Budgetary Control System for Hospitality Business Industry

This report discusses the importance of budgetary control system for hospitality business industry. It covers the advantages and limitations of budgeting process and how it facilitates better strategic planning, performance evaluation, savings of excessive costs, better communication and coordination, and improved results for future periods.

Running Head: Budgetary Control System
Management Accounting

Budgetary Control System 1
Part A
SALES BUDGET
February March April May June
No. of units Sold
(A) 12000 12500 13000 14000 14000
Selling price per
set (B)
$
24.00
$
24.00
$
24.00
$
24.00
$
24.00
Sales (A*B)
$
2,88,000.00
$
3,00,000.00
$
3,12,000.00
$
3,36,000.00
$
3,36,000.00
Part B
Estimated Cash Collections from Receivables in 2nd Quarter
July August September
Collection in next month $ 1,34,400.00 $ 1,48,800.00 $ 1,53,600.00
Collection in second next month
$
67,200.00 $ 67,200.00 $ 74,400.00
Total Collection from Sales $ 3,50,400.00 $ 3,69,600.00 $ 4,00,800.00
Part C
The Number of Units to be produced in the 2nd Quarter
July August September
Sales 15500 16000 18000
Add: Closing Inventory 11600 8400 4800
Less: Opening Inventory 9900 11600 8400
No. of units to be produced 17200 12800 14400
Part D
Direct Materials Budget for the 2nd quarter

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July August September
Raw Material consumption 17200 12800 14400
Add: Raw Material Closing Inventory 5120 5760 7680
Less: Raw Material opening
Inventory 6880 5120 5760
Raw Material to be purchased 15440 13440 16320
Purchase Price $ 4.00 $ 4.00 $ 4.00
Direct Material Cost $ 61,760.00 $ 53,760.00 $ 65,280.00
Part E
Cash Budget for 2nd Quarter
April May June July August
Septembe
r
Opening Cash Balance 16800 -31599 65283 167764 304109 494175
Sales Collection 302400 319200 331200 350400 369600 400800
Less
Variable selling expenses 15600 16800 16800 18600 19200 21600
Administrative expenses 14767 14767 14767 14767 14767 14767
Factory overhead 52000 52000 52000 52000 52000 52000
Production labour cost 112000 92160 94720 110080 81920 92160
Purchase payment owning
to last quarter 82000
purchase payment @20% in
2nd quarter 74432 46592 50432 18608 11648 12608
Total payments 350799 222319 228719 214055 179535 193135
Closing Cash Balance -31599 65283 167764 304109 494175 701840
PART F
Income Statement for 2nd Quarter
July August September
Sales
$
3,72,000.00 $ 3,84,000.00 $ 4,32,000.00

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Less: Variable cost
Direct Material
$
61,760.00 $ 53,760.00 $ 65,280.00
Direct Wages
$
1,10,080.00 $ 81,920.00 $ 92,160.00
Variable Factory Overheads
$
52,000.00 $ 52,000.00 $ 52,000.00
Variable selling expenses
$
18,600.00 $ 19,200.00 $ 21,600.00
Variable Administrative expenses
$
1,433.33 $ 14,766.67 $ 14,766.67
Contribution
$
1,28,126.67 $ 1,62,353.33 $ 1,86,193.33
Less: Fixed cost
Fixed factory overhead
$
12,000.00 $ 12,000.00 $ 12,000.00
Fixed administrative overhead
$
13,333.33 $ 13,333.33 $ 13,333.33
Fixed selling overhead
$
5,066.67 $ 5,066.67 $ 5,066.67
Net Profit
$
97,726.67 $ 1,31,953.33 $ 1,55,793.33
Part G
Introduction:
Finance is considered as the life blood of any business because in the absence of adequate
amount of funds business cannot be operated smoothly. Due to this fact, every business
organisation requires to undertake proper financial planning on a timely basis. Financial
planning facilitates raising of funds and their optimal utilisation in the business so as to
generate maximum wealth for the firm. Budgeting is the key process of financial planning. It
is the comprehensive process of preparation of various kinds of budgets for the business or
project of the firm. It involves estimation of expenses and incomes for a certain period of
time in future. The reports and statements that are prepared as a part of budgeting are termed

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as budgets. Budgets are prepared taking into account all the possible receipts and payments to
be occurred in the given period of time, whether they are of capital or revenue nature.
Budgets are the prepared before the commencement of any event or project so that it can be
determined as to how much funds will be required in a particular time frame to undertake
such event or project. Budgets are generally prepared in monetary terms. There are different
types of budgets that any business organisation has to prepare. Such as Sales Budget,
Purchases Budget, Production Budget, Cash Budget etc.
Hospitality business industry is a service industry and the hospitality business management is
concerned with servicing the guest clients and satisfying them to create the wealth for the
business. This industry includes different segments such as hotels and restaurants business,
travel and tourism business, event management business etc. Generally but not always, the
product that is purchased or consumed is either of intangible nature or the product’s
perceived quality is mainly impacted by the method of service through which it is received. It
is believed that the service provider itself is the part of product offered to the customers. In
hospitality industry the quality of service is not only derived from its value in monetary terms
but also from the level of respect that is offered by the service providers to them during the
course of providing the services. To operate and manage the business of hospitality, an
organisation has to undertake necessary strategic planning process. As a part of this strategic
planning, it needs to carry out the budgeting function on time to time basis so that it can run
its business successfully. Budgeting will facilitate determination of quantum of funds that
will be required to run the business. The right availability of funds at the right time will
enable the business managers of hospitality business to provide the quality services to their
customers in the most efficient manner. Also, budgeting will allow the deployment of
valuable resources of the entity to the areas from where maximum returns and customer

