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Flexible Budget - Pappadeaux Restaurants

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Please see the attached file.

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/).

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.

- See attachment to view chart.

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 page double spaced 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

We first make a flexible budget based on the details provided. In the flexible budget we take the actual sales and then change the variable expenses to the actual level of sales and maintain the fixed expenses as per the original budget.

Please view attachment to see chart.

The variable expenses of food, hourly labor and supplies are adjusted for the sales volume. Rest are taken at the budgeted level.

We see that Gregory has done quite well with the variable expenses. The food ...

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