However, advertising costs may be fixed costs and will remain the same regardless of the actual level of sales revenue. The supervisor of the organization would probably be a member of the budget committee and it is his or her job to prepare the final budget information for submission to the CEO for approval. Each month, budgets for the remaining months of the year should be reviewed to accommodate any changed circumstances.
Therefore, these operating personnel can better identify with the plans or goals of the organization. If an expense budget is overstated, there may be a tendency to find ways to spend the money still in the budget as the end of the budget period approaches. Similarly, the occupancy of the guest rooms in a hotel will affect the sales revenue in the food and beverage areas.
Since most of the department's direct operating costs are specifically related to sales revenue levels, after calculating sales revenue, the bulk of the budget is achieved. The appropriate percentage of expenses relative to sales revenue can therefore be applied to projected sales revenue to calculate the dollar amount of expenses. They are also mostly not controlled or held by department heads.
Alternatively, the day-to-day manager can set the minimum level arbitrarily to e.g. 60 percent of the current budget.
Price ᎏᎏ
A variance analysis matrix can be used to show the budget variance as well as the price and sales volume variances in a simple table format. The actual price and the target or standard price are compared to determine if there is a price difference. Also, budgeted volume and actual volume should determine if there is a sales volume variance comparison.
To determine the amount of variance, start at the bottom of the total column and subtract each total from the total shown above. If the product is negative as ($5,000) below, the variance is unfavorable when dealing with sales revenue inflows as it reduces revenue and, therefore, net income. The difference is unfavorable because we spent more than we budgeted and therefore we reduced the net income.
The total variance of $510 consists of two items: a cost variance and a sales volume variance. From a cost perspective, this is considered unfavorable because it reduces net revenues. The variance analysis matrix shows the cost budget variance, cost variance, and sales volume.
The actual costs and the budgeted or standard costs are compared to determine the cost difference. The budgeted sales volume and actual sales volume are compared to determine the difference in sales volume. To determine whether the cost variance is favorable or unfavorable, determine whether it increases or decreases net revenue.
Although this is considered unfavorable as an increase in cost, we would not be concerned as it would be more than offset by the additional revenue gained from the sale of additional rooms. In the latter case, the extra cost would more than make up for the extra charge for a double room. As shown, a detailed analysis of variance is useful in understanding differences between projected and actual sales revenue or cost outflows.
Cost ᎏᎏ
If we sell more rooms, as we did, we will obviously have to pay an additional $200 for laundry. The cause may be a supplier cost increase which we may or may not be able to do something about; or it could be that we actually sold more double rooms than budgeted (which would mean more sheets to wash and therefore cause our average laundry cost per occupied room to increase). The variance analysis shows that there was a savings of $1,875 in labor due to a reduced number of billable hours, possibly as a result of less business than budgeted.
However, the savings were reduced by $820 because the actual average hourly rate was $0.20 higher than budgeted.
Salesᎏᎏ
Unfavorable is used for a variance that reduces net revenue and is therefore either a decrease in sales revenue or an increase in costs. If actual sales revenues can be so close to budget sales revenues in percentage terms, it would indicate remarkably effective budgeting. If a cost has a variance of 0.1 percent, this variance should be considered together with the sales revenue.
Accurate forecasting in the premises and food and beverage departments is important because in many hospitality businesses they account for as much as 80 to 90 percent of total food and beverage revenue. A forecasting technique that allows a restaurant to forecast its sales revenue based on the occupancy forecast is regression analysis. The regression analysis formula used in Chapter 7 effectively handles the determination of variable and fixed elements of sales revenue.
Forecasting should take into account past actual sales revenue and trends, current expected trends, and economic, competitive and limiting factors. Once the sales revenue is forecasted, direct operating expenses can be calculated based on the expected sales revenue and ultimately unallocated costs can be deducted to arrive at the net profit for the operation. What factors should be considered when planning the sales revenue for breakfast in the hotel cafeteria.
The owner wants you to provide an estimate of sales revenue for the month of April. Beverage sales typically average 15 percent of lunch meal sales and 30 percent of dinner meal sales. Beverage sales account for 12 percent of lunch meal sales and 25 percent of food sales on weekdays (no drinks are served on Sundays and public holidays).
Additionally, beverage revenue for private party rooms averages 40 percent of total food revenue. By improving procurement and reducing portions, reducing food costs from 45 percent to 40 percent of food sales revenue. Reducing food costs from 45 to 40 percent of food sales revenue and spending an additional $2,000 per month on advertising.
In the cafeteria, the revenue from drinks is estimated at 15 percent of the total revenue from the sale of food for lunch and dinner, and in the dining room, 25 percent of the revenue from the sale of food for lunch and dinner. China and the percentages of tableware and glassware variable costs in sales revenue will remain unchanged (Example 8).