Finance in Hospitality: Cost, Pricing, Budgeting and Variances

This presentation delves into financial management within the hospitality sector, emphasizing the significance of cost assessment for setting appropriate prices for products and services. It explores the elements of cost, including material, labor, and overhead, and illustrates how cost analysis aids in making informed pricing decisions. The presentation also covers inventory management, stock control methods, and the importance of controlling cash flow for liquidity and effective business operations. Furthermore, it provides a detailed understanding of budgeting, budgetary control cycles, and the purposes of budgetary control, including variance analysis. The presentation concludes by highlighting how variance analysis assists in identifying deviations and supports strategic decision-making, offering insights into corrective steps to address variances in material price, usage, labor rate, and efficiency.

Finance in Hospitality
TASK 2 and 3

• College
• Name
• ID
• Module
• Teacher

INTRODUCTION
In the hospitality sector, effective financial
management is required for attaining goals and
objectives.
 This presentation will highlight the elements of
cost and manner in which it aid in pricing decision.
 Besides this, PPT will also provide deeper
understanding about the aspects of budgeting and
budgetary control.

2.1
Cost implies for the value of money that has been used by the business entity to produce or
deliver services to the customers. Hence, it is sum of the all the expenditures, such as direct
and indirect, which is incurred by the firm for the purpose of production.
Elements of Cost
• Material
• Labour
• Overhead
3 Elements
• Direct cost: It is also known as a prime cost which is directly attributable to the production
activities. Material and labour are the main examples of direct cost which is associated
with the production of goods or services.
• Material:
• Labour:
• Indirect cost: In order to carry out business activities more effectually firm has to incur
some expenses which are not directly attributable to production. Examples of indirect cost
are enumerated below:
• Business and administration: Insurance, depreciation etc.
• Selling and distribution: Packaging, advertising etc.

CONTD..
5 overheads
• Rent and repairs
• Insurance
• Supplies
• Advertisement
• Other utilities
Gross profit: It implies for the profit which is generated by the firm during the year over COGS or direct
expenses. One can determine gross margin by using the following formula:
Gross profit: Saes revenue – Cost of goods sold
Formula for gross profit % is as follows:
Gross profit % = Total sales – cost of goods sold / Total sales
There are several methods that can be used for the determination of price such as:
• Cost plus pricing
• Competitive pricing
• Penetration strategy
• Marginal pricing method
Selling price as per cost plus pricing = cost + (cost * profit %)

2.2
Inventory implies for the goods and materials that business unit holds with the motive to
resale.
Various stages of stock
• Raw material
• Work-in-progress (WIP)
• Finished goods
• Cost of goods sold (COGS)
Why should we control the stock
In the business unit, inventory control or management is highly required because it has
direct impact on cost in terms of ordering, storage etc.
5 stock control methods like
• Economic order quantity (EOQ)
• ROP
• Just in Time (JIT)
• ANTICIPATORY
• First in first out (FIFO)

CONTD..
Why should we control the cash?
• Business unit is required to control cash for the following aspects:
• Liquidity management
• To carry out business activities more effectively
• For investing money in profitable activities
• Enhancing profit margin
5 cash control methods
• Internal control
• Budgeting
• Comparison of actual cash aspect with budgeted
• Developing awareness among personnel
• Periodical audit

3.3
Budgets
• It may be defined as a financial framework which includes
planned revenue, expenditure, assets and liabilities. Budget is high;
Main features of budgets
• Includes forecasted cash flows
• Planning tool
Budgetary control cycle
• Forecasting
• Preparation
• Approval
• Measuring performance
• Investigation of differences
• Assessing reasons
• Taking strategic actions or measure

CONTD..
Budgetary control purposes
• Assists in co-ordinating the activities of various departments
• Helps in enhancing profitability
• Elimination of waste
• Provides assistance in developing future plan
• Helps in fixing accountability of individuals and departments
• Identification of deviations and taking corrective actions
Budgetary Control process:
• Preparation of budget
• Submission
• Approval
• Execution
• Making comparison of actual performance with standards
• Identifying deviations
• Assessing causes
• Taking corrective action

3.4
Budget Actual Variance
Units sold 100,000 70,000 (30,000 )
Material 15000 22500 (7500)
Direct labor 22500 24375 (1875)
Material (£) Labour (£)
Price/rate variance (4500) 3750
Usage/efficiency
variance
(3000) (5625)

CONTD..
Type of Variances Variance Reasons Corrective step
Unit sold (30000) In this category, negative
variance of 30000 has
identified. By
considering this, it can be
presented that business
unit failed to attract
customers and creating
demand for cutlery
items.
For reducing such
deficiency owner of
manufacturing unit is
required to lay high level
of emphasis on
promotional aspects or
campaign.
Material price variance (4500) Ciprian failed to get
material for supplier at
suitable or budgeted
price level.
Business unit should
focus on identifying
supplier who supplies
raw material at optimal
price level.

CONTD..
Material usage
variance
(3000) Due to high wastage of
material, variance of -
3000 occurred.
Business entity needs to
focus on automation for
making optimum use of
material.
Labour rate variance 3750 Positive variance
outcome shows that
Ciprian hired personnel
on suitable price which is
less than budgeted.
-
Labour efficiency
variance
(5625) Negative variance shows
that more time was taken
by labour in
manufacturing as
compared to budgeted.
Ciprian should lay
emphasis on conducting
training session which in
turn provides deeper
insight to personnel
about the way activities
need to be performed. By
doing this, firm can
enhance efficiency of
personnel and thereby
would become able to get
desired eve of outcome
or success.