slide 1 d2.tfa.cl7.05. subject elements this unit comprises three elements: element 1: identify the...

MANAGE AND CONTROL OPERATIONAL COSTS

Slide 1

D2.TFA.CL7.05

Subject elements

This unit comprises three Elements:

Element 1: Identify the context of operational costs

Element 2: Manage operational costs

Element 3: Control operational costs

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Assessment

Assessment for this unit may include:

Oral questions

Written questions

Work projects

Workplace observation of practical skills

Practical exercises

Formal report from supervisor

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1.1 Define the meaning of cost to the organisation

1.2 Distinguish between the classifications of costs experienced by the organisation

1.3 Identify examples of actual costs experienced by the organisation

1.4 Identify the decision making process that relates to cost within the organisation

1.5 Identify the cost controls provided by budgeting

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1.6 Differentiate between budget types and identify their application within the organisation

1.7 Identify the budget cycle

1.8 Identify the budgets that exist within the organisation

1.9 Determine the current status of existing budgets

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1.1 Define the meaning of cost to the organisation

Therefore the meaning of cost can be viewed in different ways by different people.

The meaning of cost may be seen as:

Regarding cost as an asset

Seeing assets as potential costs

Differentiating between costs and expenditure

Cost challenges in the tourism industry

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Whilst each tourism organisation will have their own specific types of individual costs, depending on the products and services they sell, most expenses will fall into one or more of the following 'classification' of costs:

Budgeted cost

Uncontrollable costs

Actual cost

Controllable costs

Direct costs

Indirect costs

….see trainee manual for additional points

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Indicate whether you think the following costs are fixed (F), variable (V) or mixed (M).

Commissions

Electricity

Office salaries - paid fortnightly as part of annual income

Direct labour

Cost of goods sold

Insurance

Telephone

Depreciation

Staff motor vehicle expenses

Advertising

Cleaning

Accounting

Lease of tour buses

Rent

Legal fees

Maintenance of equipment


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Managers can find it useful to divide the business into segments or activity centres of two types.

Profit Centre

Cost Centre

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Most large businesses will produce an extensive and comprehensive list of budget codes, which are, in fact, the budget lines. For example a ‘Training budget’ may have budget lines or codes for all the expenses that are expected to be incurred for training purposes.

Budget codes

Cost of goods sold

Bad debts

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Decision making process considerations

Cost spending principles

Developing relevant cost elements and performance outcomes

Determine how funds will be spent

Apply CBA

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Application of CVP analysis

To determine the price for a product, you will need to assess

What customers are willing to pay

What your competitors are charging

How much profit you wish to make

What would happen if you increase the sales price

Your market share objective

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Determine depreciation schedules

Negotiate cost with suppliers

Determining how assets will be acquired

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3.1 Set budgetary limits and objectives for individual cost-related budgets

The role of budgeting cannot be understated in ensuring costs associated with an organisation are identified, monitored and evaluated against pre-determined benchmarks.

Definition of budget

A budget is a statement of management’s planned outcomes for the business, expressed in dollars or quantities to achieve its objectives for a precise period of time

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Expressing budget limits and objectives

Budgetary limits and objectives may include:

A nominated monetary amount

A nominated physical quantity in a non-monetary budget

Acceptable parameters for budget performance, including red flag signals

KPI’s for evaluating budget performance in the short and long-term

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Understanding budget strategies

Planning

Allocating resources

Projecting revenue

Projecting expenses

Developing controls

Establishing monitoring activities and systems

Creating reporting protocols

Responding to variations Slide 16



Budgeting strategies

Smaller business – less people, less conflicts and opinions to manage

Larger organisation:

• Different opinions

• Competing demands between departments

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Activity

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Scenarios Advantages Disadvantages

1. Hotel manager completes the budget and hands to activity centre managers

2. Hotel manager, activity centre managers, and the accountant meet as a committee to prepare budgets

3. The accountant knows best, prepares the budgets for the Hotel manager, who in turn approves them for use for activity centre managers

4. Activity centre managers generate the budgets, who use the accountant to co-ordinate the activity, with final approval given by the Hotel Manager

