Tourism & Hospitality: Cost and Performance Management Analysis

This report evaluates Coastal Hotels' budgeting process for the year ending June 30, 2018, utilizing variance analysis to assess the company's financial performance. It emphasizes cost control through inventory management, credit purchases, and human resource management, particularly focusing on reducing employee turnover and optimizing resource utilization. The analysis identifies cost drivers such as inventory and employee expenses, revealing effective cost-cutting strategies in cost of sales but highlighting increased indirect expenses, especially concerning casual employees. Recommendations include shifting towards permanent employees, implementing fixed-term contracts, and enhancing internal training to improve efficiency and reduce costs. The report concludes with suggestions for increasing sales through marketing strategies and customer relationship management.

Cost and Performance Management for Tourism and
Hospitality
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Table of Contents
Introduction....................................................................3
Cost control....................................................................4
Cost Measurement Analysis...........................................5
Variance analysis...........................................................6
Recommendation.........................................................11
Conclusion...................................................................12
References....................................................................13
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Introduction
Budgeting has become an integral part of business strategies used by Business organizations
for development and growth. Each and every business organization are using budgeting in
order to control cost and gain a competitive advantage over other business organization
(Weygandt, Kimmel & Kieso, 2015). This report has evaluated the budgeting process
conducted by Coastal hotels for the year ending 30th June 2018. Variance analysis will be
used in order to identify the financial performance of the company during the year.
Suggestions will also be made on the basis of such variance analysis and cost structure of the
company.
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Cost control
Inventory management-
Management of the company should focus on inventory management to reduce cost. Majority
of the direct cost in restaurant businesses goes towards supplies purchased for making food
items. It is important to implement effective management strategies for inventory
management to reduce the wastage of food and full utilization of all the resources available
with the company. Management should also enter into annual contracts with vendors of the
company and negotiation should be done by management in order to reduce the prices of raw
material purchased. This could help in reducing the cost of sales and direct wastage of food
(Noreen, Brewer & Garrison, 2014).
Credit Purchases-
A substantial part of the contract entered with the supplier should be based on the credit
method rather than cash payments. Payment in advance reduces the opportunity cost that
could have been earned by management if materials were taken on credit. For example,
management of the company could have used this money for r daily operations. Payment to
the supplier should be made after the revenue is generated from the supplies made by the
vendor. This will also help in better management and estimation of profit on a particular set
of supplies purchased from a vendor. Bulk purchases should also be made as a discount or
other rebates received in bulk orders is generally high as compared to cash orders (Dopson &
Hayes, 2016). It will help in maintaining up appropriate business cycle i.e. supplies are
purchased, revenue generated then payments are made to creditors. Due to the development
of business cycle supplier management will become very efficient.
Human resource management-
Majority of the business operations are based on human resources in the restaurant business.
Therefore it is important to maintain proper Human Resource Management strategies in order
to control the cost of human resources. Human resources in a restaurant business should be
skilled and experience in a particular area of operation. It is important for a business
organization to reduce the employee turnover if they want to reduce the cost of labor. If a
particular experienced employee left the business organization then a new employee will be
hired and time and effort will be invested in making search employee aware of the business
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operations and policies of the company. Training and development will require additional
cost which could be higher if employee turnover ratio is very high (Langfield-Smith, Smith,
Andon, Hilton & Thorne, 2017). It would be better for management to provide good facilities
and income for their employees in order to reduce employee turnover. In long run, this
strategy would be the most cost efficient for the company.
Yield management
This is one of the most common methods of cost controlling in restaurant and food business.
Yield management is a business strategy that is used by managers in order to identify the raw
material that the actual production of a particular food item. Therefore this management
strategy will standardize the raw material and other products used for making all the food
items (Marshall, 2016). It will also reduce the overall time used by the chef to prepare food
which would ultimately increase the profitability of the company. The biggest advantage of
this method is that it will help in maintaining a similar type of flavor that can become a brand
for the company.
