Chapter 9 Flashcards
What is a budget?
a detailed plan expressed in quantitative terms, that specifies how resources can be acquired and used
What are the purposes and benefits of budgeting?
Planning: quantifying
Facilitating communication and coordination
Allocating limited resources
Control profit and operations
Evaluate performance and provide incentives
what is a pro forma income statement?
similar to a historical income statement, except it projects the future rather than tracking the past
an important benchmark or budget for future business operations by giving projections on profitability, sales and expense.
short term budget based on long term goals
Disadvantages of budgeting
Time and cost
based on unknown factors
confidential info doesn’t remain so
surpluses encourage more spending than necessary
Budgeting procedures and persons involved
- Owners establish financial objectives
- Managers and accounting department forecast revenues
- Controllers formulate operating plans into budgets
- Managers and accounting department estimate expenses
- Accounting department determines the bottom line
- CEO and/or GM review the budget
- Board of directors approve or reject
Short term budgets
a day, a week, a quarter , a year
involves middle management using resources to meet objective of long-term goals
Strategic budget
lays out the direction and goals of the business and guidelines to achieve those goals
Factors to consider when forecasting sales
Historical data
Capacity
Expected results of marketing and pricing plans
External environment
What are the steps in estimating expenses
prerequisite info
estimate direct costs
estimate indirect costs
Fixed charges: depreciation, insurance, property taxes, rent, etc
What is zero based budgeting
No expenses can be budgeted for or incurred unless they are justified in advance.
All expenses must be justified for new period
Mostly used in service departments
What is the budgetary control process
Determine variances Identify significant variances Variance analysis Identify problems Take appropriate corrective action
What is variance analysis?
absolute value of the difference
favorable and unfavorable variance is decided by its influence on operating income
increases in revenue are favorable but increases in cost are unfavorable
What are the pro forma equations for rooms and restaurant revenue?
rooms: room # x expected occupancy rate x expected ADR x operating days
restaurant: seat # x expected turnover x expected average check x operating days
What is the layout of a pro forma income statement?
Revenue forecast - Direct expense (fixed and variable) - Indirect expense (fixed and variable) = total contributory income - Fixed charges (Indirect expense too e.g. tax, insurance, interest) = Net Income
How do you go about variance analysis?
make a table with actual and budgeted numbers
create a matrix with A x A
A x B
B x B
subtract differences and analyze whether numbers are favorable or unfavorable
price, volume, and total revenue are one matrix
cost, volume, and total expense are one matrix
