(a) As the lodge has made 15% more room sales than was budgeted for ([12,420 – 10,800] ÷ 10,800 × 100), we can produce a flexible budget by increasing the revenue and variable cost figures stated in the static budget by 15%. A simple way to achieve this is to multiply them by a factor of 1.15.
Hospitality, Leisure & Tourism Series The Curbside Motor Lodge
Flexible budget performance report for the quarter ended 30 September 20X1
Actual Budget Flexible budget
Flexible budget variances
Room nights sold 12,420 10,800 12,420
£ £ £ £
Revenue (sales) 1,179,900 1,080,000 1,242,000 62,100 (U) Variable Costs:
Labour 84,456 75,600 86,940 2,484 (F)
Room amenities 5,216 5,400 6,210 994 (F)
Contribution Margin 1,090,228 999,000 1,148,850 58,622 (U)
Fixed Costs 241,000 235,000 235,000 6,000 (U)
Operating Profit 849,228 764,000 913,850 64,622 (U) (b) A shortcoming of isolating variances between actual performance and the static budget is that much of a variance may be attributable to the fact that it is practically impossible to correctly estimate the volume of sales that will occur in a forthcoming accounting period. Variances occurring as a result of an organization being busier or quieter than expected are not really reflective of the performance of many managers. If we were to take static budget variances to the extreme, we can see that very favourable variable cost variances can be achieved if we have no one staying at our hotel! To remove the effect of actual volume of sales being different from the budgeted volume of sales, we can produce a flexible budget. In a flexible budget, the static budget figures are restated as if the actual volume of sales achieved had been known at the time the budget was set.
The flexible budget performance report provides very different management insights to those provided by the static budget variances computed by Curbside’s conventional performance report. The extent of these differences is highlighted by the following table.
Hospitality, Leisure & Tourism Series
Curbside: Comparison of static budget and flexible budget variances Static budget
variances
Flexible budget variances
Revenue (sales) (F) (U)
Variable Costs:
Labour (U) (F)
Room amenities (F) (F)
Contribution Margin (F) (U)
Fixed Costs (U) (U)
Operating Profit (F) (U)
䊉 The unfavourable flexible budget variance for revenue signifies that rooms must have been sold below the rate budgeted for. This fact was not evident from the static budget variance.
䊉 The favourable flexible budget variance for labour signifies that labour worked efficiently or the labour rate was below the rate budgeted for. This fact was not evident from the static budget variance.
䊉 The size of the unfavourable revenue flexible budget variance is sufficient to have turned the favourable static budget contribution margin variance into an unfavourable flexible budget variance. This impact is also apparent at the operating profit level.
Problem 9.2
(a) Curbside: Room cleaning labour rate and efficiency variances for quarter ending 30/9/X1
Actual labour hours Actual labour hours Budgeted labour hours
ⴛ ⴛ ⴛ
Actual rate Budgeted rate Budgeted rate
5,630.4 5,630.4 6,210
ⴛ ⴛ ⴛ
£15 £14.00 £14.00
£84,456 £78,825.6 £86,940
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£5,630.4 Unfavourable labour rate variance
£8,114.4 Favourable labour efficiency variance
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£2,484 Labour favourable flexible budget variance
Hospitality, Leisure & Tourism Series (b) Curbside: Room amenities price and efficiency variances
for quarter ending 30/9/X1
Actual packs Actual packs Budgeted packs
ⴛ ⴛ ⴛ
Actual price Budgeted price Budgeted price
13,040 13,040 12,420
ⴛ ⴛ ⴛ
£0.40 £0.50 £0.50
£5,216 £6,520 £6,210
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£1,304 Amenities favourable price variance
£310 Amenities unfavourable efficiency (or usage) variance
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£994 Amenities favourable flexible budget variance
(c) Curbside: Selling price and sales volume variances for quarter ending 30/9/X1
Actual volume of sales Actual volume of sales Budgeted volume of sales
ⴛ ⴛ ⴛ
Actual selling price Budgeted selling price Budgeted selling price 12,420 room nights 12,420 room nights 10,800 room nights
ⴛ ⴛ ⴛ
£95* £100** £100
£1,179,900 £1,242,000 £1,080,000
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£62,100 Unfavourable selling price variance
£162,000 Favourable sales volume variance
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£99,900 Favourable revenue variance
* £1,179,900 ÷ 12,420 = £95
** £1,080,000 ÷ 10,800 = £100
Hospitality, Leisure & Tourism Series
Problem 9.3
(a) Tiff’s Restaurant
Flexible budget performance report for the month ended 30 June
Actual
Flexible budget
Flexible budget variance
Flexible budget variance
e e e %a
Breakfasts(actual served: 110)
Revenue (sales) 759 770 11 (U) 1.4%
Variable Costs 242 275 33 (F) 12.0%
Breakfast contribution margin 517 495 22 (F) 4.4%
Lunches (actual served: 100)
Revenue (sales) 1,700 1,400 300 (F) 21.4%
Variable Costs 540 500 40 (U) 8.0%
Lunch contribution margin 1,160 900 260 (F) 28.9%
Dinners(actual served: 300)
Revenue (sales) 6,600 7,500 900 (U) 12.0%
Variable Costs 2,850 3,000 150 (F) 5.0%
Dinners contribution margin 3,750 4,500 750 (U) 16.7%
Total restaurant contribution 5,427 5,895 468 (U) 7.9%
Less: Fixed costs 740 800 60 (F) 7.5%
Net profit 4,687 5,095 408 (U) 8.0%
a Flexible budget variance as a percentage of the flexible budget.
(b) From the above table’s final column, it is evident that there is a large lunch revenue flexible budget variance that is 21.4% of the flexible budget amount. This variance has resulted from the average lunch revenue being e17, i.e. e3 more than the budgeted average lunch revenue. If this higher average revenue stems from higher than anticipated menu prices, the higher prices may have resulted in the below-budget volume of lunch sales achieved (the restaurant has sold 50 lunches less than was budgeted for). Management may need to consider whether the higher prices have resulted in a reduced volume of sales.
A second factor that might be worthy of further investigation is the e900 unfavourable variance that has resulted from dinner average revenue being below budget. Average dinner revenue was budgeted at e25, however actual average dinner revenue is e22. Management might review what has caused the failure to meet budgeted average dinner revenue and whether dinner menu prices need to be increased.
Hospitality, Leisure & Tourism Series