SITXFIN004 Prepare and Monitor Budgets

Prepare and Monitor Budgets

SITXFIN004 Prepare and Monitor Budgets

Introduction:

The report has been prepared to give users an understanding about the preparation of various budgets in hospitality industry and monitoring them for their accuracy and relevance in future performance. The first part of the report will contain preparation of a draft budget in accordance with the forecasts available about the company. The budget will include all the items of revenue and expenditure and reasonable assumptions will be made for preparation of the same. Further the report will include calculation of various cost items and quarterly results along with the yearly results of hotel. The report will include individual tasks and calculations which should be solved according to appropriate understanding of budgets and budget analysis.

Task 1:

a.Shows the existing budgets figures for the financial year 2016: 

Budget 2016

Room Division

Particulars

Amount

Rooms available

63875

Rooms occupied

51548

Total occupancy

80.70%

Revenue per available room

134.8

Total room revenue

$ 6948897.21

Less: COGS

$                         987,555.00

Gross profit

5961342.21

Less:  Expenses

 

Staff cost

$                     1,201,980.00

Other expenses

$                         123,457.00

Net profit

4635905.21

Analysis: the above is the existing budget for the financial year 2016. The budget has been prepared in accordance with the forecasting details available with the details.   

Budgets:

Budget 2016

Particulars

Catering

Banquet

Room service

Mini bar

Bar Budget

Food revenue

1740112.81

876759.16

417442.15

Nil

67191.88

Beverage revenue

279257.72

183736.83

335796.64

146471.02

299825.78

Other revenue

Nil

Nil

34668.69

Nil

nil

Total revenue

2019370.53

1313940.16

417442.15

146471.02

367017.66

Less: COGS

$ 601,944.02

316,564.27

$ 105,345.38

$ 35,781.74

$ 114,140.20

Gross profit

1417427

997375.9

312096.8

110689.3

252877.5

Less:

 

 

 

 

 

Staff cost

 $                     1,122,433.24

 $                         476,538.08

 $ 228,397.17

 $ 55,510.55

 $ 151,731.13

Other expenses

 $                         121,742.75

 $                           63,009.20

 $ 23,233.82

 $  18,897.56

 $ 21,902.07

Net profit

173251.01

457828.62

60465.81

36281.19

792443

Analysis: Different types of segments are forecasted on the basis of previous information.

b.Using the template “Draft Budget” perform the calculations using basic formula: 

Budget 2017

Room Division

Particulars

Amount

Rooms available

$                           61,320.00

Rooms occupied

$                           51,100.00

Total occupancy

$                                   80.00

Revenue per available room

$                                 150.00

Total room revenue

$                     7,665,000.00

Less: COGS

1,149,750.00

Gross profit

6,515,250.00

Less:  Expenses

 

Staff cost

$                     1,533,000.00

Other expenses

$613,200.00

Net profit

$ 4,369,050.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis: The above budget of room division shows that room availability has been reduced by 4% and the occupancy rate has also been decreased to 80%. On the other hand, the revenues per available room have been increased to $ 150. Further, the cost has been adjusted as increase in COGS by 20%, staff cost has been increased to 20% and other expenses to 8% (Heizer, 2016). 

Budget 2017

Particulars

Catering

Banquet

Room service

Mini bar

Bar Budget

Food revenue

$   2,001,129.73

 $   1,678,460.55

 $      386,166.14

Nil

 $         83,989.85

Beverage revenue

$      301,598.34

 $      321,539.45

 $         34,668.69

 $      146,471.02

 $      359,790.94

Other revenue

Nil

Nil

 $         46,976.82

Nil

Nil

Total revenue

$   2,302,728.07

 $   2,000,000.00

$      467,811.65

 $      146,471.02

 $      443,780.79

Less: COGS

 $        690,818.42

 $        520,000.00

 $        105,345.38

 $           35,781.74

 $        114,140.20

Gross profit

1611909.65

1480000

362466.27

110689.28

329640.59

Less:

