managing financial resources fcs 387. the purpose of budgeting what is a budget? the...

Managing Financial Resources

FCS 387

The Purpose of Budgeting

What is a budget? The organization’s business plan expressed

in financial terms. Based on mission, goals, and objectives

A good budget makes sure resources are being used to accomplish the overall purpose of the organization.

Types of Budgets

Master Budget Consists of an operating budget, capital

budget, cash budget and a budgeted balance sheet.

Cash Budget Project when funds will be available and when

they can be spent. Budgeted Balance Sheet

Statement of assets and liabilities based on budget estimates.

Operating Budgets

Incremental Budgets Based on the previous years budget

Advantages: Easy to prepare Based on accurate records

Disadvantages: Not responsive to change

Operating Budgets

Zero-based budgets Based on estimated need for the coming

year, without relying on last year’s budget Manager must justify every dollar of proposed

spending Historical data is acceptable if it can be justified

Operating Budgets

Zero-based budgets Advantages:

Make organizations responsive to environment Force organizations to examine their structures

and processes in order to eliminate waste and redundancy

Disadvantages: Difficult and costly to prepare Organizational politics and manager bias

Operating Budgets Fixed Budgets (Static budget)

Funds are allocated for the entire fiscal year. Can be applied to either incremental or zero-

based Advantages:

Provide managers with goals for financial performance

Disadvantages: Not enough flexibility to be responsive to

changes in the volume of work

Operating Budget

Variable Budgets (Flexible budget) Expenses will vary in response to actual production,

volume, or revenues Advantages:

Designed to be flexible so organizations can react to change

Disadvantages: More reactive than predictive Many organizations can’t respond quickly

Preparing an Operating Budget

Cost Center

Revenue Center

Profit Center

Parts of an Operating Budget

Revenue Budget Projection of the income of an organization Written only for revenue centers Two steps:

Project the volume of goods or services Set the price

Considerations: Revenue from other sources No guarantee that all the money that is billed will

be collected


Expense Budget Deals with all anticipated costs Prepared for every department including cost

centers Sub-budgets

Labor, material, overhead, other expenses

Labor Easy to project Direct labor costs

Related to actually doing work Straight-time pay, overtime

Indirect labor cost Benefits May not be included in labor budget


Direct Material Budget The estimate of cost for raw materials to be

used in the production of goods. Food and related goods

Overhead Expenses associated with the operation of a

facility May or may not be included in a departmental

operating budget


Capital Budgets

Projects spending on items that are costly and durable such as land, buildings, and major pieces of equipment.

Organizational system for allocation of funds Submit proposals

Steps For Preparing a Capital Budget

Determine what capital goods are needed Prioritize the items on the list of needs Estimate the cost for each proposed

capital expenditure Prepare the capital budget requests,

including justification and cost data Submit the proper paperwork to formalize

the request

Controlling Costs

Table 17.1 Material Management Workflow Workforce Facilities Maintenance Management of Utilities Risk Management

Financial Reports

Operating Statement (Performance report) Compares actual fiscal performance to the

budget

Variance Analysis Prepared by managers to account for any

deviation from the budget

Profit and Loss Statements Shows net profits or losses

Income (sales)Less: Cost of food soldEquals: Gross profitLess: Labor, overhead, and operating expensesEquals: Net profit or Loss

Financial Reports

Balance Sheet Summarizes assets, liabilities, and owner’s

equity. Prepared by the accounting department

Consolidated Balance Sheet Consolidates data from multiple years into

one statement.

Financial Reports

Cost of Goods Sold (COGS)

Food cost Cost of all foods and beverages used

producing menu items Cost of Goods Sold = raw food cost

Calculated two ways: Total cost of all foods used during a given

time period The cost of one portion or menu item

Cost of Goods Sold

Calculating COGS: Conduct an inventory at the beginning and

end of desired period Day, week, month, quarter, or year

Maintain records of all purchases Generally, supplies, tools, and non-food items

are not included

Discussion Question

A fast food restaurant wraps every sandwich it sells in a sheet of wax paper. This paper costs $21.00 per 1000. Should the inventory of wax paper be included in the cost of goods sold? Why?

Calculating COGS

Practice:

The total value of food inventory on December 1 is $7,600. The restaurant purchases $2,300 worth of food during December and inventory on January 1 is worth $5,600. What is the COGS during the month of December?

Calculating COGS

Value of Food Inventory at Beginning of Period

Plus Value of Food Purchased During Period

Minus Value of Inventory at End of PeriodCost of Goods (Food) Sold

Calculating COGS

Practice:

($7,600 + $2,300) - $5,600 = $4,300

Management can use COGS to compare with the dollar value of sales for the same period

Food Cost Percentages

Food Cost Percentage Ratio of costs to sales

Practice: COGS for December was $4,300. If the food

sales for December totaled $10,750, what is the food cost percentage for the month?


Cost of Food Sold

Food Sales x 100 = Food Cost Percentage

Practice:

$4,300/$10,750 = .40 = 40%


By itself a single food cost percentage is meaningless Compare with other months of the same year Compare with same month of previous years Compare with similar food service operations

There is no perfect food cost percentage


Calculated on individual menu items: If the food items in a sliced turkey sandwich

cost $2.80 and the sandwich sells for $5.25, what is the food cost percentage?

$2.80/$5.25 = 53%

How will you reduce this percentage?


Practice: Calculate the food cost percentage for an

operation with annual sales of $540,000. The physical inventory at the start of the year listed foods on hand valued at $23,000; the year end inventory listed foods valued at $17,000. Purchases during the year totaled $235,000.


Practice:

COGS: $23,000 + $235,000 = $258,000 - $17,000 =

$241,000

Food Cost Percentage: $241,000 / $540,000 = .446 = 45%

Menu Pricing

Cost-Based

Profit-Based

Non-Cost-Based

Cost-Based Menu Pricing

Food Cost Percentage Cost per Portion / Food Cost % = Selling Price Practice:

Your manager has determined that food costs should be no more than 28% of sales. What should you charge for a bowl of onion soup if the recipe cost is $1.12 per portion?

Selling Price = $1.12/.28 = $4.00


Factor Pricing A multiplier is used to calculate menu prices 100 / Desired food cost percentage = factor Multiply the cost of each menu item by the

factor to get the selling price Practice:

What factor is used to set menu prices with a 28% food cost?

100 / 28 = 3.57


Prime Cost Pricing Prime Cost = Food Cost + Direct Labor

Prime Cost % = Food Cost % + Direct Labor %

Prime Cost / Desired Prime Cost % = Selling Price

Practice The raw food cost for a rack of lamb is $7.50

and it takes a cook a total of 9 minutes to clean and trim it for service. If that cook is paid $8.50 per hour, what is the direct labor cost? What is the prime cost?

Direct labor cost = $1.27 ($8.50 per hour = $0.14 per minute x 9 minutes)

Prime Cost = $8.77 ($7.50 + $1.27) If the desired prime cost percentage is 48%,

what is the selling price? Selling price = $18.27 ($8.77 / .48)

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