Brindley Health & Leisure Club: flexed budget and a 'conservative' target
Brindley Health & Leisure Club prepares a monthly budget at 1,800 members: subscription income £36 per member, variable running costs £8 per member and fixed costs £38,000, giving a budgeted surplus of £12,400. In November, membership averaged 1,600 and subscription income was £54,900; variable costs were £13,400 and fixed costs £39,700. The general manager reports a '£10,600 overspend' and blames the membership shortfall. Her regional director notes that she has missed the membership target in each of the last four quarters, and that in her budget submission she described the figure as 'a conservative target I know we can beat'. Concessionary rates were extended in October to students and to members aged over 65; these now account for 310 members. The fixed cost overspend includes £1,200 of unbudgeted repairs to the pool filtration plant and £600 of additional marketing.
1. Prepare a flexed budget at the actual activity level and reconcile budgeted surplus to actual surplus, showing the activity, price/rate and spending variances. Where does the real problem lie?
Read the worked answer
| Static budget | Flexed budget | Actual | |
|---|---|---|---|
| Members | 1,800 | 1,600 | 1,600 |
| Subscription income | £64,800 | £57,600 | £54,900 |
| Variable costs | £14,400 | £12,800 | £13,400 |
| Contribution | £50,400 | £44,800 | £41,500 |
| Fixed costs | £38,000 | £38,000 | £39,700 |
| Surplus | £12,400 | £6,800 | £1,800 |
Reconciliation (budget £12,400 to actual £1,800 = £10,600 adverse)
- Activity (contribution) variance: 200 fewer members × £28 = £5,600 A
- Subscription rate variance: £57,600 − £54,900 = £2,700 A (average fee £34.31, not £36)
- Variable cost spending variance: £12,800 − £13,400 = £600 A
- Fixed cost spending variance: £1,700 A
- Total: £5,600 + £2,700 + £600 + £1,700 = £10,600 A ✓
Where the problem lies. The manager's £10,600 'overspend' is a misdiagnosis: nearly half of it (£5,600) is a contribution shortfall from volume, which is a revenue-planning failure, not spending. A further £2,700 is a price effect - likely the concessionary rates, and possibly discounting to defend membership. Only £2,300 is genuine spending, of which £1,200 is a one-off repair that should be reported separately (and considered for insurance) and £600 was discretionary marketing incurred to chase members.
The members lost cost £28 each in contribution, and the discounting failed to hold them, so the two revenue variances are really one problem: pricing and retention.
2. Discuss the behavioural and control implications of the manager's 'conservative target', and recommend how the budgeting and reporting process should be changed.
Read the worked answer
What is happening. Calling an 1,800-member target 'conservative' and then delivering 1,600 is classic budgetary slack: the target is set below the achievable level so that it is easy to meet. The damage is not confined to the revenue line. If volume was padded downward to be safe, cost budgets were probably padded upward - and padding in cost budgets produces favourable spending variances even when operations are inefficient, so the control loop reads 'good' while the club loses money.
Why flexing alone does not fix it. Flexing corrects variable costs to actual volume, which is right, but it cannot detect that the volume itself was mis-planned. The result is a monthly ritual in which the manager explains an adverse activity variance as bad luck and the spending variances as good control.
Recommendations
- Separate the forecast from the target. A realistic forecast of 1,600 plus a stretch target of, say, 1,750 is honest; a single number of 1,800 presented as conservative is not.
- Challenge the baseline: zero-base discretionary items (marketing, agency staff) rather than incrementing last year.
- Introduce rolling forecasts so the volume assumption is refreshed monthly and stops being a disputable fixed number.
- Report the concession mix explicitly, so the £2,700 rate variance is attributed to deliberate policy rather than appearing as a failure.
- Assess the manager on flexed-budget contribution and non-financial measures (retention, arrears, capacity utilisation), and treat one-off repairs through a separate line so they neither excuse nor distort performance.