Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 11

CHAPTER 11 BUDGETARY CONTROL AND VARIANCE ANALYSIS I Questions a b c Budgets provide organized estimates of future revenues, expenses, manpower requirement, or equipment needs, broken down by time period and departments Budgets provide a coordinated management policy, both long-term and short-term expressed primarily in accounting terms Budgets provide a method of control so that actual results can be evaluated against budget plans and adjustment, if necessary, can be made Future items to be considered in formulating a budget: a b c d Economy New Development in the market Events affecting operations, i.e., new legislation, international conferences, etc Overall goal of the company and individual department’s targets Refer to page 226 (Chapter 10) A flexible (or variable) budget is prepared based on several levels of activity In the rooms department, sales revenue could be forecast for 60%, 70%, and 80% occupancy levels (or as many levels as are appropriate) As the actual year progresses, it can be determined at which level the operation is going to fit best, and the appropriate expense levels will have already been determined for this level In other words adjustment is easier The question could be raised, using the rooms department example, whether it is truly flexible (variable) budgeting or whether it is three (or more, if more occupancy levels are used) fixed budgets at three different occupancy levels The question is valid, but the practical result is that management is prepared to adjust to the actual situation when adjustment is required Refer to page 233 (Chapter 10) Refer to page 243 Items to consider in projecting rooms revenue: a b c d Expected inflation Changes in competitive condition Expected number of guests Business travel and tourist travel trends 11-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations e f g h Goals that could be set for operations: a b c Expected wage/price controls and the political environment Rooms available Expected occupancy rate Average room rate Maximization of revenues Control and minimization of costs Maximization of returns on investment Increase in volume is favorable in revenue analysis because it brings about an increase in revenue and profit while increase in volume is unfavorable in cost analysis because it automatically increases variable costs and expenses II Practical Exercises and Problems A EXERCISES EXERCISE Variances Food Sales Miscellaneous Sales Total Cost of Food Sales Other Cost of Sales Total Gross Profit Controllable Expenses: Salaries and Wages Employee Benefits Marketing Expenses Direct Operating Expenses Repairs Other Income before Fixed Expenses Rent Insurance Property Taxes Budget Actual P % P50,000 3,000 53,000 15,000 1,000 16,000 37,000 P52,500 3,200 55,700 15,500 900 16,400 39,300 2,500 200 2,700 (500) 100 400 2,300 5.00 6.67 5.09 (3.33) 10.00 2.50 6.22 15,000 3,000 2,000 16,000 3,600 2,500 (1,000) (600) (500) (6.67) (20.00) (25.00) 3,000 2,000 3,000 3,200 2,100 2,800 (200) (100) 200 (6.67) (5.00) 6.67 9,000 2,000 1,000 1,000 9,100 2,000 1,000 1,000 (100) – – – (1.11) – – – Budgetary Control and Variance Analysis Income before Income Taxes Income Taxes Net Income 5,000 1,500 P 3,500 5,100 1,530 P 3,570 100 (30) 70 Seats – 50 50 50 50 50 50 No of Days – 4 4 Seat Turnover – 1.3 1.2 1.4 1.4 1.3 0.5 Average check – P4.25 P4.25 P4.25 P4.25 P4.25 P4.25 Seats – 50 50 50 50 50 50 No of Days – 4 4 Seat Turnover – 1.5 1.3 1.4 1.2 1.3 0.8 Average check – P6.85 P6.85 P6.85 P6.85 P6.85 P6.85 Seats – 50 50 50 50 50 50 No of Days – 4 4 Seat Turnover – 0.5 0.6 0.6 0.5 1.0 1.5 Average check – P10.50 P10.50 P10.50 P10.50 P10.50 P10.50 11-3 2.00 (2.00) 2.00 EXERCISE Breakfast Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sales – P 1,381.25 1,020.00 1,190.00 1,190.00 1,105.00 425.00 P 6,311.25 Lunch Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sales – P 2,568.75 1,781.00 1,918.00 1,644.00 1,781.00 1,096.00 P10,788.75 Dinner Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sales – P 1,312.50 1,260.00 1,260.00 1,050.00 2,100.00 3,150.00 P10,132.50 11-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations B PROBLEMS