Solution manual managerial accounting and finance for hospitality operations CHAPTER 10

CHAPTER 10
OPERATIONS BUDGETING
I.

Questions
1.

Budgeting is planning. In order to make meaningful decisions about the future,
a manager must look ahead. One way to look ahead is to prepare budgets or
forecasts. A forecast may be very simple. For a restaurant owner/operator, the
budget may be no more than looking ahead to tomorrow, estimating how many
customers will eat in the restaurant, and purchasing food and supplies to
accommodate this need. On the other hand, in a large organization a budget may
entail forecasts up to five years (such as for furniture and equipment purchases),
as well as requiring day-to-day budgets (such as staff scheduling). Budgets are
not necessarily always expressed in monetary terms. They could involve
numbers of customers to be served, number of rooms to be occupied, number of
employees required, or some other unit, as opposed to pesos.

2.

Refer to page 225.

3.

a.
b.

4.

The other three steps in the budgeting cycle are:

3.
4.
5.

Hotel departmental budget – Rooms Department Budget
Capital budget for a restaurant – Quarterly Cash Budget for a Restaurant

Comparing actual results with those planned, and analyzing the differences
(variances).
As a result of step 3, taking corrective action, if required.
Improving the effectiveness of budgeting.

Three possible limiting factors to consider in preparing a budget for a hotel or
restaurant are:
a.

Limitation on sales revenue. A hotel cannot achieve more than a 100%
room occupancy. In the short run, room revenue (if a hotel were full every
night) can only be increased by increasing room rates. But since very few
hotels do run at 100% occupancy year-round, it would be unwise, desirable
as it might be, to use 100% as the budgeted occupancy on an annual basis.
Similarly, a restaurant is limited to a specific number of seats. If it is
running at capacity, sales revenue can only be increased, again in the short
run, by increasing meal prices or increasing seat turnover (seat occupancy).
But, again, there is a limit to increasing meal prices (customer resistance
and competition often dictate upper pricing levels), and if seat turnover is


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

increased by giving customers rushed service, the end result may be
declining sales.

5.

b.

Lack of skilled labor or skilled supervisory personnel.
Increased
productivity (serving more customers per waiter) would be desirable and
would decrease our payroll cost per customer, but well-trained employees,
or employees who could be trained, are often not available. Similarly,
supervisory personnel who could train others are not always available.

c.

Supply and demand. Customer demand and competition must always be
kept in mind when budgeting. In the short run there is usually only so much
business to go around. Adding more rooms to a hotel does not
automatically increase the demand for rooms in the area. It takes time for
demand to catch up with supply, and new hotels or an additional block of
rooms to an existing hotel will usually operate at a lower occupancy than
normal until demand increases. A new restaurant or additional facilities to
an existing restaurant must compete for its share of business.

Questions that could be asked to explain the P2,000 unfavorable variance
between actual and budgeted revenue:
a.

b.
c.

6.

The factors to be considered in projecting the revenue for the coffee shop
breakfast period in a hotel are
a.
b.
c.

7.

Was there a general reduction in selling prices of drinks and appetizers?
Was there a decrease or increase in the expected volume of sales?
Was there a change in the sales mix or product combination?

Percentage of registered guests taking breakfast at the hotel
Experience about customers taking breakfast in the hotel who are not
hotel guests
Prices of the food served

A pro-forma income statement known also as budgeted income statement shows
the projected of revenues, costs and expenses and expected result of operations
(income or loss) for a future period of time.

II. Practical Exercises and Problems
A. EXERCISES
EXERCISE 1
P120

=

Sales revenue
100 x 2.25 x 312

P120

=

Sales revenue
70,200

=

P8,424,000

Sales revenue


Operations Budgeting

10-3

EXERCISE 2
P340

=

Sales revenue

70 x 80% x 30

P340

=

Sales revenue
1,680

=

P571,200

Sales revenue
EXERCISE 3
70%
=
70%
=
No. of rooms

=

No. of rooms
40 x 365

=

No. of rooms
14,600

=

10,220

P320
=

=

Sales revenue
40 x 70% x 365

P320
=

=

Sales revenue
10,220

Sales revenue =
P3,270,400
P3,270,400
613,200
P2,657,200
2,400,000
P 257,200

Sales
Variable cost (P60 x 10,220)

