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CHAPTER 9
OPERATIONS BUDGETING
INTRODUCTION
This chapter, although it covers most of the relevant theory of budgeting, concentrates on
budgeted income statements. For this reason, the student should be very familiar with the content
of Chapter 2 concerning income statements and their typical content and format. Also,
familiarity with the information of Chapter 6 concerning menu prices and room rates will be
useful. The material in Chapters 7 and 8 concerning fixed and variable costs and their
relationship to sales revenue is essential. This chapter will discuss budgeting and create a base
for the section on cash budgeting in Chapter 11 and for much of the material in Chapter 12 that
discusses long-term investments.
TRUE OR FALSE QUESTIONS
(Correct answer indicated by T for True and F for False answers)
1. Budgets are always expressed in monetary terms.
F
2. A long-term budget is usually for a period from 1 to 5 years.
T
3. A cash budget is a type of capital budget.
F
4. A fixed budget is one based on a specific level of sales revenue.
T
5. A flexible budget is one based on various possible levels of sales revenue.
T
6. One purpose of budgeting is to provide management control over operations.
T
7. The general manager and the comptroller should be the only ones to prepare a budget.
F
8. One of the advantages of budgeting is that it permits subsequent comparison of actual
with forecast figures.
T
9. Budgets should only be prepared when the future is perfectly predictable.
F
10. In establishing objectives in budgeting, limiting factors should be considered.
T
11. Because there is usually a difference between budgeted figures and actual results, there
is little reason to spend time and money on budgeting.
F
12. The first step in the preparation of departmental budgets is the sales revenue forecast.
T
13. Past actual sales records, when available, are the foundation on which budgeted sales
revenue is built.
T
14. Derived demand is sales revenue from customers who walk in off the street.
F
15. In preparing budgeted sales revenue figures from historic records, current competition
can be ignored.
F
16. Current economic factors are considered in budgeting.
T
17. Preparing a staffing schedule for employees is one of the purposes of budgeting.
T
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18. To forecast restaurant sales revenue for a meal period, the only factors that must be
taken into consideration are the number of seats, seat turnover rate, and average check.
F
19. In forecasting monthly room sales revenue in a hotel, the number of rooms in the hotel
can be ignored.
F
20. In forecasting beverage sales revenue in a dining room, that sales revenue can usually
be calculated as a percent of food sales revenue.
T
21. With incremental budgeting, budgets are automatically increased each year by the rate
of inflation.
F
22. A restaurant plans to keep its advertising budget at the same amount as last year. This
is a form of ZBB.
F
23. An advantage of ZBB is that it concentrates on the dollar cost of each department’s
activities and budget and not on broad percentage increases.
T
24. Variance analysis is a method of analyzing the differences between budgeted figures
and actual results.
T
25. A difference between budgeted sales revenue and actual sales revenue can be broken
down into a price variance and a sales volume variance.
T
26. A restaurant budgeted 1,000 customers with an average check of $12.00. Actual
customers were 900 with an average check of $12.50. The price variance will be $250
favorable.
F
27. A motel budgeted the sale of 3,000 rooms and a cleaning cost of $4.00 per room.
Actual results showed 3,100 rooms occupied with a cleaning cost of $4.05 per room;
there is a sales volume variance of $200 unfavorable.
F
28. Variance analysis is only useful for showing department heads how badly they are
doing their job.
F
29. A moving-average forecast is a time-series method of analysis.
T
30. A regression analysis forecast is not a time-series method.
F
MULTIPLE CHOICE QUESTIONS
(Correct answer indicated by asterisk)
1. Short-term budgets differ from long-term budgets in that a short-term budget:
(a) Is for a day, week, or month and a long-term one is for six months or a year
(b) Is expressed in monetary terms where a long-term budget is generally expressed in the
number of customers or some other measure
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2. A capital budget is one:
(a) Prepared at the head office
3. A flexible budget is one:
(c) That is not part of the master budget
(d) That includes only variable costs
4. The budget preparation procedure:
(c) Starts from the top down
(d) Commences after the period concerned has started
5. An advantage of budgeting is that:
(c) If budgeted expenses are overestimated, there will be extra money at the end of the period
for staff bonuses
(d) Staff involved in budgeting will learn about confidential management matters
6. One of the steps in the budget cycle is to:
(a) Increase the forecast return on investment over the previous period
(b) Establish goals that are 50% above last year
7. Limiting factors in budgeting are factors that:
(c) Prevent a department head from talking to his staff about budgeting
(d) Ensure that sales revenue goals will always be established at the highest limits
8. If restaurant has budgeted 1,000 customers at an average check of $9.00 and actual customers
were 800 with an actual average check of $9.50, then:
(a) Actual sales revenue will be higher than budgeted
(b) We can assume that the higher average check is keeping customers away
9. Derived demand is demand:
(c) From customers who have given up going to competitive restaurants
(d) As a result of additional advertising
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10. A restaurant has 125 seats with an average check of $8.00 and a daily seat turnover of 2.5. It
is open 5 days a week and the average check is forecast to increase by 10% in the next year.
