Conceptual Understanding of Rate / Volume Analysis for Balance Sheet changes
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Not sure if this is the right place to ask this but I searched and didn't find this question already asked. I am having a lot of trouble conceptually understanding the formulas behind a rate / volume analysis for changes to a bank's balance sheet. I know this is just a specific application of a more general question (apportioning change to different factors) but this is the application within which I am working. Below is an example and then my question.
- Time Period 1: Balances = 100, Interest Rate = 1%, Income = 100 * 1% = 1
- Time Period 2: Balances = 200, Interest Rate = 2%, Income = 200 * 2% = 4
- Change in Income = 4 - 1 = 3
I am trying to explain how much of the increase in income is due to the balance increase and how much is due to the interest rate increase. The way I was taught to do this, and everything I've read in the last hour or so of googling, is below:
- Change due to volumes = (200 - 100) * 1% = 100 * 1% = 1
- Change due to rates = (2% - 1%) * 200 = 1% * 200 = 2
The math here works, and I understand what we're doing conceptually by calculating the change due to volumes (in the absence of any rate increase this is the income that is attributable to our observed volume increase), but I don't understand what we're doing conceptually by calculating the change due to rates; it seems like we should be multiplying the change in rates times the old balances i.e. calculating increased income in the absence of any balance increase. That math doesn't work, though.
Assuming these are the correct calculations for apportioning change (and if they aren't please let me know!), what is the conceptual explanation behind what we're doing to calculate rate change? And is my understanding of change due to volumes incorrect?
analysis volume variance
asked May 21 '16 at 21:18
Greg Bunker
613
add a comment |
up vote
1
down vote
favorite
Not sure if this is the right place to ask this but I searched and didn't find this question already asked. I am having a lot of trouble conceptually understanding the formulas behind a rate / volume analysis for changes to a bank's balance sheet. I know this is just a specific application of a more general question (apportioning change to different factors) but this is the application within which I am working. Below is an example and then my question.
- Time Period 1: Balances = 100, Interest Rate = 1%, Income = 100 * 1% = 1
- Time Period 2: Balances = 200, Interest Rate = 2%, Income = 200 * 2% = 4
- Change in Income = 4 - 1 = 3
I am trying to explain how much of the increase in income is due to the balance increase and how much is due to the interest rate increase. The way I was taught to do this, and everything I've read in the last hour or so of googling, is below:
- Change due to volumes = (200 - 100) * 1% = 100 * 1% = 1
- Change due to rates = (2% - 1%) * 200 = 1% * 200 = 2
The math here works, and I understand what we're doing conceptually by calculating the change due to volumes (in the absence of any rate increase this is the income that is attributable to our observed volume increase), but I don't understand what we're doing conceptually by calculating the change due to rates; it seems like we should be multiplying the change in rates times the old balances i.e. calculating increased income in the absence of any balance increase. That math doesn't work, though.
Assuming these are the correct calculations for apportioning change (and if they aren't please let me know!), what is the conceptual explanation behind what we're doing to calculate rate change? And is my understanding of change due to volumes incorrect?
analysis volume variance
asked May 21 '16 at 21:18
Greg Bunker
613
You haven´t calculated the variance. Please read the definition of the variance here:en.wikipedia.org/wiki/Variance
– callculus
May 21 '16 at 22:09
Hi, thank you for the link but I know what variance is. I'm not referring to the statistical definition of variance, I'm referring to the colloquial definition just meaning the change in income. I've taken your point, though, and I've edited my post to say "change" instead of "variance".
– Greg Bunker
May 21 '16 at 22:35
add a comment |
up vote
1
down vote
favorite
up vote
1
down vote
favorite
Not sure if this is the right place to ask this but I searched and didn't find this question already asked. I am having a lot of trouble conceptually understanding the formulas behind a rate / volume analysis for changes to a bank's balance sheet. I know this is just a specific application of a more general question (apportioning change to different factors) but this is the application within which I am working. Below is an example and then my question.
