CHAPTER 10 OPERATIONS BUDGETING I Questions Budgeting is planning In order to make meaningful decisions about the future, a manager must look ahead One way to look ahead is to prepare budgets or forecasts A forecast may be very simple For a restaurant owner/operator, the budget may be no more than looking ahead to tomorrow, estimating how many customers will eat in the restaurant, and purchasing food and supplies to accommodate this need On the other hand, in a large organization a budget may entail forecasts up to five years (such as for furniture and equipment purchases), as well as requiring day-to-day budgets (such as staff scheduling) Budgets are not necessarily always expressed in monetary terms They could involve numbers of customers to be served, number of rooms to be occupied, number of employees required, or some other unit, as opposed to pesos Refer to page 225 a b The other three steps in the budgeting cycle are: Hotel departmental budget – Rooms Department Budget Capital budget for a restaurant – Quarterly Cash Budget for a Restaurant Comparing actual results with those planned, and analyzing the differences (variances) As a result of step 3, taking corrective action, if required Improving the effectiveness of budgeting Three possible limiting factors to consider in preparing a budget for a hotel or restaurant are: a Limitation on sales revenue A hotel cannot achieve more than a 100% room occupancy In the short run, room revenue (if a hotel were full every night) can only be increased by increasing room rates But since very few hotels run at 100% occupancy year-round, it would be unwise, desirable as it might be, to use 100% as the budgeted occupancy on an annual basis Similarly, a restaurant is limited to a specific number of seats If it is running at capacity, sales revenue can only be increased, again in the short run, by increasing meal prices or increasing seat turnover (seat occupancy) But, again, there is a limit to increasing meal prices (customer resistance and competition often dictate upper pricing levels), and if seat turnover is 10-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations increased by giving customers rushed service, the end result may be declining sales b Lack of skilled labor or skilled supervisory personnel Increased productivity (serving more customers per waiter) would be desirable and would decrease our payroll cost per customer, but well-trained employees, or employees who could be trained, are often not available Similarly, supervisory personnel who could train others are not always available c Supply and demand Customer demand and competition must always be kept in mind when budgeting In the short run there is usually only so much business to go around Adding more rooms to a hotel does not automatically increase the demand for rooms in the area It takes time for demand to catch up with supply, and new hotels or an additional block of rooms to an existing hotel will usually operate at a lower occupancy than normal until demand increases A new restaurant or additional facilities to an existing restaurant must compete for its share of business Questions that could be asked to explain the P2,000 unfavorable variance between actual and budgeted revenue: a b c The factors to be considered in projecting the revenue for the coffee shop breakfast period in a hotel are a b c Was there a general reduction in selling prices of drinks and appetizers? Was there a decrease or increase in the expected volume of sales? Was there a change in the sales mix or product combination? Percentage of registered guests taking breakfast at the hotel Experience about customers taking breakfast in the hotel who are not hotel guests Prices of the food served A pro-forma income statement known also as budgeted income statement shows the projected of revenues, costs and expenses and expected result of operations (income or loss) for a future period of time II Practical Exercises and Problems A EXERCISES EXERCISE P120 = Sales revenue 100 x 2.25 x 312 P120 = Sales revenue 70,200 = P8,424,000 Sales revenue Operations Budgeting 