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Saturday, August 14, 2010

Pappadeaux Restaurant Responsibility Accounting

Pappadeaux Restaurant

The use of static budget is not a very useful tool in assessing one’s performance. It measures one level of activity and not flexible upon the circumstances that happen in the organization. It should be noted that under responsibility accounting, only the controllable costs, costs that are variable, can be included in one’s responsibilities, a manager or supervisor.

Flexible budget, on the other hand surely helps and is a very useful tool to determine and assess the performance of one department manager, supervisor or any head of a certain segment or branch . The same assumptions are used as with the static budget but in this the case of flexible budget, as the name suggests, it has some flexibilities. Selling prices remains the same as well as costs, given that the situations are the same. The same classifications and categorizations hold true for fixed and variable cost. However, in this case the variable amounts are recalculated using the actual level of activity, which is in the case of Pappadeaux Restaurants, its sales of $800,000. The following explains the income statement presented ending April 30, 2007.

Note A. The sales is in fact has a favorable variance result. Given the decrease in national advertising, which is 20%, where the sales in San Diego depend upon, the new forecasted amount of sales should have been $720,000: $80,000 lesser than the actual results ($800,000), a favorable sales performance.

Note B. Food expenses has direct relationship with sales, thus, 33% of sales, the food budget would have been $264,000. However, actual results depict that a 10% increase in food happened. This would make the flexible budget on food 10% more (264,000 x 1.10) equalling to $ 290,400. The actual food expense resulted to $40,400 favorablevariance.

Note C. Hourly Labor is proportionate to sales at 20%. This makes the flexible budget amount to $160,000. Actual labor expemses is $ 10,000 favorable.

Note D. Supplies expense has a 2% direct relation with sales. If sales is at $800,000 level, the expense amount for supplies would have been $16,000. Actual results is only $15,000 making it $10,ooo favorable.

Notes E,F,G and H. These expense items are not flexibe since they are fixed and cannot be controlled by the area manager, who does not have power over them. Following are the tables of comparison for the sales and expense analysis:

Table 1. Facts Given/ Projected Budget and Actual Results on Gregory’s Performance

Item

Budgeted

Actual

Variance

Sales

$ 900,000

$ 800,000

$ (100,000)

Expense

0

0

0

Food

300,000

250,000

50,000

Supervisory Labor

90,000

95,000

(5000)

Hourly Labor

180,000

150,000

30,000

Utilities

40,000

47,000

(7,000)

Insurance and Taxes

30,000

32,000

(2,000)

Rent

50,000

60,000

(10,000)

Supplies

18,000

14,000

4,000

Corporate Overhead

90,000

120,000

30,000

Total Expenses

798,000

768,000

30,000

Net Income

$ 102,000

$ 32,000

$ (70,000)

Note: ( ) sign denotes an unfavorable variance


Table 2. Flexible Budget

Item

Flexible Budget

Actual

Variance

Sales

A $ 800,000

$ 800,000

$ 0.00

Expense

--

--

--

Food

B 290,400

250,000

40,400

Supervisory Labor

E

Hourly Labor

C 160,000

150,000

10,000

Utilities

F

Insurance and Taxes

G

Rent

H

Supplies

D 16,000

14,000

2,000

Corporate Overhead

I

Variable Expenses

466,400

414,000

52,400

Contribution Margin

$ 333,600

$ 386,000

$ 52,400

Thus, Mr. Hammerhead, I would like to note that this year’s operation of Pappadeaux San Diego is profitable if the expenses would be all under the manager’s control. If given the same level of sales, the results are not as bad than what the static budget comparison shows. The flexible budget shows a favorable variance of $52,400, giving a difference of $122,400 from what the static budget shows ($52,400 - -70,000).