 

 

 

 

 

Staff cost

 $     1,013,200.35

 $        380,000.00

 $        159,055.96

 $           55,510.55

 $        159,761.08

Other expenses

 $        161,190.09

 $        280,000.00

 $           23,233.82

 $           18,897.56

 $           79,880.54

Net profit

 $ 437519.21

 $ 820000

 $ 180176.49

 $ 36281.17

 $ 89998.97

 

Analysis: the budget for different segments such as catering, banquet, room service, mini bar and bar budget. These are prepared in accordance with different changing policies. In catering segment, food revenue will increase by 15%, beverage revenue will increase by 8%, staff cost has been adjusted at 44% of the food budget and lastly, other expenses has been increased by 7% of the previous year (Pavlatos, 2015).

Same wise, other segments has also been adjusted according to the given information. In the banquet segment, food revenue was set at $ 2,000,000 and the beverage revenue increased by 75% and such as.         

Task 2:

1.Calculate the anticipated food revenue for each month and the yearly total.

TURNOVER

CUSTOMER NUMBERS

AVERAGE SPEND(FOOD)

FOOD REVENUE

JANUARY

1850

 $                                  45.00

 $                               83,250.00

FEBURARY

2000

 $                                  37.00

 $                               74,000.00

MARCH

700

 $                                  42.00

 $                               29,400.00

APRIL

1200

 $                                  48.00

 $                               57,600.00

MAY

1200

 $                                  36.50

 $                               43,800.00

JUNE

600

 $                                  35.00

 $                               21,000.00

JULY

950

 $                                  34.00

 $                               32,300.00

AUGUST

800

 $                                  38.00

 $                               30,400.00

SEPTEMBER

900

 $                                  29.00

 $                               26,100.00

OCTOBER

650

 $                                  29.50

 $                               19,175.00

NOVEMBER

980

 $                                  35.50

 $                               34,790.00

DECEMBER

2200

 $                                  48.00

 $                             105,600.00

TOTAL

 

 

 $                             557,415.00

Analysis: the food revenue anticipation has been calculated by multiplying the average expenditure made by customers in all the months. The different number of customers is anticipated for different months and their average expenditure based on previous trend has been analysed (Heizer, 2016).

2.Calculate the anticipated beverage revenue per month and the yearly total.

TURNOVER

CUSTOMER NUMBERS

 AVERAGE SPEND (BEVERAGE)

BEVERAGE REVENUE

JANUARY

1850

 $                                                                                    9.70

 $                     17,945.00

FEBURARY

2000

 $                                                                                    9.70

 $                     19,700.00

MARCH

700

 $                                                                                    9.70

 $                     26,190.00

APRIL

1200

 $                                                                                    9.70

 $                     11,640.00

MAY

1200

 $                                                                                    9.70

 $                     11,640.00

JUNE

600

 $                                                                                    9.70

 $                       5,820.00

JULY

950

 $                                                                                    9.70

 $                       9,215.00

AUGUST

800

 $                                                                                    9.70

 $                       7,520.00

SEPTEMBER

900

 $                                                                                    9.70

 $                       8,730.00

OCTOBER

650

 $                                                                                    9.70

 $                       6,305.00

NOVEMBER

980

 $                                                                                    9.70

 $                       9,506.00

DECEMBER

2200

 $                                                                                    9.70

 $                     21,340.00

 

 

 

 

TOTAL

 

 

$155,551.00

Analysis: the anticipated beverage revenue has been ascertained through multiplying the number of customers with the anticipated average spenders over the beverage business.

3.Calculate the total revenue for each month and the yearly total.

