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Gagan Sharma the owner representative hired by Ms. Katrina in Katrina & company which is managed by the SRK corporation. Ms. Katrina hired me to make the budget data reports and analyze the CVP to know the actual position of the company and to set the new targets on the basis of the budget data.When Ms. Katrina appointed me as owner representative the management of the company provided me the data of September, 2018 on the basis of the data I am supposed to make the variance charts on the basis of data provide to me comparing the actual budget data to static budget data and flexible budget data to the actual budget data.
On the basis of the data charts I have done the CVP analysis to get the break even points and margin of safety to the company to know about how much minimum sale and unit room to be sold to not to be in profit or in loss.
Data Reports of September, 2018Katrina & company, Little India, SingaporeTotal Number of rooms in hotel = 125 1.
The data for the month of September 30, 2018
Average daily rate $180Occupancy 80%
Variable housekeeping cost per room $3.50
Variable labour cost per room $8.00
Fixed cost per month $125,100
Average daily rate $170Occupancy 96%
Variable housekeeping cost per room $3.00
Variable labour cost per room $9.00
Fixed cost per month $125,200
The owner wanted you to investigate the September 30, 2018 Income Statement Variance Report as the General Manager of the management company reported another good month for the operating profit even though the average daily rate drop from 0 to 0.
The owner felt that it was not an appropriate comparison of actual to static budget as it would distort the overall profitability.
Prepare the Static Budget Income Statement Variance Report and Comment.The owner had also heard of a better variance report by comparing actual to flexible budget.Please comment on the assignment to address the concern of the owner.
The owner would also like to know the break-even point units of sold and sales volume for budgeted and actual period respectively. Also calculate the break-even point occupancy and margin of safety. Please comment on your recommendation on how to improve profitability.
Based on the written report above, you are required to present with power-point slides and be able to deliver a speech to address the owner concern of the hotel.Task 1- Income variance reports for moth of September, 2018Static Budget: According to Staff, 2018, A static Budget is a sort of spending that consolidates foreseen values about sources of info and yields that are imagined before the period being referred to starts. At the point when contrasted with the genuine outcomes that are gotten sometime later, the numbers from static budget are frequently very not quite the same as the real outcomes
Static budget variances are the differences between what a company or individual thought it would spend in its budget versus what it actually did. In a static budget, a company or individual creates the budget for the entire period — a year, a quarter, or any other amount of time — and doesn’t change the budget as time moves forward.
Flexible Budget: According to Bragg and Bragg, 2018, A flexible budget is a spending that modifies or flexes for changes in the volume of action. The flexible budget is more refined and helpful than a strategic plan, which stays at one sum paying little heed to the volume of movement.Flexible budget variance: A flexible budget variance is a spending that demonstrates contrasting dimensions of income and cost, in view of the measure of offers movement that really happens. Normally, genuine incomes or real units sold are embedded into a flexible budget model, and planned cost levels are consequently created by the model, in view of recipes that are set at a level of offers.Static Budget variance report of September,2018
Actual Static VarianceRoom Sales 3600 3000 Average room rate $612,000 $540,000 $72,000(F)Variable Costs Room Amenities $10,800 $10,500 $300(U)Labour $32,400 $24,000 $8,400(U)Contribution Margin $568,800 $505,500 $63,300(F)Fixed Cost $125,200 $125,100 $100(U)Operating Profit $443,600 $380,400 $63,200(F)As on my opinion the budget which is given by the company of September month of 2018, after reading the budget thoroughly I have made the variance chart in which the comparison of actual and static budget is done. In the comparison there are favorable and unfavorable variances in the values of the expenses, revenues and profits of the company.
If we look in the variable costs (the room amenities costs and Labour cost) is unfavorable as because of the company spent more on them to achieve the targets but it is done only because to give the comfortable stay to guest in the hotel and target to target to make more and more revenue from it.
By taking the expenses on other hand, if we look at the operating profit of the company it is $ 63,300More than the operating profit of the static budget of the company. It means if we talk about the variance chart on the basis of static budget the company is going in a profit but the company has to reduce their costs like room amenities and labour cost. If we consider about that this is actual performance of accompany than it is wrong because it is not relevant comparison which shows the position of the company.
Note: u= unfavorable F= Favorable(b) Flexible budget variance report of September, 2018
Actual Flexible VarianceRoom Sales 3600 3600
Average room rate $612,000 $648,000 -$36,000(U)
Variable Costs Room Amenities $10,800 $12,600 -$1800(F)
Labour $32,400 $28,800 $3,600(U)
Contribution Margin $568,800 $606,600 -$37,800(U)
Fixed Cost $125,200 $125,100 $100(U)
Operating Profit $443,600 $481,500 -$37,900(U)
After making the flexible budget on the basis of the actual data given by the company I started making the budget on the basis of the 3600 room sales in a month. The company has obtained the variance in average room revenue of -$36,000 to the actual budget and same as in the contribution margin. In the end if we talk about the operating profit the company facing loss in the in September month if we talk the company production on the basis of the operating profit.Variance chart of static budget and flexible budget
Static Budget VS Actual (Favourable [F] & Unfavourable [U]) Flexible BudgetVSActual(Favourable [F] & Unfavourable [U])
Sales Revenue F [72,000] U [-36,000] Variable cost Housekeeping cost U  F [-1800]Labour cost U [8,400] U [3,600] Contribution margin F [63,300] U [-37,800]Fixed costs U  U Operating Profit F [63,200] U [-37,900]
In the above data if we look at the comparison between static budget variance and flexible budget variance there are too much difference in between them if we consider about sales revenue the flexible budget variance is in negative terms which shows the actual status of the company in the room sales which and unfavorable to the company as compared to the static budget variance. As the contribution margin is all about the deduction of variable costs from sales revenue.
