Essay on Case: Coal and Variance
Background of Company
Luotang Power is a coal-fired power plant located in central China. This company is a subsidiary of China Hua Tong Power (HT Power). The main activity of this company is to generate electricity. Luotang Power operates using a 600 MW coal-fired power plant and sells the generated power to their primary customer, the Hubei Provincial Power Company (HPPC). HPPC was the only company in Hubei Province that owned all the power transmission and distribution facilities and independently owned power plants operating in the province. The coal is supply by Pingdingshan and according to the contract, it is required to supply low sulfur bituminous coal that met certain quality specifications.
Main Issue and …show more content…
Fuel Efficiency Variance = (Mass of coal used per net MWh sold this year – Mass of coal used per net MWh sold last year) x MWh sold this year x Price of coal last year
(346-347) x 3,427,351 x 0.4219 = 1,446,000 (unfavorable)
(347-342) x 3,937,377 X 0.4200 = 8,268,491.70 (favorable)
Based on Fuel Efficiency Variance in year 2011 it showed that unfavorable variance that 1,446,000RMB/MWh due to decline from the year 2010 to 2011. While in 2010 the fuel efficiency variance showed favorable 8,268,491RMB/MWh due from year 2009 to 2010. From that it clearly that Lutong Power have used the coal not in effectively because the total of generate each MWh of electricity has been decrease favorable 8258491.70 in year 2010 to unfavorable 1,446,000 in year 2011.
FUEL COST VARIANCE
For the Fuel Cost Variance it is based upon the price of coal purchased but also taking changes in market price for coal and the coal delivery into account. This can be define as:
Fuel Cost Variance = (Price coal this year – Price of coal last year) x Mass of coal used per MWh sold this year x MWh sold this year
(0.4238-0.4219) x 346 x 3,427,351 = 2,253,141 (favorable)
(0.4219-0.4200) x 347 x 3,937,377 = 2,595,913 (favorable)
Based on analysis of fuel cost variance, in year 2011 show