Cost Measurement Analysis
Cost driver can be defined as the underlying activity of business that has resulted in a
particular expense. For example, distance traveled by a delivery boy can be considered as a
cost driver for total transportation cost. It is important for management to identify these cost
driver if they want to control the overall cost of production. The segment of the report will
identify some of the cost drivers that can be used for ascertaining the performance of cost
control methods used by management.
Inventory management can be identified as the cost driver for the total cost of sales incurred
by the company. It can be said that inventory management of the company is very efficient in
this financial year. Budgeted total expenses estimated by the management was $165000 on a
sale of $604000. But at the end of the financial year, the company has incurred a total of
$209000 as the cost of sale where is the total amount of revenue generated by the company is
$906000. If budgeted figures are adjusted accounting to total revenue actually generated by
the company budgeted cost of sales should have been $247000. It shows that the management
of the company has effectively decreased the cost of sales with better inventory management
(Demski, 2013).
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Generally, employee cost is considered as a fixed cost because fixed payment is paid to an
employee for their services. In this case, budgeted expense in relation to casual employees
was $115000 but the actual expense goes up to $225000 which can be considered a very
substantial increase. The increase of 10% can be assumed because there might be some
employees that leave the organization and additional training course would have been
incurred on the training of new employees. But an increase of 95% expense in relation to
casual employees is very high (DRURY, 2013). It is also provided in the information that
there are more casual employees as compared to permanent employees definitely increase the
overall cost of the company in long run. Casual employees will leave the organization more
frequently if they get any permanent job in another restaurant. This would require an
additional cost on training and development of the employee. It would also result in an
efficiency in operations at an earlier stage of employment for new employees.
Following amendments should be made by management with respect to employ strategies to
reduce the overall cost of human resources-
1. A number of casual employees should be reduced and more experienced employees in the
company should be made permanent.
2. A contract can be made with every casual employee for a limited period of time so that
benefits of a particular resource is greater than cost implemented on the development of
the resource (Collings, Wood & Szamosi, 2018).
3. Training should be provided by experienced staff to new employees so that training
course can be reduced and the efficiency of the resource can be improved on the job.
4. Proper roles and responsibilities should be delegated by management to each and every
employee so that every employee can be used to their full potential and the number of
employees can be decreased.
Variance analysis
Majestic paper at the starting of the financial year where total revenue that will be generated
by the company is based on Estimation. It is the general practice of business organization to a
flexible budget so that all the financial particulars in a particular project can be adjusted
according to the actual sales made by the company (Groot & Selto, 2013). Following
statement has provided a description of the actual budget, the actual financial transaction at
the end of the financial year, adjusted budgets according to actual sales made by the company
and variances.
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ACTUAL BUDGETED
Varianc
e
Favourable/
Unfavourable
2017-
2018 2017-2018
Income
RESTAURANT Sales 846000 564000 50% Favourable
Sale of goods/services 60000 40000 50% Favourable
Total Sales 906000 604000 50% Favourable
Less: Cost of Sales 209000 165000 27% Unfavourable
Gross Profit 697000 439000 59%
Expenses
Bank charges 900 825 9% Unfavourable
property insurance 1155 1050 10% Unfavourable
Casual employee wages 225000 115000 96% Unfavourable
Cleaning & cleaning products 1485 1080 38% Unfavourable
Credit card commission 13590 9060 50% Unfavourable
Electricity/Gas 36000 33000 9% Unfavourable
FOOD DELIVERY Vehicle service
costs 1800 2700 -33% Favourable
kitchen utensils hire 900 1200 -25% Favourable
Advertising 3750 2625 43% Unfavourable
Netflix subscription 900 900 0% Unfavourable
Permanent full time employees
wages 315000 210000 50% Unfavourable
Public liability insurance 840 840 0% Unfavourable
Repair & maintenance 3150 2250 40% Unfavourable
Superannuation for employees 41325 30875 34% Unfavourable
Waste removal 1440 1620 -11% Favourable
Water charges 10800 8400 29% Unfavourable
Website hosting expenses 2662.5 2662.5 0% Unfavourable
Total Expenses 660698 424087.5 56% Unfavourable
Month Net Profit / (Loss) 36302.5 14912.5 143% Favourable
Variance analysis can be examined on the basis of four major factors i.e. revenue, cost of
sales, indirect expenses and profit.
