ACC 543 Week 3 Planning, Control and Budgets Example

Fewer Guests, Higher Rates and Overtime in Housekeeping: A Flexible Budget, Variance Analysis and Balanced Scorecard for a Composite 180-Room Hotel

[Student Name]

University of Phoenix

ACC/543: Managerial Accounting & Legal Aspects of Business

Week 3 Assignment

[Instructor Name]

[Date]

The hotel and all figures are composites written for a model paper; methods and research findings come from the sources listed.

A composite select-service hotel near a regional airport has 180 rooms and is managed for its owner by a hotel management company. The owner reviews the general manager's performance each year against budget. This year operating income was $1.10 million against a budget of $1.49 million, a shortfall of about $387,000. The owner's first reaction was to question the general manager's cost control and to ask whether the management company should be replaced. A static budget answers only whether the hotel hit its plan; it cannot say whether the manager ran the hotel well at the occupancy the market actually delivered. This paper separates the causes.

The Static Budget and Actual Results

The budget assumed 72% occupancy, 47,304 room nights, at an average daily rate of $148, for room revenue of about $7.00 million. Variable costs per occupied room were budgeted at $37 for housekeeping labor, laundry, amenities and variable utilities, plus card fees of 3% and franchise fees of 5% of revenue. Fixed costs, including management salaries, maintenance, insurance and property taxes, were budgeted at $3.2 million. Budgeted operating income was about $1.49 million.

Actual occupancy was 66%, 43,362 room nights, because a major airline reduced flights at the airport, cutting crew and traveler demand. The general manager raised rates, and the average daily rate was $152, for revenue of about $6.59 million. Actual variable costs were about $2.23 million and fixed costs $3.26 million. Operating income was about $1.10 million.

The Flexible Budget

A flexible budget recalculates what revenue and costs should have been at the actual activity level, using budgeted prices and cost rates (Garrison et al., 2021). At 43,362 room nights and the budgeted rate of $148, revenue would have been about $6.42 million. Variable costs would have been $37 times 43,362 room nights plus 8% of revenue, about $2.12 million. Fixed costs stay at $3.2 million. Flexible budget operating income is about $1.10 million.

Splitting the Shortfall

The static budget variance of about $387,000 unfavorable splits into two parts. The sales volume variance, the difference between the static and flexible budgets, is about $391,000 unfavorable. It reflects the airline's cut, which reduced room nights by about 3,900. The flexible budget variance, the difference between the flexible budget and actual results, is about $4,000 favorable. At the occupancy the market delivered, the general manager produced slightly more income than the budget's own rates and costs would predict.

Price and Cost Variances

Within the flexible budget variance, two items offset. Raising the average rate by $4 produced a favorable revenue price variance of about $173,000. Costs moved the other way. Housekeeping labor cost $1.04 million against a flexible budget of about $954,000 at $22 per occupied room, an unfavorable variance of about $86,000. The cause was overtime: two housekeepers left in the spring and were not replaced for three months, so the remaining staff worked extra hours at overtime rates. Variable utilities were about $10,000 over the flexible budget because of a hot summer. Fixed costs ran $60,000 over budget, mainly for an unplanned elevator repair. Card and franchise fees, which rise with revenue, were higher than the flexible budget because of the higher rate, which is expected.

Why the Static Budget Misled

Compared with the static budget, several costs looked favorable. Housekeeping labor, for example, was below the static budget of about $1.04 million only by a few hundred dollars, which seems like good control. Yet the hotel sold 3,900 fewer room nights, so housekeeping should have cost about $87,000 less than the static budget. Only the flexible budget reveals that housekeeping was actually overspent. In the other direction, the static budget made the general manager look responsible for the whole revenue shortfall, when most of it came from a decision by an airline. Static budgets reward managers when volume falls on the cost side and punish them on the revenue side, which is the opposite of a fair evaluation.

Who Is Responsible

The sales volume variance lies largely outside the general manager's control, although the sales team might have replaced some airline business with group bookings. The rate decision was the general manager's and was successful. The housekeeping overtime is the general manager's responsibility: slow hiring cost more than the wage savings from open positions. The elevator repair was unavoidable, though the maintenance contract should be reviewed.

A Balanced Scorecard View

Kaplan and Norton (1996) argued that financial measures should be joined by customer, internal process and learning measures that drive future financial results. For the hotel, the owner will track guest satisfaction scores, which fell slightly during the overtime months as rooms were cleaned later in the day, housekeeping turnover and time to fill open positions, rooms cleaned per labor hour and revenue per available room compared with nearby competitors. The last measure is especially useful: the hotel's revenue per available room fell 7%, while its competitive set fell 11%, suggesting the hotel held share well in a weak market.

Using the Budget With Managers

Hansen et al. (2003) reviewed research showing that budgets serve several purposes, planning, coordination and performance evaluation, and that using one budget for all of them can encourage managers to build in slack. Jensen (2001) warned that tying bonuses to budget targets leads managers to lowball forecasts. The owner will therefore evaluate the general manager on the flexible budget variance and on scorecard measures relative to competitors rather than on the static budget, and will reforecast occupancy midyear when market conditions change sharply.

Reforecasting

The airline announced its schedule cut in February, three months into the fiscal year. At that point the budget's occupancy assumption was no longer realistic, and a midyear reforecast would have given the general manager an achievable target and prompted earlier action on group sales and staffing. The owner and management company agreed to reforecast in the future whenever occupancy runs more than five points from budget for two consecutive months, while keeping the original budget for comparison.

Actions

The general manager will keep a small pool of on-call housekeepers to avoid overtime when positions open, begin recruiting as soon as a resignation is received and pursue group business from the university and hospital near the airport to replace airline demand. The owner will review the elevator maintenance contract and ask the management company to present next year's budget with a range of occupancy scenarios rather than a single figure.

Conclusion

The hotel's $387,000 shortfall came almost entirely from lower occupancy caused by an airline's schedule cut. At actual occupancy, the general manager slightly beat the flexible budget, with a successful rate increase offsetting housekeeping overtime and an elevator repair. A flexible budget, variance analysis by cause and a balanced scorecard gave the owner a fairer and more useful view of performance than the static budget.

References

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting (17th ed.). McGraw Hill.

Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15(1), 95-116. https://doi.org/10.2308/jmar.2003.15.1.95

Jensen, M. C. (2001). Corporate budgeting is broken, let's fix it. Harvard Business Review, 79(10), 94-101.

Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, 74(1), 75-85.