CHAPTER 3: OPERATING BUDGET AS A CONTROL TOOL

CHAPTER 3: OPERATING BUDGET AS A CONTROL TOOL

      

      -          A budget is simply a forecast or estimate of projected revenue, expenses and profit.

-          The budget is known as the plan, referring to the fact that the budgets details the operation’s                estimated or planned for, revenue and expense for given period.

THE OPERATING BUDGET, BUDGET STANDARDS

     -          An operating budget is a combination of known expenses, expected future cost and forecasted income over the course of a year.

      -          Operating budgets are completed in advance of the accounting period which is why they require estimated expenses and revenues.

      -          Normally prepared using historical information records.

      -          Can be prepared for any time of period a day, a week or full year.

FORECASTING SALES INCOME

      -          Sales is defined as revenue resulting from the exchange of products and services for value.

MONETARY TERMS

·         SALES PRICE = Amount charged each customer purchasing one unit of item.

·         AVERAGE SALE = Total Sale / Total number of covers (customer)

·         AVERAGE SALE PER SERVER = Total sale for Celina / Number of customer for Celina.

NON-MONETARY TERMS

·         Total number sold – Total number of steaks, shrimp cocktails or any item sold.

·         Cover – To describe one diner (quantitiy of food he / she consume)

·         Total covers – Total number of customers served in a given period

                COVERS PER HOUR = Total covers / Number of hours operation

                COVERS PER DAY = Total covers / Number of days of operation

                COVERS PER SERVER = Total covers / Number per servers

·   Seat turnover – number of seats occupied during a given period = number of customer served

·         REVENUE FORECAST = Sales last year + (Sales last year x % increase estimate)

·         INCREASE REVENUE = Revenue forecast – sales last year

TREATING PROFIT AS AN EXPENSE, ESTIMATING EXPENSES, VARIABLE AND FIXED EXPENSES

      

-          There are relationship between sales, cost of sales, cost of labour, cost of overhead and profit.

·         SALES = Cost of sales + cost of labour + cost of overhead + profit

OR

SALES = Variable cost + Fixed cost + profit

-          Because cost of sales is variable, cost of labour includes both fixed and variable elements and cost of overhead is fixed.

ALLOCATING COSTS AND PROFIT REQUIREMENTS

       -          Each dollar of sales then may be divided imaginatively into two portions:

·         That which must be used to cover variable costs associated with the item sold

·         That which remains to cover fixed costs and to provide profit.