CHARLEY'S FAMILY STEAK HOUSE (B) "I guess I'll just have to find out if I can still cook like I used to," thought Alex Pearson, manager of Charley's Family Steak House No.2, as he hung up the telephone. One of his cooks had just called in sick, one was in the hospital, and the other two were on vacation. He wasn't too concerned, however, because the first two weeks in January were typically not very busy. Many of his steady customers made annual New Year's resolutions about losing weight, and it usually took at least a week for them to resume their former eating habits. Alex's only real concern that morning was how Charley Turner, the owner of the steak house, would assess Alex's performance now that he had completed his first full year as manager. Unit No. 2 was one of four Charley's Family Steak Houses owned by Mr. Turner. Alex had been promoted from assistant manager to manager of the restaurant in September 2007 after the previous manager was caught falsifying the weekly financial reports that were submitted to Mr. Turner. Alex had previously worked as a cook at Unit No. 1 and as assistant manager of Unit No. 4. He was moved to Unit No. 2 in June 2007 because Charley Turner had serious concerns about the manner in which that restaurant was being managed Unlike the other three restaurants, Unit No. 2 was located next to a small shopping center and close to a large office complex. In July 2008, a 100-room economy motel with a pool but no restaurant opened within easy walking distance of the steak house. Except for a sandwich shop and pizza place located in the shopping center, there were no other eating establishments within about one mile of Unit No. 2. Charley Turner considered it to be an excellent location. In September 2008, Alex developed an express service innovation at Unit No. 2 for frequent lunchtime customers who didn't have much time to eat. It consisted of a "quick-serve" menu (see Exhibit 1), prepaid meal cards, and a separate ordering and payment line. This innovative service became very popular with people who worked in nearby office buildings, and it enabled the restaurant to establish a brisk lunchtime business throughout the workweek. Soon after his promotion to manager, Alex had met with Mr. Turner to develop the 2008 operating plan for Unit No. 2. Although the plan was not unreasonable, Alex viewed the sales projections as being very aggressive. Nevertheless, he was delighted with his new position and the opportunities it would provide. He felt confident he would find a way to meet the high expectations Mr. Turner had for Unit No. 2 and for Alex as Besides, Mr. Turner had informed him that he was considering implementing a bonus system that would make Alex eligible to earn up to an additional 25% of his salary. Alex believed the most important performance measure of the bonus its manager 119 ASE CHARLEY'S FAMILY STEAK HOUSE (B) However, he wasn't sure what other performance factors might be used, and he was never program was likely to be the achievement of predetermined annual sales and profit goals. asked for his thoughts regarding the implementation of the new bonus plan. He hoped to have an opportunity to make his views known when he met with Mr. Turner later the week to review the operating performance of Unit No. 2 for 2008. In planning for his upcoming meeting, Alex had prepared an operating statement comparing the actual results with the original plan for 2008 (see Exhibit 2). His task over the next few days was to prepare himself to explain to Charley Turner why Alex thought both he and Unit No. 2 had performed extremely well in 2008 despite the fact that the restaurant's profit was more than 40% less than originally planned. Alex knew that Mr. Turner would not be pleased with Unit No. 2's lower profit, as the actual gross sales volume was greater than expected for the year. Alex tried to think of all the factors that had affected Unit No. 2's results for 2008, and he jotted them down on a notepad (see Exhibit 3). In addition, he prepared a schedule of actual vs. budgeted staff labor hours and wages for the year (see Exhibit 4). He knew he had done a good job, and all he had to do now was to convince Charley Turner. Doing so would entail responding to Mr. Turner's two favorite questions: How did actual sales compare with planned sales? and; How well were costs and expenses controlled? Alex suspected that his only hope for receiving a bonus was to prepare an explanation of the 2008 operating results for Unit No. 2 that was comprehensive, logical, and very convincing. IRED 1. Now that you know 2008's actual gross sales and overall customer count, use that information to prepare a revised budget for all of the restaurant's expenses In essence, prepare a new budget for each of the restaurant's expenses as if, at the time of making the original budget, you had predicted gross sales and total customer count to be what they actually ended up being. This revised expense budget is often referred to as a flexible expense budget. How do the actual expense amounts compare to the flexible budget amounts? Do you think it is more meaningful to compare the actual expenses incurred to the flexible budget amounts or to the original budget amounts? Why? 2. What were the major factors that contributed to the difference between actual net sales and planned net sales in 2008? 