Vertical

Chapter 3The Income Statement

2009 John Wiley & Sons Hoboken, NJ 07030

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Managerial Accounting for the Hospitality Industry Dopson & Hayes

Chapter Outline The Purpose of the Income Statement Income Statement Preparation Income Statement Analysis


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Learning Outcomes State the purpose of regularly preparing an income statement for a hospitality business. Explain the way managers and accountants actually prepare an income statement. Analyze an income statement to improve the operation of your own business.


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The Purpose of the Income Statement When you manage a hospitality facility, you will receive Revenue, the term used to indicate the money you take in, and you will incur Expenses, the cost of the items required to operate the business. The dollars that remain after all expenses have been paid represent your profit.Revenue Expenses = Profit


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The Purpose of the Income Statement Many hospitality managers call each individual revenue generating segment within their business a profit center. The revenue-expense = profit formula holds even in what is not typically considered a for-profit segment of the hospitality industry. In many business dining situations, food is provided as a service to the companys employees either as a nocost (to the employee) benefit or at a greatly reduced price. Thus, it is common in many situations to operate a cost center that generates costs but no revenue. 2009 John Wiley & Sons Hoboken, NJ 07030

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The Purpose of the Income Statement All stakeholders who are affected by a businesss profitability will care greatly about the effective operation of a hospitality business. Owners Investors Lenders Creditors Managers

When an accurate income statement is used to provide information, the businesss owners, lenders, investors and managers can all make better decisions about how best to develop and operate it. 2009 John Wiley & Sons Hoboken, NJ 07030

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Return on Investment Investors are particularly interested in return on investment (ROI), which measures the quality or strength of an investment. The income statement is the source of the information required to determine the numerator of the ROI calculation. ROI is computed as follows:Money earned on funds invested Funds invested = ROI


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Income Statement Preparation In very small hospitality operations, the owner or managers of the business may be responsible for the preparation of the income statement. In larger restaurant chain operations, the manager may submit financial data to a centralized accounting office, which would then prepare the units income statement. In very large restaurants and in many hotels, the income statement may be prepared by professionals who work on-site. 2009 John Wiley & Sons Hoboken, NJ 07030

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Format of the Income Statement An income statement is designed to identify revenues, expenses, and profits and is a summary of financial information for a defined accounting period. In its very simplest structure, the income statement appears as follows:Figure 3.1 Summary of Financial Information

Blue Lagoon Water Park Resort Income StatementFor the Period: January 1 through January 31, 2010 Revenues Expenses Income (Loss) Before Income Taxes $ 2,100,150 $ 1,937,976 $ 162,174


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Format of the USAR A restaurant income statement, using the Uniform System of Accounts for Restaurants (USAR), shows sales and cost of sales related to food and beverage and any other expenses related to the functioning of the restaurant. Figure 3.2 shows the restaurant income statement using the USAR.


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Figure 3.2 Restaurant Income Statement

Joshuas Restaurant Income StatementFor the Year Ended December 31, 2010 SALES: Food Beverage Total Sales COST OF SALES: Food Beverage Total Cost of Sales GROSS PROFIT: Food Beverage Total Gross Profit OPERATING EXPENSES: Salaries and Wages Employee Benefits Direct Operating Expenses Music and Entertainment Marketing Utility Services Repairs and Maintenance Administrative and General Occupancy Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Income Taxes Net Income

2,058,376 482,830 2,541,206 767,443 96,566 864,009 1,290,933 386,264 1,677,197

714,079 111,813 132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 1,400,769 276,428 84,889 191,539 76,616 114,923

Prepared using USAR 2009 John Wiley & Sons Hoboken, NJ 07030

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Format of the USAR The USAR can be divided into three sections arranged on the income statement from most controllable to least controllable by the foodservice manager. The gross profit section consists of food and beverage sales and costs that can and should be controlled by the manager on a daily basis. The operating expenses section is also under the control of the manager but more so on a weekly or monthly basis (with the exception of wages, which you can control daily). The nonoperating expenses section is least controllable by the foodservice manager and includes items such as interest and income taxes.


