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Part 1 – Allocate Budget Resources

2019 Budget

Department

Allocated Funds

2018 Allocation

Operations

$24,12,025

35%

Marketing

$6,89,150

10%

Finance

$10,33,725

15%

Human Resources

$27,56,600

40%

Total Expenditure

$68,91,500

100%

The forecasted revenue of the business for the year 2019 is worth $98,45,000.

The provided profit margin is 30% of total revenue while total expenses is 70% of total revenue.

Hence, total expenditure = $9,845,000 * 70% = $68,91,500.

This expenditure is the total budgeted expenditure distributed among the four departments mentioned above. The allocation is on the basis of 2018 allocation rates provided in the column above. Hence, each of the departments have received the following funds:

  1. Operations: $68,91,500* 35% = $24,12,025
  2. Marketing: $68,91,500* 10% = $6,89,150
  3. Finance: $68,91,500* 15% = $10,33,725Human Resources: $68,91,500* 40% = $27,56,600 

As per the meeting conducted with the representatives of each of the above 5 departments, the following changes to the budget drafted above has been suggested:

  1. The operations department had to face a budget shortfall of $137,830 in their budget which was allocated the previous year in 2018 and requires funding for this year. Further, they also require access to an additional funding of $206,745 this year for facilitative growth and expansion.
  2. The marketing department had only consumed 80% of their total allocated resources in 2018 and they are of the opinion that this year will remain same with respect to cost savings.
  3. The finance department in 2018 had implemented a new accounting process that has resulted in them purchasing a new cost saving accounting software. They are of the opinion that they will be able to save $551,320 worth of funds this year as a result.
  4. Lastly, the human resource department will need to hire more staff for which they need an additional funds worth 3.5% of the total forecasted revenue for the year 2019.

Based on the changes highlighted above, the following adjustments have to be done for meeting the demands of operations department and the human resource department. In a nutshell, the cost savings by finance department and marketing department will help set off the additional requirements of the operations and human resource department.

2019 Budget

Department

Allocated Funds

Adjustments

Revised Allocation

%

Operations

$24,12,025

$3,44,575

$27,56,600

40.00%

Marketing

$6,89,150

-$1,37,830

$5,51,320

8.00%

Finance

$10,33,725

-$5,51,320

$4,82,405

7.00%

Human Resources

$27,56,600

$3,44,575

$31,01,175

45.00%

Total

$68,91,500

$0

$68,91,500

100.00%

Hence, the revised budget (distribution of resources) for the year 2019 has been presented as per requirements of question as follows: 

2019 Budget

Department

Allocated Funds

Operations

$27,56,600

Marketing

$5,51,320

Finance

$4,82,405

Human Resources

$31,01,175

Total

$68,91,500

It is worth mentioning that as a result of the adjusted budget figures, the total allotted budget for the year 2019 will not change. Adjustments are being done among departments internally. 

The additional requirement for operations department = $137,830 + $206,745 = $3,44,575

The additional requirement for human resources department = $9,845,000 * 3.5% = $3,44,575

The amount saved by marketing department = $6,89,150 * 20% = $1,37,830

The amount saved by finance department = $551,320 (given in case study) 

As the presentation of the revised budget has been completed, the budget review form in Appendix 2 has been completed as follows: 

Budget Review Form

Names of Department Representatives Who Developed the Budget

Mary

Brenda

Randy

Ivan

Date of Review:

  01 January

Budget Year in Review

2019

Have all the departments received satisfactory allocation of funds? If no, please explain.

All the four departments have received a satisfactory allocation of funds as required. This is because the cost savings that have been undertaken by the marketing and finance department makes up for the additional requirement of the operations and human resource department.

Have there been any changes to the allocation of funds, from the previous year’s budget? If yes, please explain the extent of the changes and why they were necessary.

Yes, the allocation of funds has changed when compared to previous year. In 2018, the operations department was allotted 35% of the total budgeted expenditure that has increased in 2019 to 40% because of additional resource requirements for making up the shortfall and facilitating growth. The marketing department in 2018 was allotted 10% of total expenditure that has now reduced to 8% in 2019 because the department could only consume 80% of their resources and they expect the same for this year. The finance department in 2018 was provided resources worth 15% of the total expenditure that has reduced to 7% this year as the department expects to save significant resources on account of purchasing a new cost saving accounting software. Lastly, the human resource department was provided with 40% of the budgeted expenditure last year that has increased to 45% because of additional staffing needs.

