In the face of increasing local competition, the financial director of a large Canadian hotel complex convened a task force with the express purpose of identifying potential cost saving initiatives. One of the participants on the task force, the head of engineering, aired the view that water consumption in the complex had risen considerably over the last couple of years and that this had occurred during a time of increasing water rates. e head of engineering felt that, as a result of minimal real accountability in this area, little was being done to ensure efficient water usage. He recommended that the hotel’s five restaurants should be separately metered in order to monitor water consumption and that an appropriate accounting analysis be made of performance with regards to water consumption. e task force agreed that this was an initiative worth pursuing. In the following month, all restaurants were metered for water consumption and monthly water expense budgets developed.

The “Niagara Falls” restaurant monthly water expense budget was set at

$600. is was set based on an estimated monthly consumption of 60,000 litres of water at a rate of $10 per 1,000 litres. In formulating this budget it had been agreed that water can be viewed as a variable cost, i.e., when restaurant activity doubles, water consumption would double.

Niagra Falls’ performance in the first month of“ water accountability” was as follows:

Required:

a) Calculate water price and efficiency variances for Niagra Falls in the first month of “water accountability”.

b) Who should be held accountable for the water efficiency variance, and who should be held accountable for the water price variance?

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Covers served: Water consumed: Water cost per 1,000 litres: 10% above budget 90.000 litres $9.50