Finance

Introduction  Scope of Report
The Income Statement prepared, which encompasses a variance analysis between actual and budgeted figures is not appropriate for performance measurement.  This is due to the fact that a fixed budget is utilized to compute the respective variances.  A flexible budget ought to be prepared, where the budgeted figures a flexed in accordance with actual sales figures.  In addition, the variances resulting from the flexible budget will be examined in relation to qualitative features that shed light upon if the variance was within the operational manager control.  This will be conducted in the forthcoming sections.

Flexible Budget Statement
DetailsOriginalRevisedSales (note 1)900,000540,000ExpensesFood (note 2)300,000180,000Hourly Labor (note 2)180,000108,000Supplies (note 2)18,00010,800Supervisory Labor (note 3)90,00090,000Utilities (note 3)40,00040,000Rent (note 3)50,00050,000Corporate Overhead (note 4)90,00084,000Insurance  Taxes30,00032,000Total Expenditure798,000594,800Net Income(Loss)102,000(54,800)

Note 1 
Flexing Sales Revenue

There is a direct correlation between the level of advertising and sales revenue.  Hence, the 40 reduction in advertising in the San Diego area is envisaged to diminish sales revenue by such amount.  Thus the flexed sales amount to
900,000 x 60  540,000

Note 2  Variable Costs Dependent on Sales
Since the flexed sales revenue changed, the variable costs dependent on sales should also alter.  First one needs to compute the original proportion of such cost in relation to the budgeted sales, which is done below
 EMBED Equation.3 
 EMBED Equation.3 
 EMBED Equation.3 
Flexed Food Expenditure 540,000 x 33.33  180,000
Flexed Hourly Labor Costs 540,000 x 20  108,000
Flexed Supplies Expenses 540,000 x 2  10,800

Note 3  Unaltered Costs The costs that fall within this category are unaffected when flexed, because they encompass fixed costs, which are not influenced by fluctuations in sales. 

Note 4  Corporate Overhead
 EMBED Equation.3 
Flexed Corporate Overhead 540,000 x 10  54,000
Increase due to New Computer System       30,000
Corporate Overhead                   84,000

Performance Evaluation and Controllable Expenditure
Comparing the flexible budget statement with the actual results, one can note that the performance of the Restaurant Manager was positive.  This is highlighted in the Variance Analysis Statement Below
DetailsActualFlexedVarianceSales 800,000540,000260,000 FExpensesFood 250,000180,00070,000 (U)Hourly Labor 150,000108,00042,000 (U)Supplies 14,00010,8003,200 (U)Supervisory Labor 95,00090,0005,000 (U)Utilities 47,00040,0007,000 (U)Rent 60,00050,00010,000 (U)Corporate Overhead 120,00084,00036,000 (U)Insurance  Taxes32,00032,000Total Expenditure768,000594,800173,200 (U)Net Income(Loss)32,000(54,800)86,800 F

Further more, a number of expenditure items are outside the control of the operational manager, where he cannot be held accountable for such rise.  For instance, corporate overheads and rent increased due to decisions taken by top management and sales were lower than the original budget due to decreased advertisement decided by executive management.  Utility rates were also the result of a general increase enacted by the Public Utility Commission, which falls outside the control of the operational manager.  Therefore, the performance of Gregory was a positive one and Harry should take into account the aforesaid elements, before evaluating the applicability for performance bonus.