exam 2 hrt accounting

Intuitive pricing

Based on what the manager feels the guest is willing to pay.

zero-base budgeting (ZBB)

for service departments. requires all expenses to be justified. assume that each department starts with zero dollars and must justify all budgeted amounts. require all documentation showing all budgeted amounts are cost-justified

Standard costs

forecast; used for control and evaluation are forecasts of what actual costs should be under projected conditions; a standard of comparison for control purposes or for evaluations of productivity.

incremental budgeting

forecasting budgets based on historical financial information

Time-series approaches

forecasts made on the assumption that an underlying pattern is recurring overtime (A pattern recurs over time and can be identified from historical data ) do not consider the potential effects of certain decisions, such as pricing and advertising -includes naive model and moving average

Causal forecasting approaches

single and multiple regressions, and econometric models

variances result from

subtracting the actual results from the budget figures. results in parentheses means it is a unfavorable variance percentage variances are determined by dividing the dollar variance by the budgeted amount.

explicit forecasts

systematic, may be reasonably reliable and accurate, and are easier to evaluate rationally

operations budget

****aka THE REVENUE AND EXPENSE BUDGET. **it is a detailed operating plan by profit centers, cost centers within profit center (like housekeeping dept), and service centers. includes all revenues and expenses that appear on the income statement and related subsidiary schedules. -management's plans for generating revenues and incurring expenses for a given period.** -operated department budgets - budgets for rooms, f/b, telecommunication, and other profit centers, and service centers such as marketing, accounting, and human resources. -also includes planned expenses for depreciation, interest expense, and other fixed charges annual operating budgets are normally subdivided into monthly periods.

Multiple regression analysis

- two or more independent variables.

5 steps in the budgetary control process

1. determination of variances 2. determination of significant variances 3. analysis of significant variances 4. determination of problems 5. action to correct problems

relevant factors used to determine the most effectiveness and cost of different forecasting methods

1. frequency with which forecasts will be updated 2. turnaround required for an updated forecast 3. size and complexity of the hospitality operation 4. forecasting skills of personnel involved in making forecasts 5. purposes for which the forecasts are made

limitations of moving average

1. the need to store and continually update the historical data covering the most recent number of time period used in calculating the moving average. (costly to large retail business, but for hrt is not that bad) 2. gives equal weight to each of the observations gathered over the specified number of time periods

two major reasons why forecasters should not rely totally on LFS

1. the study is prepared to secure financing, and the figures are not detailed by month, type of market and etc. 2.the figures are prepared before the construction of the hotel, at least 2 years prior the hotel opens, therefore the figures are somewhat dated. (numbers can be updated before using)

Budgeted Room Revenue example • The 140-room The Funny Inn forecasts 69% occupancy for a 30-day month and an average room rate of $129. The budgeted room revenue for the month is:

140 X 69% X 30 X $129 = $373,842

volume variance

= budgeted price x (actual volume - budgeted volume) VV = BP(AV - BV)

price variance formula

= budgeted volume x(actual price - budgeted price) PV=BV(AP-BP)

smoothing constant

= period 2 forecast - period 1 forecast / period 1 actual demand - period 1 forecast smoothing constant should be small if sales have been relatively stable in the past, and large if the goods is experiencing rapid growth.

CVP Analysis

A set of analytical tools used to determine the revenues required to reach any desired profit level. Managers use CVP Analysis as an analytical tool to examine the relationships among costs, revenues, and sales volume.

Prime Ingredient markup

Consider ONLY the cost of the major ingredient Prime Ingredient Mark-up ($9.00-$1.57)/$1.57 = 473%

Ingredient markup

Consider all product costs Total portion cost X Cost markup Ingredient Mark-up ($9.00-$1.86)/$1.86 = 384%

Step costs

Constant within a range of activity, but different among ranges of activity

The Hubbart Formula

Desired profits + Income taxes + Management fees + Fixed costs + Undistributed operating expenses ± Non-room departmental losses (profits) + Direct expenses of the rooms department = Required rooms department revenue

Basic Assumptions Behind CVP Analysis

Fixed costs remain fixed. • Revenues are directly proportional to volume. • Mixed costs can be divided into their fixed and variable elements. • All costs can be assigned to individual operated departments.

The Basic Single-Product CVP Equation

In = SX - VX - F where In = net income S = selling price X = units sold V = variable cost per unit F = total fixed costs

bottom-up approach

In a bottom-up approach to pricing rooms, the average price per room is determined by turning the income statement upside down. It is called bottom-up because the first item, net income (profit), is at the bottom of the income statement. This approach then continues to incorporate the items on the income statement in reverse order in order to arrive at the room rate.