- Time Period 1: Balances = 100, Interest Rate = 1%, Income = 100 * 1% = 1
- Time Period 2: Balances = 200, Interest Rate = 2%, Income = 200 * 2% = 4
- Change in Income = 4 - 1 = 3
I am trying to explain how much of the increase in income is due to the balance increase and how much is due to the interest rate increase. The way I was taught to do this, and everything I've read in the last hour or so of googling, is below:
- Change due to volumes = (200 - 100) * 1% = 100 * 1% = 1
- Change due to rates = (2% - 1%) * 200 = 1% * 200 = 2
The math here works, and I understand what we're doing conceptually by calculating the change due to volumes (in the absence of any rate increase this is the income that is attributable to our observed volume increase), but I don't understand what we're doing conceptually by calculating the change due to rates; it seems like we should be multiplying the change in rates times the old balances i.e. calculating increased income in the absence of any balance increase. That math doesn't work, though.
Assuming these are the correct calculations for apportioning change (and if they aren't please let me know!), what is the conceptual explanation behind what we're doing to calculate rate change? And is my understanding of change due to volumes incorrect?
analysis volume variance
asked May 21 '16 at 21:18
Greg Bunker
613
Not sure if this is the right place to ask this but I searched and didn't find this question already asked. I am having a lot of trouble conceptually understanding the formulas behind a rate / volume analysis for changes to a bank's balance sheet. I know this is just a specific application of a more general question (apportioning change to different factors) but this is the application within which I am working. Below is an example and then my question.
- Time Period 1: Balances = 100, Interest Rate = 1%, Income = 100 * 1% = 1
- Time Period 2: Balances = 200, Interest Rate = 2%, Income = 200 * 2% = 4
- Change in Income = 4 - 1 = 3
I am trying to explain how much of the increase in income is due to the balance increase and how much is due to the interest rate increase. The way I was taught to do this, and everything I've read in the last hour or so of googling, is below:
- Change due to volumes = (200 - 100) * 1% = 100 * 1% = 1
- Change due to rates = (2% - 1%) * 200 = 1% * 200 = 2
The math here works, and I understand what we're doing conceptually by calculating the change due to volumes (in the absence of any rate increase this is the income that is attributable to our observed volume increase), but I don't understand what we're doing conceptually by calculating the change due to rates; it seems like we should be multiplying the change in rates times the old balances i.e. calculating increased income in the absence of any balance increase. That math doesn't work, though.
Assuming these are the correct calculations for apportioning change (and if they aren't please let me know!), what is the conceptual explanation behind what we're doing to calculate rate change? And is my understanding of change due to volumes incorrect?
analysis volume variance
analysis volume variance
asked May 21 '16 at 21:18
Greg Bunker
613
asked May 21 '16 at 21:18
Greg Bunker
613
edited May 21 '16 at 22:34
asked May 21 '16 at 21:18
Greg Bunker
613
asked May 21 '16 at 21:18
Greg Bunker
613
asked May 21 '16 at 21:18
Greg Bunker
613
613
You haven´t calculated the variance. Please read the definition of the variance here:en.wikipedia.org/wiki/Variance
– callculus
May 21 '16 at 22:09
Hi, thank you for the link but I know what variance is. I'm not referring to the statistical definition of variance, I'm referring to the colloquial definition just meaning the change in income. I've taken your point, though, and I've edited my post to say "change" instead of "variance".
– Greg Bunker
May 21 '16 at 22:35
add a comment |
You haven´t calculated the variance. Please read the definition of the variance here:en.wikipedia.org/wiki/Variance
– callculus
May 21 '16 at 22:09
Hi, thank you for the link but I know what variance is. I'm not referring to the statistical definition of variance, I'm referring to the colloquial definition just meaning the change in income. I've taken your point, though, and I've edited my post to say "change" instead of "variance".
– Greg Bunker
May 21 '16 at 22:35
You haven´t calculated the variance. Please read the definition of the variance here:en.wikipedia.org/wiki/Variance
– callculus
May 21 '16 at 22:09
You haven´t calculated the variance. Please read the definition of the variance here:en.wikipedia.org/wiki/Variance
– callculus
May 21 '16 at 22:09
Hi, thank you for the link but I know what variance is. I'm not referring to the statistical definition of variance, I'm referring to the colloquial definition just meaning the change in income. I've taken your point, though, and I've edited my post to say "change" instead of "variance".
