Budgeting

Pasta Bowl is a chain of restaurants which operates across the UK. Below is Pasta Bowl’s actual expenditure, across eight cost centres. Analysis of past expenditure patterns indicate that variable costs in some centres vary according to the number of restaurants (NR) while others vary according to the number of seats occupied (NS).
The actual expenditure for the year ended 30 September 2022 is shown below;

Table (1) Actual results y/e 30-Sep-2022
Number of Resataurants (NR): 593
Number of seats occupied (NS): 47,440
Cost centre Cost varies with Total Cost £
Food & Beverage NS 2,134,800
Staff Costs (excluding Head Office) NS 1,605,000
Staff Costs Head office NR 1,956,500
Advertising and Promotion NR 2,130,000
Cleaning NS 998,000
Maintenance NR 1,530,000
Administation and IT NR 1,256,000
Utilities NS 876,000

The business operates an incremental budgeting system. The previous year’s actual expenditure is adjusted for the impact of anticipated changes in volumes and costs. You have been asked to help prepare the budget for the year to 30 September 2023 and you have gathered the following information;
“(i) Total fixed costs in the year to 30 September 2022 were £1,677,500. These were incurred by Advertising and Promotion charges (£1,200,000), Maintenance (£227,500) and Head Office Staff Costs (£250,000).
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“(ii) Some restaurants were closed temporarily due to COVID, as a result of this some pizza ovens required replacing. On the on 1st October 2022 twenty pizza ovens were purchased, costing £,3000 each. The ovens have expected useful economic lives of 5 years and no residual value. The old diesel ovens were scrapped. The cost of the ovens should be assigned to the Maintenance centre.
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“(iii) Due to the significant revenue fall in 2021 and 2022 from COVID, Pasta Bowl have had to reduce their cost base on Food and Beverages. They have appointed a new food and beverage contractor to undertake activities with effect from 1st October 2022. The contracted price of £43.20 per occupied seat plus a fixed fee of £400,000 p.a is payable quarterly in arrears.
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“(iv) Cleaning materials have inflated due to supply chain issues and hence have increased by £0.05 per occupied seat.
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“(v) All other costs and expected to increase in line with inflation of 6% p.a.
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(vi) Due to COVID there was a reduction in sales last year, so volumes of both NR and NS are expected to increase by 35%.
(vii) There is little seasonal variation in volumes during the year so the budget is phased evenly for each month.

It is now November 2022. The actual volumes and costs for October 2022 have been reported and are shown below:
Table (2) Actuals – month ended 31-Oct-2022
Number of Resataurants (NR): 60
Number of seats occupied (NS): 5,512

Cost centre Total Cost £
Food & Beverage NS 265,890
Staff Costs (excluding Head Office) NS 136,800
Staff Costs Head office NR 441,500
Advertising and Promotion NR 514,000
Cleaning NS 99,123
Maintenance NR 127,500
Administation and IT NR 104,667
Utilities NS 163,213

The following information below has been added to explain the large increase in costs:

(i) Due to the significant losses reported at the end of the financial year, a new CEO has been appointed, which has increased the Head office Staff Costs
ii) Utilities have increased due to the significant rise in oil and gas prices
“(iii) Advertising and Marketing has significantly increased due to it’s television advertising campaign. Currently TV is is Pasta Bowls main medium to advertise.

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Requirements
“(1) Using MS Excel build a budgeting model in accordance with good spreadsheet design principles, for the financial year ended September 2023. As per the student template all numbers should be rounded to the nearest whole number, the exception ‘VC per unit’ being 2dp.
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“(2) In the same MS Excel file create a worksheet and build a variance report for Oct-2022 showing the budget, actual and variances for all cost centres. As per the student template all numbers should be rounded to the nearest whole number, the exception ‘VC per unit’ being 2dp.
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“(3) The Senior Management of Pasta Bowl have reviewed the Variance Report and are concerned about the adverse variances. Write a 250 word email (+/- 10%) to the MD including:
– a brief explanation of a variance report
– Identify and explain the cause of two adverse variances
– Make appropriate recommendations to reduce these variances
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“(4) The Senior Management of Pasta Bowl have reviewed Go’s Variance Report and are concerned about the adverse variances. They want to improve their visibility on cost and therefore want a better budgetary system. They are looking for a new budget system whereby budget owners will need to justify each cost to senior management.
Requirement
Prepare a 5 min video, recommending a new budget type for Pasta Bowl. Describe two advantages and two disadvantages.