3214THS Financial Management: Budgeting and Variance Analysis Report

This report presents a comprehensive analysis of budgeting and variance analysis within the context of the hospitality industry, specifically examining the performance of the Waterfall Cafe. The report begins by addressing the shortfalls of using budgets for staff performance evaluation, including issues such as discouragement, inconsistent messaging, and time consumption. It then outlines the reasons for using budgets in the hospitality industry, highlighting their role in benchmarking performance and setting financial targets. The report delves into problems related to the use of budgets, such as unrealistic targets and communication gaps. Part 2 focuses on the variance analysis of the Waterfall Cafe's events, comparing actual results with both master and flexible budgets. The analysis includes price and volume variances for revenue, and purchase price and consumption variances for raw materials, with detailed computations and explanations of the variances' impacts on profitability. Part 3 synthesizes the findings, emphasizing the importance of quality control and realistic budgeting to maintain long-term business success. The report incorporates references to relevant literature and provides recommendations for addressing the identified variances, offering a practical application of financial management principles in the hospitality sector.

Contents
Shortfalls of using budgets for Performance evaluation of staffs........................................2
Reasons for use of the budget in the Hospitality Industry.....................................................3
Problems related to using these budgets :..................................................................................................4
References...................................................................................................................................................7

Shortfalls of using budgets for Performance evaluation of staffs
1) Discouragement
It may be the chances that the budget process is not a pleasant experience,
so it has the potential to discourage staff. Moreover the standard set in the
budget may be unrealistic or too optimistic .As the budgets are normally
prepared by senior level management based on their own assumption , so it
might not suit the lower level management and may discourage their
performance . (Freedman, 2019)
2) Changes in government rules and regulation may require immediate
changes or review of budget which in turn cost more time and money.
3) Inconsistent Message
As we all struggle with memory as we are busy as so it becomes critical to
document issues (both positive and negative) when it is fresh in our minds.
But managers usually does not keep notes and accurate records of employee
behavior, thus may not be successful in sending a consistent message to the
employee leading to bad preparation and allocation of budgeted task.
4) Wrong Use of Past Trends
Budgets are usually prepared from past dates and trends of staff
performances , but if the data are not analysed efficiently and correctly then
it may cause wrong performance evaluation of staffs.
5) Not much participation from staff members :
As the budget usually defines a particular process of doing a particular job
and the time limit within which a job should get completed , hence lower level
managers and staffs are not interested in adding any comment to the
budget. Moreover ,sometimes high level managers ignore the fact of
participation by the staffs.
6) Time Consuming
It is recommended that a manager spend about an hour per employee writing
performance appraisals and depending on the number of people being
evaluated, it can take hours to write the department’s PA but also hours
meeting with staff to review the PA. On the basis of this , budgets are usually
prepared and task allocation is done , hence the it is too time consuming.

7)Unfortunate events :
As the budgets are prepared keeping in mind the assumption of unfortunate
event not to occur but in real scenario this is not the story. Unfortunate
events like natural disaster or breakdown of machinery or any type of
accident may occur, so this may cause the budget not to be achieved and if
the senior managers are not cooperative and understanding , this may cause
difference in the evaluation of staffs .
8) Over estimate / under estimate
A Managers usually makes mistake while preparing budgets by either over
estimating or under estimating the budget . From both point of view both
issues are identified as a bad influence in evaluating budgets.
9) Lack of communication gap
Lack of communication gap between top level management and bottom level
management may also create problems in assigning task and evaluating
staffs.
Reasons for use of the budget in the Hospitality Industry
The use of budget and budgetary control has become a crucial part of the
Hospitality industry accounting as it is used as a benchmark to measure their
performance and helps to succor in this competitive market by performing as a
successful player by setting up their financial target. This industry comprises hotels
and other accommodations, restaurants, fast food retail, bars, and catering.In the
21st century the business of hotel is growing at a rapid pace.
Gareth Owen (1998) has explained the full budgetary process in the hotel business
by drawing a layout of full budgetary cycle.
o Environmental Influences audit
o Internal resources audit
o Actual result
o Master Budget
o Departmental Budget (Budgeting in the Hotel Industry, 2019)
o Strategic Plan
o (3-7) years
o Annual Business plan
o Long term Strategic Gap
o Short term Operational gap
The budget provides following benefits to hospitality industry :

