HFT 3431

1. HFT 3431 Chapter 10 Operations Budgeting

2. 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?

3. Budget Questions • What Is the Expected ADR? • What Is the Departmental Income? • How Do Actuals Compare With Budgets? • What Is the Projected Net Income?

4. 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.

5. Budget • Budgets Are Presented for the Concern As a Whole and for Each Subdivision. • Organized Estimates of the Future • Management Policy • Method of Control

6. 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

7. 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

8. Benefits of Budgeting • Forces Management to Examine Alternatives Prior to a Course of Action • Compels Management to Examine Facts • Provides a Standard for Comparison

9. Benefits of Budgeting • Allows Management to Prepare for Future • Measures Progress and Self Evaluation • Objectives Are Clear • Management Is Participatory • Aids in Pricing

10. Disadvantages of Budgeting • Time and Cost • Unknown Factors • Breaching Confidentiality • Spending Because “Available”

11. Budget Cycle • Establish Realistic Goals • Planning • Comparing • Corrective Action • Improvement

12. Budget Cycle • Establish Financial Objectives • Forecast Revenues • Estimate Expenses • Forecast Net Income

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

14. 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

15. Issues in Budgeting • Budgetary Control Determine Variances Identify Significant Variances Analyze Significant Variances Identify Problems Correct Problems

16. 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)

17. 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

18. 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)

19. 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

20. Variance Analysis - Variable Labor - Definitions • BR = Budgeted Rate • BT = Budgeted Time • ATAO = Allowable Time for Actual Output • AR = Actual Rate • AT = Actual Time

21. 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)

22. Variance Analysis - Variable Labor • Efficiency Variance EV = BR * (ATAO - AT) • Rate-Time Variance R-TV = (BT - AT) * (BR - AR)

23. 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