Management Accounting for Food Pavilion Restaurant

This document provides a detailed analysis of the financial performance of Food Pavilion Restaurant, a moderately priced restaurant located in Edmonton Alberta, Canada. It includes a forecast of income statement and balance sheet, performance analysis, and ratio computation.

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
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Table of Contents
Introduction and background...........................................................................................................2
Restaurant description.....................................................................................................................2
Business objectives and mission......................................................................................................3
Competitive edge.............................................................................................................................3
Financial analysis.............................................................................................................................4
Assumptions................................................................................................................................4
Forecast of income statement......................................................................................................5
Forecast of balance sheet.............................................................................................................6
Performance analysis.......................................................................................................................7
Ratio computation........................................................................................................................7
Conclusion.......................................................................................................................................8
Reference.........................................................................................................................................9

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Introduction and background
Food Pavilion will be the moderately priced restaurant that will have 75 seats and will
offer the family style foods. The business will be located in Edmonton Alberta, Canada. The
location is chosen for starting up the restaurant as it has more than 10,00,000 population and the
place is quite popular among the travellers from different places of Canada as well as the
travellers visiting from outside Canada. Among different menus the restaurant will serve pot
roast, pork chops, steaks in addition to wraps, hamburgers and different types of salads. Further,
the restaurant will offer the specialty selections for the children’s menu that will include smaller
portions and lighter options. The 3500 square feet space will be taken on rent that was previously
leased to an Italian restaurant. Although the same place was previously used as the restaurant the
previous owner taken away most of the equipments, furniture and fixtures and the owner of Food
Pavilion will decorate it as per its own theme (Dubé, Brunelle & Legros, 2016).
Restaurant description
The restaurant will be located in Edmonton Alberta, Canada and will be owned 2 retired
professors John Almada and Freida Wright. It will serve different kinds of classic home-style
dishes starting from mashed potatoes, pot roasts to ice creams and patty melts. It will be opened
7 days a week from 12.00 pm to 11.00 pm. Theme that will be used by Food Pavilion is the
family style dining that is also known as the casual style dining. It will offer the entrees with
moderate price and menus will feature mix of the classic cuisines that will be individualized with
the signature dips, toppings and sauces. It will further offer non-disposable dishes, table side
services and will keep moderate price for the menus (Eravia & Handayani, 2015).

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Business objectives and mission
Primary objectives of Food Pavilion are –
 To become premier family style restaurant in Edmonton Alberta, Canada
 Providing quality foods at reasonable prices along with exemplary services
Mission of the business is providing relaxing and unique dining experience that is similar
to the dining at home. Further the business will strive to achieve the goal through – (i) providing
the menu items with incorporation of quality ingredients at the reasonable prices (ii) being
mindful regarding the well being of the customers as well as staffs along with treating each
person with respect and dignity (Bradley et al, 2017).
Competitive edge
Main competitive edge of the business will be its people. Owners of Food Pavilion
believe that the business not only the foods are good but also qualities of the staffs are well as the
staffs are reflection of the business. As both the owners do not have much knowledge about the
restaurant business, specialized and experienced staffs will be hired for the restaurant in all
aspects. Long term goal of the business is hiring team members those are hand selected and are
honest towards the family values (Bradley et al, 2017). As the size of the business is lean as
compared to the big chain competitors the business will make changes quickly as per the
preference of its customers that will make them proactive. It has further been realized by the
owners that the Food Pavilion’s success will be gained through serving the quality foods and
offering friendly services. Further, at Food Pavilion, the cost accounting is very important as the
profitability for individual dishes varies significantly and the prices for the menu items will be
determined through that (Feerasta, 2017).

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Financial analysis
Assumptions
 Sales – 70% of the sales revenues will be received from selling of foods and 30% will be
received from selling of the beverages. Sales are expected to be increased by 12% in
2018, 14% in 2019 and 15% each in 2020 and 2021.
 Cost of goods sold – for year 2017 and 2018 the COGS will be 60% each whereas from
2019 the company will be able to reduce the same to 59%.
 Gross profit for year 2017 and 2018 will be 40% each whereas from 2019 the company
will be able to increase the same to 41%
 Direct operating expenses will be 4% to 5% of sales revenue
 2 accountant’s fees will be $ 80,000 for 2017, 2018 and 2019 and will be increased to $
100,000 for 2020 and 2021.
 Advertising and marketing fees will be 6% to 10% of sales revenue
 Music and entertainment expenses will be 2% of sales revenue
 Bank interest will be 12% of the balance loan. Long term bank loan will be amounted to
$ 18,00,000 that will be repaid in 6 equal yearly instalments.
 Useful life of furniture and fit-out and equipment/tools will be 10 years and depreciation
will be charged at straight line method
 Depreciation on vehicles will be charged at 15% using reducing balance method
 Loan repayment will be $ 300,000 per annum
 Rent and rates for the rented premises will be $ 120,000 for 2017, 2018, 2019 and will be
increased to $ 180,000 for 2020 and 2021.
 Repairs and maintenance will be 2% to 4% of sales revenue.