3. Prepare a detailed reconciliation of actual profit with planned profit for 2008. Exhibit 1 CHARLEY'S FAMILY STEAK HOUSE (B) Menu for Unit No. 2 Top of the Line Lobster Dinner New York Strip Jumbo Shrimp Prime Rib $ 16.99 11.99 10.99 9.99 Popular Sirloin BBQ Ribs Seafood Platter Sirloin Tips Chicken Breast Rib Eye 8.99 8.99 8.99 8.79 8.29 8.19 + Value Chopped Sirloin Country Fried Steak Baked Fish Fried Shrimp Ham Steak 6.99 6.79 6.79 5.99 5.79 + + + + + + Sandwiches and Salad Bar Chopped Steak Fish Fillet Beef BBQ Barbeque Chicken Jumbo Hot Dog alad Bar Buffet Side Salad 3.99 3.79 3.79 3.59 2.99 5.99 1.99 Exhibit 2 CHARLEY'S FAMILY STEAK HOUSE (B) Operating Statement 2008 Actual 2008 Plan Gross Sales Net Sales Food Labor Other Operating Expenses Contribution Advertising Miscellaneous Depreciation Insurance Licenses and Fees Rent (Base) Rent (Overage) Management Profit $1,936,025 $ 1,726,725 1,025,870 185,800 152.450 $ 362,605 78,625 3,320 24,000 9,780 10,940 72,000 6,801 98.000 $ 59,139 $ 1,861,860 $ 1,761,760 1,024,023 200,096 148,949 $ 388,692 65,165 3,000 24,000 9,400 11,700 72,000 3,093 95.000 $ 105,334 Supporting Data: Average weekly customer count % customers - lunch % customers - dinner Average gross check - lunch Average net check - lunch Average gross check - dinner Average net check - dinner 4,025 50% 50% $7.50 $6.50 $11.00 $10.00 3,850 40% 60% $7.50 $7.00 $10.50 $10.00 Exhibit 2 (continued) CHARLEY'S FAMILY STEAK HOUSE (B) Gross Sales: Net Sales: Food: Explanation of Operating Statement Total sales using menu prices. All menu prices remained the same during the year. Gross sales minus discounts that were mainly from use of coupons. The coupons were good at any of the four Charley's Family Steak Houses. The annual food cost in the plan was based on the expected total sales of each menu item and the predetermined markup for that item. For 2008, food costs were expected to be 55% of gross sales. Alex learned that the actual prices of food purchased by Mr. Turner had been about 2% below the level used in the plan. Labor: The annual labor cost varied by type of employee. Labor cost for cooks was expected to be fixed, while labor cost for servers and cashiers was expected to vary with the number of customers. Actual vs. budgeted staff hours and wages for 2008 are shown in Exhibit 4. Other Operating These included supplies, maintenance and utilities. Alex thought they were driven Expenses: primarily by customer count, and the plan set them at 8% of gross sales. Advertising Mr. Turner managed the advertising for the four units. Of the 3.5% of gross sales included in the plan, 0.5% was for use by the restaurant manager, 1% was for broadcast media, 1% was for print media, and 1% was for ad preparation. Miscellaneous: A catchall for small items, some fixed and some responding to customer-count variations. Depreciation: This represented straight-line depreciation on furniture, the POS system, and other equipment Insurance This represented both property and liability insurance. Licenses and Fees: This represented a combination of federal, state, and local business licenses and fees. Some of the amount represented a corporate allocation. Base Rent: A fixed annual rent paid on the restaurant property. Rent Overage: Management: A variable amount equal to 5.0% of the excess of actual gross sales above $1,800,000 This consisted of the restaurant manager's and assistant manager's combined salary of $55,000, a charge assessed to cover Mr. Turner's salary, and Unit No. 2's portion of the purchasing, accounting, and other service activities that occurred at corporate headquarters 123 TY'S FAMILY STEAK HOUSE (B) Exhibit 3 CHARLEY'S FAMILY STEAK HOUSE (B) Alex's Notes for Unit No. 2 Sales Factors: Number of customers Customer lunch/dinner mix Average gross check at lunch and dinner Discount coupon usage Expense Factors: Food prices Food usage Labor rates Labor usage Spending variances Exhibit 4 CHARLEY'S FAMILY STEAK HOUSE (B) Schedule of Staff Hours and Wages 2008 Plan 2008 Actual Cooks Hours worked Average wages per hour 8,000 $12.50 8,000 $13.00 Cashiers and Servers Hours worked Average wages per hour 26,400 $3.25 32,032 $3.00 