Contribution margin
Fixed costs
Operating income
EXERCISE 4
Average
Check

Turnover
Breakfast
Lunch
Dinner

2.25
1.75
2.75

x
x
x

P38.00
40.00
58.00

Seats

Days

x
x 365

80
80
x
x 365
x
x 365
80
Total sales revenue

Sales
=
=
=

P2,496,600
2,044,000
4,657,400
P9,198,000

EXERCISE 5
Occupancy
Breakfast
Lunch
Dinner

60%
70%
78%

Room

Rate
x P280.00
x
320.00
x
360.00

Rooms
x
x
x

Days

x
=
60
90
x
=
60
90
x
=
60
90
Total room revenue

Sales
P 907,200

1,209,600
1,516,320
P3,633,120


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

EXERCISE 6
Sales
Variable costs
Contribution margin
Fixed costs
Operating income

P880,000
616,000 (a)
P264,000 (b)
244,000
P 20,000 (c)

B. PROBLEMS
PROBLEM 1
Sales (80 x 70% x 365 x P440)
Variable costs [P80 x (80 x 70% x 365)]
Contribution margin
Fixed costs
Operating income

P8,993,600
(1,635,200)
P7,358,400
(2,200,000)
P5,158,400

PROBLEM 2
Average
Check

Turnover
Breakfast
Lunch
Dinner

1.50
1.75
1.25

x P 40.00
75.00
x
x
125.00

Seats
x
x
x

130
130
130

Days
x
x
x

31
31
31

Sales
= P 241,800.00
528,937.50
=
=
629,687.50
P1,400,425.00

PROBLEM 3
80% x 150 = P120 x 3 = 360 guests
360 x 95% = 342 persons eat breakfast
360 x 25% = 90 persons eat lunch
360 x 75% = 270 persons eat dinner

Breakfast
Lunch
Dinner

Average
meal prices

Guests

Days

Sales

P 45.00
75.00
126.00

342
90
270

30
30
30

P 461,700.00
202,500.00
1,020,600.00
P1,684,800.00


Operations Budgeting

10-5

PROBLEM 4
120 seats – 305 days – Monday to Saturday – Lunch and Dinner
60 days – Sunday and holiday – Dinner only
Food
Sales – restaurant (Schedule A)
Sales – private party room
Total food sales
Beverage
Lunch (12% x P3,019,500)
Dinner (25% x P4,895,250)
Private Party Room (40% x P1,440,000)
Total beverage sales
Total Sales
Cost of Sales
Food cost (37% x P10,938,750)
Beverage cost (33% x P2,162,153)
Gross Margin
Payroll and related costs
Salaries fixed
P2,840,000
Variable wage cost (15% x P9,498,750)
1,424,813
Employee benefits (12% x P4,264,813)
511,778
Other operating costs
China, glass, silver, linen
Laundry
Supplies

Menus and beverages
Advertising
Repairs & maintenance
Miscellaneous expense
Total variable operating costs (11% x P13,100,903)
Fixed operating overhead costs
Administration and general
P 24,000
Licenses
15,000
Rent
90,000
Equipment depreciation
73,400
Total operating costs
Net income before taxes

P 9,498,750 *
1,440,000
10,938,750
362,340
1,223,813
576,000
2,162,153
13,100,903
4,047,338
713,510
4,760,848
8,340,055

4,776,591

1,441,099

202,400
6,420,090
P 1,919,965


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

* Schedule A
Seat
Turnover
Weekday lunch
Weekday dinner
Sunday and
holiday dinner

Average
Check

Seats

Days

Sales

1.50
1.25

x P 55.00 x 120 x 305 = P3,019,500.00
x 107.00 x 120 x 305 = 4,895,250.00

2.00

x

110.00 x 120 x

60

=

1,584,000.00
P9,498,750.00

PROBLEM 5
Requirement (a)
Budgeted Income Statement
Room sales (80 x 75% x 365 days x P220)

P4,818,000

Room Payroll and related benefits
Fixed wages
Housekeeping (80 x 75% x 365 days x P45 x ½)
Fringe benefits (15% x P1,350,000)

Linen, laundry, etc. (80 x 75% x 365 days x P25)
Total
Departmental income

857,250
492,750
202,500
547,500
2,100,000
P2,718,000

Food Sales
Breakfast (21,900 x 2 x 80% x P20)
Lunch (50 x P55 x 365 days)
Direct operating costs – bar (75% x 1,704,550)
Departmental income
Total Operating Income
Indirect costs
Net income

700,800
1,003,750
1,704,550
1,278,413
426,137
P3,144,137
2,894,000
P 250,137

Requirement (b)

1.

