Luotang Power Case Study

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;

Teaching Note | HBS Case Collection | January 2013 (Revised March 2017)

Luotang Power: Variances Explained (Brief Case)

Robert Simons and Craig Chapman

The primary objective is to explore the concepts of variance analysis in performance from one year to the next and the predictability of contracting counterparts to extract value from contract positions where they can. The general manager of a coal-fired power plant located in central China is reviewing his annual results and needs to explain the reasons for poor performance to his board. The case centers on variance analysis as to how the power plant has performed. Compared with a traditional variance case, there is added complexity due to the nature of the contracting environment of the power plant and the possibility to explore strengths and weaknesses of some contracting structures.

Keywords: Variance Analysis; strategy and execution; Profitability analysis; Management Control Systems; Contracts; Valuation; Energy Generation; Accounting; Performance Evaluation; China;

Citation:

Simons, Robert, and Craig Chapman. "Luotang Power: Variances Explained (Brief Case)." Harvard Business School Teaching Note 913-534, January 2013. (Revised March 2017.)  View Details

One thought on “Luotang Power Case Study

Leave a Reply

Your email address will not be published. Required fields are marked *