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HFT 3431. Chapter 10 Operations Budgeting. Budget Questions. What Are the Forecasted Revenues for the Month? What Is the Budgeted Labor for the Year? How Many Rooms Are Expected to Be Sold?. Budget Questions. What Is the Expected ADR? What Is the Departmental Income?
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HFT 3431 Chapter 10 Operations Budgeting
Budget Questions • What Are the Forecasted Revenues for the Month? • What Is the Budgeted Labor for the Year? • How Many Rooms Are Expected to Be Sold?
Budget Questions • What Is the Expected ADR? • What Is the Departmental Income? • How Do Actuals Compare With Budgets? • What Is the Projected Net Income?
Budget • A Management Plan Covering All Phases of Operations for a Definite Period in the Future. • It Is a Formal Expression of the Plans, Objectives, and Goals Established by Management.
Budget • Budgets Are Presented for the Concern As a Whole and for Each Subdivision. • Organized Estimates of the Future • Management Policy • Method of Control
Types of Budgets • Long Term and Short Term • Capital Budgets • Buildings, land, equipment • Cash Budgets • last one done but most important • Operating Budget • Day to day revenues & expenses
Types of Budgets • Departmental Budget • Depts roll into overall budget • Master Budget • Combined budget for property • Fixed Budget • Static not based on volume • Flexible Budget • Based on volume
Benefits of Budgeting • Forces Management to Examine Alternatives Prior to a Course of Action • Compels Management to Examine Facts • Provides a Standard for Comparison
Benefits of Budgeting • Allows Management to Prepare for Future • Measures Progress and Self Evaluation • Objectives Are Clear • Management Is Participatory • Aids in Pricing
Disadvantages of Budgeting • Time and Cost • Unknown Factors • Breaching Confidentiality • Spending Because “Available”
Budget Cycle • Establish Realistic Goals • Planning • Comparing • Corrective Action • Improvement
Budget Cycle • Establish Financial Objectives • Forecast Revenues • Estimate Expenses • Forecast Net Income
Budget Cycle • If the Board Accepts the Budget, the Process Is Complete. If It Does Not, Another Budget Is Developed and Proposed.
Issues in Budgeting • Who Is Responsible for Budgeting? • Incremental Budgeting • Based on historical financial information • Zero-base Budgeting • Requires all expenses to be justified: start at zero • Budgeting in a New Operation
Issues in Budgeting • Budgetary Control Determine Variances Identify Significant Variances Analyze Significant Variances Identify Problems Correct Problems
Variance Analysis - Sales • Revenue Budget Variance Total Actual Sales – Total Budgeted Sales • Volume Variance VV = BP * (AV - BV) • Price Variance PV = BV * (AP - BP) • Price-Volume Variance P-VV = (AP - BP) * (AV - BV)
Variance Analysis – SalesWhat it means • Revenue Budget Variance (Total) • Volume Variance • Price Variance • Price/Volume Variance • For all of the above: • If positive = favorable • If negative = unfavorable
Variance Analysis - Cost of Goods Sold • Expense Budget Variance Total Budgeted Expenses – Total Actual Expenses • Cost Variance CV = BV * (BC - AC) • Volume Variance VV = BC * (BV - AV) • Cost-Volume Variance C-VV = (BC - AC) * (BV - AV)
Variance Analysis - Cost of Goods Sold: What it Means • Total Expense Variance • Cost Variance • Volume Variance • For the above: • If positive = favorable • If negative = unfavorable • Cost Volume Variance • If positive = unfavorable • If negative = favorable
Variance Analysis - Variable Labor - Definitions • BR = Budgeted Rate • BT = Budgeted Time • ATAO = Allowable Time for Actual Output • AR = Actual Rate • AT = Actual Time
Variance Analysis - Variable Labor • Labor Budget Variance Total Budgeted Labor – Total Actual Labor • Volume Variance VV = BR * (BT - ATAO) • Rate Variance RV = BT * (BR - AR)
Variance Analysis - Variable Labor • Efficiency Variance EV = BR * (ATAO - AT) • Rate-Time Variance R-TV = (BT - AT) * (BR - AR)
Variance Analysis - Variable Labor: What it Means • Total Variance • Volume Variance • Rate Variance • Efficiency Variance • For the above • Positive = Favorable • Negative = Unfavorable • Rate Time Variance • Positive = Unfavorable • Negative = Favorable