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Format of the USALI A hotel income statement, using the Uniform System of Accounts for the Lodging Industry (USALI), shows sales and cost of sales related to rooms and non-rooms departments and any other expenses related to the functioning of the hotel. Figure 3.3 shows the hotel income statement using a vertical format. Figure 3.4 shows the hotel income statement using a horizontal format. 2009 John Wiley & Sons Hoboken, NJ 07030

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Figure 3.3 Hotel Income Statement Vertical Format

Blue Lagoon Water Park Resort Income StatementFor the Period: January 1 through January 31, 2010 Total Revenue Rooms - Revenue Payroll and Related Expenses Other Expenses Department Income Food - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Beverage - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Telecommunications - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Other Operated Departments - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Rentals and Other Income - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Total Operated Department Income 2,100,150 1,200,000 247,200 105,900 846,900 600,000 178,200 182,400 44,400 195,000 240,000 37,620 44,580 16,800 141,000 6,000 14,100 4,500 2,400 -15,000 45,000 6,600 15,000 5,400 18,000 9,150 1,320 4,080 900 2,850 1,188,750


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(Figure 3.3 continued) Total Operated Department Income Undistributed Operating Expenses Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income 1,188,750

113,100 29,700 48,600 23,100 0 27,900 129,360 99,750 89,250 560,760 627,990 146,700 105,000 376,290 106,000 270,290 108,116 162,174

Prepared using USALI


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Figure 3.4 Hotel Income Statement Horizontal Format Blue Lagoon Waterpark Resort Income Statement For the Period: January 1 through January 31, 2010 Payroll and Related Expenses 247,200 182,400 44,580 4,500 15,000 4,080 497,760

Net Revenue Operated Departments Rooms Food Beverage Telecommunications Other Operated Departments Rentals and Other Income Total Operated Departments Undistributed Operating Expenses Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income Prepared using USALI 2,100,150 1,200,000 600,000 240,000 6,000 45,000 9,150 2,100,150

Cost of Sales 0 178,200 37,620 14,100 6,600 1,320 237,840

Other Expenses 105,900 44,400 16,800 2,400 5,400 900 175,800

Income (Loss) 846,900 195,000 141,000 -15,000 18,000 2,850 1,188,750

76,800 12,000 43,800 16,620 0 4,200 64,320 24,300 0 242,040 237,840 739,800

36,300 17,700 4,800 6,480 0 23,700 65,040 75,450 89,250 318,720 494,520

113,100 29,700 48,600 23,100 0 27,900 129,360 99,750 89,250 560,760 627,990

146,700 105,000 376,290 106,000 270,290 108,116 162,174


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The USALI can be divided into three sections arranged on the income statement from most controllable to least controllable by the hotel manager. The operated department income section consists of separate profit centers as department income. Each department reports revenues, expenses, and income. The undistributed operating expenses section covers Undistributed Operating Expenses through Gross Operating Profit and includes expenses that cannot truly be assigned to one specific department. The nonoperating expenses section is least controllable by the hotel manager and includes items such as depreciation, interest, and income taxes. 2009 John Wiley & Sons Hoboken, NJ 07030

Format of the USALI

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Depreciation It is important to note here that depreciation expense in all forms of the income statement serves a very specific purpose. Depreciation is a method of allocating the cost of a fixed asset over the useful life of the asset. Depreciation is subtracted from the income statement primarily to lower income, thus lower taxes. The portion of assets depreciated each year is considered tax deductible because it is subtracted on the income statement before taxes are calculated. 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes

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Accounting Period For many businesses, the accounting periods established coincide with the calendar months of the year. In some cases, businesses prefer to create income statements that are 28 days long. This helps the manager compare performance from one period to the next without having to compensate for extra days in any one period. Businesses may also elect to create income statements bi-monthly, quarterly, annually, weekly, daily, or even hourly. 2009 John Wiley & Sons Hoboken, NJ 07030

