Read the scenario below and answer the questions that follow inyour role as a member of the senior management team at Oakwood. Youare reviewing budgets and actual results for the month of April forthe various business activities and today, you are focusing on GolfCart Rentals. In the recent past, there has been some tensionbetween the management of Golf Cart Rentals and Golf CourseOperations, so some information about Golf Course Operations isincluded below.
About Oakwood
Oakwood is a resort hotel with tennis courts, swimming pools,three golf courses, restaurants, and many other fine amenities. Theresort’s management structure is highly decentralized because eachbusiness activity is quite different and requires a different setof managerial skills, experience, and staffing. For example, beinga good hotel dining room manager requires a completely differentset of skills and experiences than being a good golf course proshop manager. Oakwood believes that the decentralized structure isa key success factor in its strategy and tries to operate every oneof its business activities as a profit center unless the activitydoes not have a measurable revenue stream. Those activities aremanaged as cost centers. Two of the most important activities inGolf Division are Golf Course Operations and Golf Cart Rentals.Each of these activities are managed as profit centers because eachhas an identifiable revenue stream and each requires a specific setof managerial skills to be successful.
Golf Cart Rentals
Oakwood customers who wish to play golf may either rent a cartor walk the course. They only pay a cart rental fee if they rent acart. The Golf Cart Rentals profit center’s revenue each month isthe total of the cart rental fees. Jay MacDonald (“Mac”) is themanager of the Golf Cart Rentals profit center and he supervisesall business activities related to rentals of motorized golf cartsat Oakwood. The carts are leased from various vendors and Macnegotiates these leases. Most vendors like to lease for two orthree years, but one of Mac’s valuable skills is his ability tomake good deals with golf cart suppliers. His crafty negotiationshave given Oakwood a portfolio of lease rental terms ranging fromthree months to three years at very good rates.
Mac manages the golf cart maintenance crew that keeps the200-cart fleet clean, properly fueled with oil and gas, and thatmakes minor repairs on the carts. The carts are solidly built andrarely need major repairs as long as they are properly maintained,and Mac does a good job of hiring and keeping skilled mechanics whoexcel at maintenance and minor repairs. He always says that payinga little more is worth it to get hard-working, competent workers,and the golf cart maintenance crew does have a higher average payrate than most of the other Golf Division employees. As a result ofthis excellent maintenance program, the few carts that do needmajor repairs are usually old and about to go off-lease anyway. So,instead of repairing them, Mac just takes them out of service andreplaces them in the next round of leasing. The accountingdepartment records the salaries and related costs (payroll taxesand benefits) in the Labor account.
Two years ago, Mac installed large underground tanks (one forgas and one for oil) so Oakwood could buy in bulk and get quantitydiscounts. This has worked out well and has reduced oil and gascosts so much that the cost of the tanks and installation will berecaptured at the end of this year. The distributor’s tankertrucks, one for oil and one for gas, stop by every three or fourweeks to refill the tanks. The accounting department records thesecosts in the Gas and oil expense account when they get the invoicefor each delivery, usually a few days after the delivery.
Golf Course Operations
Sandra Bunker (“Sandy”) is the manager of Golf CourseOperations. A major part of her job is supervising golf coursemaintenance and repair. A resort golf course must be in excellentcondition to draw resort guests and others to the course. Thus, thecondition of the course is an important part of the entire resort’sreputation. Oakwood has had several marketing research studies doneover the years and all of them confirm that when a resort’s golfcourse falls into poor condition, everything from dining roomrevenue to room rental revenue suffers.
Golf Course Operations is a profit center and its revenue is thetotal of greens fees collected from resort guests and others toplay on the golf courses. Costs charged to Golf Course Operationsinclude grounds crew salaries and benefits, the cost of outsourcedservices such as planting and trimming the trees and bushes thatline the fairways, and the cost of supplies such as fertilizer,grass seed, bedding flowers, sand, and various kinds of mulch. Thegrounds crew workers are mostly unskilled laborers who aregenerally paid just a little more than the minimum wage.
