Introduction
At the beginning of the year, I received the projected budget of San Diego restaurant for the just concluded financial year, which shows the expected outcome, but due to several reasons, the actual results show some variances. The net income expected from the restaurant in the last financial year was 102,000 but the actual value was 32,000, which shows a variance of 70,000. In line with the requirements of responsible accounting, every department or line is expected to act as a revenue center, cost center, and profit center too (Bengu & Can, 2010, p.751). In this report, I will analyze the possible reasons for this variance and the actions that I will take to improve the performance of the restaurant for the next financial year.
Variance analysis
In the projected budget prepared at the beginning of the year, the restaurant was expected to make sales worth 900,000 but the actual sale for the year was 800,000, which shows an unfavorable variance of 100,000. Low sale volume can be attributed to reduced advertisement since the sale of the business depends on the level of advertisement. National advertisement reduced by 20% while local advertisement reduced by 40% during the year. On the other hand, the restaurant was expected to incur expenditures worth 798,000, but at the end of the year, the total expenditure was 768,000, which is a favorable variance of 30,000. This may indicate that the total variance in the net income was not due to high expenses but rather a low volume of sales. However, this does not rule out the fact that some expenses were higher than projected at the beginning of the year. It can also be observed that all the variable costs incurred in the year were less than projected; food expenses incurred were 60,000 less, hourly labor 30,000 less, and supplies expenses were also less by 4,000. These figures indicate that variation in expenses was because of fixed costs variances and not variable costs expenses. According to Anderson (2009), good estimates of costs will help in the allocation of resources (p.27). Fixed costs that show unfavorable expenses include utilities (7,000), insurance and taxes (7,000), and rent (15,000). If all these types of fixed costs were less than projected at the beginning of the year, then total expenditures of the restaurant would be less thus increasing net income reported at the end of the year.
Supervisory labor expense, which is a fixed cost, was higher than projected at the beginning of the year because the salaries of all the supervisors were raised at the middle of the year by the area manager. As Roman (2011) argues, controlling cost is important in raising the profitability of the firm (p.181). The decision to increase salaries along the year increased costs of the restaurant by 5,000 which meant a reduced net income of the same margin. The salary increase could have been included in the projection at the beginning of the year. Rent expenses were also higher than projected and the restaurant had no control of this expense since such controls take place at the corporate headquarter. Corporate overheads were also raised by 30,000 due to the new installation of computers at the corporate headquarter. Since this type of expense is charged according to the revenue collected at the end of the year in all the revenue centers, working with a flexible budget would cater for such increases that may arise in the course of business operation. The commission of public utility raised public utility (fixed cost) value by 7,000; this value was not in the control of the restaurant manager and it made the net income reduce at the end of the year. This also happened to the insurance costs that were not carted in the projected budget but increased in the year.
Flexible budget
The flexible budget is used to show the variation between the actual results and the anticipated results if the actual level of output were known at the beginning of the year. A flexible budget is better than an actual budget (Ekholm & Wallin, 2011, p.145). It helps to determine variable costs and revenue since fixed costs cannot be changed. In this case, the flexible budget can be prepared using actual sales (800,000) and adjust all the variable costs depending on this level of sale. Fixed costs will not change since they are fixed. This will show the net income that would have been obtained if the budget were prepared using the actual level of sale (Siegel, Levine, & Qureshi, 2007, p.309).
Conclusion and recommendations
To reduce the variations in the net income of the restaurant, several strategies need to be implemented in the next financial year. This can be attained by the use of a flexible budget that shows the actual level of sales that are expected in the next financial year. These strategies include
- Increasing advertisement both nationally and locally to increase the level of sales.
- Fixed costs such as rent, insurance, and utility need to be fixed at the beginning of the year to avoid much variance in the year.
- The restaurant ought to change the accounting system used where a flexible budget is adopted rather than a static budget for such action will improve projections made at the beginning of the year.
- Only costs incurred in a certain cost center should be accounted for in its profit accounting. This will ensure that managers are accountable for the costs they only control.
References
Anderson, J. (2009).Determining Manufacturing Costs. Chemical Engineering Progress. 105(1), 27-29.
Bengu, H., & Can, A. (2010). An evaluation about the importance of criteria determining the allocation sequence in step-down allocation of manufacturing overhead costs. Ege Academic Review, 10(3), 751-771.
Ekholm, B., & Wallin, J. (2011).The Impact of Uncertainty and Strategy on the Perceived Usefulness of Fixed and Flexible Budgets. Journal of Business Finance & Accounting, 38(1/2), 145-164.
Roman, F. (2011). A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines. Issues in Accounting Education, 26(1), 181-200.
Siegel, J., Levine, M., & Qureshi, A. (2007). GAAP 2008: Handbook of Policies and Procedures. Chicago: CCH, Inc.