CHARLEY'S FAMILY STEAK HOUSE (B) "I guess I'll just have to find out if I can still cook like I used to," thought Alex Pearson, manager of Charley's Family Steak House No.2, as he hung up the telephone. One of his cooks had just called in sick, one was in the hospital, and the other two were on vacation. He wasn't too concerned, however, because the first two weeks in January were typically not very busy. Many of his steady customers made annual New Year's resolutions about losing weight, and it usually took at least a week for them to resume their former eating habits. Alex's only real concern that morning was how Charley Turner, the owner of the steak house, would assess Alex's performance now that he had completed his first full year as manager. Unit No. 2 was one of four Charley's Family Steak Houses owned by Mr. Turner. Alex had been promoted from assistant manager to manager of the restaurant in September 2007 after the previous manager was caught falsifying the weekly financial reports that were submitted to Mr. Turner. Alex had previously worked as a cook at Unit No. 1 and as assistant manager of Unit No. 4. He was moved to Unit No. 2 in June 2007 because Charley Turner had serious concerns about the manner in which that restaurant was being managed Unlike the other three restaurants, Unit No. 2 was located next to a small shopping center and close to a large office complex. In July 2008, a 100-room economy motel with a pool but no restaurant opened within easy walking distance of the steak house. Except for a sandwich shop and pizza place located in the shopping center, there were no other eating establishments within about one mile of Unit No. 2. Charley Turner considered it to be an excellent location. In September 2008, Alex developed an express service innovation at Unit No. 2 for frequent lunchtime customers who didn't have much time to eat. It consisted of a "quick-serve" menu (see Exhibit 1), prepaid meal cards, and a separate ordering and payment line. This innovative service became very popular with people who worked in nearby office buildings, and it enabled the restaurant to establish a brisk lunchtime business throughout the workweek. Soon after his promotion to manager, Alex had met with Mr. Turner to develop the 2008 operating plan for Unit No. 2. Although the plan was not unreasonable, Alex viewed the sales projections as being very aggressive. Nevertheless, he was delighted with his new position and the opportunities it would provide. He felt confident he would find a way to meet the high expectations Mr. Turner had for Unit No. 2 and for Alex as Besides, Mr. Turner had informed him that he was considering implementing a bonus system that would make Alex eligible to earn up to an additional 25% of his salary. Alex believed the most important performance measure of the bonus its manager 119 ASE CHARLEY'S FAMILY STEAK HOUSE (B) However, he wasn't sure what other performance factors might be used, and he was never program was likely to be the achievement of predetermined annual sales and profit goals. asked for his thoughts regarding the implementation of the new bonus plan. He hoped to have an opportunity to make his views known when he met with Mr. Turner later the week to review the operating performance of Unit No. 2 for 2008. In planning for his upcoming meeting, Alex had prepared an operating statement comparing the actual results with the original plan for 2008 (see Exhibit 2). His task over the next few days was to prepare himself to explain to Charley Turner why Alex thought both he and Unit No. 2 had performed extremely well in 2008 despite the fact that the restaurant's profit was more than 40% less than originally planned. Alex knew that Mr. Turner would not be pleased with Unit No. 2's lower profit, as the actual gross sales volume was greater than expected for the year. Alex tried to think of all the factors that had affected Unit No. 2's results for 2008, and he jotted them down on a notepad (see Exhibit 3). In addition, he prepared a schedule of actual vs. budgeted staff labor hours and wages for the year (see Exhibit 4). He knew he had done a good job, and all he had to do now was to convince Charley Turner. Doing so would entail responding to Mr. Turner's two favorite questions: How did actual sales compare with planned sales? and; How well were costs and expenses controlled? Alex suspected that his only hope for receiving a bonus was to prepare an explanation of the 2008 operating results for Unit No. 2 that was comprehensive, logical, and very convincing. IRED 1. Now that you know 2008's actual gross sales and overall customer count, use that information to prepare a revised budget for all of the restaurant's expenses In essence, prepare a new budget for each of the restaurant's expenses as if, at the time of making the original budget, you had predicted gross sales and total customer count to be what they actually ended up being. This revised expense budget is often referred to as a flexible expense budget. How do the actual expense amounts compare to the flexible budget amounts? Do you think it is more meaningful to compare the actual expenses incurred to the flexible budget amounts or to the original budget amounts? Why? 2. What were the major factors that contributed to the difference between actual net sales and planned net sales in 2008? 