Flexible budgets and the motivational role of budgets Club Atlantic is an all-weather holiday complex providing holidays throughout the year. The fee charged to guests is fully inclusive of accommodation and all meals. However, because the holiday industry is so competitive, Club Atlantic is only able to generate profits by maintaining strict financial control of all activities.

The club’s restaurant is one area where there is a constant need to monitor costs. Susan Green is the manager of the restaurant. At the beginning of each year she is given an annual budget which is then broken down into months. Each month she receives a statement monitoring actual costs against the annual budget and highlighting any variances.

The statement for the month ended 31 October is reproduced below along with a list of assumptions:

Assumptions:

(a) The budget has been calculated on the basis of a 30-day calendar month with the cost of rents, insurance and depreciation being an apportionment of the fixed annual charge.

(b) The budgeted catering wages assume that:
(i) there is one member of the catering staff for every 40 guests staying at the complex (ii) the daily cost of a member of the catering staff is €30.

(c) All other budgeted costs are variable costs based on the number of guest days.
Task 1 Using the data above, prepare a revised performance statement using flexible budgeting. Your statement should show both the revised budget and the revised variances.
Club Atlantic uses the existing budgets and performance statements to motivate its managers as well as for financial control. If managers keep expenses below budget they receive a bonus in addition to their salaries. A colleague of Susan is Brian Hilton. Brian is in charge of the swimming pool and golf course, both of which have high levels of fixed costs.
Each month he manages to keep expenses below budget and in return enjoys regular bonuses. Under the current reporting system, Susan Green only rarely receives a bonus.
At a recent meeting with Club Atlantic’s directors Susan Green expressed concern that the performance statement was not a valid reflection of her management of the restaurant. You are currently employed by Hall and Co., the club’s auditors, and the directors of Club Atlantic have asked you to advise them whether there is any justification for Susan Green’s concern.
At the meeting with the Club’s directors, you were asked the following questions:

(a) Do budgets motivate managers to achieve objectives?

(b) Does motivating managers lead to improved performance?

(c) Does the current method of reporting performance motivate Susan Green and Brian Hilton to be more efficient?
Task 2 Write a brief letter to the directors of Club Atlantic addressing their question and justifying your answers.
Note: You should make use of the data given in this task plus your findings in Task 1.

Transcribed Image Text:

Club Atlantic Restaurant Performance Statement Month to 31 October Variance (over)/ Actual Budget under Number of guest days 11,160 9,600 (1,560) () () () Food 20,500 20,160 (340) Cleaning materials 2,232 1,920 (312) Heat, light and power 2,050 2,400 350 Catering wages 8,400 7,200 (1,200) Rent rates, insurance and depreciation 1,860 1,800 (60) 35,042 33,480 (1,562)