As based on Silver Coat Tourism Resort's Income and Expenditure Statement, a What-If Analysis was drawn. After studying the statement, the What-If analysis was administered by formulation of 2 case scenarios. The scenarios would concentrate on the Planned Direct expenses wherein different values would be assigned to this item and how the Net Profit Income of each profit generating centre would be affected. A comparison of the original planned expenses to the two case scenarios would be made as well as show the different net ncomes that they will actually provide. Table 1 is presented below:

Original Planned
Expenses Case Scenario 1 Case Scenario 2
Administration $72,500.00 $110,000.00 $52,000.00
Depreciation $61,250.00 $86,500.00 $63,000.00
Energy $46,000.00 $48,750.00 $31,500.00
Insurance $12,500.00 $32,450.00 $22,500.00
Maintenance $26,000.00 $38,000.00 $28,000.00
Marketing $52,250.00 $61,000.00 $60,000.00
Net Income $650,910.00 $544,710.00 $664,410.00

Table 1. Table showing Original Planned Expenses, Case Scenario 1 and 2 assigned expenses as well as Net Income yield of each category

As shown in Table 1, Case Scenario 1 was assigned higher planned expenses as compared to the original planned expenses. In comparison of both the values presented, it clearly shows that higher planned expenses would translate to lower net income. Therefore, when Case Scenario 1 is considered, it will result to a lesser net income since comparing it's net income value to the original planned expenses column will result to a decrease of $106,200.00.

Warning and Friendly Reminder: Plagiarism is a crime. This essay is here to give you an idea or guide you, not to be copied by you. You can look at the references and Works cited provided by this free academic essay and from that you can create your own. Be a smart student,be honest: look for free academic essays anywhere in the web or the Internet but don’t forget to make your own. There are so many free essays online as guides but please do your own. You can also utilize free plagiarism checkers available online.

Case Scenario 2 as a different approach, assigns values in a different manner. Some expenses were increased and other expense categories were decreased. This resulted to an increase in net income of $ 13, 500.00 which is equivalent to approximately 2%. Therefore, knowing which expenses to minimize and which ones to increase will definitely result to higher net income.
In conclusion, when a company puts effort on how to somehow minimize their indirect expenses it will definitely result to increase in net income. The company must employ the best means of decreasing their expenses in order for them to yield a higher profit.

Business Value of the Excel Workbook

The excel workbook is a tool that will help financial planners since it can help gauge the overall financial performance of a business when being faced with various modifiable constraints. The values placed on Planned Indirect Expenses are considered the modifiable variables. The indirect/operating expenses can be manipulated while keeping constant the Net Income, Cost of Sales and Direct Expenses. This way, the business can weigh the effects of the changes made in indirect expenses and they can work on ways on how these expenses be mnimized. In effect, the company profit is maximized. With the excel woorkbook, financial planners can determine the expense which should be monitored closely, which ones are to be minimized, how to effectively do it and what are the best expense allocation expense technics to be employed that will give positive results.

Instructions
Business Value of the Excel Workbook

The excel workbook is a simple indirect expense allocation tool created to help foresee a business’ financial performance given a set of modifiable constraints. In this tool, the only modifiable variables are what you place on planned indirect expenses. Net Income, Cost of Sales and Direct Expenses are assumed to be constant while you play around with indirect/operating expenses. This can allow businesses to make mitigation plans to maximize their end profit. Such questions like (1) what expense type should closely be monitored, (2) where to cut cost, (3) how to effectively minimize unnecessary expenses and (4) what feasible expense allocation can yield the best results, are things that this workbook can help financial planners to answer.

Life Cycle Costing Method

I. Introduction

Costing is very important in an organization or a business entity. Without a system to identify the cost of the product an entity would not be able to analyze if a certain product or project is feasible or not, or if it advantageous with potential financial returns and not disadvantageous carrying losses with it. To identify the cost is to recognize an activity’s “expenditure, usually of money, for the purchase of goods or services” or to recognize “an expenditure, usually of money, incurred in achieving a goal, such as. producing certain goods, building a factory, or closing down a brand.” These are the definitions of cost provided by the A Dictionary of Business (1996, p.133) These costs can any of the following: current cost; economic cost; fixed cost; historical cost; marginal cost; opportunity cost; and/or replacement cost. These items are very relevant in cost accounting.

