Profit Variance Analysis

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# Profit Variance Analysis - PowerPoint PPT Presentation

Profit Variance Analysis. Ken Homa. PVA Profit Variance Analysis. Objective : Disaggregate a change in profits from one period to another by isolating major contributing factors, e.g. Volume Price Inflation (cost) Program spending Productivity. Profit Variance Analysis. Base Profit.

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### Profit Variance Analysis

Ken Homa

PVA Profit Variance Analysis

Objective: Disaggregate a change in profits from one period to another by isolating major contributing factors, e.g.

• Volume
• Price
• Inflation (cost)
• Program spending
• Productivity
Profit Variance Analysis

Base Profit

Profit Increase

Price

Cost Inflation

Productivity

Programs

Volume

New Profit

PVA Simplified Analytical Process (Price first)
• Restate (inflate) base period (P1) sales using current period (P2) prices,i.e. multiply by any cost increases
• Recalculate the profit or loss
• Difference in P&L from prior year nominal values is attributable to salesprice
• Restate base period costs by multiplying by the cost increases from P1 to P2
• These intermediate results are P1 @ P2 prices & costs
• Recalculate the profit or loss
• Difference in P&L from prior step values is attributable to cost inflation
• Calculate real volume growth
• Divide current period (P2) sales by restated (inflated) P1 sales
• Answer is ‘real volume growth’ from P1 to P2

continued …

PVA Simplified Analytical Process (Price first, continued)
• Apply the real growth factor to all base period (P1) inflated value levels (for sales and costs)
• Recalculate the profit or loss
• Difference in P&L from prior step values is attributable to volume growth
• Subtract the P&L from the prior step to the original current period (P2) P&L (expressed in nominal or “current P2” dollars)
• Difference in P&L from prior step values is attributable to productivity
• Note: if there is a change in program spending (e.g. productivity enhancing initiatives) … calculate the nominal change year-to-year before calculating productivity
• Note: to calculate ‘inflation recovery’, compare the P&L change attributable to price to that attributable to cost inflation, e.g. if ‘price’ is \$8,000 and cost inflation is \$10,000 then 80% of cost inflation is ‘recovered’ in price
PVA Simplified Analytical Process (Volume first)
• Calculate real volume growth:
• Restate (inflate) base period (P1) sales using current period (P2) prices
• Divide current period (P2) sales by restated P1 sales
• Answer is ‘real volume growth’ from P1 to P2
• Apply the real growth factor to all base period (P1) dollar levels
• These intermediate results are P2 @ P1 prices & costs
• Recalculate the profit or loss
• Difference in P&L from P1 nominal values is attributable to volume growth
• Using the results from the prior step, restate sales by multiplying by the sales price increase from P1 to P2
• These intermediate results are P2 @ P2 prices, but P1 costs
• Recalculate the profit or loss
• Difference in P&L from prior step values is attributable to salesprice

continued …

PVA Simplified Analytical Process (Volume first,continued)
• Using the results from the prior step, restate costs by multiplying by the cost increases from P1 to P2
• These intermediate results are P2 @ P2 prices & costs
• Recalculate the profit or loss
• Difference in P&L from prior step values is attributable to cost inflation
• Subtract the P&L from the prior step to the original current period (P2) P&L (expressed in nominal or “current P2” dollars)
• Difference in P&L from prior step values is attributable to productivity
• Note: if there is a change in program spending (e.g. productivity enhancing initiatives) … calculate the nominal change year-to-year before calculating productivity
• Note: to calculate ‘inflation recovery’, compare the P&L change attributable to price to that attributable to cost inflation, e.g. if ‘price’ is \$8,000 and cost inflation is \$10,000 then 80% of cost inflation is ‘recovered’ in price