3. Prepare a detailed reconciliation of actual profit with planned profit for 2008. Exhibit 1 CHARLEY'S FAMILY STEAK HOUSE (B) Menu for Unit No. 2 Top of the Line Lobster Dinner New York Strip Jumbo Shrimp Prime Rib $ 16.99 11.99 10.99 9.99 Popular Sirloin BBQ Ribs Seafood Platter Sirloin Tips Chicken Breast Rib Eye 8.99 8.99 8.99 8.79 8.29 8.19 + Value Chopped Sirloin Country Fried Steak Baked Fish Fried Shrimp Ham Steak 6.99 6.79 6.79 5.99 5.79 + + + + + + Sandwiches and Salad Bar Chopped Steak Fish Fillet Beef BBQ Barbeque Chicken Jumbo Hot Dog alad Bar Buffet Side Salad 3.99 3.79 3.79 3.59 2.99 5.99 1.99 Exhibit 2 CHARLEY'S FAMILY STEAK HOUSE (B) Operating Statement 2008 Actual 2008 Plan Gross Sales Net Sales Food Labor Other Operating Expenses Contribution Advertising Miscellaneous Depreciation Insurance Licenses and Fees Rent (Base) Rent (Overage) Management Profit $1,936,025 $ 1,726,725 1,025,870 185,800 152.450 $ 362,605 78,625 3,320 24,000 9,780 10,940 72,000 6,801 98.000 $ 59,139 $ 1,861,860 $ 1,761,760 1,024,023 200,096 148,949 $ 388,692 65,165 3,000 24,000 9,400 11,700 72,000 3,093 95.000 $ 105,334 Supporting Data: Average weekly customer count % customers - lunch % customers - dinner Average gross check - lunch Average net check - lunch Average gross check - dinner Average net check - dinner 4,025 50% 50% $7.50 $6.50 $11.00 $10.00 3,850 40% 60% $7.50 $7.00 $10.50 $10.00 Exhibit 2 (continued) CHARLEY'S FAMILY STEAK HOUSE (B) Gross Sales: Net Sales: Food: Explanation of Operating Statement Total sales using menu prices. All menu prices remained the same during the year. Gross sales minus discounts that were mainly from use of coupons. The coupons were good at any of the four Charley's Family Steak Houses. The annual food cost in the plan was based on the expected total sales of each menu item and the predetermined markup for that item. For 2008, food costs were expected to be 55% of gross sales. Alex learned that the actual prices of food purchased by Mr. Turner had been about 2% below the level used in the plan. Labor: The annual labor cost varied by type of employee. Labor cost for cooks was expected to be fixed, while labor cost for servers and cashiers was expected to vary with the number of customers. Actual vs. budgeted staff hours and wages for 2008 are shown in Exhibit 4. Other Operating These included supplies, maintenance and utilities. Alex thought they were driven Expenses: primarily by customer count, and the plan set them at 8% of gross sales. Advertising Mr. Turner managed the advertising for the four units. Of the 3.5% of gross sales included in the plan, 0.5% was for use by the restaurant manager, 1% was for broadcast media, 1% was for print media, and 1% was for ad preparation. Miscellaneous: A catchall for small items, some fixed and some responding to customer-count variations. Depreciation: This represented straight-line depreciation on furniture, the POS system, and other equipment Insurance This represented both property and liability insurance. Licenses and Fees: This represented a combination of federal, state, and local business licenses and fees. Some of the amount represented a corporate allocation. Base Rent: A fixed annual rent paid on the restaurant property. Rent Overage: Management: A variable amount equal to 5.0% of the excess of actual gross sales above $1,800,000 This consisted of the restaurant manager's and assistant manager's combined salary of $55,000, a charge assessed to cover Mr. Turner's salary, and Unit No. 2's portion of the purchasing, accounting, and other service activities that occurred at corporate headquarters 123 TY'S FAMILY STEAK HOUSE (B) Exhibit 3 CHARLEY'S FAMILY STEAK HOUSE (B) Alex's Notes for Unit No. 2 Sales Factors: Number of customers Customer lunch/dinner mix Average gross check at lunch and dinner Discount coupon usage Expense Factors: Food prices Food usage Labor rates Labor usage Spending variances Exhibit 4 CHARLEY'S FAMILY STEAK HOUSE (B) Schedule of Staff Hours and Wages 2008 Plan 2008 Actual Cooks Hours worked Average wages per hour 8,000 $12.50 8,000 $13.00 Cashiers and Servers Hours worked Average wages per hour 26,400 $3.25 32,032 $3.00