chapter 14
Income
Statements and
Budgets
Class Name
Instructor Name
Date, Semester
Foundations of Cost Control
Daniel Traster
Income Statement Disclaimer
• The National Restaurant Association’s Uniform System
of Accounts for Restaurants describes an industry
standard format for income statements, so businesses
can compare their data to other businesses
• The income statement format described here is NOT
the NRA approach, but a similar, simplified version
that is easier to learn and that makes a transition to
the NRA format easier as well.
• The NRA version is described in the appendix.
2
Three Financial Reports
Balance Sheet
• reports company’s assets, liabilities, and equity
Statement of Cash Flows
• depicts movement of cash through a business
Income Statement
• overview of business’s revenue, expenses, and
profit (and the focus of the chapter)
3
Income Statement Format
• Can be written to cover any time period
• Common Size Income Statement lists dollars and
percents for each line item and category
• Percents express each line item as a percent of sales,
except for the subheadings under “Cost of Sales”
4
Figure 14a: Portion of Common Size
Income Statement
Total Sales
$375,400
100.0%
Salaries and Wages
$110,380
29.4%
Employee Benefits
$24,838
6.6%
$135,218
36.0%
Labor
Total Labor Cost
5
Income Statement Format (cont.)
• Always start with a “Sales” category, which is
subdivided into “food” and “beverage” sales
• Percents for food and beverage sales show the sales
mix between food and beverage
• Total sales always equals 100%
6
Income Statement Format (cont.)
Subcategories under “cost of sales” use different
percent bases (not based on total sales)
Food
Cost %
Food
Cost
Food
Sales
7
Income Statement Format (cont.)
Beverage
Cost %
Beverage
Cost
Beverage
Sales
8
Income Statement Format (cont.)
Total
Cost of
Goods
Sold
Sum of Food and
Beverage Costs
(variable)
9
Income Statement Format (cont.)
Gross
Profit
Money left
from sales
after total cost
of goods sold
is deducted
10
Figure 14b: Portion of Common Size Income
Statement
Sales
Food
$727,194
74.0%
Beverage
$255,561
26.0%
Total Sales
$982,755
100.0%
Food Cost
$255,180
31.0% (% of food sales)
Beverage Cost
$58,804
23.0% (% of beverage sales)
Total Cost of Goods
Sold
$283,984
28.9%
Gross Profit
$698,771
71.1%
Cost of Sales
11
Income Statement Format (cont.)
Labor
• cost for employees, both earnings and benefits
• Semi-variable cost
Salaries and Wages
• labor’s income
Employee Benefits i
• cost of benefits
Prime Cost
• sum of total cost of goods sold and total labor cost
12
Figure 14c: Portion of Common Size
Income Statement
Labor
Salaries and Wages
$275,442
28.0%
Employee Benefits
$52,155
5.3%
Total Labor Cost
$327,597
33.3%
Prime Cost
$611,581
62.2%
13
Income Statement Format (cont.)
Controllable Expenses
• all other semi-variable costs
Direct Operating Expenses
• cost for items other than food and drink that
go toward serving customers and that are
not covered in other controllable expense
categories. (Flowers, china, menus, uniforms,
laundry, cleaning supplies, etc.)
14
Income Statement Format (cont.)
Music and Entertainment
• license fees and royalties, performer fees and
food, equipment for entertainment
Marketing
• costs for all marketing activities (advertising, PR,
comp meals, etc.)
Utilities
• costs for gas, water, electric, and waste removal
15
Income Statement Format (cont.)
General and Administrative
• costs for infrastructure required in any
business (telephone, internet, insurance,
office supplies, etc.)
Repair and Maintenance
• cost for all equipment and facility repairs and
maintenance
16
Income Statement Format (cont.)
Total Controllable Expenses
• sum of all controllable expenses
Income before Fixed Costs
• Equals:
• Total Sales – Prime Cost – Total Controllable Expenses
• In other words, income before fixed costs is the amount
left to cover fixed costs and profit
17
Figure 14d: Portion of Common Size
Income Statement
Controllable Expenses
Direct Operating
Expenses
$48,506
4.9%
Music and Entertainment
$14,300
1.5%
Marketing
$19,325
2.0%
Utilities
$38,992
4.0%
General and
Administrative
$24,774
2.5%
Repairs and
Maintenance
$14,500
1.5%
Total Controllable
Expenses
$160,397
16.3%
Income before Fixed
Costs
$210,777
21.4%
18
Income Statement Format (cont.)
Fixed Costs includes 3 major categories:
Occupancy
Costs
rent, property taxes, property insurance
Interest
cost of using someone else’s money; like interest paid to
a bank for a loan
Depreciation
an accounting device used to spread a significant cost
across multiple years based on the life expectancy of
the purchased item (large equipment or renovations)
19
Income Statement Format (cont.)