The “techniques used in collecting, processing, and presenting financial and quantitative data within an organization to ascertain the cost of the cost centers, the cost units, and the various operations” Hussey (1999, p.99) are termed as cost accounting. Presently cost accounting is regarded as a division of management accounting, which also incorporates the techniques of planning, decision-making, and control in the entity. In large organizations, the management team usually includes a cost accountant responsible for various costing needs and problems encountered by the company. One of them is the Life Cycle Costing

II. What is Life Cycle Costing (LCC)?

Life Cycle Costing, also known as the Whole Life Costing, is a costing technique to establish the total cost of ownership. As Defined in the A Dictionary of Business (1996, p. 292) it is the approach to determining the total costs of a fixed asset that takes into account all the costs likely to be incurred both in acquiring it and in operating it over its effective life.

For example, the initial cost to a plant or factory equipment is only part of the relevant costs to the decision to purchase it. The operating and maintenance costs over its effective life are also relevant and would therefore be part of the decision - making data. This is an aspect of terotechnology or s technology that encompasses management, financial, and engineering skills in installing, operating, and maintaining plant and machinery.

LCC is a structured costing method that addresses “all the elements of this cost and can be used to produce a spend profile of the product or service over its anticipated life span” (Life Cycle Costing). The outcome of an LCC analysis is very useful in assisting management in the decision-making process where there are choices of options. One factor that needs to be considered in this costing method however, is the accuracy of the analysis. As the time frame moves further into the future the accuracy of the analysis diminishes due to factors such as time value of money or inflation among others. Thus, it is very important to present a comparative tool when long-term assumptions apply to some options.

III. The Cost of Ownership

As mentioned, LCC totally accounts all costs in using an item. This cost “can be broadly divided into three categories: acquisition, running and disposal costs” Whole Life Costing (p.2). The following figure presents the cost of ownership.

Acquisition costs are incurred before the item, product or service is ready for implementation. On the other hand, running costs are those incurred as a result of actually utilizing the item, product or service or by simply keeping it available. Disposal costs are incurred, as the name suggests, costs incurred during disposal or when dealing with its potential contamination or other harmful effects of the item. This happens during the end of the life of the products.

There may also be some income that will be associated with or realized during the disposal phase of the item if a resale or residual value is available for that asset. This residual or resale income together with any rental or other income when assets are not in use (opportunity cost saved) can be used to offset against the costs in determining the whole life cost. The previous illustration presents some examples of the costs incurred on each phase of an asset’s life also known as the costs of ownership.

III. Application of LCC

The utilization and application of LCC is important for both end-users (clients) and suppliers (contractors). “LCC is based on the premise that to arrive at meaningful purchasing decisions full account must be taken of each available option.” (Life Cycle Costing) ” All significant aspect of the expenditure process regarding the use of resources which are likely to be incurred as a result of any decision must be addressed. Important considerations must be given to all relevant costs for each of the options, including opportunity costs, from initial consideration of a certain project until its disposal.

The level of complexity of LCC will vary also according to the respective complexity of the goods or product to be procured, contracted. Following are the common fundamental concepts to all applications of LCC:

a. Cost breakdown structure (CBS) which aims to identify all the relevant cost elements. CBS must also have well defined boundaries to avoid omission or duplication;

b. Cost estimation is a necessary procedure in LCC that may be determined by known factors or rates, cost estimating relationships (CERs) derived from accessible historical or empirical data and an opinion of some experts;

c. Discounting which is a technique used to compare costs with benefits that occur in various time periods; and

d. Inflation, which is not a necessary factor for LCC but may be considered. The inflation rate is not the discount rate.

Two good real life examples in the application of LLC are on government projects and procurement of equipments such as hospital equipments. Both the agencies mentioned (hospital and government agency) together with their respective project contractors would find LCC techniques very helpful in letting them decide on the feasibility and profitability of the projects. The better aspect of using LLC is on its “disposal phase” because sustainability is being thought of since the initial and during the entire process. Thus, when the disposal stage arrives, both the supplier and the client need not worry further on the environmental issues that the project may encounter.

