Hospitality Industry Managerial Accounting

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Hospitality Industry Managerial Accounting

• HRT 374
• Chapter 10
• Don St. Hilaire

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Chapter 10 - Basic Budget Characteristics

• Revenue and expense plan.
• Includes all income statement revenues and
  expenses.
• Budgeting horizons.
• Strategic planning.
• Used in planning and control.

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Chapter 10 - Benefits of the Budgeting Process

• Must examine alternatives.
• Provides a standard.
• Enables management to look forward.
• Can involve all levels of management.
• Provides a communications channel.
• Provides estimates of future expenses.

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Chapter 10 - Major Elements of Operations Budget

• Financial objectives.
• Revenue forecasts.
• Expense forecasts.
• Net income forecasts.

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Chapter 10 - GM or CEO Responsibilities

• GM or CEO responsible.
• Controller coordinates.
• Major input from department and lower-level
  managers.

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Chapter 10 Operations Budgeting

• Purposes of budgeting for operations
• Allows management to accomplish planning,
  execution, and control.

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Chapter 10 Roles Responsibilities

• CEO enlists controller to coordinate budget
  preparation process
• Controller facilitates budget preparation process
  by providing informaiton to operating managers.
• Managers work with lower level managers to give
  input on budget.

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Chapter 10 Roles Responsibilities

• Controller formulates input into budget.
• CEO and Controller present budget to Board of
  Directors

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Chapter 10 - Preparing the Operations Budget

• Step 1 Establish financial objectives
• Step 2 Forecast revenues
• Step 3 Estimate expenses
• Step 4 Determine the bottom line
• Step 5 If the Board of Directors accepts the
  budget, the budget process is completed. If it
  does not, another budget is developed and
  proposed.

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Chapter 10 Budgeting Process-Financial
Objectives

• Board of Directors establish financial objectives
  for the organization (long-term profit
  maximation, for example)

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Chapter 10Budgeting Process-Estimating Revenues

• Profit center managers use information regarding
  economic environment, marketing plans, capital
  budgeting, and historical financial operating
  results to forecast revenue for their departments.

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Chapter 10 Budgeting Process- Estimating
Expenses

• Profit center managers use expected cost
  increases for supplies, etc, and labor cost
  increases (including cost of benefits and payroll
  taxes) to estimate expenses estimate expenses in
  relation to projected revenue.

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Chapter 10 Budgeting Process- Projecting Fixed
Charges

• Fixed charges (depreciation, property taxes, rent
  expense, insurance expense) are projected on
  basis of experience and expected changes
  determined by management and/or Board of
  Directors.

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Chapter 10 - Incremental vs. ZBB Budgets

• Incremental builds from historical foundation.
• ZBB - service centers must justify all expenses.

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Chapter 10 - Static vs. Flexible Budgets

• Static - one level of activity.
• Flexible - several possible levels of activity.
  Great opportunity to do "What If" analysis on
  electronic spreadsheets.

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Chapter 10 - Operations Budgets as Tools

• Timely budget reports indicate variances.
• Absolute and percentage variances.

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Chapter 10 - Determination of Variances

• Determined by using budget report to compare
  actual results to budget.

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Chapter 10 - Determination of Significant
Variances

• Significance criteria are used to determine which
  variances are significant expressed in terms of
  both dollar and percentage differences.
• Determination of significant variances
• Analysis of significant variances
• Determination of problems
• Action to correct problems.

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Chapter 10 - 5 Basic Budgetary Control Steps

• Step 1 Determine variances.
• Step 2 Identify significant variances.
• Step 3 Analyze significant variances.
• Step 4 Identify problems.
• Step 5 Take appropriate action.

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Chapter 10 - Revenue Variances

• Revenue variances occur because of price and
  volume differences
• Use information from budget reports to calculate
  and analyze revenue variances such as price
  variances, volume variances, and price-volume
  variances.

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Chapter 10- Revenue Variances - Price

• Price variance. Budgeted Volume X (Actual
  Price- Budgeted Price)
• PV BV X (AP - BP)

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Chapter 10 - Revenue Variances - Volume

• Volume variance. Budgeted Price X (Actual Volume
  - Budgeted Volume)
• VV BP X (AV - BV)

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Chapter 10 - Revenue Variances - Price-Volume

• Price-volume variance. (Actual Price - Budgeted
  Price) X (Actual Volume - Budgeted Volume)
• P-VV (AP - BP) X (AV - BV)

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Chapter 10 - Cost of Goods Sold Variances

• Cost of goods sold variances occur because of
  differences due to cost and volume the amount
  paid for the goods sold (food and/or beverages)
  differs from the budget, and the total amount
  sold differs from budgeted sales.

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Chapter 10 - CGS Variances - Cost

• Cost variance Budgeted Volume X (Budgeted Cost
  - Actual Cost)
• CV BV X (BC - AC)

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Chapter 10 - CGS Variances - Volume

• Volume variance Budgeted Cost X (Budgeted
  Volume - Actual Volume)
• VV BC X (BV - AV)

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Chapter 10 - CGS Variances - Cost-Volume

• Cost-Volume variance (Budgeted Cost - Actual
  Cost) X (Budgeted Volume - Actual Volume)
• C-VV (BC - AC) X BV - AV)
• See Text Exhibit 15 - Cost of Food Sold Variance
  Analysis - Sample Restaurant

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Chapter 10 - Labor Variances

• Variable labor variance reports help managers
  determine differences between actual labor
  expenses and what has been forecasted

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Chapter 10 - Labor Variances - Volume

• Volume variances result when there is a different
  volume of work than forecasted.
• Volume Variance Budgeted Rate X (Budgeted Time
  - Allowable Time for Actual Output)
• VV BR X (BT - ATAO)

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Chapter 10 - Labor Variances - Rate

• Rate variances result when the average wage rate
  is different than planned.
• Rate Variance Budgeted Time X (Budgeted Rate -
  Actual Rate)
• RV BT X (BR - AR)

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Chapter 10 - Labor Variances -Efficiency

• Efficiency variances result when the amount of
  work performed by the labor force on an hourly
  basis differs from the forecast.
• Efficiency Variance Budgeted Rate X (Allowable
  Time for Actual Output - Actual Time)
• EV BR X (ATAO - AT)

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Chapter 10 - Labor Variances - Rate-Time

• Rate-time variances are due to the
  interrelationship of the major elements of the
  labor budget variance.
• Rate-Time Variance (Budgeted Rate - Actual Time
  ) X (Budgeted Rate - Actual Rate)
• See Text Exhibit 17 - Labor Variance Analysis -
  Sample Restaurant..

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Chapter 10 - Reforecasting

• Necessary when actual results begin to vary
  significantly from budget
• Adjusts for changing conditions

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Chapter 10 -Budgeting process - multi-unit
hospitality

• Bottom-up approach.
• Top-down approach.
• Major differences between single-unit and chains.