5. Accountant prepares draft budgets for activity centre managers, who amends if and when necessary

1.6 Differentiate between budget types and identify their application within the organisation

1.8 Identify the budgets that exist within the organisation

Expenditure budget

Capital expenditure budget

Departmental budget

Fixed budget

Flexible budget

Operating budgets

Sales budget

Labour budgets

Material budgets

Inventory budgets

Overhead budgets

Budgeted financial performance statement

Cash flow budgets

Master budgets

Project budget

Purchases budget

Budgeted statement of financial position

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Activity - Department budgets and Profit and Cost centres

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Senior Managers and

Owners

Food and Beverage

Bar

Restaurant

Room service

Rooms

Front Office

Reservations Concierge

Housekeeping

Supervisors

Room and Laundry attendants

Maintenance

Engineers

Tradesmen

Finance

Accountants

Clerical staff

Sales and Marketing

Sales Managers

Marketing assistants

Clerical staff

1.7 Identify the budget cycle

Setting a budget cycle makes management more aware of their goals, including the operation’s potential and costs, for a specific period of time.

Importance of budget cycles

Budget cycle activities

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The budgeting cycle

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Collect information

Prepare budget

Evaluate performance

Take corrective

action

Improve budget

Establish goals and objectives

Budgeting cycle

The draft budget

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Policies and guidelines

Estimate revenue and expenses

Consultation

Circulate draft

Finalise budget

Distribute final budget

The draft budget

Budgeted sales:

An example:

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Budget data25 tours

(previous period)

28 tours Price per tour 110

24 Clients per tour

Number of tours per year 25

Number of clients each tour 20

Price per client per tour 100

Sales Budget 50,000

Number of tours x number of clients x price per client = Sales budget

The draft budget

Budgeted sales

An example:

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Budget data 25 tours (previous period) 28 tours Price per

tour 11024 Clients per

tour

Number of tours per year

25

Number of clients each tour

20

Price per client per tour

100

Sales Budget 50,000


20

100

28

56,000

The draft budget

Budgeted sales:

An example:

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tour

Number of tours per year 25 28

Number of clients each tour 20 20

Price per client per tour 100

Sales Budget 50,000 56,000


20

100 110

55,000

25

The draft budget

Budgeted sales:

An example:

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tour

Number of tours per year

25 28 25

Number of clients each tour

20 20 20

Price per client per tour

100 110

Sales Budget 50,000 56,000 55,000


20

100 110

52,800

24

The draft budget

Budgeted expenses:

An example – Sales budget value of 56,000

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Budget data Sourceddata

Wages 30%

Rent11,000

Advertising1%

Sales budget 56,000 56,000

Wages 28%

Rent 10,000

Advertising 1.5%

Total expenses

Sales x expense % = Total expense

16,800 16,80016,800

11,000 11,000

560

28,360

The final budget

An example:

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Line item Amount

Sales 56,000

Less: Wages 16,800

Rent 11,000

Advertising 560

Total expenses 28,360

Total Profit or Income 27,640

Sales minus expenses = Total profit or income

1.9 Determine the current status of existing budgets

Budget reviews are common place in some businesses and not in others as part of a continuous improvement cycle.

Benefits of regular reviews

Stakeholders involved in budget reviews

Budget review questions

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Element 2: Manage operational costs

2.1 Develop or confirm procedures for managing cost

2.2 Develop or confirm documentation required to support and record cost allocations to budgets

2.3 Develop or confirm cost analysis and verification procedures

2.4 Develop or confirm cost-related reporting procedures

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Managing cost procedures

Controlling inventory

Managing purchases

Identifying purchase specifications

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Managing cost procedures

Tenders - (activity)

Maintaining current, accurate and relevant data relating to items and prices

Purchase orders

Payment systems

Credit policies and procedures for clients

Cash payments - (activity)

Petty cash - (activity)

Cash budgets

Labour costs

Payroll - (activity)

Fixed assets - (activity)

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2.2 Develop or confirm documentation required to support and record cost allocations to budgets

Every purchase should be supported by some form of documentation or record to provide evidence the purchase is a valid one and has been appropriately paid.

