Question

	Revenue	Cost	Profit
Budget	168,000	120,000	40%
Actuals	157,000	125,500	25%
Variance	-11,000	5,500	-15%

do analysis with this table, and give an advice to make business better

Answer 1

1. Revenue is 6.5% down that the budget. This may be due to decrease in the price of the product or decrease in the quantity sold or both. Sometime, price of the product may be increased but still there may be decrease in revenue because of decrease in quantity sold and vice versa. Given one example-

Case A- Decrease in Price
	Price	Volume	Revenue
Budget	100.00	1680	168000
Actual	93.45	1680	156996
Case B- Decrease in Quantity Sold
	Price	Volume	Revenue
Budget	100.00	1680	168000
Actual	100.00	1577	157700
Case C- Decrease in Price as well in Quantity Sold
	Price	Volume	Revenue
Budget	100.00	1680	168000
Actual	98.00	1602	156996
Case D- Increase in Price but decrease in Quantity Sold
	Price	Volume	Revenue
Budget	100.00	1680	168000
Actual	110.00	1427	156970
Case E- Increase in Quantity Sold but decrease in Price
	Price	Volume	Revenue
Budget	100.00	1680	168000
Actual	92.76	1700	157692

Therefore, to analyse more, we need to check exactly under which case the problem has been fallen into. If there has been a increase in price, we need to check the competitor's price, industry average price, prices of similar product in local market and so on.

If there is decrease in quantity sold, then we need to recheck our product quality, marketing strategy, efforts of the team, sales promotion strategy and whether the product is solving customer problem as expected or not. A quality benchmarking with competitor is always useful to implement.

We need to optimize the price and volume using the following equation-

P= a- bQ,

Where,

P= Price,

a= Price at which demand is Zero

b= Slope of the demand curve calculated as b=Change in Price/Change in Quantity

2. Cost is 4.8% up from the budgeted one. The information does not provide us the break down of cost into fixed and variable. If fixed cost if increased, then we can compensate it by putting an extra efforts to sell more quantity. If variable cost increased, then we need to figure out exactly which is main cost driver of the product, can we compromise a little bit in quality, or can we implement better technology to reduce cost. A cost reduction strategy such as Kaizen Costing along with a cost control strategy is always useful. We can also implement value engineering to get the product at a targeted cost.

Conclusion: After careful analysis of the root cause of decrease in revenue and increase in profit, we can implement best strategy to make the business profitable as expected. Also, our budget should be a realistic one and need to be changed from time to time as per change in circumstances. Apart from budget, forecast should also be be implemented to get how market is reacting towards us.

Note:

Kaizen costing is a cost reduction strategy which targets to reduce cost continuously in small amount and thus gives a cumulative effects on cost reduction.

Value Engineering is a scientific analysis of the value of the product which aims to reduce cost by re-engineering the various manufacturing process of the product and/or the features and quality of the product.