Direct& Indirect Costs

In general, a direct cost is one readily identified with an object; an indirect cost is not. Indirect costs are sometimes called overhead costs when discussed in relation to profit centers

Mixed Costs

Many costs are partly fixed and partly variable. They are sometimes called semi-variable or semi-fixed, but are usually called mixed

Market Segmentation

Market segmentation involves understanding of the type of customer generating demand. Some typical hotel market segments are weekday corporate, corporate discount, weekend leisure, government, e-commerce, and group. Each segments can have unique demand patterns and price thresholds. Revenue managers can determine the amount of their product they want to make available to any particular segment.

Trial-and-error pricing

Monitors guests' reactions, and then adjusts the price based on these reactions

Competitive pricing

On the basis of what the competition charges

Psychological pricing

On the basis of what the guest "expects" to pay (e.g., "the more paid, the better the product.")

Break even analysis

Only one point among an infinite number of points that CVP analysis can determine.

Fixed Costs

Remain constant in the short run, even when sales volume varies. e.g., Salaries, rent expense, insurance expense, property taxes, depreciation expanse, and interest expense

Yield (Revenue) Management

Revenue management involves understanding, anticipating, and reacting to buying trends. It requires managers to analyze supply of and demand for rooms to make pricing decisions. Many components must be considered: the revenue channels providing demand, accurate forecasting of purchase patterns of the customers in those channels, and the types of customers or market segments available to generate demand. Pricing strategies are set based on where the customer buys (the revenue channel) and who the customer is (market segment).

naive methods

TIME SERIES the simplest time series approach, use most recently observed value as a forecast assumes no seasonality affecting sales, to take seasonality into account, may use the same month of previous year as a base then +/- a certain percentage example: hotel's January 2011 room sales totaled $150,000, the projection for January 2012, using an anticipated 10% increase would = $165,000 base(1+10%) =forecast for 2012 Jan. 150,000(1.1) = 165,000

moving averages

TIME SERIES use by forecasters attempting to remove the randomness that may never happen again by removing or smoothing the data from specified time periods used by investors and traders to track and identify trends moving average = sum of all activity in previous n periods/ n n = the number of periods in the moving average (eg.# of weeks) the more periods averaged, the less effect the random variation will have on forecast. =the more weeks averaged, the better it is to take out the randomness, and more accurate

The Indifference Point

The level of activity at which the period cost is the same under either arrangement

Relevant Costs

To be relevant, a cost must be differential, future, and quantifiable. The cost between two or more options be different. • The cost must be incurred only after the decision is made. • e.g., Sunk Cost is a past cost relating to a past decision. • The cost must be quantifiable. An unquantifiable preference is not a cost consideration.

Variable Costs per Room by using the High/low two-point

Variable Costs per Room = Difference in mixed costs / Difference in rooms activity

Variable Costs

Variable costs change proportionally with the volume of business.

coefficient of correlation

a mathematical measure of the relationship between the dependent and independent variables. may be any number between-1 and +1

coefficient of determination

a measure that reflects the extent to which the change in the independent variable explains the change in the dependent variable. the square of the coefficient of correlation; a number between 0 and +1

price volume variance (P-VV)

a minor variance due to the interrelationship of the price and volume variance =(actual price-budgeted price) x (actual volume - budgeted volume)

inelastic

a price increase will increase total revenues

Elastic demand

a situation in which the percentage change in quantity demanded exceeds the percentage change in price. Demand is considered elastic if a small price change affects demand significantly.

Lodging Feasibility Study (LFS)

a source for budgeting for a new lodging property. it provides a summary of operations including sales, direct expenses of the profit centers, and operating overhead expenses.

capital budgeting

additional property and equipment (and time) -renovations and etc. must be covered before projecting sales and expenses for the upcoming year

marketing plans

advertising and promotion plans. -providing results and comparison from the past. -expected results.

short term forecast

allow for staffing and, in food and catering, for ordering the food supplies to service the dining guests, and to motivate personnel by using the short term sales forecast as a target. different methods are used by different profit center. 1st method: combination of existing reservation + estimated walk in (moving average) 2nd method: adjusting the prior period's sales based on intuitive expectations for the forecast period. (usually small lodging properties) 3rd method: using the prior period's sales figure and adjusting it for expected differences for the forecast period. (MOST COMMON!) example: if 100 dinner served last monday, for this upcoming monday we would add or minus an adjustment for expected differences. these difference is based on house guests, local events, weather forecasts, and etc.

