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 accommoda- tion and all meals. However, because the holiday industry is so competitive, Club Atlantic is only able to generate profits by maintaining strict finan- cial 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 forty guests staying at the complex; (ii) the daily cost of a member of the cater- ing 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 perform- ance 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 direc- tors Susan Green expressed concern that the per- formance 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 perfor- mance motivate Susan Green and Brian Hilton to be more efficient?

Transcribed Image Text:

Club Atlantic Restaurant Performance Statement Month to 31 October Variance (over)/ Actual Budget under Number of guest days 11160 9600 (1560) () () () Food 20 500 20160 (340) Cleaning materials 2232 1920 (312) Heat, light and power 2050 2400 350 Catering wages 8400 7200 (1200) Rent rates, insurance and depreciation 1860 1800 (60) 35042 33480 (1562)