A Performance Report Combining Activity and Revenue and Spending Variances
Focusing first on revenue, the flexible budget indicates that, given the actual level of activity, revenue should have been $198,000. However, actual revenue totaled $194,200. Consequently, revenue was $3,800 less than it should have been, given the actual number of client-visits for the month. This discrepancy is labeled as a $3,800 U (unfavorable) variance and is called a revenue variance. A revenue variance is the difference between what the total revenue should have been, given the actual level of activity for the period, and the actual total revenue. If actual revenue exceeds what the revenue should have been, the variance is labeled favorable. If actual revenue is less than what the revenue should have been, the variance is labeled unfavorable. Why would actual revenue be less than or more than it should have been, given the actual level of activity? Basically, the revenue variance is favorable if the average selling price is greater than expected; it is unfavorable if the average selling price is less than expected. This could happen for a variety of reasons including a change in selling price, a different mix of products sold, a change in the amount of discounts given, poor accounting controls, and so on.
Focusing next on costs, the flexible budget indicates that electricity costs should have been $1,610for the 1,100 client-visits in March. However, the actual electricity cost was $1,550. Because the cost was $60 less than we would have expected for the actual level of activity during the period, it is labeled as a favorable variance, $60 F. This is an example of a spending variance. By definition, a spending variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost. If the actual cost is greater than what the cost should have been, the variance is labeled as unfavorable. If the actual cost is less than what the cost should have been, the variance is labeled as favorable. Why would a cost have a favorable or unfavorable variance? There are many possible explanations including paying a higher price for inputs than should have been paid, using too many inputs for the actual level of activity, a change in technology, and so on. In the next chapter we will delve into this topic in greater detail.
Note from Exhibit 9–6 that the overall net operating income variance is $9,280 U (unfavorable). This means that given the actual level of activity for the period, the net operating income was $9,280 lower than it should have been. There are a number of reasons for this. The most prominent is the unfavorable revenue variance of $3,800. Next in line is the $2,360 unfavorable variance for client gratuities. Looking at this in another way, client gratuities were more than 50% larger than they should have been according to the flexible budget. This is a variance that Rick would almost certainly want to investigate further. Rick may directly control the client gratuities himself. If not, he may want to know who authorized the additional expenditures. Why were they so large? Was more given away than usual? If so, why? Were more expensive gratuities given to clients? If so, why? Note that this unfavorable variance is not necessarily a bad thing. It is possible, for example, that more lavish use of gratuities led to the 10% increase in client-visits.
A Performance Report Combining Activity and Revenue and Spending Variances
LEARNING OBJECTIVE 4
Prepare a performance report that combines activity variances and revenue and spending variances.
Exhibit 9–7 displays a performance report that combines the activity variances (from Exhibit 9–5 ) with the revenue and spending variances (from Exhibit 9–6 ). The report brings together information from those two earlier exhibits in a way that makes it easier to interpret what happened during the period. The format of this report is a bit different from the format of the previous reports in that the variances appear between the amounts being compared rather than after them. For example, the activity variances appear between the planning budget amounts and the flexible budget amounts. In Exhibit 9–5 , the activity variances appeared after the planning budget and the flexible budget.