Following are the statements taken from the published article on Achieving Sustainability by the Sustainability Action Group of the Government Construction Clients’ Panel of the United Kingdom (UK) government on how helpful it is to consider sustainability in government projects.

It clearly sets out how Government clients will take forward the sustainable development agenda through better procurement of new works, maintenance and refurbishment. This will deliver better value for money for occupiers, users and the public and will make clients and, in turn, suppliers fully aware of their responsibilities regarding sustainability.

Sometimes, in evaluating profitability versus market opportunity potential, decision-making process “often becomes more of an art than a management science” Eastaugh (1992, p.207) Decisions that must be made by hospital management is very important with regards to its reputation and continued existence. Eastaugh further emphasized the importance of using LCC in hospital projects:

.

The better hospital CEO would take the long-run perspective, consider life cycle costing, and concentrate on safeguarding the reputation of the institution. If one factors in the malpractice expense of mediocre performers, a big loss in the courts could more than wipe out 10 years of "cash cow" profits. Profitability should include some life-cycle costing adjustment for malpractice risk and facility reputation risk. Eastaugh (1992, p.207)

IV. The Use of LCC to Producers, Suppliers or Contractors

The primary consideration in the procurement of construction projects or the purchase of a long term asset is the need to obtain the best value for money or its equivalent “in the whole life” (Achieving Sustainability, 2000) of the facility or the service. This is the reason why it is best to utilize LCC in projects that require not only the setup but also require operation maintenance as well as disposal.

The design, function and operation of the project, be it a constructed plant or equipment, or facility or a rendered service should maximize the delivery of effective customer and public benefit and satisfaction. These goals are most likely to be achieved through a combination of the design, construction, operation and ongoing maintenance, appropriate procurement methods and proper setup and disposal that will deliver the best value for money against the inputs that the producer, supplier or service provider have invested.

“Design, construction, operation and maintenance should not be considered in isolation from each other” (Achieving Sustainability, 2000). Thus, with the use of LCC all the cost can be integrated and proper pricing on projects can be done leading to a competitive bid or to a successful project itself. LCC is a great help in developing strategies that identify the best way to achieve the objectives of the project and value for money, taking into account all of the possible risks and constraints such as maintenance and disposal which are not incorporated in normal costing method that accounts only for the acquisition cost. The strategies gained from using LCC will help the producers, suppliers or contractors to decide about the funding mechanism and asset ownership for the project. The use of LCC greatly assists in achieving the goal of the procurement strategies of the producer, supplier or contractor to achieve the optimum balance of risk, control and funding for a particular project.

V. LCC for the End Users

For an investment decision to be properly made, the decision maker, which is the management board of the entity, must have access to very important and relevant information. This is because the decision carries accountability. The relevant information that the decision makers need is on the cost of the planned project. Before deciding if the project is to be implemented or to be rejected, a proper costing is needed, a costing method that accounts for all the cost of the project since its inception until its disposal. This is where LCC comes in for the use of End-users or clients.

With the assistance of LCC, clients would be able to compare the cost data and make a proper decision when project bidders present their respective offers. Assessing the whole life cost of the project is essential, if the entity has a going concern objective. What the entity must know is not only the initial cash outlay or the investment cost but the entire cost of ownership of the project.

To fully understand what the project can give them, the client must be able to identify the ownership costs associated with the it. These costs are generally categorized as the following:

a. Acquisition costs are those incurred between the decision to proceed with the procurement and the entry of the goods or services to operational use

b. Operational costs are those incurred during the operational life of the asset or service

c. End life costs are those associated with the disposal, termination or replacement of the asset or service. In the case of assets, disposal cost can be negative because the asset has a resale value.

The use of LCC makes the entity secure and ready for all the potential expenditures the project can cause. This is much more important than to know the cost of the initial investment only which appears lower and more favorable but has not accounted for other costs of ownership or the entire cost during the lifetime of the asset.