Moreover, with regards to the issue of lesser contribution margin which is still below the projected amount, I would like to reiterate that the level of sales has tremendously decreased due to the cross cutting in advertisement. If advertisements would have remained, the sales would stay at its original which is 1.25% (1.00/ 0.8 of original advertisement) of the actual results amounting to $ 1,000,000 ($800, 000 x 1.25) If this was the case the following table shows how much would have been the contribution margin earned, the amount which I am responsible for:

Table 3. Flexible Budget at $1,000,000 Sales Level

Item

Flexible Budget

Static

Variance

Sales

$ 1,000,000

$ 900,000

$ 100,000

Expense

--

--

--

Food

(no price increase assumption) 333,000

300,000

(33,000)

Supervisory Labor

Hourly Labor

200,000

180,000

(20,000)

Utilities

--

--

--

Insurance and Taxes

--

--

--

Rent

--

--

--

Supplies

20,000

18,000

(2,000)

Corporate Overhead

--

--

--

Variable Expenses

553,000

498,000

Contribution Margin

$ 447,000

$ 402,000

$ 45,000

As depicted in the table, the differences would have been different if things/the factors have remained. In this case, I would have made a $45,000 favorable result than to have a $70,000 unfavorable one, still a positive performance.

I strongly believe that I did an excellent performance this year, in which case, is deserving of a bonus. Thank you for reading this report and I thank you for giving me a chance to show you how things have gone.

Report Prepared and Presented By:

Gregory Gourmet

Pappadeaux Restaurant Manager

==============================================

Instructions:

Pappadeaux Restaurants

The Pappadeaux chain of restaurants is a well-known and popular series of various restaurants located primarily in the Southwest (http://www.pappadeaux.com/).

Case Assignment Task:

Now assume the following hypothetical facts. Last year Pappadeaux opened a new seafood restaurant in San Diego to test that market. Gregory Gourmet has been the manager and has just completed his first year and is now undergoing his first annual review. Harry Hammerhead, the area manager, will determine Gregory’s bonus based on this review.

Below is the projected budget Gregory was given at the opening of the restaurant and the actual results for the first year.

Pappadeaux Restaurants - San Diego No.1
Income Statement
For the Year Ended April 30, 2007

Sales:
Budget - 900,000
Acutal - 800,000
Variance - (100,000)

Expenses:
Budget - 0
Actual - 0
Variance - 0

Food:
Budget - 300,000
Actual - 250,000
Variance - 50,000

Supervisory Labor:
Budget - 90,000
Actual - 95,000
Variance - (5,000)

Hourly Labor:
Budget - 180,000
Actual - 150,000
Variance - 30,000

Utilities:
Budget - 40,000
Actual - 47,000
Variance - (7,000)

Insurance and Taxes:
Budget - 30,000
Actual - 32,000
Variance - (2,000)

Rent:
Budget - 50,000
Actual - 60,000
Variance - (10,000)

Supplies:
Budget - 18,000
Actual - 14,000
Variance - 4,000

Corporate Overhead:
Budget - 90,000
Actual - 120,000
Variance - (30,000)

Total Expenses:
Budget - 798,000
Actual - 768,000
Variance - 30,000

Net Income:
Budget - 102,000
Acual - 32,000
Variance - (70,000)

Harry reviewed the budget and said to Gregory `This was a terrible year for you. Your profits are $70,000 under budget and I am holding you responsible. Don’t even think about a bonus – in fact, perhaps you should begin to think about some other line of work. But I am a generous man so you review this budget and then you tell me how you could have done better and I will give you another chance if your explanation shows you understand how you need to improve. Have a written report of 2 to 4 pages on my desk in 48 hours.`

Gregory’s analysis revealed the following:

National corporate advertising was reduced by 20% nationally and 40% in the San Diego area. Sales are heavily dependent on national advertising.

All food, hourly labor and supplies are variable (dependent on sales). The other costs are fixed in nature.

All food is purchased by the central corporate office and billed to the restaurants. Food prices for the year were 10% above projected unit prices.

Gregory has reduced the number of hourly employees but increased their wage rates in the belief that better paid employees would work harder.

Supplies are purchased locally.

Supervisory labor was over budget because Harry granted all supervisors a mid-year raise.

Utility rates were increased by the Public Utility Commission although consumption was on budget.

Insurance costs were on budget but local business taxes were increased.

Rent is established by corporate headquarters because the building is company owned.

The corporate rate is allocated to all restaurants on the basis of revenue. The application rate was increased because of a new computer system installed in corporate headquarters.

Prepare the 2 to 4 page report that Gregory must give to Harry. Be sure to include a flexible budget and concentrate on the concept of responsibility accounting. What recommendations would you make to change the system of accounting for the company? Why?

San Diego Branch