HFT 3431HFT 3431

Chapter 10Chapter 10

Operations BudgetingOperations Budgeting

Budget QuestionsBudget Questions

• What Are the Forecasted Revenues What Are the Forecasted Revenues for the Month?for the Month?

• What Is the Budgeted Labor for the What Is the Budgeted Labor for the Year?Year?

• How Many Rooms Are Expected to How Many Rooms Are Expected to Be Sold?Be Sold?

Budget QuestionsBudget Questions

• What Is the Expected ADR?What Is the Expected ADR?

• What Is the Departmental Income?What Is the Departmental Income?

• How Do Actuals Compare With How Do Actuals Compare With Budgets?Budgets?

• What Is the Projected Net Income?What Is the Projected Net Income?

BudgetBudget

• A Management Plan Covering All A Management Plan Covering All Phases of Operations for a Definite Phases of Operations for a Definite Period in the Future. Period in the Future.

• It Is a Formal Expression of the Plans, It Is a Formal Expression of the Plans, Objectives, and Goals Established by Objectives, and Goals Established by Management.Management.

BudgetBudget

• Budgets Are Presented for the Budgets Are Presented for the Concern As a Whole and for Each Concern As a Whole and for Each Subdivision.Subdivision.

• Organized Estimates of the FutureOrganized Estimates of the Future

• Management PolicyManagement Policy

• Method of ControlMethod of Control

Types of BudgetsTypes of Budgets

• Long Term and Short TermLong Term and Short Term

• Capital BudgetsCapital Budgets

–Buildings, land, equipmentBuildings, land, equipment

• Cash Budgets Cash Budgets

– last one done but most importantlast one done but most important

• Operating BudgetOperating Budget

–Day to day revenues & expensesDay to day revenues & expenses

Types of BudgetsTypes of Budgets

• Departmental BudgetDepartmental Budget

–Depts roll into overall budgetDepts roll into overall budget

• Master BudgetMaster Budget

–Combined budget for propertyCombined budget for property

• Fixed BudgetFixed Budget

–Static not based on volumeStatic not based on volume

• Flexible BudgetFlexible Budget

–Based on volumeBased on volume

Benefits of BudgetingBenefits of Budgeting

• Forces Management to Examine Forces Management to Examine Alternatives Prior to a Course of Alternatives Prior to a Course of ActionAction

• Compels Management to Examine Compels Management to Examine FactsFacts

• Provides a Standard for ComparisonProvides a Standard for Comparison

Benefits of BudgetingBenefits of Budgeting

• Allows Management to Prepare for Allows Management to Prepare for FutureFuture

• Measures Progress and Self Measures Progress and Self EvaluationEvaluation

• Objectives Are ClearObjectives Are Clear

• Management Is ParticipatoryManagement Is Participatory

• Aids in PricingAids in Pricing

Disadvantages of BudgetingDisadvantages of Budgeting

• Time and CostTime and Cost

• Unknown FactorsUnknown Factors

• Breaching ConfidentialityBreaching Confidentiality

• Spending Because “Available”Spending Because “Available”

Budget CycleBudget Cycle

• Establish Realistic GoalsEstablish Realistic Goals

• PlanningPlanning

• ComparingComparing

• Corrective ActionCorrective Action

• ImprovementImprovement

Budget CycleBudget Cycle

• Establish Financial ObjectivesEstablish Financial Objectives

• Forecast RevenuesForecast Revenues

• Estimate ExpensesEstimate Expenses

• Forecast Net IncomeForecast Net Income

Budget CycleBudget Cycle

• If the Board Accepts the Budget, the If the Board Accepts the Budget, the Process Is Complete. If It Does Not, Process Is Complete. If It Does Not, Another Budget Is Developed and Another Budget Is Developed and Proposed.Proposed.

Issues in BudgetingIssues in Budgeting

• Who Is Responsible for Budgeting?Who Is Responsible for Budgeting?