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Revenue Data The first portion of the income statement details the revenue data to be reported during the identified accounting period. Hotel revenue categories include: Rooms Food Beverage Telecommunications Garage and Parking Golf Course Golf Pro Shop Guest Laundry Health Center Swimming Pool Tennis Tennis Pro Shop Other Operated Departments Rentals and Other Income


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Expense Timing Accrual accounting requires a businesss revenue to be reported when earned and its expenses to be recorded when incurred. This matching principle is designed to closely tie expenses of a business to the actual revenues those expenses helped the business generate. The consistency principle of accounting requires managers to be uniform in decision making. That is, if an expense is treated in a specific manner in one instance, it should be treated in an identical manner in all subsequent situations. 2009 John Wiley & Sons Hoboken, NJ 07030

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Expense Classification Expense classification is the process of carefully considering how a businesss expenses will be detailed for reporting purposes. In the hotel industry, when an expense is easily attributable to one department, it is classified as a departmental cost. This type of cost is sometimes referred to as a direct operating expense. When the expense cannot truly be assigned to one specific area within an operation, it is classified as an undistributed operating expense. 2009 John Wiley & Sons Hoboken, NJ 07030

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Schedules In addition to income statement summaries, managerial accountants may use one or more departmental schedules to provide statement readers with more in-depth information about important areas of revenues and expenses. A hotel income statement may consist of a summary with reference to one or more departmental schedules that will provide additional detail. In the food and beverage revenue area, schedules may be created based upon the sales and expenses achieved by restaurants and bars. 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes

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Figure 3.7 Income Statement with Revenue Schedules Identified

Blue Lagoon Water Park Resort Income StatementFor the Period: January 1 through January 31, 2010 Revenues: Rooms (Schedule 1) Food (Schedule 2) Beverage (Schedule 3) Telecommunications (Schedule 4) Other Operated Departments (Schedule 5) Rentals and Other Income (Schedule 6) Total Revenues Expenses Income (Loss) Before Income Taxes

$ 1,200,000 $ 600,000 $ 240,000 $ 6,000 $ 45,000 $ 9,150 $ 2,100,150 $ 1,937,976 $ 162,174

Figure 3.8 Rooms Department Revenue Schedule

Blue Lagoon Water Park Resort Schedule 1: Rooms Department RevenueFor the Period: January 1 through January 31, 2010 Rooms Revenue: Transient Leisure Group Leisure Transient Package Group Package Total

$ 600,000 $ 390,000 $ 150,000 $ 60,000 $ 1,200,000


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Figure 3.9 Principles of Income Statement Preparation A properly prepared income statement: 1. Clearly identifies the business whose revenues and expenses are being summarized 2. Plainly states the specific accounting period for which the statement has been prepared 3. Includes a summary, in the most informative (detailed) manner practical, of all the revenue generated by the business during the accounting period 4. Summarizes all accounting period expenses utilized by the business to generate the stated revenue 5. Utilizes a logical and consistent system to classify expenses 6. Provides additional clarity via the use of schedules where appropriate 7. Incorporates the use of a uniform system of accounts if applicable


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Income Statement Analysis Managers analyze income statements to help them better understand, and thus better manage, their business. A manager will be primarily interested in the revenues, expenses, and profits over which he or she has primary control. The income statement is naturally divided into three main parts that should be analyzed: Revenue Expenses Profit 2009 John Wiley & Sons Hoboken, NJ 07030

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Revenue Analysis When restaurant managers seek to increase revenue, they must do so by: Increasing the number of guests served, and/or Increasing the average amount spent by each guest.

