Pappadeaux The current accounting system at Pappadeaux is fundamentally flawed, and the result is distorted performance figures for managers. Appendix A contains the basic income statement that Harry is using to evaluate Gregory, with variance noted. However, Gregory should not be evaluated on matters that do not relate to his performance. A significant portion of the poor performance against the budget relates to elements of the budget that were out of Gregory's control. For example, all food is purchased at head office; overhead is allocated by head office; utility rates cannot be controlled, only usage; Harry granted supervisors a raise; rent is established by corporate head office; taxes are out of Gregory's control.

With respect to food costs, a variance budget would show that the food expense should be 1/3 of sales, based on the budget. This implies that the food budget should have been $266,666 but was $240,000. This is an improvement of $26,666. The supervisors' budget would have been on target if not for...

This would have been $80,000. Based on the budget, hourly labor should have been 20% of sales, or $160,000 based on $800k in sales. This was therefore $10,000 under budget. Thus, when all of these factors are taken into consideration, Gregory did $40,667 better than he should have (Appendix B).
It also needs to be taken into consideration that sales only disappointed because the advertising budget was cut 20% nationally and 40% in San Diego. For a new restaurant to only see a sales reduction of 11.1% from the target with a 40% advertising cut is impressive. If anything, Gregory did an exceptional job adapting to the reduced sales. He brought food, supplies and hourly labor costs below expectations. The overages in supervisory labor, rent and corporate overhead were the direct result of head office decisions, and therefore should not reflect on Gregory's performance evaluation. Likewise, Gregory has no control over the taxes the business pays -- in fact the better he does the more taxes…