1. Profit Variance Analysis
Ken Homa

2. 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

3. Profit Variance Analysis
Base Profit
Profit Increase
Price
Cost Inflation
Productivity
Programs
Volume
New Profit

4. 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 sales price
Restate base period costs by multiplying by the cost increases from P1 to P2
These intermediate results are P2 prices & costs
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 …

5. 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

6. 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 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 prices, but P1 costs
Difference in P&L from prior step values is attributable to sales price
continued …

7. 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 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