Case 3. Val Dizzy Air is a hotel complex located in a well-known ski resort in Queenstown, New Zealand. The towns population doubles during the skiing months of June through to October, and hotel activity also doubles during these months. A new chief administration officer was hired one year ago as part of an initiative designed to increase the hotels profitability. Among the new ideas introduced was responsibility accounting. This was formally announced in a memorandum accompanying quarterly cost reports supplied to department heads. Previously, cost data were presented to department heads infrequently. Excerpts from the announcement and the first cost report received by the supervisor of laundry services are presented below. The new administrator constructed the annual budget for 20X3 and then divided it by four to facilitate the provision of quarterly feedback to the operating managers. The administrator considered establishing a budget according to an average of the prior three years costs, hoping.

Val Dizzy Air Hotel MEMORANDUM To: Supervisor, Laundry Department From: Hotel Chief Administration Officer Date: 15 October 20X3 As I indicated to you in our last department heads' meeting, I am introducing a quarterly performance reporting system. Please find your performance report for July, August and September attached. Under this new system, all heads of department will receive quarterly reports, which will identify the costs of operating your department, your departmental budget and variations between your actual performance and budgeted performance. Highlighting variances in this manner will enable you to quickly identify aspects of your operation requiring immediate attention. As you know, I based this year's budget for costs by taking last year's performance less 3%. I believe this to be an appropriate basis for our budget setting as it is consistent with our hotel's philosophy of seeking continuous improvement. I trust we would all agree that there is always scope for improvement You will note from the report that your department's costs are significantly above budget (all items over budget are indicated by way of brackets in the variance column). I would be grateful if you could prepare a report for me outlining why these variations have occurred and also what remedial actions you plan to implement. Val Dizzy Air Hotel Laundry Department quarterly performance report 3 months to 30 September 20X3 Variance % Variance Actual 9,600 100,000 Budget 8,000 80,000 (1,600) (20,000) (20%) (25%) Room occupancy days Kilograms of laundry processed $ $ 944 (144) (105) (1,200) 5 800 500 8,000 3,000 425 1,500 800 (18%) (21%) (15%) 0.2% Cleaning products Laundry equipment electricity Labour Salaried supervision Laundry equipment depreciation Facility maintenance Allocation of central administration overheads 605 9,200 2,995 425 1.650 896 (150) (96) (10%) (12%) 16,715 15,025 1,690 (a) Describe two ways that the budget-setting exercise could be improved at the Val Dizzy Air Hotel. Your answer can refer to technical as well as behavioral aspects of budget setting. (b) Explain whether the report effectively communicates the level of efficiency of the laundry department (c) Redesign the quarterly performance report so that it provides a more meaningful and fair appraisal of the performance of the supervisor of the Laundry Department. Val Dizzy Air Hotel MEMORANDUM To: Supervisor, Laundry Department From: Hotel Chief Administration Officer Date: 15 October 20X3 As I indicated to you in our last department heads' meeting, I am introducing a quarterly performance reporting system. Please find your performance report for July, August and September attached. Under this new system, all heads of department will receive quarterly reports, which will identify the costs of operating your department, your departmental budget and variations between your actual performance and budgeted performance. Highlighting variances in this manner will enable you to quickly identify aspects of your operation requiring immediate attention. As you know, I based this year's budget for costs by taking last year's performance less 3%. I believe this to be an appropriate basis for our budget setting as it is consistent with our hotel's philosophy of seeking continuous improvement. I trust we would all agree that there is always scope for improvement You will note from the report that your department's costs are significantly above budget (all items over budget are indicated by way of brackets in the variance column). I would be grateful if you could prepare a report for me outlining why these variations have occurred and also what remedial actions you plan to implement. Val Dizzy Air Hotel Laundry Department quarterly performance report 3 months to 30 September 20X3 Variance % Variance Actual 9,600 100,000 Budget 8,000 80,000 (1,600) (20,000) (20%) (25%) Room occupancy days Kilograms of laundry processed $ $ 944 (144) (105) (1,200) 5 800 500 8,000 3,000 425 1,500 800 (18%) (21%) (15%) 0.2% Cleaning products Laundry equipment electricity Labour Salaried supervision Laundry equipment depreciation Facility maintenance Allocation of central administration overheads 605 9,200 2,995 425 1.650 896 (150) (96) (10%) (12%) 16,715 15,025 1,690 (a) Describe two ways that the budget-setting exercise could be improved at the Val Dizzy Air Hotel. Your answer can refer to technical as well as behavioral aspects of budget setting. (b) Explain whether the report effectively communicates the level of efficiency of the laundry department (c) Redesign the quarterly performance report so that it provides a more meaningful and fair appraisal of the performance of the supervisor of the Laundry Department