TURNOVER

CUSTOMER NUMBERS

AVERAGE SPEND(FOOD)

FOOD REVENUE

 AVERAGE SPEND (BEVERAGE)

BEVERAGE REVENUE

TOTAL

JANUARY

1850

 $                                  45.00

 $                               83,250.00

 $                                                                                    9.70

 $                     17,945.00

 $        101,195.00

FEBURARY

2000

 $                                  37.00

 $                               74,000.00

 $                                                                                    9.70

 $                     19,700.00

 $          93,700.00

MARCH

700

 $                                  42.00

 $                               29,400.00

 $                                                                                    9.70

 $                     26,190.00

 $          55,590.00

APRIL

1200

 $                                  48.00

 $                               57,600.00

 $                                                                                    9.70

 $                     11,640.00

 $          69,240.00

MAY

1200

 $                                  36.50

 $                               43,800.00

 $                                                                                    9.70

 $                     11,640.00

 $          55,440.00

JUNE

600

 $                                  35.00

 $                               21,000.00

 $                                                                                    9.70

 $                       5,820.00

 $          26,820.00

JULY

950

 $                                  34.00

 $                               32,300.00

 $                                                                                    9.70

 $                       9,215.00

 $          41,515.00

AUGUST

800

 $                                  38.00

 $                               30,400.00

 $                                                                                    9.70

 $                       7,520.00

 $          37,920.00

SEPTEMBER

900

 $                                  29.00

 $                               26,100.00

 $                                                                                    9.70

 $                       8,730.00

 $          34,830.00

OCTOBER

650

 $                                  29.50

 $                               19,175.00

 $                                                                                    9.70

 $                       6,305.00

 $          25,480.00

NOVEMBER

980

 $                                  35.50

 $                               34,790.00

 $                                                                                    9.70

 $                       9,506.00

 $          44,296.00

DECEMBER

2200

 $                                  48.00

 $                             105,600.00

 $                                                                                    9.70

 $                     21,340.00

 $        126,940.00

 

 

 

 

 

TOTAL

 $        712,966.00

TOTAL

 

 

 $                             557,415.00

 

CROSS CHECK

 $    1,270,381.00

4. Calculate the overheads total for each month (at 90% of turnover for each moth with more than 1000 customers and 96% for each month less than 1000 customers)

Sales

Total overhead (90% of the projected sales)

 $                             101,195.00

                        91,075.50

 $                               93,700.00

                        84,330.00

 $                               55,590.00

                        53,366.40

 $                               69,240.00

                        62,316.00

 $                               55,440.00

                        49,896.00

 $                               26,820.00

                        25,747.20

 $                               41,515.00

                        39,854.40

 $                               37,920.00

                        36,403.20

 $                               34,830.00

                        33,436.80

 $                               25,480.00

                        24,460.80

 $                               44,296.00

                        42,524.16

 $                             617,926.00

                      556,133.40

Total: $1,203,952.00

                  1,099,543.86

 Analysis: Total overheads are given as 90% of the budgeted sales for every month. It is calculated by multiplying 90% to the every month’s sales. The total overheads consist of three main subheads such as staff costs, other overheads and COGS.

5.Calculate the profit for each month and the yearly total.

MONTHS

Sales

Total overhead

 PROFIT

JAN

 $                             101,195.00

                        91,075.50

 $                     10,119.50

FEB

 $                               93,700.00

                        84,330.00

 $                       9,370.00

MAR

 $                               55,590.00

                        53,366.40

 $                       2,223.60

APR

 $                               69,240.00

                        62,316.00

 $                       6,924.00

MAY

 $                               55,440.00

                        49,896.00

 $                       5,544.00

JUN

 $                               26,820.00

                        25,747.20

 $                       1,072.80

JUL

 $                               41,515.00

                        39,854.40

 $                       1,660.60

AUG

 $                               37,920.00

                        36,403.20

 $                       1,516.80

SEP

 $                               34,830.00

                        33,436.80

 $                       1,393.20

OCT

 $                               25,480.00

                        24,460.80

 $                       1,019.20

NOV

 $                               44,296.00

                        42,524.16

 $                       1,771.84

DEC

 $                             617,926.00

                      556,133.40

 $                     61,792.60

MONTHS

 $                         1,203,952.00

                  1,099,543.86

 $                   104,408.14

Analysis: the profits for every month and for the yearly total are calculated by subtracting the total overheads from the sales.