VI. The Pros and Cons of LCC

Being something normal, the LCC has its own set of advantages and disadvantages. The following section enumerates and discusses the good side of using this system as well as its drawbacks.

a. The Advantages

LCC is a very powerful tool helping a lot of management decision-making processes in the financial world. Among the benefits of using this costing system, as stated in the book of B.H Dhillon entitled Life Cycle Costing are:

a. Useful to control program

b. An excellent tool for making a selection among the competing contractors

c. Beneficial in comparing the costs of competing projects

d. Useful in reducing the total cost

e. Useful in making decisions associated with equipment replacement

f. Useful in planning and budgeting

On the other hand, if one is to make an analysis of LCC, following are the four major benefits of LCC analysis as presented in the site of the Government Construction Clients’ Panel of the UK government entitled Life Cycle Costing:

g. LCC assists in the evaluation of competing options in purchasing such as competing proposals taking into account the cost all throughout the life cycle. LCC is mostly relevant in service contracts and decisions on equipment purchase

h. LCC improves awareness of total costs by taking into account factors that drive cost and their respective resources needed for a certain purchase

i. The application of LCC makes more accurate estimation of the full cost of a project leading to an improved decision making process for the management and establishment of support policies which are also cost effective. Long term costing assessments can have more accurate forecast for its future expenditures when using LCC.

j. Performance trade-off against cost is considered when using LCC. Factors such as requirement and quality must also be considered when purchasing an asset or hiring a service are thoroughly considered in LCC.

b. The Disadvantages

As previously mentioned, LCC is not perfect. Taken from the book of Dhillon, among the pitfalls of LCC are the following:

a. Costly

b. Time consuming

c. Accuracy of data is doubtful

d. Obtaining data is a trying task

Associated with one of the disadvantages of LCC is the lower visible cost of a purchased asset, which often misleads the decision makers. The costs that the majority usually notice, which is the acquisition cost represents only a small proportion of the total cost of ownership. In majority of the big businesses, many departments are within the big organization and the responsibility for the purchase of a certain asset and its acquisition cost is held by one department while the subsequent support funding are held by another department. This can be viewed as a clear limitation of using LCC. The decision makers do not see its benefits easily. Taken from a medical point of view, this fact is stated by Eastaugh in page 7 of his book, Health Care Finance: Economic Incentives and Productivity Enhancement:

Some medical technologies appear cost decreasing, such as visualizing gallstones with ultrasound and crushing the stones with lithotripsy. This is also clearly quality-enhancing in comparison to traditional exploratory surgery. Unfortunately, the public is not well versed in life-cycle costing or the risks of old style invasive medicine (with iatrogenic infections and prolonged lengths of stay). The media tend to focus excessive attention on initial capital outlays rather than on long-run cost-benefit and cost-effectiveness.

VII. Conclusion

LCC is a very powerful tool that takes into account all the relevant cost when acquiring a product. This therefore have helped a lot of decision makers in deciding a lot of things when presented with various options to choose from. However, not everyone can utilize LCC due to some limitations such as its cost, accuracy, time needed to formulate it and the difficulties faced in acquiring the data needed to perform LCC.

Warning and Friendly Reminder: Plagiarism is a crime. This essay is here to give you an idea or guide you, not to be copied by you. You can look at the references and Works cited provided by this free academic essay and from that you can create your own. Be a smart student,be honest: look for free academic essays anywhere in the web or the Internet but don’t forget to make your own. There are so many free essays online as guides but please do your own. You can also utilize free plagiarism checkers available online.

References

Achieving Excellence in Construction Procurement Guide. (2000). [Online]. Available at: http://www.ogc.gov.uk/documents/CP0066AEGuide6.pdf (Accessed: 11 May 2008)

A Dictionary of Business. 2nd ed. (1996). Oxford: Oxford University Press.

Dhillon, B. S. (1989). Life Cycle Costing. New York: Gordon and Breach Science Publishers.

Eastaugh, S. (1992). Health Care Finance: Economic Incentives and Productivity Enhancement. New York: Auburn House.

Hussey, R. (1999). A Dictionary of Accounting. 2nd ed. Oxford: Oxford University Press.

Life Cycle Costing. 2008. [Online]. Available at: http://www.ogc.gov.uk/implementing_plans_introduction_life_cycle_costing_.asp (Accessed: 11 May 2008).

Whole Life Costing. [Online]. Available at: http://www.eprocurementscotland.com/toolkit/Documents/Whole%20Life%20Costing%203.pdf (Accessed: 12 May 2008).


4 graphics above are blocked. They may be purchased at $1 each. Contact weblogstuffs@gmail.com for more information.