Total Fixed Costs
• sum of all fixed costs
Profit before Taxes
• income before fixed costs – total fixed costs
• From pre-tax profit, income tax and profit
are determined
20
Figure 14e: Portion of Common Size
Income Statement
Fixed Costs
Occupancy Costs
$98,800
10.0%
Interest
$28,746
2.9%
Depreciation
$31,678
3.2%
Total Fixed Costs
$159,224
16.2%
Profit before Taxes
$51,553
5.2%
Income Taxes
$12,213
1.2%
Net Income
$39,340
4.0%
21
Income Statement Graphic Formula
• % column is calculated
using the graphic below
Cost
• For food cost and
beverage cost, “sales” is
the corresponding food
sales or beverage sales;
all other items use “total
sales” for sales.
Sales x %
22
Example 14a
On income statement, “marketing” is listed as
$7,000. Total sales are $380,000. What percent
should be written next to “marketing”?
% = Cost ÷ Sales
= $7,000 ÷ $380,000
= 1.8%
23
Example 14b
Income statement lists food sales as $114,600.
Manager wants to run a 30.4% food cost. What
should food cost be in dollars?
Food Cost = Food Sales X %
= $114,600 X 0.304
= $34,838
24
Comparing Income Statements and Budgets
Income
Statements
vs.
Budgets
• Income statements and budgets look similar
• Same line item names and common size format
• Income statements use real data from history
• Budget is forward-looking plan
• Both are often compared side-by-side
• Two approaches to compare them: common size
analysis and comparative analysis
25
Common Size Analysis
1. Calculate difference between the two percent
columns on each budget/income statement line
item.
2. Variance = income statement percent – budget
percent. (Or, if comparing 2 income statements, the
new statement’s percent – older statement’s
percent)
Note: Since total sales are always 100%, their variance
will always be zero. Look at sales dollars separately.
26
Figure 14f: Common Size Analysis
Budget
1/1/1112/31/11
Budget
Actual
1/1/1112/31/11
Actual
Variance
$750,000
75.0%
$727,194
74.0%
(1.0)
$250,000
25.0%
$255,561
26.0%
1.0
$1,000,000
100.0%
$982,755
100.0%
0
Sales
Food
Beverage
Total Sales
27
Variances
• Management determines acceptable variance range
in advance.
• Management must decide what to do about
unacceptable variances
• Options include:
― controlling costs
― boosting revenue through marketing
― or adjusting the budget
• If figures beat expectations without sacrificing
business standards, changing the budget may be
appropriate
28
Comparative Analysis
1. Calculate the difference (variance) in dollars
between the line items in two periods as follows:
variance = newer dollars – older (or budget) dollars
2. Convert the dollar difference into a percent change
as follows:
Dollar variance
%
=
Earlier time period
(or budget) dollars
29
Comparative Analysis (cont.)
• Great for determining trends
• Identifies how well dollar figures align with the
budgeted dollar figures
• Does not highlight problems that occur when
managers fail to adjust their expenses to reflect shifts
in revenue
30
Figure 14g: Comparative Analysis
Budget
1/1/1112/31/11
Actual
1/1/1112/31/11
Variance $
Variance %
Food
$750,000
$727,194
($22,806)
(3.0%)
Beverage
$250,000
$255,561
$5,561
2.2%
$1,000,000
$982,755
($17,245)
(1.7%)
Sales
Total Sales
31
Why Comparative vs. Common Size Analysis?
Comparative vs.
Common
Size
• Comparative provides dollar differences as well as
percent variances
• Comparative highlights differences in small value line
items better
• Comparative shows trends for future budgeting
• Common Size better highlights changes management
should have made when revenue misses its target
• Best to perform both types of analysis
32
Creating a Budget
• Budget must be realistic to have any value
• Goals of a budget:
1.
2.
Predict revenue and expenses accurately
Set aggressive targets for managers to hit
•
Accuracy gives managers a road map to use
•
Aggressive targets push everyone to be a little more
efficient
33
Why Front-Line Workers Should
Care about Profits
• Greater profits lead to stable company and better job
security
• Large profits can lead to expansion, raises, and
promotions
• With profits, owner may invest in facility to improve
working conditions
34
Prior to Writing a Budget
Research historical data and trends for the business.
Investigate upcoming internal and external variables that
may impact future budgets.
Set budget goals based on information collected and the
owner’s and management team’s desires.
35
Historical Data
Historical Data is the starting point for the next
budget.
• Usually comes from POS
• Include:
― check average
― customer counts
― expense patterns and trends (in $ and %)
― income statements over multiple years
36
Internal and External Variables
Internal and External Variables are used to identify
changes from prior trends.
Internal
External
• new equipment
• new competitor
• menu changes
• closure of local
business
come from outside the business.
come from outside the business.
• spikes in food prices
External learned from trade publications, professional
associations, news reports, customers and purveyors
37
Setting Budget Goals
• Management team sets goals for revenue growth and
expense percents
• Must be realistic, achievable, and based somewhat
on historical data and internal/external variables
• Do not have to match forecasts exactly
38
Example 14c
Total sales on income statement were $700,000.
Management wants 5% increase in sales next
year. What is next year’s total sales budget?