an alternative approach to budgeting revenue

base the revenue projection on unit sales and prices. considers only 2 variables: unit sales and prices.

informal methods in forecasting

based on intuition and lack systematic procedures transferable to other forecasters

alternate way to estimating expenses

based on standard amounts. experience and expected changes. ex: if 800 rooms are projected to be sold, and if $2 amenities per each room, = $1600 same with labor costs, supplies, etc.

flexible budgets

budget for several different levels of activity. (like a plan b and c or d) with flexible budgeting, revenues and variable expenses change with each level of activity, while fixed expenese remain constant. -revenue increase/decrease with occupancy -departmental expenses increase/decrease with occupancy -undistributed operating erpenses increase/decrease only slightly, since a major portion of these expenses is fixed -fixed expenses remainconstant as expected -net income changes with activity, but not as much as revenue. -net income as a percentage of total revenue is calculated by net income/total revenue MAJOR BENEFIT: **able to provide management and owners with bottom-line results for alternative levels of activity.** caution: different levels of activity will most likely affect prices and possibly related expenses.

budgetary control

budget reports must prepared periodically (monthly basis) for each level of financial responsibility, eg. profit, cost, and service centers.

budgets

budgets are formal plans reduced to dollar. two types of budgets: cash budget -management's plan for cash receipts and disbursements. capital budget -related to planning for the acquisition (asset that is brought to obtain) of equipment, land, and building

4-4-5 quarterly plan

consists of two 4-week plans followed by one 5-week, =13 weeks in a quarter. four of these quarterly plans serve as the annual operations budget

significance criteria

criteria used to determine which variances are significant. generally expressed in terms of both dollar and percentage difference. the larger the operation, the larger the dollar difference criteria. the greater the control exercised over the item, the smaller the criteria

historical financial information

detailed by department. at least monthly basis or daily. quantities and prices should both be provided. generally, financial info for at least 2 prior years is provided.

qualitative methods of forecasting

emphasize human judgment, information is logical, unbiased, and systematic. includes market research - gathering info from potential customers regarding a new product or service juries of executive opinion- top executives jointly prepare forecasts sales force estimates - a bottom-up approach to aggregating unit managers' forecasts Delphi methods - a formal process conducted by a group of experts to achieve consensus on future events as they affect the company's markets

regression analysis

estimating an activity on the basis of other activities or factors that are assumed to be causes or highly reliable indicators of the activity. is used to predict the dependent variable given the value of the independent variable. example: f/b sales (unknown variable) is dependent to room sales, which is independent (known variable)

forecast net income

final step of budget formulation process. formulate the entire budget based on submissions from operated departments and service departments. budget formulation process may need to be redone if board of directors are not happy with it, many changes will be proposed

major elements in budget preparation process

financial objective revenue forecasts expense forecasts net income forecasts

Causal approaches

forecasts made on the assumption that the future value of one variable is a function of other variables. (assume that the value of a certain variable is a function of other variables) for example, the sale of food and beverages in a hotel is a function, among other things, of hotel occupancy. thus a food and beverage slaes forecast is based in part on forecasted rooms sales -includes single and mutiple lineral regression, nonlineral regression, and econometric models.

formal methods in forecasting

formal forecasting method outline steps to be followed so they can be applied repeatedly. divided between qualitative methods and quantitative methods

quantitative methods of forecasting

includes causal and time series CAUSAL regression analysis - independent variables are related to the dependent variable using least squares: y = A + Bx1 + Cx2 econometric - a system of interdependent regression equations describing one or more economic sectors TIME SERIES naive - simple rules such as forecast equals last period's actual activity Smoothing - based on average past values of a time series (moving average)or weighting more recent past values of a time series (exponential smoothing) Decomposition - a time series that is broken down into trend, cyclical, seasonality, and randomness

economic environment information

inflation ability to pass on cost increases to guests changes in competitive condition expected revenue from guests spending for goods/service business travel trends tourist travel trends expected wage/price controls and political environment

variances

is the differences found between daily revenue and its goal . it requires analysis and determination of causes and corrective action

variance analysis

is the process of analyzing variances in order to give management more information about variances.

budget variance calculation

is the sum of all three variance: VV + PV + P-VV

strategic planing

it is essential to the controlled growth of major hospitality organizations. it considers the revenues and expense, evaluated and selects from among major alternatives aka long-range planning. commonly 5 years. the first year is much more detailed than the 2nd to 5th year. the second year's budget serves as a starting point for preparing the operations budget. the long-range budget procedure is used to review and update the next 4 years and add the fifth year to the plan.

