Reference no: EM131519102

Question: (This question draws partially on material covered in the previous chapter) Val Dizzy Air is a hotel complex located in a well-known ski resort in Queenstown, New Zealand. The town's population doubles during the skiing months of June through to October, and hotel activity also doubles during these months. A new chief administration officer was hired one year ago as part of an initiative designed to increase the hotel's profitability. Among the new ideas introduced was responsibility accounting. This was formally announced in a memorandum accompanying quarterly cost reports supplied to department heads. Previously, cost data were presented to department heads infrequently. Excerpts from the announcement and the first cost report received by the supervisor of laundry services are presented below.

The new administrator constructed the annual budget for 20X3 and then divided it by four to facilitate the provision of quarterly feedback to the operating managers. The administrator considered establishing a budget according to an average of the prior three years' costs, hoping that installation of the system would reduce costs to this level. However, because of rapidly increasing prices, 20X2 costs, less 3%, were finally chosen for the 20X3 budget. Activity levels were set at the volume achieved in 20X2, which was approximately equal to the volume in each of the previous two years.