When hotel managers seek to increase rooms revenue, they must do so by: Increasing the number of rooms sold, and/or Increasing the average daily rate (ADR) for the rooms it sells. 2009 John Wiley & Sons Hoboken, NJ 07030

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Revenue Analysis Additional factors to be considered when making a complete evaluation of revenue increases include: The number of days included in the accounting period Changes in the number of high or low volume days included in the accounting period Differences in date placement of significant holidays (i.e. month or day of week) Changes in selling prices Variations in operational hours


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Expense Analysis Guests cause businesses to incur costs. If there are fewer guests, there are likely to be fewer costs, but fewer profits as well! The real question to be considered is not whether costs are high or low. The question is whether costs are too high or too low, given managements view of the value it hopes to deliver to the guest and the goals of the operations owners. 2009 John Wiley & Sons Hoboken, NJ 07030

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Profit (Loss) Analysis Profit can be considered, to a large degree, the ultimate measure of the ability of hospitality professionals to plan and operate a successful business. Net income, or profit, is sometimes known as the bottom line, because it is often the bottommost line on an income statement. In a properly prepared income statement, it represents the difference between all recorded revenue transactions and all recorded expense transactions. 2009 John Wiley & Sons Hoboken, NJ 07030

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Profit (Loss) Analysis For most hospitality managers, the bottom line is not the most important number on the income statements they will generate. Hospitality managers (as opposed to the businesss owners) may concern themselves most about income that remains after subtracting the expenses they can actually control. 2009 John Wiley & Sons Hoboken, NJ 07030

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Vertical Analysis Vertical analysis compares all items on the income statement to revenues using percentages. In this approach, an operations total revenue figure takes a value of 100%. When utilizing vertical analysis, individual sources of revenue and the operations expenses are expressed as a fraction of total revenues. Each percentage computed is a percent of a common number. As a result, vertical analysis is also sometimes referred to as common-size analysis. Figures 3.11 and 3.12 show vertical analysis of a hotel income statement and a restaurant income statement, respectively. 2009 John Wiley & Sons Hoboken, NJ 07030

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Figure 3.11 Vertical Analysis of a Hotel Income Statement

Blue Lagoon Water Park Resort Income StatementFor the Period: January 1 through January 31, 2010 Dollars Total Revenue Rooms - Revenue Payroll and Related Expenses Other Expenses Department Income Food - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Beverage - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Telecommunications - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Other Operated Departments - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Rentals and Other Income - Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Total Operated Department Income 2,100,150 1,200,000 247,200 105,900 846,900 600,000 178,200 182,400 44,400 195,000 240,000 37,620 44,580 16,800 141,000 6,000 14,100 4,500 2,400 -15,000 45,000 6,600 15,000 5,400 18,000 9,150 1,320 4,080 900 2,850 1,188,750 % 100.0 57.1 11.8 5.0 40.3 28.6 8.5 8.7 2.1 9.3 11.4 1.8 2.1 0.8 6.7 0.3 0.7 0.2 0.1 -0.7 2.1 0.3 0.7 0.3 0.9 0.4 0.1 0.2 0.0 0.1 56.6


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(Figure 3.11 continued) Total Operated Department Income Undistributed Operating Expenses Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income 1,188,750 56.6

113,100 29,700 48,600 23,100 0 27,900 129,360 99,750 89,250 560,760 627,990 146,700 105,000 376,290 106,000 270,290 108,116 162,174

5.4 1.4 2.3 1.1 0.0 1.3 6.2 4.7 4.2 26.7 29.9 7.0 5.0 17.9 5.0 12.9 5.1 7.7

Prepared using USALI


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Figure 3.12 Vertical Analysis of a Restaurant Income Statement

Joshuas Restaurant Income StatementFor the Year Ended December 31, 2010 Dollars SALES: Food Beverage Total Sales COST OF SALES: Food Beverage Total Cost of Sales GROSS PROFIT: Food Beverage Total Gross Profit OPERATING EXPENSES: Salaries and Wages Employee Benefits Direct Operating Expenses Music and Entertainment Marketing Utility Services Repairs and Maintenance Administrative and General Occupancy Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Income Taxes Net Income $2,058,376 482,830 2,541,206 767,443 96,566 864,009 1,290,933 386,264 1,677,197 % 81.0% 19.0 100.0 37.3 20.0 34.0 62.7 80.0 66.0