Does the budget allow for the desired profit margin of 30% of total revenue to be achieved? If no, please explain

The 2018 budget was formulated in such a way that the total expenditure amounted to 70% of the total revenue resulting in a desired profit margin of 30%. The total revenue forecasted for the year of 2019 is $98,45,000. Further, there is no change in the value of total expenditure this year that remains at $68,91,500 resulting in a total dollar value of margin worth $29,53,500. Thus, the budgeted margin for 2019 is ($29,53,500/$98,45,000*100) = 30%. Hence, this falls in line with the desired margin of 30%.

Reviewers Signature:

Date: March 25

To: Chief Executive Officer,

From: Author

Subject: Budget Revision for year 2019

Respected Sir,

Hope this email finds you well. Please note, on conducting a meeting with the representatives of each of the four departments, the original budget has been revised to meet the needs of individual department. It is an earnest request for you to kindly review the revised budget for 2019 along with the supporting budget review form attached above for your reference.

            The budget has been revised after a thorough consideration of the needs of each department. Since, the finance department and marketing department have confirmed cost savings in their departments respectively, the additional funding provided to them is required to be transferred to the operations department and human resource department for meeting their needs. Please be rest assured that the total budget requirements remain same as planned with the only changes being in the resources to be transferred to the respective departments. These changes are required for facilitating growth, promoting operational efficiency for each of the department, for ensuring an optimal resource allocation and for avoiding departmental conflicts It is important to budget appropriately for attaining the desired results that aligns with the goals and objectives of the organisation as a whole. Further, an appropriate budget can help distribute resources efficiently for departments to operate at their maximum efficiency. It also allows for exercising cost control and reducing wastage which can be ascertained by the savings of finance & marketing department. I urge you to consider the discussions presented in this email as a matter of priority and request you to revert back in case of additional queries.

Task 1:

Kind Regards,

Name:

Contact Information:

Signature:

Calculation of Deviations (Variances)

Particulars

Budget

Actual

Variance

Deviation

Revenue

$98,45,000

$96,24,428

$2,20,572

2.24%

Department Expenditure:

Operations

$27,56,600

$25,36,072

$2,20,528

8.00%

Marketing

$5,51,320

$6,06,452

-$55,132

-10.00%

Finance

$4,82,405

$4,82,405

$0

0.00%

Human Resources

$31,01,175

$32,87,246

-$1,86,071

-6.00%

Total

$68,91,500

$69,12,175

-$20,675

-0.30%

Annual Year-End Financial Performance

Review Form

Name of Reviewer:

Date:

31 December 2019

Year in Review:

2019

What was the profit for the year in review? Please provide a short description and justification.

For the year in review 2019, the actual profit that the business has generated is worth $2,712,253. This is the surplus of revenue worth $96,24,428 over the total expenses incurred which is worth $69,12,175. It is worth pointing out that the actual profit generated by the business in 2019 falls short of desired profit margin of 30%. The total unfavourable deviation is worth 8.17%.

Was there any exceptional financial activity which has caused the year in review’s financial performance to be different from previous years? If yes, please explain.

As discussed above, the actual profit of the company fell short of the budgeted profits with a desired profit margin of 30%. There are several reasons that justify the shortfall. Firstly, the total revenue of the company was not at par with the budgeted revenue that the business had expected. This is possible because of either a decline in demand or an increase in external booking website fees. Furthermore, the increase in total expenditure in comparison to the budgeted expenditure has also resulted in a decrease in margins. From among the four departments, the marketing department & human resources department have been observed to reflect adverse variances meaning that their actual spends exceeded their budgeted spends with a deviation of 10% and 6% respectively.

Were there any deviations greater than 5% in the year in review from the budget?

Yes, there are three deviations precisely which exceeds 5% considering the actual results relative to the budgeted results. The operations department has witnessed a favourable deviation of 8% while the marketing and human resources departments have witnessed an adverse variance of 10% and 6% respectively.

Has the year in review met its investor return requirements of $2,000,000? If not, please explain.

Although the profit margin of the business has declined in 2019 which is the year in review, the investor returns requirements of $2,000,000 have been met. This is because the dollar value of returns generated during the year is $2,712,253 that exceeds the expectations mentioned above.

Signature of Reviewer:

Task 2:

To: [email protected], [email protected], [email protected]

From: Author

Subject: Review of Financial Performance 2019

Dear Team,

Here’s hoping that this email finds you well. Kindly note, this email is being written with the rationale of presenting the analysis of financial performance for the current year 2019. The overall bottom-line profitability of the business has declined this year in terms of dollar value from the expected budgeted profit of $29,53,500 to an actual profit of $27,12,253 resulting in an adverse deviation of 8.17%. As a result, the actual profit margin of the business has declined to 28.18% when compared to the budgeted profit margin of 30.00%. This email in conjunction with the deviation results and the financial performance review from attached above is intended to investigate and highlight the potential reasons for performance deviation this year.