Weather conditions are an important factor in the overallprofitability of any golf course. Rainy or cold weather will reducethe number of golfers who play the course, but even more importantis that the condition of the course can be affected by how it isused when it has become wet. If rain continues for several days orthe rain amounts are unusually high, the course can becomewaterlogged. Operating golf carts on a waterlogged course can doserious and permanent damage to the turf. To prevent permanent turfdamage, Sandy can choose to close the course to golf cartsentirely, or she can have the grounds crew restrict golf cart useby placing rope fences around the wet areas. A course that isclosed to carts can still generate greens fees paid by golfers whoare willing to walk the course. On rare occasions, the course willbecome so wet that Sandy will close the course to all golfers.Sandy determines whether each course will be open or closed due toweather conditions on any particular day. She also determineswhether players can use golf carts. As you might imagine, Sandydoes hear from Mac on days when she prohibits golf carts, but Sandydoes have the final say in that decision since the condition of thegolf courses is, ultimately, her responsibility. Sandy is on thecourses each morning at dawn supervising the maintenance crews, soshe is in a good position to decide whether to rope off just thewettest parts of the course and allow carts, prohibit carts, orclose the course entirely.
A Rainy April at Oakwood
This April, golf cart operating profits were extremely low,amounting to a mere 49% of budgeted profits. When you discussedthis matter with Mac, he explained that the poor results werecaused by the unusually heavy rains in April. He complained thatSandy had closed entire courses to carts on several days when onlyparts of the courses were too wet to tolerate the carts safely. Heargued that, on those days, guests could play the courses (andgenerate revenue for Sandy), but they could not drive carts, whichshut his revenue off completely. Note: Guests are not permitted todrive carts in roped off areas of a golf course; but they can rentcarts and drive them elsewhere on the course. If an entire courseis roped off, guests cannot rent carts at all when playing thatcourse on that day.
Mac said he had overheard Sandy’s grounds crew members talkingamong themselves on the days that entire courses were closed tocarts. He had heard the crew members saying that they were too busyto rope off just the wet areas and that they had gone ahead andclosed entire courses to cart traffic instead because it was easierto do that than to spend time roping off the wet areas. You couldsee that Mac was not happy about this. In your conversation withMac, for example, he compared the grounds crew unfavorably to hisgolf cart maintenance crew, noting that his crew were all hardworking employees and not “lazy” like the grounds crew.
When you met with both Mac and Sandy, you learned that theycommunicate regularly and often share the same opinions about theoperation of Oakwood as a whole. Your impression is that theygenerally work together in a positive and cooperative manner toresolve issues that arise. But you do see that the decisions Sandymakes about roping off the courses (or parts of the courses) are aconsistent source of concern for Mac.
The resort’s controller, Ampzilla Forkwort, developed a flexiblebudget analysis for April that she says will help you betteranalyze Mac’s results. Her analysis for the month appears below (Findicates a favorable variance, U indicates an unfavorablevariance):
Requirements:
Your solution should be written in single-spaced text, includedin one Microsoft Word or RTF document, and should addressspecifically the following four questions (you do not need toreprint the questions in your solution, but do number youranswers):
- Most accountants would argue that a flexible budget is good touse when calculating variances on variable costs (such as gas andoil). In 100 words or less, using the knowledge about accountingyou have gained in this course and the facts presented in the casenarrative, identify and describe the most likely cause of the $900unfavorable variance on gas and oil expense and explain the basisfor your belief.
- Categorize Mac’s performance for April using this ratingscheme: “Really Great,” “Pretty Much OK,” or “Really Awful.” In100-200 words, explain why you ranked him as you did.
- Assume you decide to start measuring Mac’s performance usingthe flexible budget (experienced businesspersons with MBAs wouldcall that “flexing out the volume effect”). In 100-200 words,describe the most likely effects (intended and unintended) of usingthis measure on the quality of the cart rental fleet and theprofitability of the cart rental operation in the future. In youranswer, describe any assumptions you make and be sure to stateclear, logical arguments that lead to your conclusions.
- A conflict between the interests of Mac and Sandy might existin this situation. One might argue that having each of thesemanagers achieve their goals separately might not lead to the bestresults for Oakwood as a whole. In 100-200 words, describe anyconflict that exists here and suggest possible solutions that wouldbetter align the goals of these managers with the overall goals ofOakwood. Remember that Sandy and Mac communicate regularly and workout most issues in a friendly way, (other than the issue of closingcourses to carts because of weather-related conditions) sosuggesting they communicate better is not going to be a solutionhere. Also, remember that Oakwood has a strong policy ofdecentralization and that Mac and Sandy each have valuableknowledge about their specific operations that Oakwood wants tomake sure they use effectively in managing their respectiveoperations.