714,079 111,813 132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 1,400,769 276,428 84,889 191,539 76,616 114,923

28.1 4.4 5.2 0.3 2.5 3.5 1.4 2.8 4.7 2.2 55.1 10.9 3.3 7.5 3.0 4.5

Prepared using USAR


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Vertical Analysis For example, when a hotels accountant reports the costs of the hotels food department, these are commonly expressed as a percentage of total hotel revenue.go figure!When analyzing the Blue Lagoon Water Park Resort income statement as presented in Figure 3.11, managerial accountants would compute the food cost (food cost of sales) as a percentage of total revenue. Thus: Food Costs (Food Cost of Sales) = Food Cost% Total Revenue or $ 178,200 $ 2,100,150 = 8.5%


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Vertical Analysis In a restaurant income statement, all ratios are calculated as a percentage of total sales except the following: Food costs are divided by food sales. Beverage costs are divided by beverage sales. Food gross profit is divided by food sales. Beverage gross profit is divided by beverage sales.

In restaurants, food and beverage items use their respective food and beverage sales as the denominator so that these items can be evaluated separately from total sales. 2009 John Wiley & Sons Hoboken, NJ 07030

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go figure!When analyzing Joshuas income statement as presented in Figure 3.12, managerial accountants would compute his food cost percentage as a percentage of food sales, rather than total sales. Thus: Food Costs = Food Cost % Food Sales or $ 767,443 $ 2,058,376 = 37.3 %


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Vertical Analysis Vertical analysis may be used to compare a units percentages with industry averages, budgeted performance, other units in a corporation, or percentages from prior periods. Profit margin is the most telling indicator of a manager's overall effectiveness at generating revenues and controlling costs in line with forecasted results. 2009 John Wiley & Sons Hoboken, NJ 07030

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go figure!As can be seen in Figure 3.12, profits for Joshuas refer to the net income figure at the bottom of his income statement. Joshua's net income for this year was $114,923 and his total sales for this year were $2,541,206. His profit percentage using the profit margin formula is as follows:

Net Income Total Sales = Profit margin or $114,923 $2,541,206 = 4.5%


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Vertical Analysis In both the USAR and USALI, an important objective is that of responsibility accounting for each separate department. It is important for upper management to know how each department is performing, so individual department managers can be held responsible for their own efforts and results.


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Vertical Analysis Expenses should increase when increased revenues require management to provide more products or labor to make the sale. If expenses are reduced too much, the effect on revenue can be both negative and significant. Managers analyzing the expense portion of an income statement should be most concerned about the relationship between revenue and expense (vertical analysis) and less concerned about the total dollar amount of expense. 2009 John Wiley & Sons Hoboken, NJ 07030

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Vertical Analysis As a professional hospitality manager, you can do even more to analyze expenses in each line item. Figure 3.13 expresses each direct operating expense as a percentage of total direct operating expenses. This is a form of vertical analysis because the common denominator for all expense % calculations is total direct operating expenses. 2009 John Wiley & Sons Hoboken, NJ 07030

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Figure 3.13 Vertical Analysis - Direct Operating Expenses Schedule

Joshuas Restaurant Direct Operating Expenses ScheduleFor the Year Ended December 31, 2010 % of Direct Operating Expenses Notes 10.2 31.0 17.0 Expense is higher than budgeted because china shelf collapsed on March 22. 2.9 6.9 1.9 8.0 2.0 4.1 5.1 Expense is lower than budgeted because the new wine supplier agreed to print the wine lists free of charge. 1.4 6.8 2.7 100.00

