Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 11

Budgets provide a method of control so that actual results can be evaluated against budget plans and adjustment, if necessary, can be made.. In the rooms department, sales revenue could

BUDGETARY CONTROL AND VARIANCE ANALYSIS

I Questions

1 a Budgets provide organized estimates of future revenues, expenses,

manpower requirement, or equipment needs, broken down by time period and departments

b Budgets provide a coordinated management policy, both long-term and short-term expressed primarily in accounting terms

c Budgets provide a method of control so that actual results can be evaluated against budget plans and adjustment, if necessary, can be made

2 Future items to be considered in formulating a budget:

a Economy

b New Development in the market

c Events affecting operations, i.e., new legislation, international conferences, etc

d Overall goal of the company and individual department’s targets

3 Refer to page 226 (Chapter 10)

4 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)

5 Refer to page 243

6 Items to consider in projecting rooms revenue:

a Expected inflation

b Changes in competitive condition

c Expected number of guests

d Business travel and tourist travel trends

e Expected wage/price controls and the political environment

f Rooms available

g Expected occupancy rate

h Average room rate

7 Goals that could be set for operations:

a Maximization of revenues

b Control and minimization of costs

c Maximization of returns on investment

8 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 1

Variances

Controllable Expenses:

Direct Operating

Income before Fixed

Income before Income

EXERCISE 2

Breakfast

Seats No of Days Turnover Seat Average check Sales

P 6,311.25

Lunch

Seats No of Days Turnover Seat Average check Sales

P10,788.75

Dinner

Seats

No of Days

Seat Turnover

Average

P10,132.50

B PROBLEMS

PROBLEM 1

Breakfast

Seats No of Days Turnover Seat Average Check Sales

P233,688

Lunch

Seats

No of Days

Seat Turnover

Average

P306,930

Dinner

Seats

No of Days

Seat Turnover

Average

P325,065 Clique Café

Sales Budget Sales

P891,653.49

PROBLEM 2

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

PROBLEM 3

Requirement (1)

Ingrid Motor Hotel Rooms Department Condensed Budget

Less: Labor costs

Variable (P5 x 27,375) P136,875

P1,131,875.00 Other operating costs (P2.50 x 27,375) (68,437.50)

Requirement (2)

The projection will be acceptable to management because expected profit exceeded P1,000,000 and it is 77.7% of revenues

PROBLEM 4

Requirement (1)

Sherwood Flexible Operating Budget

Labor costs

Other operating costs (8%) 56,000 80,000 104,000

P 88,000 P 160,000 P 232,000

P (12,000) P 60,000 P 132,000 Income taxes (30%) – (18,000) (39,600) Net income (loss) P (12,000) P 42,000 P 92,400

P1,063,437.50 P1,368,750.00

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 5

Lunch

Seats No of Days Turnover Seat Average Check Sales

P447,392

Dinner

Seats No of Days Turnover Seat Average Check Sales

P475,068 Operations Budget

Francis’ Place For year of 2004

P332,086

P193,717

P 43,717

PROBLEM 6

Budgeted wage cost (6,000 / 2 x P4.50) 13,500

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

2 Volume variance

3 Rate variance

4 Efficiency variance

Multiply by: Budgeted rate per hour P4.50

5 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 more rooms were occupied

b higher wage rate per hour was paid

6,400 2