Delectable Deliveries Questions:

1. Evaluate Delectable Deliveries, Inc.'s preparation and use of accounting information.

2. A good budgeting process has at least two distinct objectives: planning and control. Discuss the effectiveness of Delectable Deliveries, Inc.'s budgeting process in accomplishing these two goals.

3. What modifications would you make to the current budgeting process to make it more effective? What changes in the corporate culture would have to occur before these modifications could be implemented? Do you believe such changes are likely to occur?

4. Various stakeholders of the firm may have different views of the relationship among the corporate culture, the budgeting process, and the compensation system. Identify Delectable Deliveries, Inc.'s stakeholders and comment on how each would view this relationship.

5. Should Doug have made the $10,000 supplies expense accrual? What should Doug do next month when Mr. Elliot and Mr. Johnson request another accrual? Should Doug report the earnings manipulations to anyone?

6. Budgets are frequently seen as planning tools; however, they are also useful for controlling operations (comparing actual results to planned results). How well does Delectable Deliveries' budget process accomplish these two roles?

7. What recommendations do you have for improving Delectable Deliveries' budgeting process (be specific)?

32 ELIZABETH B. DAVIS, CHARLES E. DAVIS AND BRAD COPLAND Elizabeth B. Davis, Charles E. Davis, and Brad Copland Baylor University DelectableDeliveries, Inc. Doug Anderson, Assistant Controller for the Western Zonc country cooking delivery into the mid-1980s, creating in Mr Operations of Delectable Deliveries, Inc, had just received Mason a false sense of security. Investment decisions resided his second bonus check of the year. As he contemplated primarily with Mr. Mason. As a result, corporate profits whether he should spend it all at once or save it along withwere redirected from the company and spent on houses, the remaining 11 bonus checks to be received this ycar, he planes, and exotic cars instead of reinvested in technology recalled the events of last week. Jack Elliott, Doug's boss capital improvements, research and strategic planning. These and the Controller for Western Zone Operations, instructed decisions later proved to be detrimental to the firm's ability Doug to reverse a $10,000 supplies expense ca Doug to perpetuate its market leadership position. knew that all expense adjustments had already been made, yet he also knew why Mr. Elliott made his request. Western the company, none were well-organized or well-funded in the Zone profits were below budget, and Steve Johnson, West-early years. However, by the mid-1980s a competitor began ern Operations Vice-President, asked Mr. Elliott what it an aggressive campaign to attack the delivery market, build- would take to make budget. Every four weeks, Mr. Johnsoning high visibility and high technology locations throughout called Mr. Elliott to check on profits relative to budget.the country. These locations were supported by an ongoing Sometimes accruals were made, sometimes they were reand intense advertising campaign. The competitor's strategy versed and other times no adjustments were necessary. Dougcontrasted sharply with Delectable Deliveries strategy of knew this undermined the compensation system, but won-easing space in low visibility strip centers, relying on a non- dered if it was unethical since it was done company-widetechnical paper-based system of accounting for sales, and with full knowledge of all interested partics, including the majority shareholder and CEO, Mark Mason. Although competitors existed throughout the history of geting advertising as a percentage of sales. As a result, the competitor began to increase its market share rapidly Delectable Deliveries suffered from progressive decreases in sales and profits, reduced royalty income, a substantial ero- COMPANY BACKGROUND Delectable Deliveries, Inc, established in Shreveport, Louisi-sion of market share, and loss of the leadership position ana in 1973, initially consisted of a single store that served within its segment. dine-in country cooking to the local community. Recognizing an opportunity, owner Mark Mason decided to offer delivery service. The delivery idca worked tion soon opened to service the Sh humble beginning, Delectable Deliveries grew into an inte the remaining stock held by current and former execu- national corporation with approximately 5,500 units in all 50 ive-level employees. This ownership structure and Mr. Ma- so well that another loca- reveport area. From this CAPITAL STRUCTURE Mr. Mason held approximately 97% of the compa states as well as six other countries. son's personal management style created a dynamic, flexible, Franchisees operated approximately 80% of the units, and responsive company. In contrast to a large public com- with the remaining units operated by the corporation. Mr. pany that not only is subjeet to the ongoing scrutiny of mar Mason believed that franchising offered several benefits to ket analysts, but also beholden to a diverse group of the company. First, rapid growth could be accomplished by stockholders, Delectable Deliveries' ownership structure al business opportunities to eager investors with owed for the quick implementation of decisions free from stifling bureaucracy access to capital. Second, franchise fees and royalty income generated significant revenue. Third, consistency of product To finance growth and undertake other investment and service could be maintained through strict qualificaion opportunities, Delectable Deliveries incurred a significant criteria and a comprehensive franchise agreement, requiring amount of debt from a syndicate of banks. During the every prospective franchisee to have at least one year of exgrowth years, servicing the debt was not a problem. How- ever, as competition intensified and market share contracted During the early years, Delectable Deliveries grew rap- Delectable Deliveries eventually was in technical default, giv- idly as the company expanded operations both domestically ing the banks the right to call the loans, which could have and abroad. The company was the clear market leader in orced a sale of the company. Fortunately, the banks wanted perience managing a Delectable Deliveries store. This case was prepared by Elizabeth B. Davis and Charles E. Davis, Baylor University, Waco, Texas, USA and Brad Copland (former student of Baylor University, Waco, TX), as the basis for class discussion