Task 3: Department Variance Analysis 15 marks
This task requires you to identify potential causes for variances in the operational profitability of the hotel’s banquets department. You are given an extract of the department’s financial performance report and also budget information (see blow). The report focuses on the aspects of performance that show the largest deviations from the budget:
- Sales revenues for banquet meals
- Costs relating to the one complimentary welcome drink served with each meal
- Costs relating to the major ingredient of the main course: Wagyu beef
- Kitchen labour costs*
*Note: The majority of preparation time is spent on preparing and cooking the main ingredient, the Wagyu steak.
At first glance it appears the sales revenue show a significantly positive variance relative to the budget, however, the unexpected adverse expense variances for drinks, the key ingredient to the main course and also for labour costs mitigate against the significant positive revenue gain to an overall positive net effect on the profit of $8,946 for the department.
The Best Hotel
Financial Performance Report
For the Month ended 31st May 2018
|Banquet meals sold||10,800 meals||9,000 meals|
|1. Sales Revenue||$529,200||$472,500|
|Variable Costs of inputs:|
|2. Drinks (Cost of sales)||$82,476|
|3. Meals (Cost of sales)||$81,000|
|4. Labour (Kitchen Staff)||$120,420|
|Departmental net operating profit impact||$245,304|
|Drinks standards and used input|
|Budgeted:||1 bottle Champagne containing 750ml costing $40per bottle should provide 5 full pours (full glasses).|
|Actual:||The end of the month report shows that 2,088 bottles of Champagne were purchased and used.|
|Meals standards and used input|
|Budgeted:||250g of Wagyu beef per person per meal while the hotel planned to purchase the beef for $30 per kilo.|
|Actual:||The report shows that 3,240kgs of meat where consumed in the production process.|
|Labour standards and used hrs|
|Budgeted:||Planned time for kitchen staff to prepare the meals was 21minutes per meal while the average wage was anticipated to be $25per hour.|
|Actual:||Labour hours actually worked were 5,400hrs.|
The banquets manager is concerned about variances and has asked you to systematically explore the variances and identify possible explanations for each to assist further investigation and the quest for high efficiency.
- Calculate the static-budget variance for all 4 items referred to in the financial performance report (Sales revenues, costs of the drinks, the meat and the direct labour costs).
- Compute the flexible-budget variance for all 4 4 items referred to in the financial performance report.
- Compute the price and efficiency variances for the champagne and indicate whether each variance is favourable or unfavourable.
- Compute the price and efficiency variances for the main ingredient and indicate whether each variance is favourable or unfavourable.
- Compute the price and efficiency variances for labour and indicate whether each variance is favourable or unfavourable.
- Comment on your findings for requirements 3-5 and provide a possible explanation as to why these variances have occurred.
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