Calculate the following variances

CASE 304 Hereford Steak Houses Thomas Ahrens. United Arab Emirates University and Christopher Chapman. Imperial College London I'd love to know where I am as an area manager. I don't know what to do with food margin, Shall I say to my restaurant managers, well done? Thank you? You're fired? Hereford Steak Houses operated a chain of more than 200 wholly owned, full-service restaurants across the UK. Over the past 10 years the division had achieved substan- tial growth in revenue and earnings through the addition of new restaurants. More recently, however, with increasing numbers of new entrants to the UK eating-out market and the growing saturation of Hereford Steak Houses' own outlets, senior managers were increasingly turning their attention to internal financial controls as a means to sustain earnings growth. National branding and marketing for the chain was managed centrally by Hereford Steak Houses' head office. Most significant to this was the nationwide menu that defined the food specifications, cost and price of all dishes for sale in all outlets. Menus were designed to deliver a target food gross profit margin that was agreed between the boards of Hereford Steak Houses and the corporate leisure group of which it was part, and applied to all of Hereford Steak Houses' outlets. While food cost was a primary element of restaurant controllable costs, as the above quotation from an area man- ager indicates, there was a lack of agreement on how the food margin reports should Source: Thomas Ahrens, United Arab Emirates University and Christopher Chapman, Imperial College London. 594be used to evaluate a restaurant manager. Restaurant managers emphasised that they wanted leeway to meet the demand of their local clientele. The gross profit margin was defined as sales minus cost of food used, and was generally referred to as the 'food margin'. For each new menu a selection of dishes was iteratively developed in order to achieve the target food margin (in terms of percentage and cash). This was a complicated process since the menu needed to con- tain dishes at a range of price points to appeal to different customers. Depending on the selling price, different levels of margin were realistic. For example, a very high margin on high-cost dishes resulted in unrealistic sales prices, but could be sustainable on low-cost dishes. High-volume dishes offered scope for the centralised purchasing department on negotiate substantial price discounts. Hereford Steak Houses' position as a buyer of large quantities of food also allowed them to enforce strict quality stand- ards for raw materials. The process of developing individual restaurant budgets started with an estimation of the achievable level of sales growth based on expected number of dishes and prices from the central menu. Budgets were painstakingly built up. They drew on the data- base of standard ingredient costs, which included a standard allowance for wastage (Exhibit 304.1). Then dish specifications, prices and expected sales mix were decided (Exhibit 304.2). For weekly management reporting this data was used to generate a target food margin based on each restaurant's actual dish-mix that could be compared with the actual cost of food used (Exhibit 304.3). The actual cost of food was calcu- lated by adding the opening inventory to deliveries received minus closing inventory (see Exhibit 304.4). Exhibit 304.1 Menu design ingredients database report Standard wastage percentage: Ingredient no. Description Input cost Wastage Standard cost 100 1 pat butter 0.05 0.00] 0.05 PART III Case study problems 101 1 standard garnish 0.20 0.002 0.20 102 1 sachet ketchup 0.05 0.001 0.05 151 1 bread roll 0.15 0.002 0.15 297 1 portion of fries 0.60 0.006 0.61 314 1 carton vegetable soup 2.40 0.024 2.42 601 9 oz rump steak 6.00 0.060 6.06 907 6 oz frozen cod fillet 3.60 0.036 3.64 915 1 fish finger 0.25 0.003 0.25Case 304 Exhibit 304.2 Dish specification and costing report (@ standard cost Sales Gross profit Cost price margin Dish no. Description ' sales Ingredients (E) (E) (E) 1 Soup 10.09% 1 pat butter 0.05 1 bread roll 0.15 1 carton vegetable soup 2.42 Total E.2. 63 E5.50 52.39% E2.87 11 Steak and chips 45.0% 1 standard garnish 0.20 1 portion of fries 0.61 9 oz rump steak 6.06 Total 16.87 E11.95 12.596 65.08 12 Fish and chips 25.09% 1 standard garnish 0.20 1 portion of fries 0.61 6 oz frozen cod fillet 3.64 Total E4.44 68 50 17.796 E4.06 21 Fish fingers 20.096 I sachet ketchup 0.05 1 portion of fries 0.61 3 fish fingers D.75 Total E1.41 E4.95 71.46 63.54 Exhibit 304.3 Restaurant no. 219 budget report - week 48 Budget Actual Dishes 1 500 1 600 Revenue 13 563.75 13116.00 Cost 7120.50 6 805.50 Gross profit margin (E) 64 43.25 6310.50 Gross profit margin (9%) 47.59% 48.16 Actual dishes sold Soup 240 Steak and chips 480 Fish and chips 480 Fish fingers 400Case 304 Exhibit 304 4 Restaurant no. 219 stock-keeping report - week 48 Opening Purchases Closing stock during stock Ingredient no. Description count week count 100 1 pat butter 200 120 30 101 1 standard garnish 200 1300 300 102 1 sachet ketchup 300 400 300 151 1 bread roll 300 100 60 297 1 portion of fries 2000 900 1840 314 1 carton vegetable soup 100 180 40 601 9 oz rump steak 300 400 160 907 6 of frozen cod fillet 250 DOE 70 915 1 fish finger 200 1200 200 In order to take advantage of centralised purchasing and also to ensure tight con- trol over quality standards, restaurants sourced all their food purchases through the centralised supply chain. Especially for seasonal produce it was normal for Hereford Steak Houses to agree price bands with their food suppliers. Auctuations in the price of food purchased were accounted for by the central purchasing department. The weekly budget reports for the restaurants were based on the standard costs that had been defined during the design of the menu. Questions 1 Calculate the following variances for restaurant no. 219: Static budget variance, sales volume variance, sales mix variance. sales quantity variance and the flexible budget variance. 2 Calculate usage ( efficiency ) variances for all ingredients for restaurant no. 219. PART III Case study problems 3 If you were the manager of restaurant no. 219. what would you do? 4 Recently the central purchasing department managed to secure a 5% reduction on the input cost for steaks and a 15% reduction in the input costs of portions of fries compared with those shown in Exhibit 3041. Calculate the resulting price variances for restaurant no. 219 for week 48