91Ó°ÊÓ

Responsibility in a restaurant. Paula Beane owns a restaurant franchise that is part of a chain of "southern homestyle" restaurants. One of the chain's popular breakfast items is biscuits and gravy. Central Warehouse makes and freezes the biscuit dough, which it then sells to the franchise stores where it is thawed and baked in the individual stores by the cook. Each franchise also has a purchasing agent who orders the biscuits (and other items) based on expected demand. In March 2018 , one of the freezers in Central Warehouse breaks down and biscuit production is reduced by \(25 \%\) for 3 days. During those 3 days, Paula's franchise runs out of biscuits but demand does not slow down. Paula's franchise cook, Betty Baker, sends one of the kitchen helpers to the local grocery store to buy refrigerated ready-to-bake biscuits. Although the customers are kept happy, the refrigerated biscuits cost Paula's franchise three times the cost of the Central Warehouse frozen biscuits, and the franchise loses money on this item for those 3 days. Paula is angry with the purchasing agent for not ordering enough biscuits to avoid running out of stock and with Betty for spending too much money on the replacement biscuits. Who is responsible for the cost of the biscuits? At what level is the cost controllable? Do you agree that Paula should be angry with the purchasing agent? With Betty? Why or why not?

Step by step solution

01

Identify the parties involved and their roles

In this situation, we have Paula Beane (the owner of the franchise), the purchasing agent (responsible for ordering biscuits and other items based on expected demand), Betty Baker (the cook, who sends a kitchen helper to buy replacement biscuits) and Central Warehouse (the biscuit dough provider). #Step 2: Analyze the cost control in the situation#

02

Analyze the cost control in the situation

The cost of the biscuits and inventory management is usually under the control of the purchasing agent. They are responsible for ordering the right amount of biscuits to avoid running out of stock and minimize waste. However, in this case, the Central Warehouse experienced an unforeseen issue with a broken freezer, reducing biscuit production by \(25\%\) for three days. #Step 3: Identify the responsibility for the cost of biscuits #

03

Identify the responsibility for the cost of biscuits

While the purchasing agent is responsible for ordering the correct amount of biscuits, they could not have predicted the Central Warehouse issue, which affected the availability of biscuits supply. Thus, their responsibility in this situation is limited. Since Betty was responsible for taking action to substitute the Central Warehouse frozen biscuits with refrigerated ready-to-bake biscuits, she shares responsibility for the increased cost of biscuits during the shortage. #Step 4: Determine the controllable level of cost#

04

Determine the controllable level of cost

The cost of the biscuits is mainly controllable at the purchasing agent level, as they order the products based on expected demand. However, during an unforeseen event like Central Warehouse's freezer breakdown, cost control becomes more challenging and might require a collaborative decision-making process between the purchasing agent, cook, and the franchise owner. #Step 5: Justify Paula's anger towards the purchasing agent and Betty#

05

Justify Paula's anger towards the purchasing agent and Betty

Since the purchasing agent could not predict the Central Warehouse issue, Paula's anger towards them is not entirely justified. However, it might indicate a need to review inventory management practices and consider contingency plans for potential supply issues. On the other hand, Paula's anger towards Betty might be justified as Betty made an independent decision to buy the more expensive biscuits without consulting Paula or considering alternative solutions, which resulted in financial loss for those three days. In conclusion, both the purchasing agent and Betty share responsibility for the cost of biscuits in this situation. The cost is controllable at the purchasing agent level mainly, but during unforeseen events, it might require a collaborative decision-making process. Paula's anger towards the purchasing agent is not entirely justified, but her anger towards Betty could be justified due to her decision to buy the overpriced biscuits causing the franchise to lose money.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Responsibility Accounting

Responsibility accounting is a system of accounting that segments an organization into various responsibility centers, allowing managers and employees to take responsibility for their own performance in relation to the company's financial goals. In the context of the exercise, Paula Beane's restaurant operates as a responsibility center within the larger franchise chain. When the freezer breakdown at Central Warehouse occurred, it created a situation where the responsibility for the resulting costs became fragmented.

Each person in the operation, such as the purchasing agent and Betty the cook, operates in their own sphere of influence. The purchasing agent is normally in charge of inventory levels and ensuring supply meets expected demand, while the cook's realm includes meal preparation and perhaps some immediate, on-the-ground decision making. Under responsibility accounting, it's crucial to set clear expectations for each role and ensure they have the control and authority to meet those expectations. This event highlights a significant aspect of responsibility accounting: the need to adapt to unforeseen circumstances while still maintaining responsibility for decision-making within one's sphere of influence.

Controllable Costs

Controllable costs are expenses over which a manager or department has authority and decision-making power. In our scenario, standard biscuit costs are usually controllable by the purchasing agent, who orders based on projections for restaurant demand. However, due to the Central Warehouse freezer malfunction, an uncontrollable external factor impacted the supply chain, leading to higher costs that were not easily controllable by the purchasing agent.

When Betty, the cook, decided to purchase more expensive biscuits, this decision also represented controllable costs, but at the cook's level. Ideally, controllable costs should be managed efficiently to optimize profitability, and it is often important to distinguish between controllable and uncontrollable costs when assessing performance. This distinction aids in evaluating whether individuals are effectively controlling costs that fall under their jurisdiction and not unjustly holding them accountable for costs beyond their control.

Inventory Management

Inventory management is a critical aspect of cost control in any business that deals with physical goods. It requires careful planning and forecasting to ensure that the right amount of product is available to meet demand without excessive surplus or shortage. In the textbook exercise, the purchasing agent's role includes maintaining optimal inventory levels to avoid situations like the one encountered.

Good inventory management would typically include contingencies for unexpected events such as a breakdown in supply. Since this did not occur, it indicates a potential area for improvement in the restaurant's operations. Paula's franchise could benefit from better inventory management strategies that include safety stock, improved demand forecasting, and perhaps agreements with multiple suppliers to mitigate risks associated with supply chain disruptions. While the purchasing agent and Betty had limited options during the crisis, incorporating robust inventory management practices could minimize the negative impacts of similar events in the future.