Next year’s budgeted sales revenue will be:
(a) $286,000
(b) $650,000
11. When departmental budgets are increased each year by a flat percentage rate, this is known
(c) Incidental budgeting
(d) Inflationary budgeting
12. Which of the following is not true of ZBB?
(c) It obliges managers to identify inefficient or obsolete functions within their areas of
responsibility
(d) It can identify areas of overlap or duplication
13. Variance analysis is a:
(a) Procedure for questioning department heads about differences between budgeted and
actual results
(b) Method of analyzing limiting factors
14. A banquet department’s annual budgeted sales revenue was based on 45,000 guests at an
average check of $10.00. Actual figures were 47,500 guests at a $9.50 average check. The
total budget, price, and sales volume variances respectively are:
(a) $1,250 Unfavorable, $23,750 Unfavorable, and $22,500 Favorable
(b) $1,250 Favorable, $2,750 Favorable, $1,500 Unfavorable
15. The general equation for a moving-average forecast that uses n for the number of periods is:
(c) Total of all of the previous n periods multiplied by n
(d) Average for each of the previous n periods multiplied by n
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EXERCISE SOLUTIONS
E9.1 Estimate sales revenue: [Seats × Turnover × Average check × Operating days]
E9.2 Estimate monthly sales revenue:
E9.3 Calculate housekeeping cost and quantity variance analysis.
a. Budget: 8,000 × $4.40 = $35,200
Actual: 8,480 × $4.90 = $41,552
Proof:
Actual
Quantity
Actual
cost
Totals
Actual
Budget
variance
8,480
×
$4.90
=
$41,552
$41,552
$4,240
Actual
quantity
×
Budgeted
cost
=
cost
variance
Unfavorable
($6,352)
8,480
×
$4.40
=
$37,312
Unfavorable
$2,112
Budgeted
quantity
×
Budgeted
cost
=
Quantity
volume
Variance
Unfavorable
Budget
8,000
×
$4.40
=
$35,200
$35,200
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E9.4 Calculate sales revenue variance analysis.
a. Budget: 8,000 × $82 = $656,000
b. Price variance: 8,480 × $ 5.00 = $42,400 Unfavorable
Proof:
Actual
volume
×
Actual
price
Totals
Actual
Budget
variance
8,480
×
$77.00
=
$652,960
$652,960
($42,400)
Actual
volume
×
Budgeted
price
=
Price
variance
Unfavorable
($3,040)
8,480
×
$82.00
=
$695,360
Unfavorable
$39,360
Budgeted
volume
×
Budgeted
price
=
Sales
volume
variance
Favorable
Budget
8,000
×
$82.00
=
$656,000
$656,000
E9.5 Calculate the moving average guests count for three months.
January: Guests 1,670
February: Guests 1,880
E9.6 Forecast operating income.
SR: [Rooms × Occupancy % × Average room rate × Operating days]
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E9.7 Forecast annual sales revenue by meal periods.
SR: [Seats × Turnover × Average check × Operating days = Meal sales revenue]
E9.8 Calculate room sales revenue for three months.
E9.9 Calculate sales revenue and operating income for a year.
SR = [Rooms Available x Avg. Occupancy % x Avg. room rate x 365 days]
Rooms sales revenue: 70 × $125 × 74% × 365 = $2,363,375
E9.10 Answer questions relative to VC, gross margin and operating income.
a. VC = VC% × SR = 72% × $ 912,000 = $656,640
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PROBLEM SOLUTIONS
P9.1 Determine monthly sales revenue considering room rate increases and occupancy.