Type of Expense Uniforms Laundry and Linen China and Glassware

Expense $ 13,408 40,964 22,475

Silverware Kitchen Utensils Kitchen Fuel Cleaning Supplies Paper Supplies Bar Expenses Menus and Wine Lists

3,854 9,150 2,542 10,571 2,675 5,413 6,670

Exterminating Flowers and Decorations Licenses Total Direct Operating Expenses

1,803 9,014 3,604 132,143


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Vertical Analysis For example, the $40,964 expended for laundry and linen comprises 31.0% of all direct operating expenses.go figure!The formula utilized to compute the percentage in this example is:

Specific Expense Total Expenses = Specific Expense % or Laundry and Linen Expense Total Direct Operating Expenses = Laundry and Linen Expense % or $40,964 $132,143

= 31.0%


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Horizontal Analysis Managers can utilize horizontal analysis (also called comparative analysis) to evaluate the dollars or percentage change in revenues, expenses, or profits. A horizontal analysis of income statements requires at least two different sets of data. Managers may be concerned with comparisons such as: Current period results vs. prior period results Current period results vs. budgeted (planned) results Current period results vs. the results of similar business units Current period results vs. industry averages 2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes

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Figure 3.14 Comparative Analysis of a Restaurant Income Statement

Joshuas Restaurant Income StatementsFor the Years Ended December 31, 2009 and 2010 2009 SALES: Food Beverage Total Sales COST OF SALES: Food Beverage Total Cost of Sales GROSS PROFIT: Food Beverage Total Gross Profit OPERATING EXPENSES: Salaries and Wages Employee Benefits Direct Operating Expenses Music and Entertainment Marketing Utility Services Repairs and Maintenance Administrative and General Occupancy Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Income Taxes Net Income $1,891,011 415,099 2,306,110 712,587 94,550 807,137 1,178,424 320,549 1,498,973 641,099 99,163 122,224 2,306 43,816 73,796 34,592 66,877 120,000 41,510 1,245,383 253,590 86,750 166,840 65,068 101,772 2010 $2,058,376 482,830 2,541,206 767,443 96,566 864,009 1,290,933 386,264 1,677,197 714,079 111,813 132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 1,400,769 276,428 84,889 191,539 76,616 114,923 $ Change 167,365 67,731 235,096 54,856 2,016 56,872 112,509 65,715 178,224 72,980 12,650 9,919 5,318 19,714 15,146 985 4,277 0 14,397 155,386 22,838 (1,861) 24,699 11,548 13,151 % Change 8.9 16.3 10.2 7.7 2.1 7.0 9.5 20.5 11.9 11.4 12.8 8.1 230.6 45.0 20.5 2.8 6.4 0.0 34.7 12.5 9.0 (2.1) 14.8 17.7 12.9

Prepared using USAR


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Determining Variance The variance shows changes from previously experienced levels, and will give you an indication of whether your numbers are improving, declining, or staying the same. All dollar variances and percentage variances of expenses on the income statement can be calculated in the same way. The comparative income statement helps managers analyze their expenses and take corrective action if it is needed. 2009 John Wiley & Sons Hoboken, NJ 07030

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go figure!To calculate the variance, Joshua would use the following formula:

Sales This Year Sales Last Year =Variance or $2,541,206 - $ 2,306,110 = $235,096

Effective managers are also interested in computing the percentage variance, or percentage change, from one time period to the next. Thus, Joshuas sales percentage variance is determined as follows:

(Sales This Year Sales Last Year) Sales Last Year or ($2,541,206 - $2,306,110) $2,306,110

= Percentage Variance

= 10.2%


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(go

figure! continued)

Of course, an alternative and shorter formula for computing the percentage variance is as follows:

Variance Sales Last Year or


$235,096 $2,306,110 = 10.2%

Another way to compute the percentage variance is to use a math shortcut, as follows:

Sales This Year Sales Last Year or $2,541,206 $2,306,110)

