Master Budget and Responsibility
1. Describe the master budget and
explain its benefits
2. Describe the advantages of budgets
3. Prepare the operating budget and
its supporting schedules
4. Use computer-based financial planning models for sensitivity analysis 5. Describe responsibility centers and
6. Recognize the human aspects of
7. Appreciate the special challenges
of budgeting in multinational
Amid the recent recession, one of the hottest
innovations was the growth of Web sites that enable
users to get an aggregate picture of their financial data
and to set up budgets to manage their spending and
other financial decisions online. (Mint.com, a pioneer in
this market, was acquired by Intuit for $170 million in
Budgets play a similar crucial role in businesses. Without budgets, it’s difficult for managers and their employees to know whether they’re on target for their growth and spending goals. You might think a budget is only for companies that are in financial difficulty (such as Citigroup) or whose profit margins are slim—Wal-Mart, for example. As the following article shows, even companies that sell high-dollar value goods and services adhere to budgets.
“Scrimping” at the Ritz: Master Budgets
“Ladies and gentlemen serving ladies and gentlemen.” That’s the motto of the Ritz-Carlton. With locations ranging from South Beach (Miami) to South Korea, the grand hotel chain is known for its indulgent luxury and sumptuous surroundings. However, the aura of the chain’s old-world elegance stands in contrast to its rather heavy emphasis— behind the scenes, of course—on cost control and budgets. It is this very approach, however, that makes it possible for the Ritz to offer the legendary grandeur its guests expect during their stay.
A Ritz hotel’s performance is the responsibility of its general manager and controller at each location worldwide. Local forecasts and budgets are prepared annually and are the basis of subsequent performance evaluations for the hotel and people who work there. The preparation of a hotel’s budget begins with the hotel’s sales director, who is responsible for all hotel revenues. Sources of revenue include hotel rooms, conventions, weddings, meeting
facilities, merchandise, and food and beverage. The controller then seeks input about costs. Standard costs, based on cost per
occupied room, are used to build the budget for guest room stays. Other standard costs are used to calculate costs for meeting rooms and food and beverages. The completed sales budget and annual operating budget are sent to corporate headquarters. From there, the hotel’s actual monthly performance is monitored against the
The managers of each hotel
meet daily to review the hotel’s
performance to date relative to plan.
They have the ability to adjust prices
in the reservation system if they so
choose. Adjusting prices can be
particularly important if a hotel
experiences unanticipated changes
in occupancy rates.
Each month, the hotel’s actual
performance is monitored against
the approved budget. The controller
of each hotel receives a report from
corporate headquarters that shows
how the hotel performed against
budget, as well as against the actual
performance of other Ritz hotels. Any ideas for boosting revenues and reducing costs are regularly shared among hotel controllers. Why does a successful company feel the need to watch its spending so closely? In many profitable companies, a strict budget is actually a key to their success. As the Ritz-Carlton example illustrates, budgeting is a critical function in organizations. Southwest Airlines, for example, uses budgets to monitor and manage fuel costs. Wal-Mart depends on its budget to maintain razor-thin margins as it competes with Target. Gillette uses budgets to plan marketing campaigns for its razors...
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