10-3 EXERCISE P340 = Sales revenue 70 x 80% x 30 P340 = Sales revenue 1,680 = P571,200 Sales revenue EXERCISE 70% = 70% = No of rooms = No of rooms 40 x 365 = No of rooms 14,600 = 10,220 P320 = = Sales revenue 40 x 70% x 365 P320 = = Sales revenue 10,220 Sales revenue = P3,270,400 P3,270,400 613,200 P2,657,200 2,400,000 P 257,200 Sales Variable cost (P60 x 10,220) Contribution margin Fixed costs Operating income EXERCISE Average Check Turnover Breakfast Lunch Dinner 2.25 1.75 2.75 x x x P38.00 40.00 58.00 Seats Days x x 365 80 80 x x 365 x x 365 80 Total sales revenue Sales = = = P2,496,600 2,044,000 4,657,400 P9,198,000 EXERCISE Occupancy Breakfast Lunch Dinner 60% 70% 78% Room Rate x P280.00 x 320.00 x 360.00 Rooms x x x Days x = 60 90 x = 60 90 x = 60 90 Total room revenue Sales P 907,200 1,209,600 1,516,320 P3,633,120 10-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations EXERCISE Sales Variable costs Contribution margin Fixed costs Operating income P880,000 616,000 (a) P264,000 (b) 244,000 P 20,000 (c) B PROBLEMS PROBLEM Sales (80 x 70% x 365 x P440) Variable costs [P80 x (80 x 70% x 365)] Contribution margin Fixed costs Operating income P8,993,600 (1,635,200) P7,358,400 (2,200,000) P5,158,400 PROBLEM Average Check Turnover Breakfast Lunch Dinner 1.50 1.75 1.25 x P 40.00 75.00 x x 125.00 Seats x x x 130 130 130 Days x x x 31 31 31 Sales = P 241,800.00 528,937.50 = = 629,687.50 P1,400,425.00 PROBLEM 80% x 150 = P120 x = 360 guests 360 x 95% = 342 persons eat breakfast 360 x 25% = 90 persons eat lunch 360 x 75% = 270 persons eat dinner Breakfast Lunch Dinner Average meal prices Guests Days Sales P 45.00 75.00 126.00 342 90 270 30 30 30 P 461,700.00 202,500.00 1,020,600.00 P1,684,800.00 Operations Budgeting 10-5 PROBLEM 120 seats – 305 days – Monday to Saturday – Lunch and Dinner 60 days – Sunday and holiday – Dinner only Food Sales – restaurant (Schedule A) Sales – private party room Total food sales Beverage Lunch (12% x P3,019,500) Dinner (25% x P4,895,250) Private Party Room (40% x P1,440,000) Total beverage sales Total Sales Cost of Sales Food cost (37% x P10,938,750) Beverage cost (33% x P2,162,153) Gross Margin Payroll and related costs Salaries fixed P2,840,000 Variable wage cost (15% x P9,498,750) 1,424,813 Employee benefits (12% x P4,264,813) 511,778 Other operating costs China, glass, silver, linen Laundry Supplies Menus and beverages Advertising Repairs & maintenance Miscellaneous expense Total variable operating costs (11% x P13,100,903) Fixed operating overhead costs Administration and general P 24,000 Licenses 15,000 Rent 90,000 Equipment depreciation 73,400 Total operating costs Net income before taxes P 9,498,750 * 1,440,000 10,938,750 362,340 1,223,813 576,000 2,162,153 13,100,903 4,047,338 713,510 4,760,848 8,340,055 4,776,591 1,441,099 202,400 6,420,090 P 1,919,965 10-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations * Schedule A Seat Turnover Weekday lunch Weekday dinner Sunday and holiday dinner Average Check Seats Days Sales 1.50 1.25 x P 55.00 x 120 x 305 = P3,019,500.00 x 107.00 x 120 x 305 = 4,895,250.00 2.00 x 110.00 x 120 x 60 = 1,584,000.00 P9,498,750.00 PROBLEM Requirement (a) Budgeted Income Statement Room sales (80 x 75% x 365 days x P220) P4,818,000 Room Payroll and related benefits Fixed wages Housekeeping (80 x 75% x 365 days x P45 x ½) Fringe benefits (15% x P1,350,000) Linen, laundry, etc (80 x 75% x 365 days x P25) Total Departmental income 857,250 492,750 202,500 547,500 2,100,000 P2,718,000 Food Sales Breakfast (21,900 x x 80% x P20) Lunch (50 x P55 x 365 days) Direct operating costs – bar (75% x 1,704,550) Departmental income Total Operating Income Indirect costs Net income 700,800 1,003,750 1,704,550 1,278,413 426,137 P3,144,137 2,894,000 P 250,137 Requirement (b) Revenue Revenue – actual (21,700 x P221) Revenue – budgeted Unfavorable variance P4,795,700 4,818,000 P 22,300 Operations Budgeting Analysis: Revenue Variance Quantity variance Actual rooms occupied Budgeted rooms (80 x 75% x 365 days) Unfavorable Multiply by: Budgeted room rate Unfavorable quantity variance Price variance Actual