New amt = old amt. X (1 + % change)
= $700,000 X (1 + 0.05)
= $735,000
39
Example 14d
Management says “marketing” should be 4.9% of
sales. If total sales are budgeted at $735,000, what
is marketing budget?
Cost = Sales X %
= $735,000 X 0.049
= $36,015
40
Example 14e
This year, repairs and maintenance is $17,300.
Management wants to cut this line item by 8%.
What is next year’s budget for repairs and
maintenance?
New Cost = Old Cost X (1 + % change)
= $17,300 X (1 + (-0.08))
= $17,300 X 0.92
= $15,916
41
Example 14f
For next year, management knows rent will remain
$4,800 per month. Property taxes are increasing to
$800 per month. Property insurance will be $630
per month. If these are the only components of
occupancy cost, what is the monthly and annual
budget for next year’s occupancy cost line?
Monthly = $4,800 + $800 + $630 = $6,230
Annual = $6,230 X 12 months = $74,760
42
Planning for Profit
If entering all sales and expense dollars, based
on forecasts and management goals, into
budget spreadsheet does not generate desired
profit, management must adjust the expense
lines to try to hit the profit target – unless the
profit goal is unrealistic.
43
Planning for Profit (cont.)
• Changes to initial budget must be feasible for
managers to achieve, or they will never materialize
• Every change must come with a plan of action
describing how the change will be managed in the
real-world
44
Dividing a Budget into Smaller Time Frames
• Easier to adjust daily work habits, schedules, and
purchases to align with a budget if the budget is done
in a smaller time frame
• Using only annual budgets, managers may not catch
problems until it is too late
• Business fluctuates seasonally, so managers cannot
just divide annual budget by 12 or 52 to get monthly
or weekly versions
45
Dividing a Budget into Smaller Time Frames
Historical data reveals the percent of annual
revenue that is brought in each month, week, or
day.
Historical patterns are usually consistent from year
to year.
46
Creating a Monthly Revenue Budget
1. List last year’s historical revenue per month and total
annual revenue
2. Calculate percent revenue each month represents.
Monthly sales
%
=
Annual sales
3. Using next year’s annual sales forecast, calculate
each month’s sales as: Annual Sales X % for a given
month (from step 2)
47
Example 14g
In August last year, sales were $33,300. Annual
sales were $358,000. If next year’s sales budget is
$380,000, what should August’s sales budget be?
$33,300 ÷ $358,000 = 0.093 or 9.3% (August %)
$380,000 X 0.093 = $35,340 (August sales)
48
Calculating Monthly Budget
• Management may adjust monthly percents slightly
based on internal or external variables
• From monthly sales, calculate monthly expenses:
• Keep variable costs the same % of sales
• Write fixed costs based on their payment schedule;
may be evenly divided by month.
49
Calculating Monthly Budget (cont.)
• For semi-variable costs, separate the fixed and
variable components.
• Divide fixed components evenly over the year; keep
variable components the same percent of sales.
• With labor, factor in any planned pay increases
• For expenses with an irregular payment schedule
(e.g., repairs and maintenance), schedule the
payments for the appropriate months.
50
Calculating Shorter Time Frame Budgets
• Use the same logic as for monthly budgets
― For weekly, compare the same week of the prior year (e.g. 32nd
week of the year)
― For daily, compare the same day of the week of the prior year
(e.g. 2nd Monday in April)
• Always factor in any internal and external variables
that may change sales percents
• For weekly or daily budgets, fixed costs paid monthly
may not be relevant, so remove them.
51
Example 14h
• Manager forecasts $800,000 in annual sales next year.
• Last year, June was 10.2% of sales.
• Budget forecasts cost of goods sold at 32.5% of sales
and annual occupancy costs of $80,000.
If occupancy costs are divided evenly over the
year, calculate the June expense lines for cost
of goods sold and for occupancy costs.
52
Example 14h (cont.)
June sales = $800,000 X 0.102
= $81,600
COGS = $81,600 X 0.325
= $26,520
Occupancy = $80,000 ÷ 12 months
= $6,667
53
More on Shorter Budgets
• Profit % may not match annual % because sales
dollars fluctuate seasonally but fixed costs do not.
• Can create daily budgets for every ingredient,
employee, etc., but unless manager incorporates
them into daily control processes, they become a
waste of time
• Manager should compare weekly schedule to weekly
budget to try to stay on budget; chef can do the
same for weekly food orders
• If weekly revenue targets are missed, management
may need to shift marketing strategies or adjust
expense budgets
54
More on Shorter Budgets
• Making changes weekly rather than waiting a full
year allows managers plenty of time to change
course to maintain profit
• It is possible to create weekly budgets first (from guest
forecasts and average check) and then to create
monthly and annual budgets, but annual budgets
must be adjusted for profit and then weekly budgets
must be adjusted accordingly.
55
The Evaluation Cycle
• Always evaluate budget’s accuracy and company’s
adherence to budget guidelines
• Variances can stem from poor controls or from poor
forecasting and budgeting
• Learning from mistakes, managers can improve
forecasting and budgeting ability in the future
56