Chapter 13

Adnan AlibegovicJenny HonVivian NgoTom Spaulding

Case 13-1: Hoof & Fin Restaurants Opened over 40 years ago in Austin, Texas Grown to a 20-location chain throughout Texas David Green - restaurant manager for one of 20

restaurants Principal attractions:

Selections include steak and seafood Low pricing compare to competitors Menu & décor appeals to target market: budget-

conscious diners

Case 13-1

Budget set for each location by CFO of company Bonus: profits exceeding budgets Trend: customer preference towards seafood

has increased (significantly) as preference towards steak has decreased (slightly)

Case 13-1

What managers of each restaurant had control of:HiringFiringEmployee wage rateHours workedOperating expenses

Case 13-1 Advertising expenses

5% of sales & allocated among 20 restaurants Home office expenses

Equally among all Straight line depreciation depending on each

building/equipment Corporate costs

Net book value of each restaurant Management costs = mgr & assistant mgr salary +

home office mgmt costs (legal, accounting, etc.)

Case 13-1

Actual BudgetGross Sales $1,811,160 $1,664,000Net Sales $1,587,560 $1,612,000

Less Variable ExpensesFood $724,350 $676,000Labor $484,688 $500,000Operating Expenses $74,550 $83,200

Total Variable Expenses $1,283,588 $1,259,200Net Contribution $303,973 $352,800

Other ExpensesAdvertising $83,450 $83,200Misc. $3,200 $2,000Depreciation $33,000 $33,000Insurance $7,960 $8,800Taxes $9,220 $6,500Interest $49,000 $49,000Management $84,000 $84,000

Total Other Expenses $269,830 $266,500Profit $34,143 $86,300

Hoof and Fin RestaurantOperating Statement

Year Ended December 31, 2004

Case 13-1

Actual % Budget % Variance F/U

Net Sales $1,587,560 100% $1,612,000 100% $24,440 UVariable Expenses $1,283,588 81% $1,259,200 78% $24,388 UContribution Margin $303,972 19% $352,800 22% $48,828 UFixed Expenses $269,830 17% $266,500 17% $3,330 UOperating Income (Profit) $34,142 2% $86,300 5% $52,158 U

Hoof and Fin RestaurantAnalysis of Operations

Year Ended December 31, 2004

Case 13-1

Actual Flex. Budget Var Flex. Budget Sales Vol. Var Static BudgetMeals 223,600 - 223,600 15,600 208,000 Discounted Sales 1,587,560$ (145,340)$ 1,732,900$ 120,900$ 1,612,000$ Variable Exp 1,283,588$ 70,052$ 1,353,640$ (94,440)$ 1,259,200$ CM 303,972$ (75,288)$ 379,260$ 26,460$ 352,800$ Fixed 269,830$ (3,330)$ 266,500$ -$ 266,500$ Operating Net 34,142$ (78,618)$ 112,760$ 26,460$ 86,300$

Case13-1

Sales Vol. Variance = $26460.00 FMarket for Seafood is larger and represents

opportunity for expansion However, CM is smaller because we are

selling lower CM items. We now sell higher proportion of Seafood, along with a higher discount.

Case13-1

Large unfavorable Operating Inc. Flex Budget VarianceUnfavorable Sales Variance (Increasing sales

alone doesn’t mean more)Favorable Variable Expense VarianceUnfavorable Fixed expense Variance (Can’t

blame the Corp, since it is too small)

Case13-1

Reality is that such large unfavorable variance is David’s fault (don’t tell Marv though)Primary source is large discountWhile seafood may sell more quantity wise, it

makes no sense to pursue unless the inputs cost can be reduced

Case13-1

Food Costs saving 8¢ Steak: $3.50 $3.42 Seafood: $$3.00 $2.92

DM Usage Variance FavorableMeans improvements in usage of direct

materials, likely caused by substitution of items mentioned

Case13-1

Labor Variances Insignificant because what one improved the

other cancelled outLess hours worked at higher rate, or more

hours worked at lower rate

Q&A

Reading 13-11 – 13-18:Redesigning Cost Systems: Is Standard Costing Obsolete?

Adnan AlibegovicJenny HonVivian NgoTom Spaulding

Standard Cost System

Standard cost - The cost a firm should incur for an operation based on operating standards (e.g. optimum materials and labor requirements)

Goal: Assess effectiveness and efficiency Effectiveness – attain goal set for the operation Efficiency – waste no resources in operation

Flexible Budget

A budget that adjusts revenues and costs to the output achieved

Used to identify variances from the master budget which is built with the standard cost system

Traditional SCS Variances

Selling price—Diff between actual selling price and budgeted price

Variable CostDirect materialsDirect laborVariable overheadVariable selling and admin

Fixed Cost (Ch. 14)

Q1: Criticisms of Traditional SCS Variances Obsolete variances

Overemphasis on priceDoesn’t account for qualityMeasures utilization of capacity but ignores

inventory No provision for continuous improvement Use of variances for responsibility

accounting can cause internal conflict

Adjusted Variances

Raw materials ordering—assesses the effectiveness of suppliers

Price—still a concern but diluted

Actual pounds ordered X Actual

Price

Actual pounds purchased X

Standard Price

Actual pounds purchased X Actual Price

Raw Materials Ordering Variance

Price Variance

Adjusted Variances

RM Inventory—Management of purchasing

Efficiency—DM used vs. allowed by standards incl. scrap/waste

Actual pounds Purchased X

Standard Price

Std. pounds allowed for total production X Std

Price

Actual pounds Used X Standard

Price

Raw Materials Inventory Variance

Efficiency Variance

Quality—Scrap/waste (Efficiency + Quality = Traditional DM Variance)

Production—Actual vs. scheduled (any variance is unfavorable)

Adjusted Variances

Total production X Std. Cost per

unit

Scheduled production X Std.

Cost per unit

Goods units produced X Std.

Cost per unit

Quality Variance

ProductionVariance

Finished goods—Produced vs. shipped Sales order—Opportunity cost for orders

placed vs. shipped

Adjusted Variances

Good units produced X budgeted

contribution margin

Sales order placed X budgeted

contribution margin

Sales orders filled X budgeted

contribution margin

Finished goods Variance Sales order

Variance

Price deemphasized by addition of several new variances

Split Traditional DM variance to account for quality

Several adjusted variances account for inventory

Adjusted Variances

“Push-through” results in departmentalization/ separation of processes with large inventories

“Pull-through” uses multi-functional work cells which produce according to demand

Q2: Push-through vs. Pull-Through

SCS for Responsibility Accounting

Lines of responsibility less rigid due to work cells/pull through—reduced departmental competition

Improved variance reporting Trade-offs between Price/Efficiency/Quality Inventory

RM + WIP + Finished Goods = Cost of Capital & Lost CM

Both types of reports illustrate trade-offs

Q3: SCS for Continuous Improvement/ Making SCS More Dynamic

Standards can be adjustedPrior periods’ resultsBenchmarkingMoving cost reductionsTarget costs

Q4: What Parts of Updated SCS Make Most Sense?

Dynamic Standards Focus of Management Reporting on

Trade-offs rather than Competition

Q&A