MANAGE AND CONTROL
OPERATIONAL COSTS
D2.TFA.CL7.05
Slide 1
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
Slide 2
Assessment
Assessment for this unit may include:

Oral questions

Written questions

Work projects

Workplace observation of practical skills

Practical exercises

Formal report from supervisor
Slide 3
Element 1: Identify the context of
operational costs
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
Slide 4
Element 1: Identify the context of
operational costs
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
Slide 5
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
Slide 6
1.2
Distinguish between the classifications
of costs experienced by the organisation
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
Slide 7
1.2
Distinguish between the classifications
of costs experienced by the organisation
Indicate whether you think the
following costs are fixed (F),
variable (V) or mixed (M).

Telephone

Depreciation

Staff motor vehicle
expenses

Commissions

Electricity

Advertising

Office salaries - paid
fortnightly as part of annual
income

Cleaning

Accounting

Lease of tour buses

Rent

Legal fees

Maintenance of equipment

Direct labour

Cost of goods sold

Insurance
Slide 8
1.3
Identify examples of actual costs
experienced by the organisation
Managers can find it useful to divide the business into
segments or activity centres of two types.

Profit Centre

Cost Centre
Slide 9
1.3
Identify examples of actual costs
experienced by the organisation
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
Slide 10
1.4
Identify the decision making process
that relates to cost within the organisation

Decision making process considerations

Cost spending principles

Developing relevant cost elements and
performance outcomes

Determine how funds will be spent

Apply CBA
Slide 11
1.4
Identify the decision making process
that relates to cost within the organisation
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
Slide 12
1.4
Identify the decision making process
that relates to cost within the organisation

Determine depreciation schedules

Negotiate cost with suppliers

Determining how assets will be acquired
Slide 13
1.5
Identify the cost controls provided by
budgeting
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
Slide 14
1.5
Identify the cost controls provided by
budgeting
3.1
Set budgetary limits and objectives for
individual cost-related budgets
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
Slide 15
1.5
Identify the cost controls provided by
budgeting
3.1
Set budgetary limits and objectives for
individual cost-related budgets
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
1.5
Identify the cost controls provided by
budgeting
3.1
Set budgetary limits and objectives for
individual cost-related budgets
Budgeting strategies

Smaller business – less people, less conflicts and
opinions to manage

Larger organisation:
• Different opinions
• Competing demands between departments
Slide 17
Activity
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 coordinate 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
Slide 18
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

Inventory budgets

Capital expenditure
budget

Overhead budgets

Budgeted financial
performance statement

Departmental budget

Fixed budget

Cash flow budgets

Flexible budget

Master budgets

Operating budgets

Project budget

Sales budget

Purchases budget

Labour budgets


Material budgets
Budgeted statement of
financial position
Slide 19
Activity - Department budgets and Profit
and Cost centres
Senior
Managers and
Owners
Food and
Beverage
Bar
Rooms
Front Office
Maintenance
Housekeeping
Restaurant
Reservations
Concierge
Supervisors
Engineers
Finance
Accountants
Tradesmen
Clerical staff
Sales and
Marketing
Sales Managers
Marketing
assistants
Room
service
Room and Laundry
attendants
Clerical staff
Slide 20
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
Slide 21
The budgeting cycle
Establish goals
and objectives
Improve
budget
Collect
information
Budgeting
cycle
Take
corrective
action
Prepare
budget
Evaluate
performance
Slide 22
The draft budget
Policies and
guidelines
Estimate revenue
and expenses
Consultation
Circulate draft
Finalise budget
Distribute final
budget
Slide 23
The draft budget
Budgeted sales:

An example:
Budget data
25 tours
(previous
period)
Number of tours per year
25
Number of clients each
tour
20
Price per client per tour
100
Sales Budget
28 tours
Price per
tour 110
24 Clients
per tour
50,000
Number of tours x number of clients x price per client = Sales budget
Slide 24
The draft budget
Budgeted sales

An example:
25 tours
(previous period)
28 tours
Number of tours per
year
25
28
Number of clients
each tour
20
20
Price per client per
tour
100
100
50,000
56,000
Budget data
Sales Budget
Price per
tour 110
24 Clients
per tour
Number of tours x number of clients x price per client = Sales budget
Slide 25
The draft budget
Budgeted sales:

An example:
25 tours
(previous period)
28 tours
Price per
tour 110
Number of tours per
year
25
28
25
Number of clients
each tour
20
20
20
Price per client per
tour
100
100
110
50,000
56,000
55,000
Budget data
Sales Budget
24 Clients
per tour
Number of tours x number of clients x price per client = Sales budget
Slide 26
The draft budget
Budgeted sales:

An example:
25 tours
(previous period)
28 tours
Price per
tour 110
24 Clients
per tour
Number of tours per
year
25
28
25
24
Number of clients
each tour
20
20
20
20
Price per client per
tour
100
100
110
110
50,000
56,000
55,000
52,800
Budget data
Sales Budget
Number of tours x number of clients x price per client = Sales budget
Slide 27
The draft budget
Budgeted expenses:

An example – Sales budget value of 56,000
Budget data
Sourced
data
Sales budget 56,000
56,000
Wages
28%
Rent
10,000
Advertising
1.5%
Wages
30%
16,800
Rent
11,000
Advertising
1%
16,800
16,800
11,000
11,000
560
28,360
Total expenses
Sales x expense % = Total expense
Slide 28
The final budget

An example:
Line item
Amount
Sales
56,000
Less: Wages
16,800
Rent
Advertising
11,000
560
Total expenses
28,360
Total Profit or Income
27,640
Sales minus expenses = Total profit or income
Slide 29
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
Slide 30
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
Slide 31
2.1

Develop or confirm procedures for
managing cost
Managing cost procedures
 Controlling inventory
 Managing purchases
 Identifying purchase specifications
Slide 32
2.1
Develop or confirm procedures for
managing cost
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)
Slide 33
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
Slide 34
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
Slide 35
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
Slide 36
Element 3: Control operational
costs
3.1
Set budgetary limits and objectives for individual
cost-related budgets
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 costrelated 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
Slide 38
3.3
Take action to address negative
variances
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.
Slide 39
3.3
Take action to address negative
variances
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
Slide 40
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
Description
Actual over budget
Actual under budget
Sales and Profit
Improve profit Favourable
Reduce profit
Unfavourable
Expenses
Reduce profit Unfavourable
Improve profit Favourable
Slide 41
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
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
Slide 42
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
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%
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%
Advertising
Slide 43
3.3
Take action to address negative
variances
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
Slide 44
3.3
Take action to address negative
variances
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)
Slide 45
3.3
Take action to address negative
variances
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
Slide 46
3.3
Take action to address negative
variances

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
Slide 47
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