Revenue
Revenue – actual (21,700 x P221)
Revenue – budgeted
Unfavorable variance

P4,795,700
4,818,000
P 22,300


Operations Budgeting

Analysis: Revenue Variance
Quantity variance
Actual rooms occupied
Budgeted rooms (80 x 75% x 365 days)
Unfavorable
Multiply by: Budgeted room rate
Unfavorable quantity variance
Price variance
Actual price per room
Budgeted price per room
Favorable
Multiply by: Actual rooms occupied
Favorable price variance
Net unfavorable variance
2.

21,700
21,900
200
P 220
P44,000
P

221
220
P
1
21,700
21,700
P22,300

Housekeeping wages
Actual housekeeping wages
Budgeted wages
Unfavorable variance

P499,100
492,750
P 6,350

Analysis:
Quantity variance
Actual rooms occupied & cleaned
Budgeted rooms occupied & cleaned
Favorable
Multiply by: (P45 x ½ hr.)

Favorable quantity variance

21,700
21,900
200
P 22.50
P 4,500

Cost variance
499,100
Actual wage rate per room
21,700
Budgeted wage rate
Unfavorable
Multiply by: Actual rooms occupied and cleaned
Unfavorable cost variance

P 23.00
22.50
P 0.50
21,700
10,850

Net unfavorable variance

P 6,350

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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

PROBLEM 6
Requirement (a)
Budgeted Income Statement
Rooms - Sales revenue
Payroll (25% x P350,000)
Other operating costs (5% x P350,000)
Departmental income

P350,000
87,500
17,500
P245,000

Food – Sales revenue
Cost of sales (35% x P150,000)
Payroll (40% x P150,000)
Other operating costs (10% x P150,000)
Departmental income

P150,000
52,500
60,000
15,000
P 22,500

Total operated departmental income

Other income
Total income

P267,500
5,500
P273,000

Undistributed operating expenses
Administrative
Marketing
Property operation and maintenance
Energy costs
Total

P 25,600
15,400
16,700
12,500
P 70,200

Income after undistributed operating expenses

P202,800

Rent
Interest
Depreciation
Building
Furniture and equipment

P 28,300
11,500

Income before income taxes

P50,200
24,800

75,000
P114,800
P 88,000


Operations Budgeting

10-9

Requirement (b)
Cash Flows
Cash flows from operations
Net income
Add: Depreciation

P 88,000
75,000
163,000

Cash flows from investing activities
Purchase of new equipment (P30,000 – P5,400)
Cash flows from financing activities

Payment of mortgage
Payment of bank loan
Payment of dividends

(24,600)
(30,300)
(25,300)
(40,000)
(95,600)
P 42,800

Net increase in cash
PROBLEM 7
Requirement (a)
Budgeted Income Statement

Sales
Food cost (30% of Sales)
Wages and salaries
Basic
Additional
Other operating cost
Depreciation
Furniture and equipment
China, glass & silverware
Rent
Total operating cost
Net income

1st

P48,000

Month
2nd
P66,000

3rd
P84,000

P14,400

P19,800

P25,200

15,000
–
4,800

15,000
1,200
6,600

15,000
4,800
8,400

3,000
2,100
3,000

42,300
P 5,700

3,000
2,100
3,000
50,700
P15,300

3,000
2,100
3,000
61,500
P22,500


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Requirement (b)
Cash Budget
Month
2nd

3rd

P38,400

P52,800

9,600

P67,200
13,200

38,400

62,400

80,400

5,400 *
15,000
–
3,000
23,400
15,000
10,800
25,800
15,000
P10,800

19,800
16,200
4,800
3,000
43,800
18,600
15,000
33,600

15,000
P18,600

25,200
19,800
6,600
3,000
54,600
25,800
15,000
40,800
15,000
P25,800

st

1
Cash receipts
Cash sales (80%)
Credit sales (20% - n/30)

Cash disbursements before
partners’ withdrawal
Food purchases
Wages
Other operating costs
Rent
Total disbursements
Excess
Cash balance, beginning

Total
Minimum Cash Desired
Partner’s allowable withdrawal
* Total cost of food
Less: Initial purchases
Additional purchases

P14,400
9,000
P 5,400

Requirement (c)
Balance Sheet
End of Month Three
Assets
Cash
Accounts receivable
Furniture and Equipment
Cost
Less: Accumulated depreciation
China, glass & silverware
Cost
Less: Accumulated depreciation
Total assets

P 15,000
16,800
P180,000
9,000
P 25,200

6,300

171,000
18,900
P221,700

Liabilities and Capital
Accounts payable
Partners’ capital

P 8,400
P225,000


Operations Budgeting

Add: Net income for three months
Less: Withdrawal
Total liabilities and capital

43,500

P268,500
55,200

10-11

213,300
P221,700