6.Calculate the cost of goods sold and beverages, given a combined percentage of 32%.

MONTHS

Sales

COGS

JAN

 $                             101,195.00

 $                         32,382.40

FEB

 $                               93,700.00

 $                         29,984.00

MAR

 $                               55,590.00

 $                         17,788.80

APR

 $                               69,240.00

 $                         22,156.80

MAY

 $                               55,440.00

 $                         17,740.80

JUN

 $                               26,820.00

 $                            8,582.40

JUL

 $                               41,515.00

 $                         13,284.00

AUG

 $                               37,920.00

 $                         12,134.40

SEP

 $                               34,830.00

 $                         11,145.60

OCT

 $                               25,480.00

 $                            8,153.60

NOV

 $                               44,296.00

 $                         14,174.72

DEC

 $                             617,926.00

 $                       197,736.32

 CROSS CHECK TOTAL

 $                         1,203,952.00

 $                       385,263.84

Analysis: the calculation of COGS has been done by multiplying the sales with a standard number which is 32%. As given, COGS are 32% of the combined sales of food and beverage.

7.Calculate the staff cost for each month at 31% for months with more than 1000 customers and 35% for months with less than 100 customers

MONTHS

Sales

 STAFF COSTS(COGSX31%or 35%ACCORDINGLY

JAN

 $                             101,195.00

                                                                             31,370.45

FEB

 $                               93,700.00

                                                                             29,047.00

MAR

 $                               55,590.00

                                                                             19,456.50

APR

 $                               69,240.00

                                                                             21,464.40

MAY

 $                               55,440.00

                                                                             17,186.40

JUN

 $                               26,820.00

                                                                               9,387.00

JUL

 $                               41,515.00

                                                                             14,530.25

AUG

 $                               37,920.00

                                                                             13,272.00

SEP

 $                               34,830.00

                                                                             12,190.50

OCT

 $                               25,480.00

                                                                               8,918.00

NOV

 $                               44,296.00

                                                                             15,503.60

DEC

 $                             617,926.00

                                                                           216,274.10

 CROSS CHECK TOTAL

 $                         1,203,952.00

                                                                           408,600.20

Analysis: the staff cost has been calculated on the basis of number of customers arrived in each month. In months of Jan, Feb, April, May and December, the number of customers are more than 1000 and hence the staff cost is calculated on the basis of turnover (Heizer, 2016).  

8.Calculate the “Other overheads” for the operations

MONTHS

Total overhead

COGS

 STAFF COSTS(COGSX31%or 35%ACCORDINGLY

Other overheads (Total overheads-COGS-staff cost)