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satisfaction can be generated. Budgeting control system is the most important part of
effective management of any organisation.
There are various advantages of using budgetary control as the business management tool for
the firm that is operating its business in the hospitality industry.
1. Facilitates better strategic planning:
The budgetary plan compels the employees of the organisation to work in the manner that
will provide maximum benefits to the organisation. A formal budget plan will set the
deadlines for the operational managers and the personnel working under them. These
deadlines will therefore not allow the employees to divert their individual attention from
daily business functions to their personal motives.
2. Budgeting provides the basis for performance evaluation:
As budget is the main aspect of control and review process of the organisation in a way that
they enable the managers to set the targets and goals to be achieved by the company. The
performance of the business is the monitored against these pre-determined targets set through
budgeting process (Van der Stede, 2000). The targets are established not only for the
organisation as a whole but also for the individual operations that are necessary for the
business so that operational managers are directed and supervised to achieve the agreed
targets and parameters. In a firm which is running and operating a chain of restaurants and
hotel, the management accountant has to prepare the several budgets such as revenue budget,
expenses budget, cash budget, raw material budget in the beginning of every year so that it
can be well-determined that how much resources will be required to accomplish the desired
goals and targets (Zimmerman & Yahya-Zadeh, 2011). These budgets will also determine
the amount of funds to be arranged from various sources so that the business does not have to

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fall short of finance when it requires such funds to provide excellent quality of the product
and services. Thereafter, the performance of the overall firm and its different departments
will be evaluated on the basis of the budgetary reports that are prepared by anticipating the
possible revenues and expenses of the business.
3. Savings of excessive costs:
A budgetary control system of a firm dealing in hospitality business keeps it fit as it allows
channelizing the valuable resources of the firm in those areas which are indispensable for
providing the maximum satisfaction of its customers (Otley, 2001). If it is not planned in
advanced as to how much funds and other resources are to be allocated to the particular
operation or department, it may result into flow of excessive funds to the areas that are non-
productive. This will ultimately increase the cost of operating the business. If a clear picture
of certain level of expenses to be incurred and the revenues to be generated by each
operational manager is not drawn through budgeting, they may perform their operations in
the manner that creates their personal benefits at the cost of harming the true objectives of
organisation as a whole (Horngren, 2009).
4. Better communication and coordination:
The hospitality business, say for example, a hotel business requires numerous operations to
be performed to operate the business effectively. Some of those operations are: catering
operations, accommodation booking and room service operations, human resource operations
etc. These operations are to be performed by each operational department to achieve the
overall success of the hotel business of the firm (Hoque, 2002). In order to run the hotel
business smoothly adequate coordination must be ensured among all these departments so as
to harmonise their individual goals with the organisational goals. If proper communication of
desired results is not done, then the firm will fail to achieve such objectives. Therefore,

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budgets are necessary to communicate the desired and expected targets of the organisation.
They will identify the level at which each department should operate to achieve the
objectives. The predetermined targets and goals established through budgetary statements
will make it essential for the operational departments to coordinate with each other.
5. Improved results for future periods:
Budgetary reports cover the budgeted results of the budget period and hence it enables the
management to conduct variance analysis. This variance analysis will help the management
of the company to understand the root causes of deviations of actual results from the expected
results so that suitable course of action could be taken for the further periods (Frow,
Marginson & Ogden, 2010).
Though the budgets are said to be the basis on which the overall performance of the company
depends, there are some limitations of budgeting process. They are as follows:
1. Budgets are coercive:
Yes it is true that budgeting process instils cost control in any business but at the same time it
is an undeniable fact that an organisation can perform successfully when its management
team and employees feels motivated about their work. Budgetary system does not let the
management of the company entertain the ideas of the employees. Rather, they create
pressure on the employees to work only as per the directions of their supervisors and
budgeted plans. Therefore, budgetary system promotes the environment where employees do
not feel motivated (Garrison, Noreen, Brewer & McGowan, 2010).
2. Budgets promote rigidity:

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As the organisation has to function as per the requirements of the budgets, any changes in the
business environment, whether internal or external, cannot be incorporated in the budget
reports and hence it gets difficult for the management to cope up with the environmental
changes.
3. Time consuming process:
The preparation of budgets involves huge time and even it requires requisite skills and
knowledge of financial management as well as cost management. Therefore, it may not be
feasible for the company to implement budgetary control system (Drury, 2013).
Conclusion:
From the above report, it can now be stated that in every business organisation budgetary
control system is of the most importance. For any business belonging to hospitality industry,
budgetary planning plays significant role in achieving its overall objectives and goals as such
business has number of operations to be performed by it to service its customers in the best
possible manner. Budgeting process enables the managers of the company to optimally utilise
its valuable resources and achieve the target in the minimum possible time. Budget also
supports effective undertaking of sound economic decisions for the business.

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REFERENCES:
DRURY, C.M., 2013. Management and cost accounting. Springer.
Frow, N., Marginson, D. and Ogden, S., 2010. “Continuous” budgeting: Reconciling budget
flexibility with budgetary control. Accounting, Organizations and Society, 35(4), pp.444-461.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hoque, Z., 2002. Strategic management accounting. Spiro press.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
Horngren, C.T., Foster, G., Datar, S.M., Rajan, M., Ittner, C. and Baldwin, A.A., 2010. Cost
accounting: A managerial emphasis. Issues in Accounting Education, 25(4), pp.789-790.
Otley, D., 2001. Extending the boundaries of management accounting research: developing
systems for performance management. The British Accounting Review, 33(3), pp.243-261.
Van der Stede, W.A., 2000. The relationship between two consequences of budgetary
controls: budgetary slack creation and managerial short-term orientation. Accounting,
Organizations and Society, 25(6), pp.609-622.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.