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    System of accounting for Pappadeaux Restaurants

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    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
    Budget Actual Variance
    Sales 900,000 800,000 (100,000)
    Food 300,000 250,000 50,000
    Supervisory Labor 90,000 95,000 (5,000)
    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)
    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.
    I need a 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?

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    Solution Preview

    There were few mistakes that led to the differences in the actual and the fixed budget. The first mistake was reducing the level of advertising. As it was known that the national advertising is the driving force for sales, it should have been increased to increase sales volume. Advertising is an investment that can increase the sales volume. The main responsibility of handling the advertisement goes to the investment center and hence the investment center should look at this matter to increase sales. Now the second level of discrepancy can be seen in the variable cost of food. We can find that the projection of food prices was not accurate and the food prices were overvalued in the budget prepared by an amount of almost $75,000. The responsibility of handling cost goes to the cost center and hence it was cost centers responsibility to ...

    Solution Summary

    The system of accounting for Pappadeaux Restaurants is provided.A flexible budget is provided with the responsibility of accounting. THe recommendations that the expert would make to change the system of accounting for the company is provided.