HTM223 Budget Types

CAPITAL BUDGETS

A capital budget is a plan for the acquisition of new or replacement of existing fixed assets. A five-year replacement schedule for hotel room furnishings is a capital budget.

DEPARTMENT BUDGETS

A department budget would only be of concern to a restaurant complex (with, for example, dining room, bar, and banquet areas) where departmental income statements are prepared, or to a hotel that has a number of departments. A department budget would therefore be for a specific department and would show the forecast revenue less operating expenses for that department. Alternatively, if a department does not directly generate any revenue (e.g., the maintenance department of a hotel), a department budget could be prepared showing anticipated expenses in detail for an operating period. Generally, such department budgets are prepared annually and broken down month by month.

FIXED BUDGET

A fixed budget is based on a certain level of activity or sales revenue. Expense estimates are based on this level of sales. No attempt is made to introduce greater or lesser levels of sales revenue, and thus, different expense amounts in the budget. The disadvantage of such a budget is that, if the actual sales level differs from the budgeted sales level, there is no plan covering this possibility and expenses can only then be adjusted in the short run by guesswork. For example, suppose the rooms department budget in a hotel is based on the average yearround rooms occupancy of 70 percent. Operating costs (e.g., payroll, supplies, linen, and laundry) are based on this level of occupancy. If actual occupancy dropped to 60 percent because of unforeseen economic conditions, it might be difficult for the rooms department manager to know, in the short run, what the new payroll level should be. The same is true for all other expenses.

LONG-TERM

A long-term budget would be anywhere from one year to five years ahead. Such a budget concerns the major plans for the organization (expansion, creation of a new market, financing, and other related matters) and are often called strategic budgets. From such long-term plans evolve the policies concerning the dayto-day operations of the business, and thus the short-term budgets.

MASTER BUDGETS

A master budget is the most comprehensive of all budgets. Generally, a master budget is prepared for a year and includes a balance sheet for a year hence and all the departmental income and expense statements for the next year.

OPERATING BUDGETS

An operating budget concerns the ongoing projections of revenue and expense items that affect the income statement. For example, a forecast of sales revenue for a restaurant for a month is in an operating budget. Similarly, in a multidepartment hotel the forecast of total payroll expense for the year is an operating budget.

FLEXIBLE (OR VARIABLE) BUDGET

Is prepared based on several levels of activity. In our rooms department example, sales revenue could be forecast for 60 percent, 70 percent, and 80 percent occupancy levels (or as many levels as are appropriate). As the actual year progresses, it can be determined at which level the operation is going to fit best, and the appropriate expense levels will have already been determined for this level. In other words, adjustment is easier. The question could be raised, using the rooms department example, as to whether it is truly flexible (variable) budgeting or whether it is three (or more, if more occupancy levels are used) fixed budgets at three different occupancy levels. The question is valid, but the practical result is that management is prepared to adjust to the actual situation when adjustment is required. With flexible budgeting, variable expenses will change with the volume of sales but fixed expenses will remain the same. For example, a budget might be prepared for a restaurant based on a number of levels of sales revenue. Expenses are calculated based on each different revenue level. Variable expenses might be expressed as a percentage of sales revenue or as a dollar amount per unit sold. However, advertising expense might be a fixed expense and will be left the same, regardless of the actual level of sales revenue. In other words, regardless of the volume of sales, a definite, fixed amount is budgeted for this expense. A really flexible budget would show expenses that are truly variable, with expenses as a percentage of that sales revenue and fixed costs as a dollar amount.

SHORT-TERM BUDGETS

Short-term budgets could be for a day, a week, a quarter, or a year. Such budgets involve middle management in using its resources to meet the objectives of the long-term plans.