process of Budgetting

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2. Budgeting
 Budgets: financial statements that are prepared
and approved prior to a defined period in
accordance with the objectives and policies to be
pursued in that period
 Important management technique
 Tool to help both planning and control
 Determine the aims and objectives and how those
objectives will reached
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3. Purposes
 Planning for future activities
 Combine ideas of different units
 Coordinate the efforts of different units-
coordinated management policy
 Develop appropriate yardsticks to
measure performance
 Provide a method of control so that
actual results can be evaluated against
plans
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4. Types of Budgets
 Long term vs. short term budgets
 Capital budget
 Operating budget
 Department budget
 Fixed vs.flexible budgets
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5. Advantages and Disadvantages
 Give business a  Time consuming
direction
 Costly
 Forces
management to  Unpredictability of
think ahead the future
 Provide basis to  Reveal confidential
measure information
performance
 Tendency of
 Encourage “spending to the
communication and budget”
coordination
 May create conflicts
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6. Budgeting Framework
determine targets
system oF Budgetary
Control to aChieve targets
Capital Budgets
operating Budgets
Budget
Commitee Cash Budget
room operations Fixed assets Bud.
F&B operations deBtor-Creditor
minor dept.s Capital Funds
undist. expenses
draFt Budget For approval
Budgeted B+s
Budgeted i+s
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7. Budget Preparation
 Bottom-up approach
 Involve department heads at least
 Budget committee for coordination
 Formal presentation by the accounting department
 Approval by the general manager and then by board of directors
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8. Budget Cycle
 Establish goals and objectives
 Planning to achieve these goals and objectives
 Comparing actual results with the plans and
analyzing differences (variances)
 Take corrective action if required
 Improve the effectiveness of budgeting
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9. Departmental Budgets
 Starting point
 Most important and most difficult to prepare
 Form the budgeted income statement
 Estimate revenue levels by depatment
 Deduct estimated direct operating expenses
 Combine estimated departmental incomes
 Deduct estimated undistributed expenses
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10. Rooms Revenue
June July August
Number of Rooms 30 30 30
Average room rate 45 49,5 49,5
Occupancy 75% 80% 90%
Daily revenue $1.013 $1.188 $1.337
Monthly Revenue $30.375 $36.828 $41.432
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11. Budgeted Rooms Revenue – PR 9.1
June July August
Rooms 30 30 30
ARR 90 99 99
Occupancy 75% 80% 90%
Budgeted Rooms Revenue 60.750 73.656 82.863
PR 9.2 – Annual Budget
PR 9.3 Budgeted F&B Revenue
PR 9.4 – Budgeted Sales Revenue
For Coffee Shop
PR 9.6 Budgeted Food Revenue
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12. Flexible Budget – PR 9.5
Revenue 800.000 900.000 1.000.000
Food Cost 320.000 360.000 400.000
Variable Labor Exp. 200.000 225.000 250.000
Other Variable 96.000 108.000 120.000
Total Variable 616.000 693.000 770.000
Gross Margin 184.000 207.000 230.000
Fixed Labor Cost 60.000 60.000 60.000
Other Fixed Costs 120.000 120.000 120.000
Total Fixed Costs 180.000 180.000 180.000
Income Before Tax 4.000 27.000 50.000
Tax 1.200 8.100 15.000
Net Income 2.800 18.900 35.000
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13. Budgeting in a New Operation
 Feasibility study could serve as a base
 Forecasts based on a combination variables
 Meal period revenue
 Number of seats
 Seat turnover
 Average check
 Days open in the month
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14. Variance Analysis
 Comparison of budget and actual
 Dolar and percentage variances over
budgeted figure
 Dolar or percentage variance
investigated depending on the size
and nature of establishment
 Only variances exceeding the
allowance will be investigated
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15. Variance Analysis
 Analyze differences for each revenue
and expense item
 Total variance consists of:
 Price variance:
 (Difference in price) * Actual quantity
 Quantity variance
 (Difference in quantity) * Budgeted price
 Classified as favorable and
unfavorablevariances
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16. Forecasting
 Two common techniques
 Moving averages
 Regression
 Regression depends on causal relationships
 Y = a + bX
 Number of restaurant meals = Meal to non-hotel
customers + b (Number of guest nights)
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