JAN

                        91,075.50

 $                         32,382.40

                                                                             31,370.45

                 27,322.65

FEB

                        84,330.00

 $                         29,984.00

                                                                             29,047.00

                 25,299.00

MAR

                        53,366.40

 $                         17,788.80

                                                                             19,456.50

                 16,121.10

APR

                        62,316.00

 $                         22,156.80

                                                                             21,464.40

                 18,694.80

MAY

                        49,896.00

 $                         17,740.80

                                                                             17,186.40

                 14,968.80

JUN

                        25,747.20

 $                            8,582.40

                                                                               9,387.00

                    7,777.80

JUL

                        39,854.40

 $                         13,284.00

                                                                             14,530.25

                 12,040.15

AUG

                        36,403.20

 $                         12,134.40

                                                                             13,272.00

                 10,996.80

SEP

                        33,436.80

 $                         11,145.60

                                                                             12,190.50

                 10,100.70

OCT

                        24,460.80

 $                            8,153.60

                                                                               8,918.00

                    7,389.20

NOV

                        42,524.16

 $                         14,174.72

                                                                             15,503.60

                 12,845.84

DEC

                      556,133.40

 $                       197,736.32

                                                                           216,274.10

               142,122.98

 CROSS CHECK TOTAL

                  1,099,543.86

 $                       385,263.84

                                                                           408,600.20

               305,679.82

Analysis: The cost of other overheads is calculated by subtracting the COGS, staff costs from total overheads. The other overheads are residual overheads extracted from the total overheads after subtracting the COGS and staff costs.          

Task 3

3.1 What could be the reasons and explain? List 5 examples of areas you would investigate and why?

The recent budget of the company shows the cost of goods sold for various departments and there has been noticed a blown out which is approximately 4.5%. The same has been experienced due to high fluctuations in the inflation rate and the corresponding change in cost associated with various inputs and raw material required for producing the products of the Restaurant and bar operations. Another reason for such blown out was inaccuracy in making assumptions about the various cost items increase in precent. The previous year figures of budgets for the recent three years have been taken into consideration for determining the fluctuations in rates which seems to be inconsistent with the consistent policy of the company operating in this sector of industry (Pavlatos, 2015).

The areas in which investigation will be required are:

1.Assumptions made for costs – The assumptions made while preparing the forecast of the company should be carefully investigated for the purpose of their reasonableness and acceptability for the future performances. These assumptions play a crucial role in determining the percentage change that will be recognized in future years.

2.Previous year factors – It can be observed that the company has taken into consideration the previous year factors and the trends associated with these factors in the same industry in which the company is operating. These factors should be critically evaluated and careful study must be made for applying these factors in the current business scenario. This will help the company to obtain the result which will be real accurate and will provide the forecast and their related results correctly (Chenhall & Moers, 2015).

3.Reliability of figures – This will be a major area to be investigated while preparing and monitoring the budgets and their variances. The data or figures and the sources form which they are measured and recorded can be unreliable and in that case the budgets or forecasts obtained mat be meaningless. Therefore there should be proper precautions to be taken while measuring and recording the figures of past data or records.

4.Materiality of variances – The investigation must be carried out for measuring the degree of materiality involved with the occurrence of variances. The determination of the materiality will help in recognizing the scale of the problem and the associated benefits for correcting those variances. This will help in proper interpretation and evaluation of various causes.

5.Trends in variances – This will be investigated for the purpose of recognizing the consistency of variances occurring in the company. The occurrence of one adverse variance will represent the occurrence of a random event however consistent occurrence will represent the situation out of control in which certain reasonable degree of care must be taken (Pavlatos, 2015).

3.2 List five external factors which could contribute to opposite trends of decreasing budgets and which method you would use to determine this?

The opposite trends in the results obtained have been noticed due to following few factors which can be determined as under:

1.Consumer sentiment – The factor is associated with the economic factors and fluctuations in the Australian economy due to which the people will feel confident about purchasing the products of the restaurant and visiting the hotel. The weak consumer segment is a fine example of how the factors influence the down stick of sales in the hotel industry.

2.Disposable income – The rise and fall in the disposable income of the consumers which represents the way consumer has to spend its income in hotel industry is a big factor for determination of trends in the industry. The combination of consumer’s sentiments with that of disposable income will be a major factor in determining the trend of the customers for spending their money in hotel industry (Chenhall & Moers, 2015).

3.Strength of dollar – In the recent observations it was noticed that many global companies and corporations pointed currency movements as the major reason for missing the half yearly forecasts of ten year. The same has been noticed in the case of Hotel Futura where the currency movement and fluctuations has been a critical factor in determination of the pattern of the revenue. The revenue forecast of the company has experienced opposite trends and this may be due to the rate fluctuations in currency.