estimating expenses

must provide info on expected cost increases, labor cost increases. variable expenses are estimated based on their projected revenues.

revenue forecasting

must provide info regarding economic environment, marketing plans, capital budgeting, and detailed historical financial operating results from their department.

exponential smoothing formula

new forecast = past forecast + smoothing constant x (actual demand - past forecast)

sales force estimates technique

obtaining opinions of corporate personnel. input is from lower-echelon personnel, immediate superiors review and discuss estimates with each unit manager then combined to create a sale forecast.

cost of goods sold variance

occurs because of differences due to cost and volume. the amount paid for the goods sold (food and or beverage) differs from the budget, and the total amount sold differs from the budgeted sales.

the operations budget helps management accomplish 2 of its major functions:

planning, execution, and control

average cost

provide products and services is determined by dividing the total production and service costs by the quantity of production.

capture ratios

ratios based on hotel guests or some variation of hotel guests. example: hotel might estimate its dinner covers to be 40 plus one-quarter of the estimated house guests for the night. if the estimated house guests total 200, then the dinner covers forecasted equal 90. forecasted dinner covers = a + bx a = estimated walkins b = percentage of hotel guests expected to eat dinner x = hotel guest count for evening

revenue variance analysis

revenue variances occur because of price and volume differences. variances relating to revenue is called price variance (PV) and volume variance (VV)

market research method

systematically gathering, recording, and analyzing data related to a hospitality operation's marketing of products and services. provides data that can then be used in preparing formal sales forecasts.

Incremental costs

the costs of producing one more unit

Margin of Safety

the excess of budgeted or actual sales over sales at breakeven That figure can be expressed in terms of money or in terms of the number of units sold.

Operating Leverage

the extent to which an operation's expenses are fixed rather than variable • The degree of operating leverage desired reflects the degree of risk that the operation desires to take. • All other things being the same, the more highly levered the operation, the greater the risk. • However, the greater the risk, the greater the potential returns. If an operation has a high level of fixed costs relative to variable costs, it is said to be highly levered. Being highly levered means a relatively small increase in sales beyond the breakeven point results in a relatively large increase in net income.

Financial objective

the long-term profit maximization is a major financial objective set by both hospitality and business firms. may mean that the operation does not maximize its profit for the next year. used to gain more profit and reputation in the long run, but may not gain much in the short run. -by not cutting project costs, Public relations, labor and etc. to increase profit in the short run.

budgeting for new lodging property

unexpected expenses arise until the "bus" are worked out and the market realizes the property exists. therefore, the initial budget should allow for these higher than normal costs and possibly lower revenues than desired. mush have sufficient cash to carry the new property to the point of cash break even (probably after 2-3 years)

implicit forecasts

unsystematic, imprecise, and difficult to evaluate rationally

Delphi technique

used for making forecasts that are generally very futuristic in nature. involves obtaining opinions from a group of experts to achieve agreement upon future events that might affect the markets. they interacts anonymously, use of questionnaires, then responses are analyzed and resubmitted to experts. May go several rounds until results are satisfied

exponential moving average (smoothing)

uses a smoothing constant and recent actual and forecasted activity to estimate future activity. count recernt data more heavily than older datat, also elimated the need for storing all of the historical data covering the specified time period. "if the forecast for a particular period was too high, reduce it for the next period; if it was too low, raise it" MAJOR BENEFIT: data for only two prior periods need to be retained 1.the forecasts from the two pervious periods 2.the actual activity during the earlier of the 2 previous periods. MOST USEFULWHEN ONLY SHORT TERM FORECASTS ARE REQUIED, AND WHEN REASONABLY ACCURATE - RATHER THAN PRECISE - FORECASTS ARE ACCEPTABLE

jury of executive opinion technique

uses key financial, marketing, and operations executives to estimate sales for the forecast period. needs expected economic conditions and changes in the establishment's service.

determination of variances

variances are determined by using the budget report to compare actual results to the budget. disclose both monthly and year to date varinces

the price volume variance is unfavorable or favorable when

when the price and volume variances are different - that is when one is favorable and the other is unfavorable PV=(AP-BP)(AV-BV) when price and volume vaiances are the same, the price volume variance will be favoriable

major alternative directional considerations

whether a proposed acquisition will have a positive effect whether or not to expand into foreign markets whether a quick service restaurant chain should add breakfast to its existing lunch and dinner offerings. whether a single operation should add more rooms or even expand to include another property.

