Case | HBS Case Collection | January 2013

Luotang Power: Variances Explained

by Robert Simons and Craig Chapman

Abstract

The general manager of Luotang Power, a coal-fired power plant located in central China, reviews annual results before a meeting with the board of directors. He thought the company performed well during the year and both plant availability and fuel economy had improved over the previous year. However, the positive performance does not show in the financial results and he must investigate before presenting to the board. He considers performing a variance analysis to better understand plant performance compared to the previous year. He also examines the contractual arrangement the plant has with the provincial power company for a minimum purchase of electricity to supplement regional demand. The company had been successful at selling excess electricity to the power plant but over the past 12 months, demand has decreased. Students must complete a quantitative analysis of the plant's performance and prepare recommendations to improve reporting and evaluation of the plant's performance. This case can be used in an introductory managerial accounting course to explore variance analysis and incentives in contracts.

Keywords: China; financial statements; contracts; management accounting; Variance Analysis; environmental regulations; incentives; Electric Power Generation; Contracts; Valuation; Energy Generation; Accounting; Performance Evaluation; Energy Industry; China;

Citation:

Simons, Robert, and Craig Chapman. "Luotang Power: Variances Explained." Harvard Business School Brief Case 913-533, January 2013.