• Incremental BudgetingIncremental Budgeting

–Based on historical financial Based on historical financial informationinformation

• Zero-base BudgetingZero-base Budgeting

–Requires all expenses to be justified: Requires all expenses to be justified: start at zerostart at zero

• Budgeting in a New OperationBudgeting in a New Operation

Issues in BudgetingIssues in Budgeting

• Budgetary ControlBudgetary Control

Determine VariancesDetermine Variances

Identify Significant VariancesIdentify Significant Variances

Analyze Significant VariancesAnalyze Significant Variances

Identify ProblemsIdentify Problems

Correct ProblemsCorrect Problems

Variance Analysis - SalesVariance Analysis - Sales

• Revenue Budget VarianceRevenue Budget VarianceTotal Actual Sales – Total Budgeted SalesTotal Actual Sales – Total Budgeted Sales

• Volume VarianceVolume VarianceVV = BP * (AV - BV)VV = BP * (AV - BV)

• Price VariancePrice VariancePV = BV * (AP - BP)PV = BV * (AP - BP)

• Price-Volume VariancePrice-Volume VarianceP-VV = (AP - BP) * (AV - BV)P-VV = (AP - BP) * (AV - BV)

Variance Analysis – SalesVariance Analysis – SalesWhat it meansWhat it means

• Revenue Budget Variance (Total)Revenue Budget Variance (Total)

• Volume VarianceVolume Variance

• Price VariancePrice Variance

• Price/Volume VariancePrice/Volume Variance

– For all of the above:For all of the above:

• If positive = favorableIf positive = favorable

• If negative = unfavorableIf negative = unfavorable

Variance Analysis - Cost of Variance Analysis - Cost of Goods SoldGoods Sold

• Expense Budget VarianceExpense Budget VarianceTotal Budgeted Expenses – Total Actual ExpensesTotal Budgeted Expenses – Total Actual Expenses

• Cost VarianceCost Variance

CV = BV * (BC - AC)CV = BV * (BC - AC)• Volume VarianceVolume Variance

VV = BC * (BV - AV)VV = BC * (BV - AV)• Cost-Volume VarianceCost-Volume Variance

C-VV = (BC - AC) * (BV - AV)C-VV = (BC - AC) * (BV - AV)

Variance Analysis - Cost of Variance Analysis - Cost of Goods Sold: What it MeansGoods Sold: What it Means• Total Expense VarianceTotal Expense Variance• Cost VarianceCost Variance• Volume VarianceVolume Variance– For the above:For the above:• If positive = favorableIf positive = favorable• If negative = unfavorableIf negative = unfavorable

• Cost Volume VarianceCost Volume Variance– If positive = unfavorableIf positive = unfavorable– If negative = favorableIf negative = favorable

Variance Analysis - Variable Variance Analysis - Variable Labor - DefinitionsLabor - Definitions

• BR = Budgeted RateBR = Budgeted Rate

• BT = Budgeted TimeBT = Budgeted Time

• ATAO = Allowable Time for Actual ATAO = Allowable Time for Actual OutputOutput

• AR = Actual RateAR = Actual Rate

• AT = Actual TimeAT = Actual Time

Variance Analysis - Variable Variance Analysis - Variable LaborLabor

• Labor Budget VarianceLabor Budget VarianceTotal Budgeted Labor – Total Actual LaborTotal Budgeted Labor – Total Actual Labor

• Volume VarianceVolume VarianceVV = BR * (BT - ATAO)VV = BR * (BT - ATAO)

• Rate VarianceRate VarianceRV = BT * (BR - AR)RV = BT * (BR - AR)

Variance Analysis - Variable Variance Analysis - Variable LaborLabor

• Efficiency VarianceEfficiency VarianceEV = BR * (ATAO - AT)EV = BR * (ATAO - AT)

• Rate-Time VarianceRate-Time VarianceR-TV = (BT - AT) * (BR - R-TV = (BT - AT) * (BR -

AR)AR)

Variance Analysis - Variable Variance Analysis - Variable Labor: What it MeansLabor: What it Means

• Total VarianceTotal Variance• Volume VarianceVolume Variance• Rate VarianceRate Variance• Efficiency VarianceEfficiency Variance

– For the aboveFor the above• Positive = FavorablePositive = Favorable• Negative = UnfavorableNegative = Unfavorable

• Rate Time VarianceRate Time Variance– Positive = UnfavorablePositive = Unfavorable– Negative = FavorableNegative = Favorable