Revenue-
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Total revenue estimation by management was very lower as compared to actual sales made
by the company. Total revenue earned by the company was $604000 whereas total budget
revenue was 604000, therefore it was favourable for the business but this wrong estimation
on part of management shows that assumptions and capabilities of the company estimated by
management were not very effective (Rhyner, Schwartz, Wenger & Kohrell, 2017). This
could have resulted negatively in the business organization. There are various factors that are
decided on the basis of total revenue expected to be generated by the company. For example,
contacts with the supplier are generally made in advance on the basis of expected sales in
coming months. Wrong estimation of revenue will affect the cost of the supplier.
Cost of sales
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Similar to total revenue there has been an improvement in cost of sales maintained by the
company. Total cost of sales has increases from budgeted cost of sales of $165000 to
$209000 but if comparison is made with amount of total revenue then it can be said that there
has been an improvement in cost of sales. It was estimated at the start of the financial year
that total cost of sale would be around 27% of total revenue but due to cost-effective
strategies of the company this ratio was reduced to 23%. Therefore it can be said that
management was very effective in cost-cutting strategies.
Indirect expenses
Total indirect expenses has increased over the period of a month as total as total estimated
indirect expenses were 424087.5 whereas actual total expense was 660697.5. It shows that
total expenses are exceeding the budgeted expenses by $236610. After adjusting the budgeted
figure with the amount of actual revenue, adjusted total expenses should be 636131.3. This
negative variance shows that management of the company has not been very effective in cost
control on total indirect expenses. One of the major reason that has resulted in an increase in
total expenses is expense related to casual employees. All the expenses has increased in as
compared to standard expenses expect food delivery vehicle service costs, kitchen utensils
hire and waste removal expenses. Strategies have been suggested to management to reduce
the cost of human resources.
Profitability
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Gross profit of the company has been favourable as company has earned an extra gross profit
of $258000 as compared to budgeted gross profit. Main reason behind this favourable
condition is increase in overall sales.
Net profitability if the company are also improved over the year as expected net profit margin
of the company was 2.46 % whereas actual net profitability of the company is around 4%.
Over all net profits has also increased from expected profit of $14912 to actual profit of
$36302.
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Recommendation
There are various methods that can be used by the business organization to increase sales
without incurring any expenditure on total expenses. These methods are as follows-
Sales and marketing- One of the best method to boost sales of the company are through
innovative sales and marketing strategies (Pirani & Arafat, 2014). One of the best methods
that can be used in the current business environment is social media marketing. Cost of
implementation this type of marketing is very low and it would not affect the structure of the
company substantially.
Waste management strategies- effectiveness management strategies would definitely improve
the total revenue generated by a company with the help of the same amount of raw material.
This would not increase the overall direct expenditure by the company. Current waste
management strategies are working positively, therefore more innovative methods should be
adopted in this management (Baker, 2014).
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Conclusion
It can be concluded that operations of Coastal hotels for the year ending 30th June 2018 have
been more profitable as compared to Expectations of the company. Actual profit generated by
the company has exceeded the budgeted profitability but there are some factors that should be
considered in preparing a budget for the next year. For example estimation of total revenue
was very inaccurate and it can affect overall operations. Better methods and procedures
should be used for assumptions taken in relation to market demand. In addition to that, there
is also a requirement to control indirect expenses especially cost associated with casual
employees.
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