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 Salaries will be $ 35,000 per annum for 8 staffs for 2017 and 2018 and will be increased
to $ 45,000 per staff per annum for 2019, 2020 and 2021.
 Superannuation will be 30% of salaries
 Taxes will be charged at 30% of the amount for profit before taxes
 Suppliers will offer credit terms for 1 month and some customers will get 1 month credit
period for big orders.
 80% of the sales revenue will be made on cash basis and only 20% will be made on
credit basis that is for the large orders like parties
 60% of the supplies will be purchased on cash basis and for rest 40% of the purchases
one 3 months credit period will be allowed.
Forecast of income statement

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Forecast of balance sheet

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Performance analysis
Ratio computation
From the forecasting of the business it can be analysed that the gross profit ratio of the
business will be 40% each for 2017, 2018 and 2019. However, due to reduction in COGS the
gross profit will be increased to 41% for 2020 and 2021. Further, after charging all the expenses
the net profit for the business is expected to be improved slowly over the 5 years period. Net
profit margin for 2017 is 2.94% that will be increased to 4.95% in the year 2021 (DeFusco et al.,
2015).
Current ratio that measures the ability of the company to make payment for the short term
obligations for the company is in reducing trend. Current ratio is computed through dividing
current assets of the entity by the current liabilities. Generally, the current ratio of more than
represents that the company is able to meet its short term obligations with the available current
assets (Thomas et al., 2016). Though the current ratio of the entity are in reducing trend it is
found that for all the years under concern the current ratio is more than 1 that signifies that the
company is able to meet its short term obligations comfortably. On the other hand, the debt to

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equity ratio indicates the leverage position of the entity. High debt to equity ratio indicates that
the entity is excessively dependent on outside borrowing which in turn may question the
sustainability of the company (Robinson et al., 2015). From the balance sheet of the company it
can be found that the debt to equity ratio of the company for the year 2017 is significantly high
that is 4.84. It indicates that the company is highly dependent upon the outside borrowing as
compared to the equity and it may in turn raise question regarding the long term sustainability of
the entity. However, it is found that the business will improve its debt equity ratio and by the end
of year 2021 the same will be reduced to 2.98 (Williams & Dobelman, 2017).
Conclusion
From the above interpretation and analysis it can be concluded that the restaurant
business that is Food Pavilion will be a successful one over the period under concern. The reason
behind the conclusion is that the business will be able to increase its sales reduce its COGS over
the period of 5 years. Further, the gross profit as well as net profit for the company is in
improving trend for the 5 years period. If the liquidity position of the company is considered, it
can be identified that the company will be able to meet its short term obligations comfortably. If
leverage position is considered, it can be identified that though the company is highly leveraged,
it will improve its leverage position over the period of 5 years.

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Reference
Bradley, D. M., Elenis, T., Hoyer, G., Martin, D., & Waller, J. (2017). Human capital challenges
in the food and beverage service industry of Canada: Finding innovative
solutions. Worldwide Hospitality and Tourism Themes, 9(4), 411-423.
DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons.
Dubé, J., Brunelle, C., & Legros, D. (2016). Location theories and business location decision: a
micro-spatial investigation in Canada. The Review of Regional Studies, 46(2), 143-170.
Eravia, D., & Handayani, T. (2015). The opportunities and threats of small and medium
enterprises in Pekanbaru: Comparison between SMES in food and restaurant
industries. Procedia-Social and Behavioral Sciences, 169, 88-97.
Feerasta, J. (2017). Individuals with intellectual disabilities in the restaurant business: An
exploratory study of attributes for success. Journal of Human Resources in Hospitality &
Tourism, 16(1), 22-38.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Thomas, R. R., Van Greuning, H., Henry, E., & Michael, A. B. (2016). International financial
statement analysis.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
Chapters, 109-169.

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