Posted: September 17th, 2021

CVP Analysis and Budgetary Control

Question description

PLEASE FOOD & BEVERAGE PROFESSIONALS / EXPERIENCED RESTAURANT PROFESSIONALS OR ACCOUNTING / FINANCE SPECIALISTS RESPOND ONLYPlease answer questions A & B in both case studies below... Case Study 2: Making the Business Decision (Breaking Even)
Tracy Chen began dabbling in pastry making several years ago
as a hobby. Her pastry is quite creative, and it has been so popular with
friends and others that she has decided to quit her job with a travel agency
and prepare pasty full-time. She will be giving up her salary from the travel
agency, a steady $2,000 per month.
Ms. Chen has found a small building near her former employer
to rent for her pastry shop at $400 per month. She estimates that for all her
specially selected pastries, the ingredient cost will be $0.50 per finished
piece. She plans to hire workers to produce the pastries at a labor rate of
$7.50 per hour, and it will take 8 hours to produce 12 dozen sets of ten
assorted pastries. The retail selling price for each pastry is $2.50. To sell her
pastries, Ms. Chen is of the opinion that she must advertise heavily in the
local area. An advertising agency states that it will handle advertising for a
fee of $200 per month. Her brother will sell the pastries at the counter and to
local businesses for a commission of $5 per dozen pastries.
Ms. Chen already owns the production equipment, which she
purchased several years ago. This equipment will depreciate at a rate of $50
per month. A phone installed in the shop for taking orders will cost $20 per month.
In addition, a recording device will be attached to the phone for taking
after-hours messages. The phone company will charge Ms. Chen $0.40 for each
message recorded.
Ms. Chen has some money in savings that is earning interest
of $5,000 per year. These savings will be withdrawn and used to get the
business going. For the time being, Ms. Chen does not intend to draw any salary
for herself.
a. Do
you think Ms. Chen should open the pastry shop, and what advice would you give
her?
b. What
is her break-even point?
Case Study 4: Evaluating a Company’s Budget Procedures
Colin Patrick and Al Johnson strolled back to their offices
from the company head-quarters. Colin is the director of food and beverage; Al
is the director of engineering. The men had just attended the monthly
performance evaluation meeting for the Shoshone Hotel food and beverage
division. These meetings had been held on the third Tuesday of each month since
Carlton Drakes Jr., the chairman’s son, had become the managing director a year
earlier.
As they were walking, Colin spoke. “Boy, I hate those
meetings! I never know whether my department’s accounting reports will show
good or bad performance. I’m beginning to expect the worst. If the accountants
say I save the company a dollar, I’m called ‘Sir,’ but if I spend even a little
too much – boy, do I get in trouble. I don’t know if I can hold on until I
retire.”
Colin had just been given the worst evaluation he had ever
received in his long career with Shoshone Hotel. He had been the most respected
of the experienced food and beverage managers in the company. When Carlton
Drake Jr. became the managing director, he directed that monthly performance
comparisons be made between actual and budgeted costs for each department. The
departmental budgets were intended to encourage the supervisors to reduce
inefficiencies and to seek cost reduction opportunities. The company controller
was instructed to have his staff “tighten” the budget slightly whenever a
department attained its budget in a given month; this was done to reinforce the
hotel supervisor’s desire to reduce costs. The managing director often stressed
the importance of continued progress toward attaining the budget; he also made
it known that he kept a file of these performance reports for future reference
when he succeeded his father.
Colin Patrick’s conversation with Al Johnson continued as
follows:
Colin: I really don’t understand. We’ve worked hard to get
up to budget, and the minute we make it they tighten the budget on us. We can’t
work faster and still maintain quality. I think my staff is ready to quit
trying. Besides, those report don’t tell the whole story. We always seem to be
interrupting the big job for all those small rush orders. All that setup and
equipment breakdown time is killing us. And quite frankly, Al, you were no
help. When our baking oven broke down last month, your people were nowhere to
be found. We had to take it apart ourselves and got stuck with all that idle
time.
Al: I’m sorry about that, Colin, but you know my department
has had trouble making budget too. We were running well behind at the time of
that problem and if we’d spent a day on that old machine, we never would have
made it up. Instead we made the scheduled inspections of the elevators because
we knew we could do those in less than the budgeted time.
Colin: Well, Al, at least you have some options. I’m locked
into what the catering department assigns to me, and you know they’re being
harassed by sales for those special orders. Incidentally, why didn’t your
report show all the supplies you guys wasted last month when you were working
in Kevin’s department?
Al: We’re not out of the woods on that deal yet. We charged
the maximum we could to our other work and haven’t even reported some of it
yet.
Colin: Well, I’m glad you have a way of getting out of the
pressure. The accountants seem to know everything that’s happening in my
department, sometimes even before I do. I thought all that budget and
accounting stuff was supposed to help, but it just gets me into trouble. It’s
all a big pain. I’m trying to put out quality work; they’re trying to save
pennies.
a. Identify the problems that
exist in the Shoshone Hotel’s budgetary control system, and explain how the
problems are likely to reduce the effectiveness of the system.
b. Explain how Shoshone Hotel’s
budgetary control system could be revised to improve its effectiveness.

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