The operations department can be observed to perform efficiently as the actual spending was less than the budgeted spending by 8%. Further, during the start of the year the department was provided additional funds as per their requirements for avoiding shortfall and meeting growth. Although cost savings are good from a profitability perspective, the business needs to conduct a meeting to investigate if the funds allocated were more than what was needed as these may not indicate an optimal allocation of funds. The finance department has performed favourably. This is because the actual spending falls in line with the budgeted spending resulting in zero deviation for the year. The main cause of concern is in regards to the marketing department and the human resources department that have spent more than the budgeted resources at 10% and 6% respectively causing a decline in margins. On analysing the individual expenses, it is most likely that the marketing department have overspent in sponsorships & promotions while the huma resource departments may have spent extra in addition to their required staffing needs which was proposed during the beginning of the year in professional development and counselling & personal services. It is also worth mentioning that the total revenue generated by the business was also not at par with the projected revenue. This is possible because of several reasons such as changes in the external environment, customer reviews etc. Further, the budget projection may also be inaccurate and the approach needs to be changed.

The only recommendation at this point of time is to conduct meetings with the representatives of individual departments to investigate further about their resource requirements and spending. The sales team can also be reached out for investigating a shortfall in revenue. Furthermore, it is strongly recommended that the management consider the implementation of zero-based budgeting in comparison to the existing incremental budgeting system which will allow each department to justify their resource needs and funds can be directed considering their resource needs, high priority activities and the overall alignment with organisational goals as compared to incremental adjustments being made to historical data (Brewer, Garrison & Noreen, 2015). I strongly request you to consider the scope of this email and would love to hear from you at the earliest. 

Kind Regards,

Name:

Contact Information:

Signature:

Calculation of Deviations from Industry Average

Expenditure

NBH (2019)

Industry Average

Variance

Deviation

Operating Expenses:

Room Cleaning

$5,64,040

$4,52,924.12

-$1,11,115.88

-19.70%

Room Furnishing

$4,46,000

$4,95,060.00

$49,060.00

11.00%

Building Maintenance

$3,20,600

$3,55,866.00

$35,266.00

11.00%

Utilities

$2,63,900

$1,88,424.60

-$75,475.40

-28.60%

Lobby Cleaning

$1,57,000

$1,75,840.00

$18,840.00

12.00%

Hotel Management Software

$2,56,000

$3,68,640.00

$1,12,640.00

44.00%

Landscaping

$1,77,532

$2,62,214.76

$84,682.76

47.70%

External Operators Fee

$3,51,000

$3,50,000.00

-$1,000.00

-0.28%

Total

$25,36,072

$26,48,969

$1,12,897

4.45%

Human Resource Expenses:

Staffing

$25,03,010

$27,53,311.00

$2,50,301.00

10.00%

Professional Development

$3,52,100

$1,88,021.40

-$1,64,078.60

-46.60%

Counselling and Personal Services

$2,51,036

$87,165.28

-$1,63,870.72

-65.28%

Recruitment

$1,81,100

$2,34,524.50

$53,424.50

29.50%

Total

$32,87,246

$32,63,022

-$24,224

-0.74%

Financial Expenses:

Accounting and Reporting Costs

$4,30,405

$4,25,000.00

-$5,405.00

-1.26%

Payroll Software

$52,000

$45,032.00

-$6,968.00

-13.40%

Total

$4,82,405

$4,70,032

-$12,373

-2.56%

Marketing Expenses:

Website and Digital Management

$2,04,052

$2,28,538.24

$24,486.24

12.00%

Sponsorship

$2,10,000

$2,00,000.00

-$10,000.00

-4.76%

Promotions

$1,52,400

$1,50,000.00

-$2,400.00

-1.57%

Merchandising Costs

$40,000

$53,920.00

$13,920.00

34.80%

Total

$6,06,452

$6,32,458

$26,006

4.29%

The scope of this task involves a presentation which concerns comparing of actual expense results against the industry average results that needs to be completed live with the Assessor as per instructions provided in Page 15 of the assignment brief. Hence, not provided.

