American Public University Cost Accounting: Two Discussions Peer Replies

STUDENT 1: Susan

Who is responsible for the cost of the biscuits? We were not told what the organizational structure of the franchise is, but given that it is part of a larger chain of restaurants, there are usually designated supply chain partners that the individual franchises must use in order to maintain uniformity among the restaurants. The franchise should have a long-term strategy and budget, as well as a short-term operating plan that would have addressed protocol for this type of situation. On the surface, it appears there is no clear line of responsibility or communication between the different layers of management and the owner, Paula.

Paula has the right to be angry about the situation, but she should be careful about holding managers accountable for costs they could not control. If Betty or the purchasing agent made a mistake in their forecasts, or gave incorrect cost figures to Paula, then she has the right to be angry with the one who cost her lost profits.

At what level is the cost controllable? It is controllable when the person responsible for the forecast provides that data to upper management for inclusion in the budget, and executes the purchase based on the operating budget. In other words, they had influence over the costs at that point for the budget period. That would be the purchasing agent or the purchasing manager. If the purchasing agent is the one responsible for this cost center, then hopefully he looked at historical data to see trends in market demand, competition, and adjusted for unforeseen events that could occur. If there was a history of supply issues with that particular vendor, he should have communicated that to supply chain management. The purchasing agent is responsible for managing the forecast based on the input received from others. It’s possible that the purchasing agent wasn’t given adequate information from the restaurant about the inventory levels required to meet customer demand.

Should Paula be angry with the purchasing agent or with Betty for spending too much money? Again, that all depends on the management structure of the franchise and where responsibility lines were drawn. By the time they ran out of biscuits, the costs were no longer controllable if going to the grocery store was the contingency plan. If there were a master budget and operating plan in place, where feedback was freely flowing between lower and top management, then a contingency plan would have been known to the purchasing agent or Betty.



STUDENT 2:

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 2015, 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?

This is a pretty difficult question because there are a lot of factors at play in this scenario. I will attempt to break them all down into digestible chunks.

Should Paula be angry with the purchasing agent: Of course, the purchasing agent is responsible for making sure that the store does not run out of stock and should be responsible for the loss in this situation. However, because Betty took it upon herself to purchase the biscuits this takes it out of the purchasing agents hands, so Paula can not fully blame her for the loss over the past three days.
Should Paula be angry at Betty: Yes, Betty did not contact Paula before purchasing the frozen ready to bake biscuits. These biscuits were very expensive and lost the franchise money over the three day period. If Betty had contacted Paula they might have found an alternative solution by working together, perhaps finding an alternative source of biscuits or even letting labor run high and allowing cooks to get overtime making biscuits in house, this might have been a cheaper solution.

Who is responsible for the cost of the biscuits? Well, Paula will pay for the biscuits as she owns the franchise but Betty made the purchase order so the blame will fall on her and not the purchasing agent. It is unlikely that any negative consequences will happen to Central Warehouse as it was simply an unfortunate occurrence rather than a decision making error. Betty will probably be reprimanded for this.

At what level are costs controllable: controllable cost are costs that can be altered in the short term. a cost is considered to be controllable if the decision to incur it resides with one person. The decision to purchase the biscuits in the store was a controllable cost from the perspective of Betty. However, if a cost is imposed on an business by a third party, this cost is not considered to be controllable.

Chad Heinen

~References

Horngren, C. T., Datar, S. M., Rajan, M. V. Cost Accounting. [VitalSource Bookshelf]. Retrieved from https://online.vitalsource.com/#/books/97813234844…

https://www.accountingtools.com/articles/controlla…


Original Discussion Question: 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 2015, 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?

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