This paper uses profit variance analysis to examine the case of Dallas Consulting Group. Based on the financial information provided in the case, a detailed analysis has been made to discuss the impact of sales variance recorded by the company on its profits. In the given case, there were no variable costs and therefore, there is no need to perform a variance analysis on the basis of contribution. For this case, an approach that is based on an analysis of revenues is appropriate. The findings of profit variance analysis are presented in Appendix A.
The sales variance analysis indicates that the company’s actual revenues were greater than its budget. The increase was considered as a favorable change of $80,000. There were different reasons for this favorable increase in the company’s revenues. Since salaries did not change in actual, therefore, there was no need to analyze the company’s expenses. Overall, the company reported a favorable increase of $80,000 in its income. The increase in income resulted from the change in the company’s revenues. The main reasons for revenues to be higher than the budgeted revenues include differences in the number of working hours for each of the two services provided by Dallas Consulting Group namely Re-engineering and Streamlining production, and also the rate charged by the company for its services.
The calculations of variances provided in this paper indicate that the budgeted number of working hours, which were estimated by the company for consulting services in Dallas, was less than the actual number of working hours. Due to this unfavorable change in the demand for consulting services, the number of working hours assigned to two services offered by the company was affected.
The company’s budget stated that its re-engineering services would achieve 6,000 working hours at a rate per hour of $60. Instead of achieving this target, the company’s re-engineering services only completed 2,000 working hours. There was a reduction of 4,000 working hours as compared to the budget. The reduction in the actual number of working hours was unfavorable for the company as it was not able to generate revenues from its re-engineering services on the basis of budgeted working hours. However, the company was able to charge a higher rate for its re-engineering services. The re-engineering service rate was increased to $70 from $60. The change in service rate charged by the company could be considered as a favorable factor, which contributed positively to the company’s revenues. Instead of generating sales revenues of $120,000 (2,000 working hours @ $60), the company was able to achieve sales revenue of $140,000 (2,000 working hours @ $70). The increased revenues were favorable for the company. Overall, sales revenue from re-engineering services declined by a significant amount. It has been noted that the company had estimated sales revenue from its re-engineering services to be $360,000 before the commencement of the accounting period. However, the company recorded an unfavorable change of $220,000 in its revenues as it only achieved revenues of $140,000 in the last period. If the company had achieved its budgeted number of working hours at a higher service rate, then it would have generated sales revenue of $420,000 (6,000 working hours @ $70), which is well above its current level of $140,000.
The company also offers to streamline production services to its clients in Dallas. The analysis indicates that the company has estimated 9,000 working hours for its streamlining production services. In actuality, the company recorded completion of 12,000 working hours. The increase of 3,000 working hours was favorable for the company as it was able to generate higher revenues than expected. There was no change in the rate per hour charged by the company for its streamlining production services. The company projected sales revenue from its streamlining production services to be $900,000. However, due to the increase in a number of working hours, the company was able to achieve sales revenue of $1,200,000. An increase of $300,000 was favorable for the company’s overall financial performance.
From the analysis, it could be noted that the unfavorable change in sales revenue from re-engineering services was offset by the favorable change in sales revenue from streamlining production services. The difference between sales revenue of two service divisions was positive $80,000, which has been recorded by the company as an increase in its overall sales revenue.
On the basis of the analysis presented in this paper, it could be recommended to the company that it should investigate reasons for a sharp decline in the number of working hours related to its re-engineering service, which has been the major reason for slow growth in the company’s revenues.
Unfavorable change in sales revenue – Re-engineering services: $(220,000)
Favorable change in sales revenue– Streamlining production: $300,000