rather than to lustrate either effective or ineffective handling of a manage- rial situation. The authors are grateful for the insightful commens of Tom Harrison and Bill Thomas on earlier versions of this case. Grati- tude is also expressed to the students at Baylor University who participated in the classroom testing of the case. Distributed by the Accounting Education Resource Centre, The University of Lethbridge, 1999. All rights reserved to the authors and to the Accounting Education Re- source Centre. Permission to use the case in classes of instruction, without restriction, is provided to subscribers of the Journal. VOLUME 5/NUMBER 1/ 1999 THE JOURNAL OF ACCOUNTING CASE RESEARCH 32 ELIZABETH B. DAVIS, CHARLES E. DAVIS AND BRAD COPLAND Elizabeth B. Davis, Charles E. Davis, and Brad Copland Baylor University DelectableDeliveries, Inc. Doug Anderson, Assistant Controller for the Western Zonc country cooking delivery into the mid-1980s, creating in Mr Operations of Delectable Deliveries, Inc, had just received Mason a false sense of security. Investment decisions resided his second bonus check of the year. As he contemplated primarily with Mr. Mason. As a result, corporate profits whether he should spend it all at once or save it along withwere redirected from the company and spent on houses, the remaining 11 bonus checks to be received this ycar, he planes, and exotic cars instead of reinvested in technology recalled the events of last week. Jack Elliott, Doug's boss capital improvements, research and strategic planning. These and the Controller for Western Zone Operations, instructed decisions later proved to be detrimental to the firm's ability Doug to reverse a $10,000 supplies expense ca Doug to perpetuate its market leadership position. knew that all expense adjustments had already been made, yet he also knew why Mr. Elliott made his request. Western the company, none were well-organized or well-funded in the Zone profits were below budget, and Steve Johnson, West-early years. However, by the mid-1980s a competitor began ern Operations Vice-President, asked Mr. Elliott what it an aggressive campaign to attack the delivery market, build- would take to make budget. Every four weeks, Mr. Johnsoning high visibility and high technology locations throughout called Mr. Elliott to check on profits relative to budget.the country. These locations were supported by an ongoing Sometimes accruals were made, sometimes they were reand intense advertising campaign. The competitor's strategy versed and other times no adjustments were necessary. Dougcontrasted sharply with Delectable Deliveries strategy of knew this undermined the compensation system, but won-easing space in low visibility strip centers, relying on a non- dered if it was unethical since it was done company-widetechnical paper-based system of accounting for sales, and with full knowledge of all interested partics, including the majority shareholder and CEO, Mark Mason. Although competitors existed throughout the history of geting advertising as a percentage of sales. As a result, the competitor began to increase its market share rapidly Delectable Deliveries suffered from progressive decreases in sales and profits, reduced royalty income, a substantial ero- COMPANY BACKGROUND Delectable Deliveries, Inc, established in Shreveport, Louisi-sion of market share, and loss of the leadership position ana in 1973, initially consisted of a single store that served within its segment. dine-in country cooking to the local community. Recognizing an opportunity, owner Mark Mason decided to offer delivery service. The delivery idca worked tion soon opened to service the Sh humble beginning, Delectable Deliveries grew into an inte the remaining stock held by current and former execu- national corporation with approximately 5,500 units in all 50 ive-level employees. This ownership structure and Mr. Ma- so well that another loca- reveport area. From this CAPITAL STRUCTURE Mr. Mason held approximately 97% of the compa states as well as six other countries. son's personal management style created a dynamic, flexible, Franchisees operated approximately 80% of the units, and responsive company. In contrast to a large public com- with the remaining units operated by the corporation. Mr. pany that not only is subjeet to the ongoing scrutiny of mar Mason believed that franchising offered several benefits to ket analysts, but also beholden to a diverse group of the company. First, rapid growth could be accomplished by stockholders, Delectable Deliveries' ownership structure al business opportunities to eager investors with owed for the quick implementation of decisions free from stifling bureaucracy access to capital. Second, franchise fees and royalty income generated significant revenue. Third, consistency of product To finance growth and undertake other investment and service could be maintained through strict qualificaion opportunities, Delectable Deliveries incurred a significant criteria and a comprehensive franchise agreement, requiring amount of debt from a syndicate of banks. During the every prospective franchisee to have at least one year of exgrowth years, servicing the debt was not a problem. How- ever, as competition intensified and market share contracted During the early years, Delectable Deliveries grew rap- Delectable Deliveries eventually was in technical default, giv- idly as the company expanded operations both domestically ing the banks the right to call the loans, which could have and abroad. The company was the clear market leader in orced a sale of the company. Fortunately, the banks wanted perience managing a Delectable Deliveries store. This case was prepared by Elizabeth B. Davis and Charles E. Davis, Baylor University, Waco, Texas, USA and Brad Copland (former student of Baylor University, Waco, TX), as the basis for class discussion rather than to lustrate either effective or ineffective handling of a manage- rial situation. The authors are grateful for the insightful commens of Tom Harrison and Bill Thomas on earlier versions of this case. Grati- tude is also expressed to the students at Baylor University who participated in the classroom testing of the case. Distributed by the Accounting Education Resource Centre, The University of Lethbridge, 1999. All rights reserved to the authors and to the Accounting Education Re- source Centre. Permission to use the case in classes of instruction, without restriction, is provided to subscribers of the Journal. VOLUME 5/NUMBER 1/ 1999 THE JOURNAL OF ACCOUNTING CASE RESEARCH