QUESTION

St. Ashton Resorts provides high-end, all-inclusive holiday resorts in 12 locales, including Maui, Hawaii, Los Cabos, Mexico, and Australia's Great Barrier Reef. The guest pays a set daily charge that covers housing, all meals and beverages, golf, and spa treatments at St. Ashton hotels.

Each resort is viewed as a profit center, and resort managers are rewarded for meeting or exceeding the budget. Each resort management team is compensated based on the difference between budgeted and actual earnings under the profit center concept.

St. Ashton changed its budgeting system last year. Previously, each property's yearly budget was created by St. Ashton's CFO's office based on estimated occupancy rates and expected costs. The annual budget was then divided into monthly budgets that were adjusted for the number of days in each month as well as any seasonal variations in the occupancy rate.

The new CFO, who was appointed in the middle of last year, though that the previous budget strategy, which was determined before the year began, did not account for the dynamic character of the tourist business. Travelers used to plan their vacations 6-9 months in advance, allowing resorts to produce relatively accurate demand projections and, as a result, realistic budgets. Demand has grown more unpredictable as a result of the Internet and worldwide marketplaces. The previous budget was out of date shortly after the new year began, generating tremendous disquiet among managers who were awarded under the budget.

For the current fiscal year, the new CFO modified the budgeting approach to a monthly rolling model. The CFO's office establishes expenditure objectives per guest room filled for each department at each resort (lodging, food and beverage, golf, and spa) as well as annual budgets to cover each department's fixed costs before the current fiscal year begins. Annual departmental budgets are converted to monthly budgets by dividing them by 365 and multiplying the result by the number of days in the month. The revised budget model for the St. Ashton Maui Resort for the current year is shown in the table below.

BUDGET

Revenue per room day		$1,700
Number of rooms		500
Average occupancy rate		75%
Expected occupancy		375
Total expected revenue per day		$637,500
Variable costs per room Food and beverage		$300
Golf		$30
Spa		$200
Lodging		$70
Total variable cost per room day		$600
Total expected variable cost @ average occupancy		$225,000
Fixed cost per year Food and beverage		$18,000,000
Golf		$2,300,000
Spa		$1,600,000
Lodging		$88,000,000
Administration		$14,000,000
Grounds		$1,700,000
Total annual fixed cost		$125,600,000
Total annual fixed cost per day (365 days)		$344,110
Total profit per day		$68,390

Actual results for October

Guest days 10,540

Revenue $17,918,000

Variable costs Food and beverage	$ 3,035,520
Golf	305,660
Spa	2,002,600
Lodging	685,100
Total variable costs	$ 6,028,880
Fixed costs Food and beverage	$ 1,421,753
Golf	175,808
Spa	119,583
Lodging	7,175,013
Administration	1,212,821
Grounds	135,720
Total fixed cost	$10,240,701

1. Name the issues that appear in the exercise

2. Prepare the St. Ashton Maui Resort monthly budget for October (with 31 days) for the current

year before the current year begins.

3. Was the new CFO right in changing the fixed budget into a rolling budget? Why or why not?

4. "To evaluate and reward the performance of the St. Ashton Maui managers under the new

budget model, St. Ashton uses the actual number of guest days in the month, the budgeted

variable costs per room, and budgeted fixed costs to establish what the target expenses for

the month should have been. This is then compared to the actual expenses incurred. Managerial

bonuses are paid based on the difference between the target and the actual expenses."

a. What decision is rights (that is, what type of autonomy) does the new budget model imply in this scenario?

b. Is that an advantage or a disadvantage for the organization as a whole? Justify your answer.