International Finance and Accounting Handbook

Thus, for example, it is likely that LC Company, the marketing function of Affiliate
B, will have prepared its profit plan in monthly installments and will compare its ac-
tual results against the profit plan on a monthly basis. While Affiliate B, in total, will
do similarly, it is possible that the region requires only quarterly results and compar-
isons with the profit plan. If a company has numerous affiliates, it may be too costly
and, from a materiality point of view, insufficiently important to obtain monthly data
from small affiliates, such as those in some less developed countries, while results
from significant operations in some of the larger countries may need the parent com-
pany’s attention on a monthly basis.
Quarterly income comparisons are necessary, not only because of managerial con-
siderations, but also because Securities and Exchange Commission (SEC) filings of
corporations listed on the major U.S. stock exchanges require a commentary by man-
agement of the previous quarter’s results. While these commentaries pertain to a
comparison of the current quarter’s results with those of the same quarter of the pre-
vious year, the method used for analysis is the same as that used for comparison with
the profit plan.
Let us assume now that we have reached the end of Year 20X0 and that we want
to compare why the results for the year differed from those planned and, further, at-
tribute the differences to operating factors, on the one hand, and to currency factors,
on the other.

(b) Income Comparison. Exhibit 25.10 shows the income statement for Affiliate B
by function. Management also knows that the profit plan reflected a currency con-
version of LC 1 = PC 1, whereas the actual exchange rate during 20X0 and at year-
end 20X0 was LC 1 = PC 0.9, a local currency depreciation of 10%. Looking at the
PC columns in Exhibit 25.10, we note that the total administrative expense exactly

25.8 PROFIT PLANNING CONTROLS 25 • 13

AFFILIATE B—MARKETING

(LC COMPANY)

Profit Plan

Year Ended December 31, 20X0

LC

Revenues __1,000
Beginning inventory (500)
Purchases __(500)
Total (1,000)
Ending inventory __ 500
Cost of sales __(500)
Gross profit (gross margin) 500
Expense (200)
Interest (25)
Depreciation __(50)
Before-tax income ____ 225

Note:The company determined an exchange rate of LC 1 = PC 1.

Exhibit 25.9. Marketing Profit Plan.