Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 34

Analyze Performance for a Restaurant

Doug’s Diner is planning to expand operations and is concerned that its reporting system might need improvement The master budget income statement for the Downtown Doug’s, which contains a delicatessen and restaurant operation, follows (in thousands):

	Delicatessen	Restaurant	Total
Gross sales	$1,000	$2,500	$3,500
Costs
Purchases	600	1,000	1,600
Hourly wages	50	876	926
Franchise fee	30	76	106
Advertising	100	200	300
Utilities	70	126	196
Depreciation	50	76	126
Lease cost	30	50	80
Salaries	30	50	80
Total costs	$ 960	$2,454	$3,414
Operating profit	$ 40	$ 46	$ 86

The company uses the following performance report for management evaluation:

DOWNTOWN DOUG’S Net Income for the Year ($000)
	Actual Results
Actual Results	Delicatessen	Restaurant	Total	Budget	Over- or (Under-) Budgeta
Gross sales	$1,200	$2,000	$3,200	$3,500	$(300)
Costs
Purchasesb	780	800	1,580	1,600	$ (20)
Hourly wagesb	60	700	760	926	(166)
Franchise feeb	36	60	96	106	(10)
Advertising	100	200	300	300
Utilitiesb	76	100	176	196	(20)
Depreciation	50	76	126	126
Lease cost	30	50	80	80
Salaries	30	50	80	80
Total costs	$1,162	$2,036	$3,198	$3,414	$(216)
Operating profit	$ 38	$ (36)	$ 2	$ 86	$ (84)

a There is no sales price variance.

b Variable costs; all other costs are fixed.

Required

Prepare a profit variance analysis for the delicatessen segment (Hint: Use gross sales as your measure of volume.)

Step 1 of 3

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Cost variances

Cost variance is the difference between actual quantities (AQ) multiplied with actual price (AP) and standard quantities (SQ) multiplied with standard price (SP).