1


1

= 10.2%


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Determining Variance from Budget There are two basic formulas used by managers to compare actual expenditures to budgeted expenditures. These are: Variation (in dollars) from budget Percent of variation from budget

For example, Figure 3.16 shows a comparative analysis for the Property Operations and Maintenance Schedule for the Blue Lagoon. 2009 John Wiley & Sons Hoboken, NJ 07030

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Figure 3.16 Comparative Analysis - Property Operations and Maintenance Schedule Blue Lagoon Water Park Resort Property Operations and Maintenance Schedule For the Period: January 1 through January 31, 2010 Difference $ % (89) 29 660 600 (1.9) 0.2 9.6 2.5

Budget Payroll and Related Expenses Chief Engineer Engineer Assistants Benefit Allocation Total Payroll and Related Expenses Other Expenses Computer Equipment Equipment Rental Electrical & Mech. Equipment Elevators Elevator Repairs Engineering Supplies Floor Covering Furniture Grounds HVAC (heating/ventilation and air conditioning.) Kitchen Equipment Laundry Equipment Light Bulbs Maintenance Contracts Operating Supplies Painting & Decorating Parking Lot Pest Control Plants & Interior Plumbing & Heating Refrigeration & A/C Signage Repair Snow Removal Travel & Entertainment Telecommunications Trash Removal Uniforms Total Other Expenses Total Property Operations and Maintenance $ 4,800 12,060 6,840 $23,700

Actual $ 4,711 12,089 7,500 $24,300

$1,200 3,900 9,000 2,520 420 1,350 600 9,000 3,000 9,000 300 450 900 4,200 480 1,500 1,800 1,200 885 4,500 5,460 300 6,000 1,200 600 1,800 1,650 $73,215 $96,915

$1,695 4,200 8,490 2,520 840 1,050 0 11,460 3,360 8,550 534 336 900 3,948 477 852 2,568 1,290 888 5,340 5,880 0 5,910 570 528 1,680 1,584 $75,450 $99,750

495 300 (510) 0 420 (300) (600) 2,460 360 (450) 234 (114) 0 (252) (3) (648) 768 90 3 840 420 (300) (90) (630) (72) (120) (66) 2,235 2,835

41.3 7.7 (5.7) 0.0 100.0 (22.2) (100.0) 27.3 12.0 (5.0) 78.0 (25.3) 0.0 (6.0) (0.6) (43.2) 42.7 7.5 0.3 18.7 7.7 (100.0) (1.5) (52.5) (12.0) (6.7) (4.0) 3.1 2.9


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go figure!Thus, for example, (from Figure 3.16) in the area of computer equipment, the variation (in dollars) from budget for the Blue Lagoons Property Operations and Maintenance department would be computed as:

Actual Expense Budgeted Expense =Variance or $1,695- $1,200 = $495

Some managers prefer to express variations from budget in percentage terms. Thus, the percentage variance for computer equipment is determined as follows:

(Actual Expense Budgeted Expense) Budgeted Expense or


($1,695 - $1,200) $1,200 = 41.3%


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(go

figure! continued)

Of course, an alternative and shorter formula for computing the percentage variance is as follows:

Variance Budgeted Expense = Percentage Variance or $495 $1,200 = 41.3%

Another way to compute the percentage variance is to use a math shortcut, as follows:

Actual Expense Budgeted Expense

1 = Percentage Variance or

$1,695 $1,200

1 = 41.3%


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Determining Variance from Budget If our budget was accurate, and we are within reasonable limits of our budget, we are said to be in-line or in compliance with our budget. If, as management, we decided that plus (more than) or minus (less than) a designated percentage (such as 10%) of budget in each category would be considered in-line or acceptable, we are in-line with regard to expenses. A significant variation is any variation in55



Review of Learning Outcomes State the purpose of regularly preparing an income statement for a hospitality business. Explain the way managers and accountants actually prepare an income statement. Analyze an income statement to improve the operation of your own business.


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