Flexible Budgeting

Module Problem

Hmmm! is a neighbourhood coffee shop that sells the best coffee in the world. In addition to coffee, Hmmm! sells a few food items, mostly baked goods that pair well with coffee. The shop is open 24 hours. It runs three shifts, each staffed with the same number of people. The first shift begins at 6:00 a.m., the second at 2:00 p.m. and the third at 10:00 p.m. At the end of each month, the owner meets with the manager to discuss how things went that month and to prepare the budget for the upcoming month. The basic budget that is used each month is as follows:

Number of shifts	90
Number of customers	9,000
Cups of coffee sold	11,250
Food items sold	3,150
Coffee revenue	66,375
Food revenue	11,025
Coffee cost	14,400
Food cost	6,300
Labour cost	34,200
Utilities cost	12,150
Depreciation on equipment	1,500
Rent	900

At the end of February, the monthly budget meeting was held. The results for February were discouragingnet income was only $6,542. Much of the discussion centered around the three shifts that seemed to be contributing the least to the overall success of the firm. These are the last shift (from 10:00 p.m. to 6:00 a.m.) beginning on Sunday night through early Wednesday morning. The manager suggested that they close the shop for these three shifts. Both agreed that average customers per shift would likely increase as a result, perhaps to as much as 120 customers per shift. After much back and forth, they agreed to try closing those shifts for the month of March and re-evaluate after examining the results of the experiment. They prepared the budget based on the reduced number of shifts and the expected increase in customers per shift.

At the end of March, the owner prepared the following static budget analysis:

Item	Budget	Actual	Variance
Number of Shifts	78	78	-
Customer	9,360	8,869	491	U	*
Cup of Coffee	11,700	12,206	506	F
Food Items	3,276	4,934	1,658	F	**
Coffee Revenue	60,030	66,573	2,457	U
Food Revenue	11,466	20,227	8,761	F	**
Coffee Cost	14,976	14,459	517	F
Food Cost	6,880	11,594	4,714	U	**
Labour Cost	29,640	29,640	-
Utilities Cost	10,530	10,149	390	F
Depreciation and Equipment	1,500	1,500	-
Rent	900	1000	100	U	*

Authors Notes: For purposes of this exercise, please assume that the costs included in the budget are the only costs the firm incurs. Cups of coffee and number of food items sold are budgeted per customer. Utilities cost is budgeted per shift. Depreciation and rent are fixed. The asterisks in the final column indicate a significant variance based on a rule of thumb that anything over 5% of the budget is significant.

1. Prepare a flexible budget analysis for Hmmm! for the month of March. Do not forget to include activity levels.
2. Compute expected profit according to the original budget (before the experiment).
3. Compute expected profit according to the March 1 budget.
4. Compute expected profit according to the flexible budget.
5. Compute actual profit.