price per room Budgeted price per room Favorable Multiply by: Actual rooms occupied Favorable price variance Net unfavorable variance 21,700 21,900 200 P 220 P44,000 P 221 220 P 21,700 21,700 P22,300 Housekeeping wages Actual housekeeping wages Budgeted wages Unfavorable variance P499,100 492,750 P 6,350 Analysis: Quantity variance Actual rooms occupied & cleaned Budgeted rooms occupied & cleaned Favorable Multiply by: (P45 x ½ hr.) Favorable quantity variance 21,700 21,900 200 P 22.50 P 4,500 Cost variance 499,100 Actual wage rate per room 21,700 Budgeted wage rate Unfavorable Multiply by: Actual rooms occupied and cleaned Unfavorable cost variance P 23.00 22.50 P 0.50 21,700 10,850 Net unfavorable variance P 6,350 10-7 10-8 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM Requirement (a) Budgeted Income Statement Rooms - Sales revenue Payroll (25% x P350,000) Other operating costs (5% x P350,000) Departmental income P350,000 87,500 17,500 P245,000 Food – Sales revenue Cost of sales (35% x P150,000) Payroll (40% x P150,000) Other operating costs (10% x P150,000) Departmental income P150,000 52,500 60,000 15,000 P 22,500 Total operated departmental income Other income Total income P267,500 5,500 P273,000 Undistributed operating expenses Administrative Marketing Property operation and maintenance Energy costs Total P 25,600 15,400 16,700 12,500 P 70,200 Income after undistributed operating expenses P202,800 Rent Interest Depreciation Building Furniture and equipment P 28,300 11,500 Income before income taxes P50,200 24,800 75,000 P114,800 P 88,000 Operations Budgeting 10-9 Requirement (b) Cash Flows Cash flows from operations Net income Add: Depreciation P 88,000 75,000 163,000 Cash flows from investing activities Purchase of new equipment (P30,000 – P5,400) Cash flows from financing activities Payment of mortgage Payment of bank loan Payment of dividends (24,600) (30,300) (25,300) (40,000) (95,600) P 42,800 Net increase in cash PROBLEM Requirement (a) Budgeted Income Statement Sales Food cost (30% of Sales) Wages and salaries Basic Additional Other operating cost Depreciation Furniture and equipment China, glass & silverware Rent Total operating cost Net income 1st P48,000 Month 2nd P66,000 3rd P84,000 P14,400 P19,800 P25,200 15,000 – 4,800 15,000 1,200 6,600 15,000 4,800 8,400 3,000 2,100 3,000 42,300 P 5,700 3,000 2,100 3,000 50,700 P15,300 3,000 2,100 3,000 61,500 P22,500 10-10 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Requirement (b) Cash Budget Month 2nd 3rd P38,400 P52,800 9,600 P67,200 13,200 38,400 62,400 80,400 5,400 * 15,000 – 3,000 23,400 15,000 10,800 25,800 15,000 P10,800 19,800 16,200 4,800 3,000 43,800 18,600 15,000 33,600 15,000 P18,600 25,200 19,800 6,600 3,000 54,600 25,800 15,000 40,800 15,000 P25,800 st Cash receipts Cash sales (80%) Credit sales (20% - n/30) Cash disbursements before partners’ withdrawal Food purchases Wages Other operating costs Rent Total disbursements Excess Cash balance, beginning Total Minimum Cash Desired Partner’s allowable withdrawal * Total cost of food Less: Initial purchases Additional purchases P14,400 9,000 P 5,400 Requirement (c) Balance Sheet End of Month Three Assets Cash Accounts receivable Furniture and Equipment Cost Less: Accumulated depreciation China, glass & silverware Cost Less: Accumulated depreciation Total assets P 15,000 16,800 P180,000 9,000 P 25,200 6,300 171,000 18,900 P221,700 Liabilities and Capital Accounts payable Partners’ capital P 8,400 P225,000 Operations Budgeting Add: Net income for three months Less: Withdrawal Total liabilities and capital 43,500 P268,500 55,200 10-11 213,300 P221,700 ... 8,400 3,000 2 ,100 3,000 42,300 P 5,700 3,000 2 ,100 3,000 50,700 P15,300 3,000 2 ,100 3,000 61,500 P22,500 10- 10 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Requirement... 22.50 P 0.50 21,700 10, 850 Net unfavorable variance P 6,350 10- 7 10- 8 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM Requirement (a) Budgeted Income Statement.. .10- 2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations increased by giving customers rushed service, the