– Greg Bunker
May 21 '16 at 22:35
Hi, thank you for the link but I know what variance is. I'm not referring to the statistical definition of variance, I'm referring to the colloquial definition just meaning the change in income. I've taken your point, though, and I've edited my post to say "change" instead of "variance".
– Greg Bunker
May 21 '16 at 22:35
add a comment |
1 Answer
1
active
oldest
votes
up vote
1
down vote
I think it would be easier if you imagine an interim state where
Balance = 200, and interest rate = 1%.
The change can be regarded as two small changes.
- From Period 1 to interim state. Balance increased from 100 to 200. But rate stays the same.
- From interim state to Period 2. Balance stays as 200. But rate increased from 1% to 2%.
edited Nov 20 at 23:46
jgon
11.1k11839
answered Nov 20 at 21:54
Yan
111
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
add a comment |
1 Answer
1
active
oldest
votes
1 Answer
1
active
oldest
votes
active
oldest
votes
active
oldest
votes
up vote
1
down vote
I think it would be easier if you imagine an interim state where
Balance = 200, and interest rate = 1%.
The change can be regarded as two small changes.
- From Period 1 to interim state. Balance increased from 100 to 200. But rate stays the same.
- From interim state to Period 2. Balance stays as 200. But rate increased from 1% to 2%.
edited Nov 20 at 23:46
jgon
11.1k11839
answered Nov 20 at 21:54
Yan
111
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
add a comment |
up vote
1
down vote
I think it would be easier if you imagine an interim state where
Balance = 200, and interest rate = 1%.
The change can be regarded as two small changes.
- From Period 1 to interim state. Balance increased from 100 to 200. But rate stays the same.
- From interim state to Period 2. Balance stays as 200. But rate increased from 1% to 2%.
edited Nov 20 at 23:46
jgon
11.1k11839
answered Nov 20 at 21:54
Yan
111
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
add a comment |
up vote
1
down vote
up vote
1
down vote
I think it would be easier if you imagine an interim state where
Balance = 200, and interest rate = 1%.
The change can be regarded as two small changes.
- From Period 1 to interim state. Balance increased from 100 to 200. But rate stays the same.
- From interim state to Period 2. Balance stays as 200. But rate increased from 1% to 2%.
edited Nov 20 at 23:46
jgon
11.1k11839
answered Nov 20 at 21:54
Yan
111
I think it would be easier if you imagine an interim state where
Balance = 200, and interest rate = 1%.
The change can be regarded as two small changes.
- From Period 1 to interim state. Balance increased from 100 to 200. But rate stays the same.
- From interim state to Period 2. Balance stays as 200. But rate increased from 1% to 2%.
edited Nov 20 at 23:46
jgon
11.1k11839
answered Nov 20 at 21:54
Yan
111
edited Nov 20 at 23:46
jgon
11.1k11839
edited Nov 20 at 23:46
jgon
11.1k11839
edited Nov 20 at 23:46
jgon
11.1k11839
11.1k11839
answered Nov 20 at 21:54
Yan
111
answered Nov 20 at 21:54
Yan
111
answered Nov 20 at 21:54
Yan
111
111
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
add a comment |
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
This does not provide an answer to the question. Once you have sufficient reputation you will be able to comment on any post; instead, provide answers that don't require clarification from the asker. - From Review
– Leucippus
Nov 20 at 22:20
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
@Leucippus I realize that comment is from review, but I think that this answer does explain conceptually how the formulas in the question were derived.
– jgon
Nov 20 at 23:45
add a comment |
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You haven´t calculated the variance. Please read the definition of the variance here:en.wikipedia.org/wiki/Variance
– callculus
May 21 '16 at 22:09
Hi, thank you for the link but I know what variance is. I'm not referring to the statistical definition of variance, I'm referring to the colloquial definition just meaning the change in income. I've taken your point, though, and I've edited my post to say "change" instead of "variance".
– Greg Bunker
May 21 '16 at 22:35