Case Study CS-1 LO 128 Tom Ato is the President and CEO of a popular restaurant-lounge chain that serves local organic vegetarian dishes throughout the country. Every year, Tom meets with upper management of Tomayto Restaurant Group at head office, along with his team of accountants, to establish a budget for the following year. This budget is then rolled out throughout the organization to the separate departments. The departments include sales and marketing, human resources, accounting and finance, purchasing, and restaurant management. Recently, Tom has noticed some problems with the effectiveness of his budgets and has hired you, a financial advisor, to help him improve his system. The budgeting process has always been troublesome for Tom. The departments are very hostile toward each other regarding who gets a stricter budget each year. Lower management does not have any say regarding the budget. A few years ago, Tom introduced a new incentive program where every manager who was able meet the budget was awarded a bonus based on how much money they saved. Tom always likes to save more because he knows that restaurants are particularly vulnerable in an economic downturn, and he wants to make sure Tomayto survives. He always emphasizes cost savings, and managers who are not able to meet the budget do not receive great performance reviews When this program was first introduced, he found that many managers were unable to meet the budgeted figures, calling them unfair" and "impossible." Although the recent business environment has changed drastically, Tomayto still uses a system of incremental budgeting, where figures in the budgets are based on prior year's spendings. Over time, the budget has increased significantly. At the same time, Tom has noticed that managers not only are able to meet the figures, but also tend to spend exactly the amount of budgeted expenses. He finds this quite odd and has asked you to suggest why it could be happening. At the end of 2019, the company started a new line of restaurants under the name of Potayto. The Potayto project was not accounted for in the budgets for 2019. The Potayto project required working capital of $900,000 up front to get started. However, Tom realized that he is unable to finance this amount through the cash from the company's accounts. He finds this odd because the company estimated $4,000,000 in net income for 2019. The balance of the cash account at the end of 2018 was $300,000. Note that $5,000,000 was spent in 2019 buying new property for many of the restaurant's locations. Tom wants you to give him a possible reason for why he does not have enough cash on hand despite the large projected net income figure. Required a) Address Tom Ato's concerns and highlight some major issues in his budgeting process. b) Give some suggestions for how Tomayto Restaurant Group's budgetary control system can be made more effective. Case Study CS-1 LO 128 Tom Ato is the President and CEO of a popular restaurant-lounge chain that serves local organic vegetarian dishes throughout the country. Every year, Tom meets with upper management of Tomayto Restaurant Group at head office, along with his team of accountants, to establish a budget for the following year. This budget is then rolled out throughout the organization to the separate departments. The departments include sales and marketing, human resources, accounting and finance, purchasing, and restaurant management. Recently, Tom has noticed some problems with the effectiveness of his budgets and has hired you, a financial advisor, to help him improve his system. The budgeting process has always been troublesome for Tom. The departments are very hostile toward each other regarding who gets a stricter budget each year. Lower management does not have any say regarding the budget. A few years ago, Tom introduced a new incentive program where every manager who was able meet the budget was awarded a bonus based on how much money they saved. Tom always likes to save more because he knows that restaurants are particularly vulnerable in an economic downturn, and he wants to make sure Tomayto survives. He always emphasizes cost savings, and managers who are not able to meet the budget do not receive great performance reviews When this program was first introduced, he found that many managers were unable to meet the budgeted figures, calling them unfair" and "impossible." Although the recent business environment has changed drastically, Tomayto still uses a system of incremental budgeting, where figures in the budgets are based on prior year's spendings. Over time, the budget has increased significantly. At the same time, Tom has noticed that managers not only are able to meet the figures, but also tend to spend exactly the amount of budgeted expenses. He finds this quite odd and has asked you to suggest why it could be happening. At the end of 2019, the company started a new line of restaurants under the name of Potayto. The Potayto project was not accounted for in the budgets for 2019. The Potayto project required working capital of $900,000 up front to get started. However, Tom realized that he is unable to finance this amount through the cash from the company's accounts. He finds this odd because the company estimated $4,000,000 in net income for 2019. The balance of the cash account at the end of 2018 was $300,000. Note that $5,000,000 was spent in 2019 buying new property for many of the restaurant's locations. Tom wants you to give him a possible reason for why he does not have enough cash on hand despite the large projected net income figure. Required a) Address Tom Ato's concerns and highlight some major issues in his budgeting process. b) Give some suggestions for how Tomayto Restaurant Group's budgetary control system can be made more effective