Managmenet Accounting 2 Assignment 1

In: Business and Management

Submitted By fbyzantzen
Words 1586
Pages 7
Question 1 (10 marks)
Vaughan Speed Clean — budgeting
The Vaughan Speed Clean company is a young company that operates three car wash locations in the Greater Toronto Area. The owner relies on the abilities of three managers to run the car wash locations. At the end of each quarter, the owner evaluates the performance of each car wash location. His evaluations determine the size of the location manager’s bonus. If the location achieves an annual ROA1 of 10%, the location manager gets $1,000 for the quarter. The bonus is also augmented by $1 for every $10 the location exceeds its profit target.
However, the bonus contract gives the owner the right to make subjective adjustments for the effects of factors he deems outside the control of the location managers. In the past few months, he has made such adjustments for the adverse effects on revenue of having city workers repaving the street just in front of one car wash location.
By far the largest uncontrollable factor that is regularly considered is the weather. In particular, sales volume decreases sharply when it rains or snows. The budget, which is updated at the beginning of the month, is prepared on an assumption of hours of good weather. Inevitably, those assumptions are not accurate.
The last quarter of 2013 was atypical. It snowed and rained many more hours than were assumed in the budget, and actual profits for the three locations were below the budgeted profit level. The results for the Jane-HW7 location are shown in Exhibit 1. Exhibit 2 shows some operating assumptions and statistics for the quarter. The Jane-HW7 location has an average of $200,000 of total assets and is open every day, 10 hours per day, when it is not raining. When it is raining, the car wash is closed. The car wash employees are paid the legally required minimum wage plus a fixed amount for each car wash completed, so labour costs are…...

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