Situation and Instructions are at the end of this page....

As based on Silver Coat Tourism Resort's Income and Expenditure Statement, a What-If Analysis was drawn. After studying the statement, the What-If analysis was administered by formulation of 2 case scenarios. The scenarios would concentrate on the Planned Direct expenses wherein different values would be assigned to this item and how the Net Profit Income of each profit generating centre would be affected. A comparison of the original planned expenses to the two case scenarios would be made as well as show the different net ncomes that they will actually provide. Table 1 is presented below:

	Original Planned Expenses	Case Scenario 1	Case Scenario 2
Administration	$72,500.00	$110,000.00	$52,000.00
Depreciation	$61,250.00	$86,500.00	$63,000.00
Energy	$46,000.00	$48,750.00	$31,500.00
Insurance	$12,500.00	$32,450.00	$22,500.00
Maintenance	$26,000.00	$38,000.00	$28,000.00
Marketing	$52,250.00	$61,000.00	$60,000.00
Net Income	$650,910.00	$544,710.00	$664,410.00

Table 1. Table showing Original Planned Expenses, Case Scenario 1 and 2 assigned expenses as well as Net Income yield of each category

As shown in Table 1, Case Scenario 1 was assigned higher planned expenses as compared to the original planned expenses. In comparison of both the values presented, it clearly shows that higher planned expenses would translate to lower net income. Therefore, when Case Scenario 1 is considered, it will result to a lesser net income since comparing it's net income value to the original planned expenses column will result to a decrease of $106,200.00.

Case Scenario 2 as a different approach, assigns values in a different manner. Some expenses were increased and other expense categories were decreased. This resulted to an increase in net income of $ 13, 500.00 which is equivalent to approximately 2%. Therefore, knowing which expenses to minimize and which ones to increase will definitely result to higher net income.

In conclusion, when a company puts effort on how to somehow minimize their indirect expenses it will definitely result to increase in net income. The company must employ the best means of decreasing their expenses in order for them to yield a higher profit.

Business Value of the Excel Workbook

The excel workbook is a tool that will help financial planners since it can help gauge the overall financial performance of a business when being faced with various modifiable constraints. The values placed on Planned Indirect Expenses are considered the modifiable variables. The indirect/operating expenses can be manipulated while keeping constant the Net Income, Cost of Sales and Direct Expenses. This way, the business can weigh the effects of the changes made in indirect expenses and they can work on ways on how these expenses be mnimized. In effect, the company profit is maximized. With the excel woorkbook, financial planners can determine the expense which should be monitored closely, which ones are to be minimized, how to effectively do it and what are the best expense allocation expense technics to be employed that will give positive results.

What-If Analysis: Memo of Indirect Expense Allocations

As requested, a What-If Analysis has been done on Silver Coat Tourism Resort’s Income and Expenditure Statement. This was implemented by formulating two (2) case scenarios where different values were assigned to its Planned Indirect Expenses and analyzing how it affected the Net Profit Income of each profit centre. Table 1 below shows the original planned expenses and the two case scenarios side-by-side together with the actual net income each situation will essentially yield.

Original Planned Expenses Case Scenario 1 Case Scenario 2
Administration $72,500.00 $110,000.00 $52,000.00
Depreciation $61,250.00 $86,500.00 $63,000.00
Energy $46,000.00 $48,750.00 $31,500.00
Insurance $12,500.00 $32,450.00 $22,500.00
Maintenance $26,000.00 $38,000.00 $28,000.00
Marketing $52,250.00 $61,000.00 $60,000.00
Net Income $650,910.00 $544,710.00 $664,410.00

Table 1
Comparing the Original Expenses to Case #1, all planned expenses were made to be higher. Its effect is that the larger the planned expenses are, the smaller the net income will be. A net income of $106,200.00 will be lost if scenario 1 will be adopted.
Case Scenario 2, on the other hand, played well with expenses. Some were given a higher value from the original and some were given a smaller value. The result of this was that net income rose by $13,500.00 or approximately 2% from the original.
Like in any company, the bottom-line rule here is to minimize indirect expenses as much as possible in order to maximize net profit.

