Finance in Hospitality

This presentation discusses various concepts related to finance in the hospitality industry, including the meaning of cost, elements of cost, traceability, cost behavior, methods of stock control, methods of cash control, meaning of budgetary control, and variance calculation.

Finance in Hospitality

 Cost simply can be defined as the sum of amount that an entity had
paid or required to pay for acquisition of required sources for
production purpose.
 In economics, cost can be referred as monetary valuation of
material, time, value, utility, labor, risk, efforts and opportunity
forgone in the manufacturing functions.
2.1 Meaning of cost

 Material
 Labor
 Overhead
Total Cost (TC) = Material + Labor + Overhead
Element of cost

Contd…

 Direct Material: Timber in furniture manufacturing,
textile in garment industry, gold used for jewellery
making
 Direct Labor: Employees directly engaged in
production process
 Direct Overhead: architect fees, patent and royalties.
consultant fees
Traceability: Direct cost

 Indirect Material: Oil for machine lubricating, nails
for furniture, thread for garments
 Indirect Labor: Supervisor, office staff, distribution
and selling departmental staff
 Indirect Overhead: Rent, factory insurance, tax paid,
depreciation and others
Traceability: Indirect cost

 Fixed : Depreciation, Rent, Insurance
 Variable: Direct cost of material, labor and overhead
 Semi-variable/Semi-fixed: Electricity and telephone
charges
Cost behavior

 Production: Material, labor and chargeable expense
 Administration: Stationery, postage, manager salary
 Marketing: Advertisement, free sample
Type of overheads

It is computed by dividing gross profit with the total
turnover/sales of the business can be represented as
follows:
Gross profit percentage

 Sales revenue: Cash sales + credit sales – sales return
 Gross profit = Sales – cost of goods sold
Element of Gross profit percentage

 Price fixation is of utmost importance in which
company set product price by adding a desired mark-
up.
Price = Cost + Desired profit mark-up
Sales price

 Cost of the product
 Desired profit percentage
Element of selling price

 Economic order quantity = √2AO/c
2.2 Methods of stock control

 Just in time: Ordering goods at the time of requirement
 Maintaining safety/minimum stock:
 LIFO (Last-in-first-out)
 FIFO (First-in-first-out)
Contd…

 ABC analysis:
 “A” means high-value deriving product with lower
sales frequency need regular and continuous attention.
 “B” means moderate-value deriving product with
moderate sales frequency require
 “C” means less-value deriving product with high sales
frequency need less oversight
Contd..

 Cash budget: Forecasting cash inflow and outflow to
determine net cash balance (deficit/surplus)
 Internal control mechanism to safeguard cash handling
 Proper records maintenance
 Delegation of responsibilities and segregating duties to
different personnel
 Rotating employees
 Interim audit by an independent auditor
 Sudden checking of cash recording
 Independent reviews
Methods of cash control

 Budget is a statement that expresses quantitative result
for future operations for a given period of time.
 Budgetary control system includes budget preparation,
establishing coordination, comparing actual and
standard result and making decisions to achieve
defined goals.
 It is a system that helps to check that how well firm’s
managers used and designed budgets for cost
monitoring and controlling to achieve targets.
3.3 Meaning of budgetary control

Budget formulation

 To determine possible revenues and cost incurred in
future operations
 To identify net cash available in the business whether
surplus or shortfall
 To make rationalized plans for cost curtailment and
cash management
Purpose of budgetary control

Advantages and Disadvantages

 Projection of revenues from various activities
 Demand expenditures proposal from all the department of the
organization
 Examine both predicted revenues and expense and discuss with the
budget approval members
 Approval of the budget by the budget committee
 Communicate finalize budget to all the division
 Present regular and timely reports
 Determine variances (favorable/unfavorable) by comparing actual
and predicted results
 Make rationalized decisions for cost control & revenue
maximization to achieve set goals
Process of budgetary control

Budgetary control cycle

 Variance is the difference between actual and
expected/predicted financial results.
Variance = Targeted result – Actual result
3.4 Variance: Meaning and calculation

Favorable variance:
 Actual cost <= Expected cost
 Actual revenue => Expected revenue
Unfavorable variance:
 Actual cost > Expected cost
 Actual revenue < Expected revenue
Types of variance

Type Calculation (In GBP) Amount (In
GBP)
Material price variance (MPV) 4,500 A
Material usage variance (MUV) 3,000 A
Material cost variance (MCV) 15,000 - 22,500 7,500 A
Labor rate variance (LRV) 3,750 F
Labor efficiency variance (LEV) 5,625 A
Labor cost variance (LCV) 22,500 – 24,375 1,875 A
Variance calculation

Type Meaning Result Reasons/causes Corrective/mitigate action
MPV It determines
whether company
had actually incurred
expected cost of
material each unit or
exceeded it.
4,500 A  Shortage of material
availability
 High actual price
 Inaccurate forecasting
 High rate of inflation
 Search supplier with best
quality material at less
price
 Purchase goods where it
is available at cheaper
rates
MUV It find out how well
or optimally raw
material is used in
production
3,000 A  Excessive wastage
 Defective items which
cannot be returned
 Ineffective or non-
optimal use
 Material stolen or theft
 Keep tight monitoring
over usage
 Make strategies for
optimum utilization
MCV Excess of actual
material cost over
expected
7,500 A  High price
 Ineffective use
 Regular checking &
controlling of raw
material usage
 Buying item at less price
Variance: cause and corrective
action

LRV Difference
between labor’s
actual wages
rate and
targeted
payment rate
3,750 F  Easy availability of
labor who demand
less wages rate
 No correction needed
LEV How well labor
source have been
used in
production
5,625 A  Unskillful and less-
skilful workers
 High idle time as a
result of technical
failure or breakdown
 Poor monitoring
 Strict monitoring and
regular check by CCTV
footage
 Field observation on
sudden visit in
production division
 Strict policies
LCV Excess of actual
labor cost over
standard or
predicted cost
1,875 A  Unavailability of
talented people
 Inefficient use of labor
 Policies need to be made
for reducing wastage of
time
 Tight monitoring by
divisional managers
Contd…

 Axsäter, S., 2015. Inventory control (Vol. 225).
Springer.
 Shenoy, D. and Rosas, R., 2018. Inventory Control
Systems: Design Factors. In Problems & Solutions in
Inventory Management. Springer, Cham. pp. 13-32.
 DRURY, C.M., 2013. Management and cost
accounting. Springer.
REFERENCES