To: [email protected]

From: Author

Subject: Different Approaches of Budgeting

Dear Sir,

Thankyou for your previous email. In response to your previous email, this email is being written to present concise research into the four different approaches to budgeting as requested. Please present the findings of the research attached as follows: 

  1. Incremental Budgeting: The incremental form of budgeting is what is being followed by the company as the approach to budgeting. This approach requires preparing a new budget for the future period to be based upon historical budgets with incremental adjustments based upon actual results (Davis & Davis, 2019). The main advantages of this approach are that it is simple, it reduces the divisional rivalry and remains consistent. However, the main limitations with this form of budgeting are that it promotes unnecessary spending lacks a comprehensive review and does not consider externa circumstances in the budget building process (Datar & Rajan, 2018).
  2. Activity Based Budgeting: The activity basis of budgeting is an approach where the activities of an organisation are analysed for predicting costs on the basis of which resources are distributed. The advantage of this form of budgeting is that it allows to thoroughly analyse the nature of cost for any operational activity. While most form of budgets view cost of inputs in relation to an activity, this approach looks at outputs (Jiambalvo, 2019). However, this technique is quite expensive and time consuming from an implementation perspective. Also, it is based upon historical data that can provide unreliable results. Lastly, the focus is on short term results which requires a shift of focus from long term goals (Weygandt et al., 2018).
  3. Minimum Level Budgeting: The minimum level approach in budgeting requires the organisation in setting a base value for all budget line items and requires explanation for any budgeted amount which is set above the base. This method is very similar yet different to the zero-based budgeting approach (Mowen, Hansen & Heitger, 2015). The main advantage of this approach is that it helps in identifying specific line items requiring access for funds additional to the perceived limit for which investigations can be done. However, the main limitation of this approach is that the level of cost control is less when compared to zero-based budget approach as only dollar values which exceed the predetermined limit require justification (Miller, 2018).
  4. Zero Based Budgeting: The zero-based budgeting approach requires the departmental managers to justify the resource requirement for each and every line item after which resources are extended by the management. As the name suggests, the base figure is zero for each line item and this does not depend upon prior data for requiring justification for each dollar spent. The main benefits of this approach are that it is forward facing, can significantly reduce costs and minimise waste expenses resulting in optimal resource allocation. There are although several limitations of the method as well. It can be complex, expensive, time consuming and requires provision of training. It is also disruptive as it can be intellectually taxing for departments to justify each expense (Drury, 2018). Any significant alterations can reduce efficiency and tamper productivity.

I sincerely hope that this research was helpful and will suffice satisfying the queries and expectations from the previous email. Further, it is strongly recommended that the management considers the use of zero-based budgeting approach to further exercise cost control for better future margins. However, a cost benefit analysis can be done and if the perceived benefits exceed the costs associated with implementation of the same, it is advised for implementation. Alternatively, the minimum level approach may also be opted for if the zero-based budgeting is not profitable. This is because judging by industry comparisons, there are only a handful of line items that exceeds the industry average results for which this technique can be helpful because of fewer associated costs. Looking forward to hearing from you soon.

Kind Regards,

Name:

Contact Information:

Signature:

Finance Department – Internal Reporting Form

Name of Reviewer:

Date of Review:

01/01/2020 – 31/03/2020

Was the previous year budget and the approach adopted successful in managing the financial resource allocation requirements for the NBH?

No, the previous year budget and the incremental approach was not successful in managing the allocation of financial resources for NBH.

Are there any recommended changes to the budgeting approaches for the year ahead? If so, please explain.

Yes, it is recommended that the management considers the implementation of a zero-based budgeting approach after undertaking a cost benefit analysis. This is because the technique has been proven to help in stricter cost control and optimal resource allocation. This also provides an opportunity for the management to thoroughly review the cost structure of the business.

How would the recommended changes impact upon the organizations departments?

As a result of the suggested recommendation, an optimal resource allocation is expected to be seen. This means that the amount of wasteful expenses will be minimised and the deviation in between the actual results and the budget results will be less as compared to results based upon an incremental approach.

Has the recommendation been presented to the correct authority in the finance department? If so, who was it presented to and how was it presented?

The recommendation has been appropriately presented to the financial manager, Barry Barrington in writing through an official email. The budget committee should also be contacted for such a recommendation.

Signature of Reviewer:

References 

Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2015). Introduction to managerial accounting. McGraw-Hill Education. 

Datar, S. M., & Rajan, M. V. (2018). Horngren’s cost accounting: a managerial emphasis. Pearson. 

Davis, C. E., & Davis, E. (2019). Managerial accounting. John Wiley & Sons. 

Drury, C. (2018). Cost and management accounting. Cengage Learning. 

Jiambalvo, J. (2019). Managerial accounting. John Wiley & Sons. 

Miller, G. (2018). Performance based budgeting. Routledge. 

Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2015). Cornerstones of managerial accounting. Cengage Learning. 

Weygandt, J. J., Kimmel, P. D., Kieso, D. E., & Aly, I. M. (2018). Managerial Accounting: Tools for Business Decision-making. John Wiley & Sons.

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