In short, the flexible budget variance report shows the genuine correlation with the real information. In the wake of looking at this present the first outcome for the inn. In any case, the results originates from the static budget change report are not associated on the grounds that the quantity of rooms sold and cost are distinction. I recommend the administration of the Katrina and company to run with the flexible budget variance answer to get the first outcomes as contrast with static budget variance report. This proper report will assist the administration with taking the correct choice, for example, valuing methodology and cutting the expense and so forth.
CVP (Cost volume profit analysis)Break-even analysis: According to AccountingCoach.com, 2018, Break Even Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break-even point analysis is used to determine the number of units or revenue needed to cover total costs (fixed and variable costs).
Break-Even point: In accounting, the break-even point refers to the revenues needed to cover a company’s total amount of fixed and variable expenses during a specified period of time. The revenues could be stated in dollars (or other currencies), in units, hours of services provided, etc.Break-even point sale: Break-even point sale is a time when the offers of income are zero and the benefit from the incomes is zero. Break-even point occupancy: Break ” even point occupancy is the aggregate of the considerable number of costs like work cost and housekeeping cost and it is partitioned by the entire inhabitance every month. Margin of safety: The margin of safety is a proportion of distinction between the real planned deals and the make back the initial investment deals.
For Actual BudgetBreak-even point units of rooms:125200170-12= 792 Rooms
If we talk about the break-even point for the company on the basis of the actual budget the company has to sell minimum number of 792 rooms to cover all the expenses of the month.Break-even point for sales volume:792*170=$134,640
In the sense of break-even point for sales the company is at no loss or no gain if the company managed to get the revenue of $134,640.
Break-even point Occupancy:792*100125*30= 21.12%
In break-even point occupancy the company needs to have that much occupancy in a hotel so the company should not go in loss. For the Katrina & company the hotel has to be 21.12% of occupancy if they don’t want to be in a loss and making profit. Margin of safety:3600-792= 2808 Rooms
Margin of safety indicates the amount of sales that are above the break-even point. In other words, the margin of safety indicates the amount by which company sales could decrease before the company will become unprofitable.
Break-even point units of rooms:125100180-11.50= 742 Rooms
Break-even point for sales volume:742*180=$133,560
Break-even point Occupancy:742*100125*30= 19.78%
Margin of safety:3000-742= 2258 Rooms
As per the Actual Data, the Break-even point is 792 rooms which shows the hotel is required to sell 792 rooms and has to make $ 134,640 to cover all the expenses and start profit point.
Further, the rate of breakeven point occupancy is 21.12%. Margin of safety is 2,808 rooms’ states the rooms over the breakeven point after which the hotel will start making profit.I prescribe the hotel to utilize the flexible budget variance report to get the applicable practically identical outcomes and to know the actual performance of the company.
Oral PresentationOpening Speech-Good morning ladies and gentleman, I Gagan Sharma and my partners Suhagiya sandeep kumar and Prashant kumar hired by the Ms. Katrina as owner representatives. We are here to talk about the income reports of the company of September, 2018 and the break even analysis of the company. The main purpose of the presentation which we are going to present is to show the performance of the company in the September, 2018 and why CVP analysis is important to the company for the future growth.
Body of the speech: Now, if we look at the data which is given by the company of September month we made a static budget and the variance report to show the comparison between the actual sale and the actual budget of September. As you all know about what is static budget variance and flexible. If we talk about the variances between them, than we will see that some of the financial entries comparison are unfavorable of static budget to the actual budget. But this is not relevant comparison for the company to get to know about company’s status. In next we have made a flexible budget as compared to actual budget.
Now in this slide you will see the flexible budget of the company of September as in this data u will see that the numbers of terms are unfavorable to the company. This shows actual performance and productivity of the company.If we see the static budgets and flexible budget variances than we know better that the actual state of the company is different from the budget which we have made in starting of the month.
Now if we talk about the CVP analysis of the company these are the break-even analyses of the company to sell that much number of rooms to cover all the expenses and start making profit.Closing Speech:In the end the flexible budget data which is calculated on the basis of the actual data of the month is more beneficial for the management in the sense of attaining the exact numbers of the month to know the actual position, production of the company.The static budget is only made in the starting of the financial period to set the targets of the company.The CVP analysis helps in setting new targets or helps in company to make future decisions.
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