Solution manual managerial accounting and finance for hospitality operations CHAPTER 06

CHAPTER COST MANAGEMENT I Questions Refer to page 148, Classification of Costs, under “A.” Discretionary cost is a cost that may or may not be incurred at the sole discretion of a particular person, usually the general manager Nonemergency maintenance is an example of a discretionary cost The building exterior could be painted this year, or the painting could be postponed until next year Either way sales revenue should not be affected The general manager has the choice, thus it is a discretionary cost Note that a discretionary cost is only discretionary in the short run For example, the building will have to be painted at some time in order to maintain its appearance Another example is charitable contributions Refer to page 148, Classification of Costs, under “B.” Relevant costs in deciding to buy a new vacuum cleaner are Purchase price of the cleaner Maintenance costs Other avoidable costs Most costs not fit neatly into the fixed or the variable category Most have an element of fixed expense and an element of variable – and then not always variable directly to sales on a straight-line basis Such costs would include payroll, maintenance, utilities, and most of the direct operating costs In order to make some useful decisions, it is advantageous to break down these semifixed or semivariable costs into their two elements: fixed or variable II Practical Exercises and Problems A EXERCISES EXERCISE Variable cost percentage = P23,040 P48,000 = 48% 6-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations EXERCISE Contribution margin = P24,440 x 0.58 = P14,175.20 EXERCISE Sales revenue (40 x P150) Variable costs (0.75 x P6,000) Contribution margin Fixed costs Operating income P6,000 4,500 P1,500 500 P1,000 The proposal may be accepted because it will yield an income of P1,000 EXERCISE Café : 1,920 / 2,400 = 0.80 Bar : 480 / 2,400 = 0.20 Allocation of indirect costs to café: 0.80 x P14,000 = P11,200 EXERCISE Variable cost per guest Total fixed cost = = = = P15,500 – P12,000 14,000 – 10,000 P15,500 – (P0.875 x 14,000) P15,500 – P12,250 P3,250 or = = = P12,000 – (P0.875 x 10,000) P12,000 – P8,750 P3,250 B PROBLEMS PROBLEM a b c d e Fixed Variable Fixed Mixed Variable f g h i j Fixed Fixed Mixed Fixed Variable = P3,500 4,000 = P0.875 Cost Management PROBLEM Requirement Variable cost rate = P13,800 – P12,600 70 – 60 = P1,200 10 = At 60% occupancy FC = [12,600 – (120 x 60)] = 12,600 – 7,200 = 5,400 At 70% occupancy FC = [13,800 – (120 x 70)] = 13,800 – 8,400 = 5,400 Requirement = VC rate per 1% P1,200 10 = P120 Requirement Estimated repairs and maintenance costs for 2004: Variable Fixed = = P120 x 105% x 68 x 12 = 5,400 x 105% x 12 = P102,816 68,040 P170,856 PROBLEM Requirement (1) Point of indifference P3,000 x 12 = 0.05x P36,000 = 0.05x x = P720,000 (annual sales) Fixed charges P3,000 x 12 = P36,000 5% x P720,000 = P36,000 Variable charges P120 6-3 6-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Requirement (2) Since expected sales will amount to P1,000,000 for which annual rent will be P50,000; it would be better to enter into a fixed monthly rental rate of P3,000 or P36,000 annual rent PROBLEM Requirement (1) Cost of food sold Payroll costs Supplies Utilities Other operating costs Building rent Depreciation = = = = = = = Variable Mixed Variable Mixed Variable Fixed Fixed Requirement (2) VC per unit P1.50 Cost of Food Sold FC per month – Payroll Costs 5,000 – 3,500 6,000 – 3,000 VC rate FC 0.50 [3,500 – (3,000 x 0.50)] Supplies P2,000 0.20 Utilities 420 – 360 6,000 – 3,000 VC rate FC 0.02 [360 – (3,000 x 0.02)] Other operating costs 300 0.50 Rent 1,000 Depreciation P2.72 Cost equation: x = TC = P3,500 + P2.72 x number of units 200 P3,500 Cost Management 6-5 Requirement (3) TC for 8,000 Monthly sales level = = P3,500 + P2.72 (8,000) P25,260 PROBLEM Requirement (1) The cost that is not relevant is the present book value of P1,000 of the old dishwasher Requirement (2) Relevant costs Cost of new dishwasher Operating costs for years Salvage value of present dishwasher now Salvage value of present dishwasher at end of years Repairs cost Salvage value of new dishwasher at end of years Alternatives Buy new Keep old P (7,000) (65,500) P(68,000) 2,000 300 (500) 2,000 P(68,500) P(68,200) Net advantage of keeping the old dishwasher P 300 Keeping the old dishwasher yields a lesser cash outflow of P300 All things being equal, the company can continue using the old dishwasher Problem Model Cash cost Trade-in value at end of life Cash from sale of old machine Installation of new machine Initial training cost Maintenance cost Supplies cost Wages of operators Net Cash Out Flows P (5,000) 1,000 200 (75) (350) (300) (200) (32,000) P(36,725) Cash In (Out) Flow Model Model P (5,500) 1,200 200 (100) (300) (275) (200) (32,000) P(36,975) P (5,300) 800 200 (100) (250) (200) (200) (32,000) P(37,050) 6-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Model should be chosen because the analysis shows the lowest cash outflow of P36,725 PROBLEM Requirement (a) (1) Dining room Coffee shop Lounge 1,200 / 3,000 = 840 / 3,000 = 960 / 3,000 = 0.40 x P520,000 0.28 x P520,000 0.32 x P520,000 = = = P208,000 P145,600 P166,400 (2) The owner may accept the offer of the souvenir store operator to rent the coffee shop space for P80,000 because it exceeds the contribution to indirect cost of the coffee shop by P14,000 Requirement (b) Operating Results if the Coffee Shop Space is rented out: Sales / Rent Direct costs Dining Room Lounge Souvenir Store P1,848,000 1,546,000 P1,393,000 1,174,000 P 80,000 – P3,321,000 2,720,000 P 302,000 P 219,000 P 80,000 P 601,000 (466,000) P 135,000 Total Indirect costs Net income The restaurant operator will be better off if he rents out the coffee shop space His income will increase by P34,000 PROBLEM a Variable cost per room occupied b Busiest month = 2,400 x P0.50 = P1,200 Slowest month = 1,200 x P0.50 = P 600 c = P2,600 – P2,000 2,400 – 1,200 Total fixed cost per month = = = = P600 1,200 P2,600 – (P0.50 x 2,400) P2,600 – P1,200 P1,400 or = P0.50 Cost Management = = = 6-7 P2,000 – (P0.50 x 1,200) P2,000 – P600 P1,400 PROBLEM a b Food cost = P60.00 x 100 = P 6,000 Variable wage cost Other variable cost Total variable cost Fixed cost Total cost = P17.50 x 100 = P 2.50 x 100 = = 1,750 250 P 8,000 4,000 P12,000 / 100 = P120 Total selling price / revenue to earn 20% income on sales Let x = total revenues x = x = P12,000 + 0.2x P12,000 0.8 x = P15,000 Price per person = = c P15,000 100 P150 The price of P112.50 is not sufficient to cover the expected cost of P120 per person The banquet department of the hotel should therefore not accept the function  ... Variable charges P120 6-3 6-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Requirement (2) Since expected sales will amount to P1,000,000 for which annual rent will...6-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations EXERCISE Contribution margin = P24,440 x 0.58 = P14,175.20... (5,300) 800 200 (100) (250) (200) (200) (32,000) P(37,050) 6-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Model should be chosen because the analysis shows