flexible budgets and the motivational role of budgets 611410

Flexible budgets and the motivational role of budgets

Club Atlantic is an all-weather holiday complex providing holidays throughout the year. The fee charged to guests is fully inclusive of accommodation and meals. However, because the holiday industry is so competitive. Club Atlantic is only able to generate profits by maintaining strict financial control of all activities. The club’s restaurant is one area where is a constant need to monitor cost. Susan Green is the manager of the restaurant. At the beginning of each year she is given an annual budget which is then broken down into month. Each month she receive a statement monitoring actual costs against the annual budget and highlighting any variances. The statement for the month ended 31 October is reproduced below along with a list of assumption:

Assumptions:

(a) The budget has been calculated on the basis of a 30-day calendar month with the cost of rents, insurance and depreciation begin an apportionment of the fixed annual charge.

(b) The budgeted catering wages assume that:

(i) There is one member of the catering staff for every 40 guests staying at the complex;

(c) All other budgeted costs are variable costs based on the number of guest days,

Task 1

Using the data above, prepare a revised performance statement using flexible budgeting. Your statement should show both the revised and the revised variances. Club Atlantic uses the existing budgets and performance statements to motivate its managers as well as for financial control. If manages keep expenses below budget they receive a bonus in addition to their salaries. A colleague of Susan is Brian Hilton. Brian is in charge of the swimming pool and golf course, both of which have high level of fixed costs. Each month he manages to keep expenses below budget and in return enjoys regular bonuses. Under the current reporting system, Susan Green only rarely receives a bonus. At a recent meeting with Club Atlantic’s directors Susan Green expressed concern that the restaurant. You are currently employed by Hall and Co., the club’s auditors, and the directors of Club Atlantic have asked you to advice them whether there is any justification for Susan Green’s concern.

At the meeting with the Club’s directors, you were asked the following questions:

(a) Do budgets motivate managers to achieve objectives?

(b) Does motivating managers lead to improved performance?

(c) Does the current method of reporting performance motivate Susan Green and Brian Hilton to be more efficient?

Task 2

Write a brief letter to the directors of Club Atlantic addressing their question and justifying your answers.

Note: You should make use of the data given in this task plus your findings in Task 1.