- 15 Marks
MA – May 2019 – L2 – Q2b – Budgetary control
Analyze the performance of a fast-food restaurant using flexible budgeting and discuss the usefulness of the original operating statement.
Question
Otuo has recently opened a fast-food restaurant in a small town. Fast-food restaurants are characterized by their quick food service. The fast-food restaurant market in the town is dominated by a small number of long-established restaurants. Otuo is seeking to grow its business and attract the town’s residents with its burger meals.
The performance report for the first month of business is to be presented at the restaurant’s monthly management meeting. A draft performance report for the first month of business is reproduced below:
| Budget | Actual | Variance | |
|---|---|---|---|
| Sales (number of meals) | 6,000 | 5,400 | (600) |
| GH¢ | GH¢ | GH¢ | |
| Revenue | 180,000 | 167,400 | 12,600 A |
| Direct Material | 48,000 | 49,140 | 1,140 A |
| Direct Labour | 33,000 | 27,000 | 6,000 F |
| Variable Production Overhead | 21,000 | 18,900 | 2,100 F |
| Fixed costs | 36,000 | 40,000 | 4,000 A |
| Profit | 42,000 | 32,360 | 9,640 A |
Required:
i) Explain the term flexible budget. (2 marks)
ii) Using a flexible budgeting approach, redraft the operating statement to provide a more realistic indication of the variances. (7 marks)
(Note: You are not required to explain the causes of the variances)
iii) In TWO (2) ways, explain why the original operating statement was of little use to management. (2 marks)
iv) Identify FOUR (4) non-financial measures that Otuo could use to monitor the performance of the new fast-food restaurant. (4 marks)
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