Importance of financial recording and documentation system

Types of expense documents

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2.3 Develop or confirm cost analysis and verification procedures

Cost analysis and verification procedures may include:

Monitoring of budgetary activity

Validating costs allocated to budget lines

Allocating indirect costs to correct revenue areas

Calculating budget variances

Undertaking cost-per-item calculations, including product, service or package

Comparing current statistics to previous periods

Tracking costs

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2.4 Develop or confirm cost-related reporting procedures

All businesses require management to prepare a report on budget performance, and to generate suggestions for future action or budget settings.

Establish cost related reporting procedures

Objectives of reliable reporting procedures

Methods to check reliability of reporting procedures

Report schedules

Distribution of reports

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Element 3: Control operational costs


3.2 Monitor performance of cost-related budgets

3.3 Take action to address negative variances

3.4 Take action to maintain positive variances or acceptable budget performance

Slide 37

3.2 Monitor performance of cost-related budgets

The monitoring of expenses is a more complex issue than the monitoring of income because there are potentially more things to be considered.

Importance of monitoring financial performance

Areas of financial analysis

Monitor performance activities

Using budget reports

Reviewing payments made

Comparing actual costs incurred to forecasted estimates

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There will nearly always be a variation between the two sets of figures.

In general terms, in practice:

An increase in costs is unfavourable

A decrease in costs is favourable

There are certain circumstances, however, in which these generalities do not apply.

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Investigating variances

Should we investigate every variance?

Time and resource constraints

Some variances are easily explained

Management by exception

• Tolerance limits

• Only variances above the tolerance limits are investigated

• Benchmarking

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Variance analysis

Variances are:

Expressed as monetary units, percentages or sales volume

Favourable – beneficial, positive

Unfavourable – need investigation

Evaluated according to the effect on profit

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Description Actual over budget Actual under budget

Sales and Profit Improve profit Favourable Reduce profit Unfavourable

Expenses Reduce profit Unfavourable Improve profit Favourable

Variance analysis

2 main calculations:

Horizontal analysis

• Actual results and budgeted numbers for EACH line item in financial data is compared

• Actual minus budget = Variance in monetary unit

• Variance divided by budget x 100 = Variance percent

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Line item Budget Actual Variance Variance % Favourable Unfavourable

Sales 56,000 58,200 2,200 3.93% Favourable

Wages 16,800 18,900 2,100 12.5% Unfavourable

Variance analysis

2 main calculations:

Vertical analysis

• EACH line item calculated as a percentage of sales

• Line item divided by sales x 100 = Variance

• Budget and actual reports are calculated separately

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Line item Budget Variance Actual Variance

Sales 56,000 100% 58,200 100%

Wages 16,800 30.0% 18,900 32.47%

Rent 11,000 19.64% 11,000 18.9%

Advertising 560 1.0% 800 1.37%

Total Expenses 28,360 50.64% 30,700 52.75%

Profit or Income 27,640 49.36% 25,300 43.47%

Investigating variances

Management of significant deviations

Changes to the internal or external environment outside the control of the business

• Revise budget

Changes that are within the control of the organisation

• Identify cause

• Investigate reason

• Implement remedy or change

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Further analysis

Trends and Patterns:

Consistent over time

• Indicate a change in internal or external environment

Investigation to identify cause

Revise budget or action to remedy

(Continued)

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Further analysis

Changes to the internal environment:

Upselling sales

• Additional tours added to travel packages by sales staff

• Room service packages offered on arrival

Loss of key staff

Unplanned financial commitment

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Generic actions

Specific actions to address negative variances

For unfavourable variances in cost of goods sold

For unfavourable variances in labour costs

For cash flow/liquidity problems

Revising budget and activities

Re-allocating funds

Reporting and making recommendations for negative variations

Critical points about making recommendations

Management concerns

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3.4 Take action to maintain positive variances or acceptable budget performance

Where positive variances are identified, it is important that these are carefully reviewed to understand what has lead to this positive outcome.

Actions to maintain positive variances

• Refer to Trainee manual

Slide 48

The End

This unit comprised three Elements:

1. Identify the context of operational costs

2. Manage operational costs

3. Control operational costs

You have now completed this unit and the trainer will provide details on assessment.

Good Luck.

Slide 49

slide 1 d2.tfa.cl7.05. subject elements this unit comprises three elements: element 1: identify the...

Documents

control operational

meaning of cost

classifications of costs

supervisor slide

budgeting slide

slide explaining

tourism industry slide

cost controls