

Variance Analysis

Refer to the analysis in the provided excel.

Group 3_Software
Associates.xlsm
 Analysis and Insights

Would the variance analysis in Question 1 sufficient to explain the profit

shortfall to Norton at the 8 AM meeting?

Analysis performed in "Question 1" would not be sufficient to explain the

shortfalls to Norton because it does not provide the insights of the situation.
It gives Jenkins a cursory view over the variations coming in the Revenues and
Expenses. She still has to dig deep to find the probable causes which has been
done later in the analysis.

What are the insights from the Question 2? (Refer to Exhibit 2)

For Revenue - Revenue is a function of billed consultant hour and billing rate.

There has been a positive change in the number of hours billed by the consultant
i.e. 3090 hours. But the actual billing rate is $6.31 less than the budgeted which
is countering the positive effect of improved billed hours. Hence, Revenue
increased a meagre 1%.

For Expenses - Expenses are bifurcated in two parts - Consultant salaries and
Operating expenses. Consultant salaries are a function of number of consultant
and their rate.

The number of consultants is 8 more than the budgeted and the actual price rate
paid to a consultant is higher than budgeted by $1,306 which is costing the
company a major chunk of almost 83% of the total variance in the expenses and
the rest is due to the increment in operating expenses.
Analysis of flexible budget to show the spending variance attributable to
fixed (committed) and variable expenses. (Refer to Exhibit 3)

The total actual operating expense variance is $61,260 more than the budgeted
expense. The fixed budgeted expense is $5,25,000 and variable is $3,52,300.
The variance in the operating expense is coming due to two reasons:

1.Spending variance from the flexible budget

The flexible budget spending per consultant is $5,188.14. Therefore, the extra
cost due to higher consultant cost over budgeted variable per consultant cost is
contributing $21,260 to the operating variance.

2. Volume variance
The rest $40,000 variance is coming due to more number of consultants than
budgeted which is increasing the variable cost of the company. Hence the total
variation is coming unfavorable of the amount of $61,260.

How the variance in Revenue from the quantity attributable to consultant

performance? (Refer to Exhibit 4)

As per the analysis, the change in revenue from the quantity is coming because
to two main reasons. First, due to more number of consultant hours being
supplied because of which almost 90% of the total increment in the Revenue
from the quantity is coming. The number of consultant hours actually supplied
is considerably more than the number of budgeted hours.
Secondly, the percentage of billing was .70% higher than the budgeted one
which is making a 10% increase in the revenue from the quantity side.
How is the two line of the business of software associates affecting the
performance of the company? How are the variance in Revenue and
consultant expense attributable to the different lines of the business? (Refer
to Exhibit 5)

The two lines of business was "Contracts" and "Solutions". The requirement of
number of consultants in both the businesses was different with different per
hour rate. Gross margin of the both businesses was different and the
performance of the both businesses was lower from the expectations. Though,
the revenue earned from the Contracts business beat the expectation as it was
presented in the analysis. The unfavorable change came from the Solutions
business which countered the increment of the revenue generated from the
Contracts business to a meagre 1% increase of $32,100.
Interestingly, there was no change in the aspect of cost of consultant in the
business of Solutions and the whole beating was taken by the Contracts
business.
The decomposition of both the Revenue and Cost of consultant has been done in
two parts in the analysis in the Question 5 as Price Variance and Mix Variance.
 Recommendations

The three main areas where Jenkins can make the possible changes to get the
desired level of profitability are billing rate, consultant cost and productivity
of the consultant.

Billing rate:
There has been almost 9% increase in the number of billable hours by the
consultant but the billable rate is lesser than the expected rate due to which the
increase in the revenues could not reach to the expected level.
So, the billing rate should be increased to have the expected positive impact on
the revenue. It should be kept more than $90.

Consultant Cost:
The next major cause of the variation is coming from higher consultant expense
rate and increased number of consultant than the budgeted. The higher actual
price of $17,957 paid to per consultant is 53% of the total variation of the
expenses. Susan should look at the per consultant cost to keep it near to the
expected cost so that the variance could be taken care of.

Productivity:
The number of the hours billed could also be improved over hours supplied as it
is just 76% for this quarter, so there is enough room for Jenkins and Norton to
work upon and increase the productivity and efficiency of the consultants and
take an edge in the industry.
Software Associates has two business line: Contracts and Solutions.
As per our analysis, we found that the there is a favourable change in the
business of Contracts in terms of revenues which has improved by $2,55,360
while Solutions business incurred a loss of $2,23,260 due to which the overall
revenue change came to just 1%. Therefore, Billable hours and Billing rate of
the Solutions business should be increased in the coming quarter as the actual
rates and hours are behind the expected.
The expenses related to consultant salaries and fringes of the Contracts business
are unfavourable because of higher actual hourly cost of consultant. Therefore,
Susan can work out a new salary plan for the consultant to keep higher
consultant cost close to the expected charges.

By taking decisions regarding the increasing consultant cost and low billing
rate, Susan can bring positive change in the coming quarters and improve the
profitability of the business.