This paper seeks to prepare a report that Gregory must give to Harry of Pappadeaux Restaurants located in San Diego. This paper includes a flexible budget and concentrates on the concept of responsibility accounting by determining the responsibility of Gregory for the results operation of the new seafood restaurant for the first year. This also includes recommendations that would be made to change the system of accounting for the company with the reasons.
Analysis and Discussion
The flexible budget of the company under a single level of activity compared with actual results is as shown below.
Based on the flexible budget prepared above, it appears that Gregory’s performance level at the given level of activity has actually done well for the first year of operation ending April 30, 2007. The results are from the prepared flexible different from Harry questioned where he Gregory was being made responsible for lower actual net income answer by $70,000 compared with budgeted net income.
Gregory must explain to Harry that he is not responsible for all of the results of the revenues and costs under the concept of responsibility accounting since not all of the items of revenues and costs are under his authority or power to control or influence. Although net income is a function of revenues and costs (Meigs and Meigs, 1995), this paper asserts that sales revenues based from case facts are not solely within the power of Gregory to influence. The case states that the company’s sales revenues do depend heavily on national advertising which is within the control of the corporate headquarter or national office. Therefore the San Diego restaurant can not be faulted for the decision of the national office to reduce national corporate advertising by 20% nationally and by 40% in the Santiago area.
As far as the costs are concerned, this paper also asserts that Gregory, as manager, can only be responsible for variable costs but not for the fixed costs (Atkinson, A. et al, 2005). Case facts say that variable costs are limited to food, hourly labor and supplies since the same are dependent on sales. Since the sales volume as stated earlier is influenced by national advertising, the fact the variances as computed earlier are favorable for these variable cost must be an evidence of good performance of Gregory which is contrary to what is preliminarily perceived by Harry.
Since case facts say that Gregory will be given another chance, the restaurant must be shown to have done better based on the prepared flexible budget compared with actual results in term of the positive contribution margin. Gregory must be able to convince Harry that indeed the business must have done better considering that what was used to show that restaurant did made bad in terms of unfavorable variance in net income is erroneous. The better basis for evaluating performance of San Diego restaurant should be based on contribution margin alone because only said results are within Gregory’ power to control or influence. It follows that it is wrong to make Gregory responsible for fixed cost since with or without Gregory doing anything the said fixed cost will also be incurred.
To bolster his argument for better performance than initially perceived by Harry, Gregory could further explain that although food costs are variable and although the same should be within his control, he further finds that all food is purchased by the central corporate office and billed to the restaurant. Given the case fact that the food prices for the year were 10% above projected unit prices, the favorable variance as computed already could be further increased in Gregory’s favor. Furthermore, although Gregory has nothing to do with fixed costs, he must explain to Harry the factors that have increased the actual results and which could partially explain the unfavorable variances in each fixed cost despite being called fixed. These factors include the case fact that supervisor labor cost exceeded budgeted amount because of mid-year raise that Harry himself made or granted for all supervisors. Local taxes too were increased during the year. Other costs beyond Gregory’s control include rent established by corporate headquarter and the corporate overhead because of a new computer system installed in corporate headquarters.
Recommendation and Conclusion
To improve the existing system of the new seafood restaurant, different levels of activity should be assumed in the preparation of a flexible budget for the year. San Diego restaurant should be provided a separate budget for advertising to increase sales and that if national advertising is continued by national or corporate headquarters, the effect of the same in case of increase or decrease in advertising should reflected in adjusting the budget for sales revenues. Only variable costs that are within the control and influence of a branch or local manager should be included for purposes of evaluating the performance for evaluating the manager’s performance. If performance standards or systems are wrongly designed and implemented, results could be dangerous since managers instead will just lose motivation in the process or worse they could be de-motivated.
Atkinson, A. et al (2005) Management Accounting, Person Custom Publishing, New Jersey, USA
Case study – Re: Pappadeaux Restaurants located in San Diego Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, New York, USA