Room rate increase for July and August is: $80 × 110% = $88
P9.2 Prepare an annual budget for the coming year.
Sales revenue [60 × 74% × $84 × 365]
$1,361,304
Variable costs [60 × 74% × $8 × 365]
( 129,648)
Contribution margin
$1,231,656
Fixed costs
( 825,000)
Operating income
$ 406,656
P9.3 Calculate budgeted food sales revenue and beverage sales revenues.
Meal period SR = [Meal period × Seats × Turnover × Days Available]
Lunch: [66 × 1.75 × $12.95 × 27] = $ 40,385
Beverage: [15% × $40,385] = 6,058
P9.4 Calculate the budgeted sales revenue for the coffee shop for January.
[Seats × Turnover ×Average check × Operating days]
Breakfast: [120 × 1.50 × $ 7.50 × 31] = $ 41,850
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P9.5 Prepare a 3 level flexible budget. Comment on the affect of operating and net income.
Sales Revenue
$800,000
$900,000
$1,000,000
Variable Costs: [38% + 28% + 10% = 76%]
(608,000)
(684,000)
( 760,000)
Contribution Margin
$192,000
$216,000
$ 240,000
Fixed Costs: [$52,000 + $102,000]
(154,000)
(154,000)
( 154,000)
Operating Income
$ 38,000
$ 62,000
$ 86,000
Tax rate [29%]
( 11,020)
( 17,980)
( 24,940)
Net income
$ 26,980
$ 44,020
$ 61,060
Breakeven: Fixed costs + OI $154,000 + $0 $154,000 $641,667
1 − VC% 1 − 76.0% 24.0%
All three sales revenue levels exceed breakeven. At $800,000, operating income and net
income represents 4.8% and 3.4% of sales revenue respectively. At $900,000, operating
P9.6 Calculate the food sales revenue for the month of June.
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P9.7 Complete a budgeted income statement.
Budgeted Income Statement
Food Sales Revenue
Weekday lunch [120 × 1.5 × $8.50 × 305]
$466,650
Weekday dinner [120 × 1.25 × $18.50 × 305]
846,375
Sundays-holidays etc. [120 × 2.0 × $21.00 × 60]
302,400
Private party room food sales revenue
144,000
Total budgeted food sales revenue
$1,759,425
Beverage Sales Revenue
Lunch [12% × $466,650]
$ 55,998
Dinner [25% × $846,375]
211,594
Private party room [40% × $144,000]
57,600
Total budgeted beverage sales revenue
$ 325,192
Total budgeted sales revenue
$2,084,617
Cost of sales
Food cost [37% × $1,759,425]
$650,987
Beverage cost [33% × 325,192]
107,313
Total cost of sales
( 758,300)
Gross Margin
$1,326,317
Operating Expenses
Salaries expense
$284,000
Variable wage expenses [15% × $2,084,617]
312,693
Employee Benefits expense [12% × $596,693]
71,603
Other operating expenses [11.7% × $2,084,617]
243,900
Fixed overhead expenses
226,400
Total Operating Expenses
(1,138,596)
Net operating income
$ 187,721
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P9.8 Two alternative income statements; explain which you recommend and why?
Budgeted Average Monthly Income Statement
Alternative 1
Alternative 2
Sales revenue food
$40,000
$48,000
Sales revenue beverage
10,000
12,000
Total Sales Revenue
$50,000
$60,000
Cost of sales, food [37%]
$14,800
$17,760
Cost of sales, beverage [30%]
3,000
3,600
Total Cost of Sales
(17,800)
(21,360)
Gross Margin
$32,200
$38,640
Operating Expenses
Wages expenses
$13,600
$15,600
Operating Supplies expense
4,000
4,800
Admin. & general expenses
2,600
2,800
Advertising & promo.
1,800
3,800
Repairs & maintenance
900
1,200
Utilities expense
1,300
1,400
Depreciation
700
700
Interest expense
600
600
Total Operating Expenses
(25,500)
(30,900)
Operating income
$ 6,700
$ 7,740
Alternative 2 appears to be the best choice and provides a higher level of operating
income of $1,040. Alternative 2 also provides a higher level of sales revenue that
adequately provides the increases to operating expenses and yields more net income.
However, either alternative is risky if customers object to decreased portion sizes.