Business Value of the Excel Workbook
The excel workbook is a simple indirect expense allocation tool created to help foresee a business’ financial performance given a set of modifiable constraints. In this tool, the only modifiable variables are what you place on planned indirect expenses. Net Income, Cost of Sales and Direct Expenses are assumed to be constant while you play around with indirect/operating expenses. This can allow businesses to make mitigation plans to maximize their end profit. Such questions like (1) what expense type should closely be monitored, (2) where to cut cost, (3) how to effectively minimize unnecessary expenses and (4) what feasible expense allocation can yield the best results, are things that this workbook can help financial planners to answer.

The Sarbanes-Oxley Act and it's Relation to Internal Control

The Sarbanes-Oxley Act was enacted on July 30, 2002 and also known as 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and commonly called Sarbanes–Oxley, Sarbox or SOX. US Senator Paul Sarbanes and US Representative Michael G. Oxley were the sponsors of this law.

Since the Securities Exchange Act of 1934, the SOX is considered as one of the largest business reform acts because of the many provisions of the law. It has a great impact on all US public company boards, management and public accounting firms due to issuance of numerous enhanced standards. President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt" (Bumiller, 2002, p.1).

The pre-SOX scene is that of unconcerned investors and analysts who did not give that much weight on their internal control environment. Internal control issues were never given that much thought and the adequacy of internal control procedures and processes were not the highest priority. Not until the seismic accounting scandals in the early part of 2002 did the companies pay attention to their internal control. It was the Enron scandal that sparked the need for the development of new regulations that will improve the quality and reliability of financial reporting. Public awareness has also been increased with regards to the relevance of having accounting standards that will present the real financial score and stability and that auditors who evaluate the companies are governed by the principle of independence and objectivity. Presently, Section 404 of the SOX governs the issue on internal control. Companies are now required to report internal control over financial reporting and auditors should render opinions on the report as well the effectiveness of the internal control policies and procedures of the company.

Internal control provisions that is required by the SOX encompasses new auditing requirement for internal controls. Initially, the company must include in it's finacial report the internal control procedures employed by the company. The auditor then tests the scope of the one presented by the company and include the findings in the annual audit report. Auditor should include an evaluation whether the internal control provides a system wherein the company maintains a system of records that fairly and accurately reflect the company's transactions and are recorded in accordance with the preparation of GAAP financial statements. The report should also reflect whether material weaknesses are present in the internal controls and if there are non-compliance. Officer certification of internal control is also required wherein the CEO or CFO of the company certifies that they are responsible for designing internal controls, establishing and maintaining them as well as include fraud arising from lack of internal controls. They should also included significant changes in internal controls and if there are problems with it, include the corrective actions undertaken to address the problem.

With all these new provisions required by the SOX legislation, companies and auditors are now at their busiest because of the requirements that are now being demanded from them. The internal control report provided may now be an additional reference for both investors and analysts as well as shareholders and other viewers of the financial statements. Though not quantitative in nature, in fact majorly a qualitative assessment, it serves as a tool in assessing the company's effort in safeguarding their assets through internal control procedures. In addition of the honest, objective and independent evaluation of the auditor and the attestation of the auditing firm, the transactions and it's presentation is transparent enough and a reasonable assurance is confirmed. Lapses in a company's internal controls pose a big threat to the company's well-being. With effective internal controls, the risk of fraud within the company is reduced and the company gains credibility with the auditors which are responsible for providing the assessment of these controls. The establishment and maintenance of these control procedures may be costly and is in fact one of the issues of the Sarbanes-Oxley Act. However, investment on internal controls is money well spent. The Act is an improvement in the current structure of the financial community and may as well be the answer that will address the problem of early detection, better yet prevention of fraud. It decreases officer's liability and maximizes the protection of shareholder interests. As the Sarbanes-Oxley Act address the great need for an effective and well functioning internal control program it also anticipates and evaluates the possible weaknesses of the system which is generally critical for the improvement of the company. A company with a notable internal control system is one that is investor attractive and can provide assurance of it's ability to safeguard interests and can ensure it's stability in the long run.

References

Bumiller, E. (2002).Bush Signs Bill Aimed at Fraud in Corporations.

The New York Times, 1-2.

Weirich, T. (2005). Sarbanes-Oxley Act and Section 404: basics on internal control reports.

The RMA Journal, 1-8.

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