Question

Problem 17-38 Analyze Performance for a Restaurant (LO 17-5)

Doug’s Diner is planning to expand operations and is concerned that its reporting system might need improvement. The master budget income statement for the Downtown Doug’s, which contains a delicatessen and restaurant operation, follows (in thousands):

	Delicatessen						Restaurant						Total
Sales revenue		$	600					$	2,000				$	2,600
Costs
Purchases			360						1,100					1,460
Hourly wages			30						438					468
Franchise fee			18						39					57
Advertising			50						100					150
Utilities			42						63					105
Depreciation			25						38					63
Lease cost			15						25					40
Salaries			15						25					40
Total costs		$	555					$	1,828				$	2,383
Operating profit		$	45					$	172				$	217

The company uses the following performance report for management evaluation:

  

	DOWNTOWN DOUG’S
	Net Income for the Year
	($000)
	Actual Results
Actual Results	Delicatessen						Restaurant				Total				Budget				Over- or (Under-) Budgeta
Sales revenue		$	700				$	1,000			$	1,700			$	2,600				$	(900	)
Costs
Purchasesb			450					400				850				1,460				$	(610	)
Hourly wagesb			35					350				385				468					(83	)
Franchise feeb			21					30				51				57					(6	)
Advertising			50					100				150				150
Utilitiesb			45					50				95				105					(10	)
Depreciation			25					38				63				63
Lease cost			15					25				40				40
Salaries			15					25				40				40
Total costs		$	656				$	1,018			$	1,674			$	2,383				$	(709	)
Operating profit		$	44				$	(18	)		$	26			$	217				$	(191	)

^a There is no sales price variance.

^b Variable costs; all other costs are fixed.

Required:

Actual Purchases Variances Marketing & Administrative Variances Flexible Budget Activity Variance Master Budget Sales revenue $700 $600 Variable costs: Purchases 450 360 Hourly wages 35 30 Franchise fee 21 18 Utilities 45 42 Total variable costs $551 $450 Contribution margin $149 $150 Fixed costs: Advertising 50 50 Depreciation 25 25 Lease 15 15 Salaries 15 15 Total fixed costs $105 $105 Operating profit $44 $45

Answer 1

Flexible Budget :

A flexible budget, also called a variable budget, is financial plan of estimated revenues and expenses based on the current actual amount of output.

In the question it is said that the sales price variance is Nil. Means sales revenue in flexible budget is same as sales revenue actual results.

Actual (A) Purchases Variances (A - B) Marketing & Administrative Variances (A - B) [Please refer Note-2 below] Flexible Budget (B) [Please refer working notes] Activity Variance (A - B) Master Budget a. Sales revenue $700 $700 - None $600 b. Variable costs: Purchases $450 $30 U $420 $30 U $360 Hourly wages $35 $35 - None $30 Franchise fee $21 $21 - None $18 Utilities $45 $49 $4 F $42 Total variable costs $551 $525 $26 U $450 c. Contribution margin (a - b) $149 $175 $26 U $150 d. Fixed costs: Advertising $50 $0 None $50 - None $50 Depreciation $25 $0 None $25 - None $25 Lease $15 $0 None $15 - None $15 Salaries $15 $0 None $15 - None $15 Total fixed costs $105 $105 - None $105 Operating profit (c - d) $44 $70 $26 U $45

Where,

U - Unfavorable

F - Favoarable

Working Notes - Calculation of Flexible budgets for variable cost

1. Purchases:

Fixed (Static or Master) Budgeted cost of Purchses at sales revenue of $600 = $360

Flexible budgeted cost of Purchases at sales revenue of $700 = $360 x (700 ÷ 600) = $420

2. Hourly wages

Fixed (Static or Master) Budgeted cost of Hourly wages at sales revenue of $600 = $30

Flexible budgeted cost of Hourly wages at sales revenue of $700 = $30 x (700 ÷ 600) = $35

3. Franchise fee

Fixed (Static or Master) Budgeted cost of Franchise fees at sales revenue of $600 = $18

Flexible budgeted cost of Franchise fees at sales revenue of $700 = $18 x ($700 ÷ $600) = $21

4. Utilities

Fixed (Static or Master) Budgeted cost of Utilities at sales revenue of $600 = $42

Flexible budgeted cost of Utilities at sales revenue of $700 = $42 x ($700 ÷ $600) = $49

**Note 1- Fixed costs remain same irrespective of the level of activity.

**Note 2 - Selling and administrative expenses:

General and administrative expense is the set of expenses required to administer a business, and which are not related to the construction or sale of goods or services.

Another way of describing general and administrative expenses is any expense that will still be incurred, even in the absence of any sales or selling activity