PROBLEM Breakfast Sunday Monday – Friday Saturday Seats – 150 150 No of Days – 260 52 Seat Turnover – 1.2 0.8 Average Check – P4.50 P3.70 Seats – 150 150 No of Days – 260 52 Seat Turnover – 1.0 0.5 Average Check – P7.20 P6.70 Seats – 150 150 No of Days – 260 52 Seat Turnover – 0.5 1.5 Average Check – P9.80 P11.45 Sales – P210,600 23,088 P233,688 Lunch Sunday Monday – Friday Saturday Sales – P280,800 26,130 P306,930 Dinner Sunday Monday – Friday Saturday Sales – P191,100 133,965 P325,065 Clique Café Sales Budget Sales Breakfast Lunch Dinner Miscellaneous (3% x P865,683) P233,688.00 306,930.00 325,065.00 25,970.49 P891,653.49 PROBLEM Rooms sold increases by 30 annually while ADR had been increasing by P2 every year For 2004 therefore the projection will be: 2,190 x P51 = P111,690 Budgetary Control and Variance Analysis 11-5 PROBLEM Requirement (1) Ingrid Motor Hotel Rooms Department Condensed Budget Revenue (100 x 75% x P50 x 365) Less: Labor costs Variable (P5 x 27,375) Fixed P1,368,750.00 P136,875 100,000 Other operating costs (P2.50 x 27,375) Departmental income 236,875.00 P1,131,875.00 (68,437.50) P1,063,437.50 Requirement (2) The projection will be acceptable to management because expected profit exceeded P1,000,000 and it is 77.7% of revenues P1,063,437.50 P1,368,750.00 PROBLEM Requirement (1) Sherwood Flexible Operating Budget Sales Less: Food cost (45%) Labor costs Variable (23%) Fixed Other operating costs (8%) Total Fixed charges Income taxes (30%) Net income (loss) P700,000 315,000 P1,000,000 450,000 P1,300,000 585,000 161,000 80,000 56,000 612,000 P 88,000 100,000 P (12,000) – P (12,000) 230,000 80,000 80,000 840,000 P 160,000 100,000 P 60,000 (18,000) P 42,000 299,000 80,000 104,000 1,068,000 P 232,000 100,000 P 132,000 (39,600) P 92,400 11-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Requirement (2) At P700,000 sales level, the company would incur a net loss It would be favorable for the restaurant to strive to achieve sales of P1,000,000 and above to generate profit for the company PROBLEM Lunch Monday – Friday Saturday Sunday Seats 100 100 100 No of Days 260 53 53 Seat Turnover 1.50 0.50 1.50 Average Check P9.02 P9.02 P9.02 Seats 100 100 100 No of Days 260 53 53 Seat Turnover 0.75 1.50 1.50 Average Check P13.42 P13.42 P13.42 Sales P351,780 23,903 71,709 P447,392 Dinner Monday – Friday Sunday Saturday Sales P261,690 106,689 106,689 P475,068 Operations Budget Francis’ Place For year of 2004 Sales Less: P922,460 Food cost (32%) Labor costs (32%) P295,187 295,187 Other controllable expenses (15%) Fixed costs Income taxes (30%) Net income PROBLEM Actual wage cost (3,100 x P4.55) Budgeted wage cost (6,000 / x P4.50) Unfavorable P14,105 13,500 P 605 590,374 P332,086 138,369 P193,717 150,000 P 43,717 (13,115) P 30,602 Budgetary Control and Variance Analysis 11-7 The unfavorable budget variance of P605 or 4.5% of budget may or may not be considered significant depending on the materiality policy set by management Volume variance Actual rooms sold Budgeted rooms Excess Divided by: rooms / hr Excess hours Multiply by: Rate per hour Unfavorable 6,400 6,000 400 ÷ 200 P4.50 P 900 Rate variance Actual rate per hour Budgeted rate per hour Unfavorable Multiply by: Actual hours worked Unfavorable P4.55 4.50 P0.05 3,100 P 155 Efficiency variance Actual hours Allowed hours 3,100 3,200 6,400 Favorable Multiply by: Budgeted rate per hour Favorable Net Unfavorable variance (100) P4.50 P(450) P 605 The head housekeeper is not responsible for the unfavorable variance In fact, favorable efficiency variance could be attributed to her The unfavorable variance was due to two reasons: a b more rooms were occupied higher wage rate per hour was paid .. .11- 2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations e f g h Goals that could be set for operations: a b c Expected wage/price controls and the political... 92,400 11- 6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Requirement (2) At P700,000 sales level, the company would incur a net loss It would be favorable for. .. 1,312.50 1,260.00 1,260.00 1,050.00 2,100.00 3,150.00 P10,132.50 11- 4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations B PROBLEMS PROBLEM Breakfast Sunday Monday