regression analysis formula

y = a + bx y - meals served a - meals served to non hotel registrants b - average number of meals served to each hotel guest x - number of hotel room guests

Reasons for Budgeting

• A budget requires management to examine alternatives before selecting a particular course of action. -pricing alternatives, advertising alternatives, approaches to staffing, etc. ***• A budget provides management with a standard of comparison.*** (MOST IMPORTANT) eg. comparing actual operating results to a formal plan • The budget process provides a channel of communication whereby the operation's objectives are communicated to the lowest managerial levels. -lower level managers are able to react to these objectives and suggest operational goals. lower level managers are required to explain significant variances-why it happened, what are the causes, and corrective actions that should be taken • The budget process enables managers to set their prices in relation to their expenses. -prices changes can be the result of planning.

Markup Approaches to Pricing

• A major method of pricing food and beverages is marking up the cost of the goods sold. • The markup is designed to cover all non-product costs (such as labor, utilities, supplies, interest expense, taxes) and profit.

Seasonal patterns

• A seasonal pattern exists when a series of data fluctuates over time according to some pattern. • Business may vary regularly by season of the year, by month, by week, or even by the days of the week

Informal Pricing Methods

• Competitive pricing • Intuitive pricing • Psychological pricing • Trial-and-error pricing • All the informal pricing methods hospitality products and services FAIL to take into account COSTS !!!

Pricing

• Establishing prices that maximize revenues is difficult. • There is NO method guaranteed to produce prices that maximize profits. • Profits should not result simply because revenues happen by chance or luck to exceed expenses. • Profits should occur because revenues have been carefully calculated to exceed expenses.

The importance of forecasting

• Forecasting is the calculation and prediction of future events such as sales for the following day, week, or month. • Forecasting is necessary in order to plan the most effective and efficient ways to meet expected sales volume. • The accuracy of sales forecasts is a major determinant of the cost effectiveness of the hospitality operation.

forecasting Limitations

• Long-range forecasting is more difficult and less reliable than short term forecasting. • Forecasting involves uncertainty about competition, guest demand, room rates, and many other key factors. • Forecasting generally relies on historical data, which is not always a strong indicator of future activity. • By their nature, forecasts are generally less accurate than desired, especially when naïve forecasting models are used.

Cyclical patterns

• Movements about a trend line that generally occur over a period of more than one year. • A cyclical pattern is similar to a seasonal pattern except for the length of the pattern. is the most difficult to predict because it does not necessarily repeat itself at constant intervals

The importance of planning

• Planning, and thus forecasting, is pervasive in hospitality operations. • Many operations, especially food service and lodging chains, forecast sales for several years in long-range operating budgets. • At the other extreme, sales are forecast for months, days, parts of a day, and sometimes even on an hourly basis, since management must plan to service the forecasted sales.

Trend pattern

• Simply a projection of the long-run estimate of the activity being evaluated. • Often shown for several years • E.g., Dinner covers for the month of October over the past five years (2012, 2013, 2014, 2015, and 2016)

The $1 per $1,000 approach

• The $1 per $1,000 approach sets the average price of a room at $1 for each $1,000 of project cost per room. This includes the hotel fully equipped. • This approach fails to consider the current value of facilities project cost/number of rooms = $x $x / 1000 = answer

Limitations of quantitative forecasting methods

• They are virtually useless when data are scarce, such as at the opening of a new hotel, restaurant, or club due to the lack of previous data • They are unable to consider unforeseeable occurrences, such as wars or acts of terrorism, and their impact on lodging properties. • They rely on historical data and assume that historical trends will continue into the future. -historical activity may not be a strong indicator of future activity -forecasts are generally less accurate than desired -forecasting involves uncertainty -the more removed the forecast period is from the data the forecast is made, the greater the difficulty in making the forecast and the greater the risk that the actual results will differ from the forecast (the more recent the data is the better it is to forecast) -naive forecasting models, such as using the most recent value plus x percent, may be useful for small businesses. larger properties should use more sophisticated models -forecasts should be revised as soon as there is a change in the circumstance -management must plan to cover a deviation (the amount by which a single measurement differs from a fixed value such as the mean) of an additional x percent from the forecasted levels

Quantitative Forecasting Methods

• Time-series approaches • Causal approaches

Integrated-pricing Approach

• To optimize the entire operation's (not focus on individual dept's) net income • Allowing each profit center to price its roducts independently may hurt the firm's overall profits. e.g.,) Swimming Pool • When an integrated-pricing approach is used at a hospitality operation, some profit centers do not maximize profits.

data patterns

• Trend • Seasonal • Cyclical