4.Economic policies and government legislations – The determination of the economic policy of the government of Australia and the related rules and legislation concerning hospitality industry will also be a major factor for recognizing the trend in hotel industry. The government has made some strict provisions regarding liberality of companies operating in hotel industry and the same has affected the policies of the hotels which resulted in low revenues. The cost for providing the facilities grown up significantly resulting in high prices for the products and therefore opposite trends are recognized (Jermias, 2017).

5.Competition – The competition prevailing in hotel industry has experienced a complex trend in the recent six months and the rates for the products have to be controlled to remain competitive in the market. For the same reason the revenue of the company has experienced a reverse trend in increase in the revenues and budgets (Gallani, et. al., 2016).

The method which will be suitable here will be capital budgeting which will involve calculation of future results for the budgets prepared by the company. In the determination of these factors various cost constituents will be taken care of and the external factors will be properly recognized in order to determine the correct figures of the ratios.

3.3

1. Which reports you need to prepare for these issues?

The various reports which have to be prepared for negative performance in the kitchen department will include:

Variance Report – The variance report will show the quantitative numbers which have contributed towards the adverse variance obtained for kitchen/food cost as ($13467). The budgeted outcomes and figures will be recorded at one side and the actual results associated with food and kitchen will be recorded on the other side which will help in recognizing the reasons and factors responsible for this deviation. Each factor and item contributing towards the adverse variance will be analysed carefully so that necessary recommendations and solutions can be obtained for the same (Rubin, 2016).

Cash flow report – It can be observed from the given statement that there was a cash flow problem recognized in this department and for solving the same a cash flow statement will be reported for this department which will contain various items of cash inflow and outflow and the percentage change in comparison with the previous year. The report will help the management in analysing the various items of negative cash flows and this will enable the company to manage these cash flows appropriately.

2. Who is it essential to involve when these matters need to be discussed?

The personnel who are responsible for carrying out their efficient functions in this department will be called for discussing the various issues while analysing the variances. These will include:

1.F&B manager – The food and kitchen manager of hotel will be called for attending the discussion as he is engaged in purchasing the bottles which resulted in negative cash outlays due to inefficiency in maintaining the par stock. The same will be rectified on his part (Jeong, et. al., 2014).

2.Cash manager and inventory manager – The management responsible for handling the cash issues and inventory levels will be required to attend this meeting so that they can control the adverse activities associated with this activity.

3.TCWG – Those charged with governance will include the management who will be required to implement the necessary strategies for controlling the adverse results and variances (Jermias, 2017).

3. Suggest options to address and rectify these issues?

It can be observed that the budgeted expenditure cost associated with the food and kitchen cost has exceeded the actual cost by 4% which is 32%. The same can be rectified with planning and creating appropriate strategies and accurate plans for the next period and the same should be supported with control policies to be implemented by various managers in their concerned department. The same will allow the company to obtain a favourable variance in this aspect and the favourable results will be obtained by the company (Stotsky, 2016).

4. How could the cash flow issue be addressed?

It can be observed form the case study that the F&B manager has purchased 240 bottles of Hill of Blessings which is in excess of the par stock to be maintained by the company. The same has created a problem of cash flow. For rectifying the same the management needs to analyse the appropriate inventory level to be maintained and for the same purpose economic order quantity will be recognized by the company. Also the management can adopt Just in Time (JIT) policy for improving the cash flow of the company as the stock can be purchased immediately (Bogsnes, 2016).

Conclusion:

The overall report will conclude that preparation and monitoring of budget is a significant task which must be performed carefully by the management of company. The draft budget of the company will be prepared after analysing the past trends and previous observations while making certain reasonable assumptions for the future results. Therefore it should be ensured that the company and management should adopt careful and appropriate strategies for the same.

References:

1.Alawattage, C., Wickramasinghe, D., & Uddin, S. (2017). Theorising management accounting practices in Less Developed Countries. The Routledge Companion to Performance Management and Control.

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