BUSI 3016 Week 8 Revenue Variance Explanation Example

Summer Repair Revenue Came In $24,000 Below Plan: A Variance Explanation That Splits the Gap Into $74,400 Lost to Fewer Calls and $50,400 Gained From Larger Tickets at a Family Heating and Air Business

Student Name

Walden University

BUSI 3016: Finance Essentials Workplace Certificate

Instructor Name

Month Day, Year

Summer Repair Revenue Came In $24,000 Below Plan: A Variance Explanation That Splits the Gap Into $74,400 Lost to Fewer Calls and $50,400 Gained From Larger Tickets at a Family Heating and Air Business

The Gap

The Ozark Comfort plan, for this course's composite contractor, called for $372,000 of repair revenue for the three summer months of June through August 2027. Actual repair revenue was $348,000, $24,000 below plan. The owner's first reaction was that the technicians had a slow summer. That is partly right, but the total hides two movements that went in opposite directions, and only one of them was bad news.

Repair revenue here means labor and diagnostic charges on repair calls, excluding parts and equipment.

Plan and Actual

Table 1

Summer Repair Revenue, Plan Against Actual, June to August 2027

Composite figures. The plan used last summer's calls plus expected growth and last summer's average ticket.

Splitting the Variance

The total difference can be divided into two parts. The volume variance asks how much revenue changed because the number of calls changed, holding the planned average ticket fixed. The price variance asks how much changed because the average ticket changed, applied to the actual number of calls.

Volume variance = (actual calls − planned calls) × planned average ticket = (1,240 − 1,550) × $240 = −$74,400.

Price variance = (actual average ticket − planned average ticket) × actual calls = ($280.65 − $240.00) × 1,240 = +$50,400.

Total variance = −$74,400 + $50,400 = −$24,000.

Datar and Rajan (2021) describe this kind of split, separating the effect of quantity from the effect of price, as the starting point for explaining why actual results differ from a budget.

Why Fewer Calls

The company ran 310 fewer repair calls than planned, a shortfall of 20 percent. The main cause was the weather. By the company's own log of service-area highs, June and July 2027 had far fewer days above 90 degrees than the summer before, and air conditioners fail most often on long runs of hot days. Calls in August, which was hot, came in close to plan; nearly all of the shortfall fell in June and July. A smaller cause was a week in July when two of five technicians were out, one on vacation and one injured, and the dispatcher booked fewer same-day calls. That accounts for perhaps 40 of the 310.

Why Larger Tickets

The average ticket rose by about $41. Two things drove it. The first was price: in May the company raised its diagnostic fee by $10, which accounts for about $12,400 of the price variance across 1,240 calls. The second, and larger, was the mix of work. With fewer routine calls about clogged drains and tripped breakers, a larger share of the calls that did come in were major repairs on older systems, such as compressor and coil replacements that carry more labor. That shift in mix accounts for the remaining $38,000.

What the Owner Should Take From This

In plain words: we had about a fifth fewer repair calls than planned because the early summer was mild, but the calls we did get were bigger jobs and our new diagnostic fee helped, so we ended only 6.5 percent short. The shortfall was mostly weather, which the company cannot control, and partly the July staffing gap, which it can.

Two lessons follow. The plan should treat summer call volume as uncertain and show a cool-summer case and a hot-summer case, rather than a single figure. And the July staffing gap shows that the company has no slack: one injured technician cost it calls. Hope and Fraser (2003) argued that budgets built as fixed targets encourage managers to explain away misses; planning with ranges would make a mild summer something expected rather than something to explain.

How the Explanation Would Read in the Owner's Monthly Report

For the monthly report, the explanation can be compressed to three sentences: Summer repair revenue was $24,000 below plan. We ran 310 fewer calls than expected, mostly because June and July were mild, which cost about $74,000; larger repair jobs and the new diagnostic fee added back about $50,000. Next summer's plan will show a cool-summer and a hot-summer case.

Limits

The split depends on which effect is computed first. Computing the price variance at planned calls instead of actual calls would shift a little of the difference between the two parts, though not the conclusion. The weather explanation is supported by the pattern across months, not by a formal test. Garrison et al. (2021) note that variances are signals for investigation, not verdicts, and these signals point to weather first and staffing second.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting (17th ed.). McGraw Hill.

Hope, J., & Fraser, R. (2003). Beyond budgeting: How managers can break free from the annual performance trap. Harvard Business School Press.