FCS 387

 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.

 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.

 Incremental Budgets
 Based on the previous years budget
 Advantages:
 Easy to prepare
 Based on accurate records
 Disadvantages:
 Not responsive to change

 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

 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

 Fixed Budgets (Static budget)
 Funds are allocated for the entire fiscal year.
 Can be applied to either incremental or zerobased
 Advantages:
 Provide managers with goals for financial performance
 Disadvantages:
 Not enough flexibility to be responsive to changes in the volume of work

 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

 Cost Center
 Revenue Center
 Profit Center

 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

 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

 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

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

 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
Less:
Income (sales)
Less: Cost of food sold
Equals: Gross profit
Labor, overhead, and operating expenses
Equals: Net profit or Loss

 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.

 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

 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

 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?

 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?

Value of Food Inventory at
Beginning of Period
Plus Value of Food Purchased During
Period
Minus Value of Inventory at End of Period
Cost of Goods (Food) Sold

 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 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%

 Cost-Based
 Profit-Based
 Non-Cost-Based

 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)