Software Associates Assignment 2

SOFTWARE ASSOCIATES CASE ANALYSIS

SUBMITTED BY: GROUPKANCHAN GUPTAMADHULIKA RAJMOHIT LALCHANDANIVISHNU AGARWALRIDDHI JAIN-183

Software Associates Brief History: Software Associates was founded by Richard Norton ten years ago to perform system integration projects for clients. Initially it was set up to operate in client server environments and now it had grown to making web applications with the pace of technological evolution. It has two types of services to offer to clients1)Solutions Business-This Business helped clients rapidly develop targeted management strategies , and then mobilized business and technology resources to deliver software solutions. 2)Contract Business- This Business offered clients experience software engineers, programmers , and consultants, on a short term project basis ,to help the clients implement their own IT tools and solutions. Recently the company noticed that in spite of increase in revenue their profit is not increasing and on the hand showed lower profit percentage than the usual 15-20% range. With the help of below made analysis we have tried our best to acknowledge the reasons for the same.

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 8AM Meeting? Ans : Based on Exhibit 1:

Analysis: Actual Revenues have exceeded budgeted revenues but still our profit has decreased drastically, from exhibit 1 we can see that our expenses have increased significantly and hence lower profits.

Variance analysis report based on the information in exhibit 2:

Particulars Hours billed Average billing rate Total consulting revenue variance

Budget Varian Actual ed ce 39000 35910 83.69 90

Hours billed variance Average billing rate variance

32010 27810 0 24609 0

We can see here, variance for revenue and hours billed is favorable whereas,

for average billing rate it’s unfavorable. Sum of Hours variance and average billing rate variance is equal to Consulting Revenue variance. Thus, $278,100 - $246,090 = $32,010.

Question 3: Prepare a spending and volume variance analysis of operating expenses based on the additional information supplied in Exhibit 3. From Exhibit 3 we can deduce following:

Analysis: The case tells us that the budgeted expenses were neither entirely variable nor entirely fixed during the quarter and based on their variance percentage we can say that major chunk of this expense is varying for administration, information systems, dues and subscription ,education, office expense, office supplies, postage, telephone ,travel and entertainment. These have variable percentages more than 80% which means we cannot certainly predict our budgeted expense due to this variability. So our total actual expenses from the table=$938,560 And total budgeted expenses= $877,300 Therefore difference in expense=938,560-877,300=61,260 And, we know Fixed Expense = Budgeted Expense – Variable Expense Total Variable Expense = $525,000 Therefore Total Fixed Expense = $877,300-$525,000=$352,300 No of Budgeted Consultants=105 Therefore,

Variable Expense per consultant = $525000/105 = $5000 Also, Flexible budget actual volume = Total Fixed Expense + Total Actual Variable Expense Total Actual Variable Expense = Variable Expense per consultant * Actual consultants = 5000*113 = $565,000 Therefore, Flexible budget at actual volume = $352,300 + $565000 = $917,300 And, 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) Therefore, Total indirect expense variance = $61,260 = Spending Variance + Volume Variance = $21,260 + $40,000 = $61,260

Analysis: Volume variance is unfavorable for us and so is spending variance. So overall $61,260 is the extra cost which as a part of flexible budget should have been reduced.

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

Analysis of volume effect

Actual Consultant hours supplied Expected consultant hours supplied Expected billing % Expected billing rate Variance

50850 47250 76% 90 246240

Result: Favorable Analysis of productivity effect (Billing %) Actual consultant hours supplied Actual billing % Expected billing % Expected billing rate Variance

50850 76.7% 76% 90 31860

Result: Favorable Analysis: From the two tables above our volume variance is 246240 and productivity variance is 31860 so our total revenue variance is =246240+31850=278100 which is favorable.

Question 5: Prepare an analysis of actual versus budgeted revenues consultant expenses and margins using additional information in exhibit 4. Actual:

Budgeted:

So we get, Solution s

Contract Pure billing rate price variance

48000 Favourable

Total

-121200

Unfavoura ble

Mix variance

-138240 Unfavourable

-34560

Unfavoura ble

Revenue rate variance

-90240 Unfavourable

-155760

Unfavoura ble

Contrac t

Soluti ons

Pure consultant cost price variance

172800

Unfavourab le

Mix variance

-25200 Favourable

Consultant expense rate variance

147600

Unfavourab le

- Unfavoura 73200 ble 17280 0 24600 0

Unfavoura ble Unfavoura ble

Total Unfavoura ble

-

-

172800

-

-

-25200 Favourable

-

-

147600

Unfavoura ble

Conclusion: If the company tries to improve its costing methods by reducing their expenses and aiming for innovation and adapting to social environments it can expand and establish itself better.