1) There are several types of budget employed in hospitality industry , one
such is Departmental budget which helps in giving the total cost associated
with the ,many different parts of the hotel like cost associated with house
keeping ,valet charges,repairs and maintenance charges and room service
charges.
2) The second comes the cash budget , which is also helpful for the
management of the company in order to design the cash inflow and outflow
of the company and able to analyse whether the organization is in strong
position enough to meet the expenditure..
3) Another advantage is that it is also possible to compare the business with
other businesses in the same industry nationally and internationally.
4) The budget gives far more benefits then the cost that arises. It also creates a
way of communication between the departments. In the monthly meeting,
the managerial body, which contains ten heads of the departments meets
and reviews the profit and loss account and all other activities that happens
in the industry.
Problems related to using these budgets :
1) As the budget sometimes become pretty stiff and unchangeable instrument
for the employees
2) Budgets are seen as old system of control. Traditional budget are seen as a
mechanism for top down control by senior management. (Accounting
Tools.com, 2019)
3) Budgets reinforces barriers between departments.
Moreover while reviewing the different hotels and meeting and interviewing the
managers and staff of the business , it was found that
Unrealistic / too optimistic budget it is prepared by the senior level person based
on their own experience and assumption,it might not be realistic or even accepted
by the subordinates and could also turn out to be failure in meeting the target .
Lack of participation can be seen from the bottom level management ; Sometimes
while preparing budgets it might be seen that the subordinates are even not
interested in adding there own ideas and views on the budget.
Poor planning: The planning must be done very properly taking into account proper
timing in hand otherwise the budget may also fail.
Presence of communication gap.
PART 2 (1)
The sale price variance has been favourable on account of higher prices charged
and has contributed to increased revenue for Waterfall Café. Further, the price
charged stands at $ 33 compared to $30 budgeted cost. However, the
accommodation per day has not been in favour of the café and the same has seen a

drastic fall as the budgeted guest was 280 while the actual guest stood at 266
leading to downfall in revenue and unfavourable variance. Thus, on the basis of
above the impact on static budget was positive $ 378 while the impact on the
flexible budget was $798 favourable. The computation has been provided in excel
while the variances have been computed in the following manner:
Level 1 Variance
Actual Result- Master Budget
Price Variance
(Price Actually Charged- budgeted price)* actual Quantity (XPLAIND.com, 2019)
Volume Variance
(Actual Volume - budgeted volume)* Budgeted price (Accounting Tools.com, 2019)
Level 2 Variance
Actual Result- Flexible Budget
Price Variance
(Price Actually Charged- budgeted price)* actual Quantity
Since, the variance has been positive it has impacted the profits of the company in
a positive way and has increased the profits of the club. The potential reasons for
increase in price and decrease in volume could be the extra facilities provided and
the reduced volume could be on account of higher prices
PART 2 (2)
The purchase price variance has been favourable on account of lower prices paid for
main ingredient purchased from vendors. The same has contributed to increased
revenue. Further, the price paid for actual purchase was $ 5.45 while the budgeted
purchase price was $ 6.06 per litre. However, the consumption of raw material i.e.
main ingredient is quite high in case of actual as compared to budget. The same
resulted in unfavourable outcome. The actual quantity consumed per guest was
1.080 litre as compared to budgeted consumption per guest of 660 ml. The said
resulted in unfavourable variance. The impact on the static budget was
unfavourable balance of 445.79 $ while on the flexible budget, the impact was
positive 175.24$ while inbetweener the impact was negative and unfavourable. The
computation has been provided in excel while the variances have been computed in
the following manner:
Level 1 Variance
Actual Result- Master Budget

Price Variance
(Price Actually Charged- budgeted price)* actual Quantity
Volume Variance
(Actual Volume - budgeted volume)* Budgeted price
Level 2 Variance
Actual Result- Flexible Budget
Price Variance
(Price Actually Charged- budgeted price)* actual Quantity
Level 3 Variance
Actual Result- Inbetweener
Price Variance
(Price Actually Charged- budgeted price)* actual Quantity
Volume Variance
(Actual Volume - budgeted volume)* Budgeted price
Since, the variance has been negative it has impacted the profits of the company in
a negative way and has decreased the profits of the club. The potential reasons for
increase in volume by a greater extent compared to decrease in price.
The steps that can be taken to control the variance is making realistic budget and
strictly monitoring cost in accordance with budget. Further, reducing the size of
glass can also control the ingredient cost.
Part 3
Since under T2(i) the variance was favourable and was mostly on account of higher
price charged while under the T2(2ii) the variance was unfavourable on account of
increased volume. Also, under T2(2ii) it can be observed that the material
purchased was cheap as the price paid was lower which reduce the negative impact
of variance. Accordingly, it can be said that lower quality of material shall impact
the business in the long run as Marriot is a premiere restaurant and is known for
quality. Thus, controlling quality shall result in lower customer turn up and
ultimately the profit of the company shall be hit in the long run. Thus, an
appropriate solution could be to increase price and maintain similar level of quality.
References

Accounting Tools.com. (2019, May 22). Problems caused by budgeting. Retrieved from
www.accountingtools.com: https://www.accountingtools.com/articles/the-problems-caused-
by-budgeting.html
Accounting Tools.com. (2019, May 22). Sales Volume Variance. Retrieved from
www.accountingtools.com: https://www.accountingtools.com/articles/2017/5/4/sales-volume-
variance
Budgeting in the Hotel Industry. (2019, May 22). Retrieved from www.ukessays.com:
https://www.ukessays.com/dissertation/examples/leisure-management/hotel-industry-
marriott.php
Freedman, J. (2019, May 22). How Is a Budget Used to Motivate a Staff? Retrieved from
smallbusiness.chron.com: https://smallbusiness.chron.com/budget-used-motivate-staff-
50432.html
XPLAIND.com. (2019, May 22). Sales Price Variance. Retrieved from xplaind.com:
https://xplaind.com/177616/sales-price-variance