Profit Variance Analysis A strategic Focu - Essay Example

Although, prima facie, it would seem that the Company is growing at a fairly good growth rate and is in good financial health, this may not bring out the entire picture. It is very much possible that certain key indicators of business performance, like market shares, Contribution, net worth, ROI, and P/V Ratio, that is Profit volume ratios may not be as desired, but these vital parameters lie buried under the avalanche of profit statements. The Analysis reported in Table 3 fails to address certain key questions regarding the marketability of products.

If the Company is a single product catering to a single market, things are easy. But, if the Company is multi-producted, having, say two or three diverse product lines, would it be logical to assume that they have the same markets and customers. This may not be true. Different products may have different markets, diverse customers and separate market shares. To club all together, would be inadequate and misleading. Therefore, different market strategies, financial costing, and management accounting principles would have to be used for the different product lines.

Only then would a clear and correct picture emerge regarding contribution, PV Ratio, ROI product wise, market share and estimation of fixed, variable, semi-variable and step-fixed variable costs be correctly estimated and determined. Question 2 : Does a favorable variance imply favorable performanceAnswer 2 : A favorable variance, or adverse variance, does not always imply favorable or adverse performance. The connection between favorable and adverse variance on the one hand, and the favorable and adverse performance on the other, would depend upon the laying out of the strategies in the context of business, and it is only after evaluation of execution of these business strategies that it could be possible to adjudge, whether a favorable or adverse variance necessarily implies favorable or adverse product performance.

(Govindarajan & John, 1989). Question 3: Table 4 shows a rather elaborate and detailed analysis of variances of operating factors such as total market share, market share of the firm, sales mix, selling price and costs. The analysis considers almost all, if not all, the factors that are of interest and importance to management. Why is this analysis incomplete Answer 3: An important aspect of variance analysis is the implementation of strategic goal settings and the constant comparison of actual performance with the targeted strategic goals.

This method is connected with strategic analysis and aptly manifests the significance of integrating strategic planning with the assessment of the overall financial performance. The performance evaluation, which is a critical component of the management control process, needs to be embedded into the strategic structural framework of the firm for optimum results. In a Company, the different strategiesimplies different specialized tasks and requires different corporate behavioral patterns for effective performance. In such a