Albacore Chess Stores (Albacore) is a chain of 12 shops specializing in selling items associated with the game of chess: boards, pieces, clocks, software and books. Three years ago, the company was the subject of a venture capital buyout from a larger group. A new senior management team was put in place after the buyout. They have the aim of running the business in order to maximize profits.The chief financial officer (CFO), along with the other members of senior management, sets the annual budget and uses a standard costing approach with variance analysis in order to control individual shop performance. The head office handles all capital purchases and brand marketing. All inventory purchasing is done centrally and the shop opening times are set as standard across the company. As an illustration of senior management attitude, the CFO had set the budget for staff costs at $7 per hour for part-time staff and this was rigorously observed in the period.Each shop is run by a manager who reports their financial results to head office. The shop managers recruit and manage the staffing of their shop. They have some autonomy in setting prices locally and have been given authority to vary prices by up to 10 percent from a master list produced by the CFO. They also have a local marketing budget agreed each year by the shop?s manager and the marketing director as part of the annual appraisal process. The shop managers have approached the chairman of Albacore to complain about the way that they are managed and their remuneration. They feel that their efforts are unrecognized by senior management. One manager commented, ?I have had a successful year in hard economic circumstances. I have run a number of promotions in the shop that have been well received by the customers. However, the budgets that are set are impossible to achieve and as a result I have not been paid any bonus although I feel that I have done everything in my power to bring in good profits.?The shop managers at Albacore are paid a basic salary of $27 000 with bonuses of up to 30 percent of basic salary dependent on two factors: performance above budget and the operational director?s performance assessment. The budget for the next year is prepared by the CFO and presented at the shop manager?s annual appraisal.The chairman has come to you to ask if you can consider the system of performance assessment for the shop managers and give an independent perspective on the reward systems at Albacore. She has provided the following illustrative information from the previous year for one shop:Albacore Chess Stores Tunny Branch Budget for Year to Sept

Property costs includes heating, lighting and rental.Positive variances are favourable.The manager of this shop commented at the appraisal meeting that she felt that the assessment was unfair since her failure to make budget was due to general economic conditions. The industry as a whole saw a 12 percent fall in revenues during the period and the budget for the period was set to be the same as the previous period. She was not paid a bonus for the period.

Required:(a) Assess the suitability of the branch information given as a means of assessing the shop manager?s performance for this store, providing suitable additional calculations.(b) Analyse the performance management style and evaluate the performance appraisal system at Albacore. Suggest suitable improvements to its reward system for the shop managers.

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Actual Budget Variance Sales 266000 237 100 -28900 Cost of sales Gross profit 106400 94840 11560 159600 142260 -17340 11500 12000 500 Marketing Staff costs 27000 27000 Manager Part-time staff 38000 34000 4000 Property costs Shop profit 26600 26600 56000 43160 -12840