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Hospitality Industry Managerial Accounting HRT 374

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Title: Hospitality Industry Managerial Accounting HRT 374


1
Hospitality Industry Managerial AccountingHRT 374
  • Chapter 6
  • Basic Cost Concepts

2
Fixed costs
  • Constant in the short run
  • Does not vary with sales
  • Usually in dollars
  • 6 fixed costs
  • Rent, interest, taxes, depreciation,
    amortization, insurance
  • Discuss salaries

3
Fixed costs (continued)
  • As sales volume increases, fixed cost goes down
  • Rent 2,000 Sales 100,000
  • Fixed cost 2
  • If sales go up to 200,000
  • Fixed cost 1

4
Variable costs
  • Changes equally with sales
  • Direct relationship with sales
  • Usually in
  • Examplescos, supplies, labor (discuss)

5
Step costs
  • Constant within range of activity (sales)
  • Similar to mixed costs, except more constant
  • Example supervisor can supervise up to 15
    housekeepers, then must hire additional supervisor

6
Mixed costs
  • Part fixed and part variable
  • Constant within range of activity (sales)
  • Similar to step costs, except that there are many
    steps in sales

7
Costs in relation to sales volume
  • Fixed
  • Variable
  • Step
  • Mixed

Step
Fixed
Mixed
Variable
8
Total costs
  • Total costs Fixed Costs Variable Costs
  • Or TC FC (vc per unit x unit sales)
  • Example
  • Sells 1,000 rooms
  • FC 20,000 VC per unit 20
  • TC 20,000 (1,000 x 20)
  • TC 20,000 20,000
  • TC 40,000

9
Determination of mixed cost elements
  • 3 methods
  • Hi lo two point method
  • Scatter diagram
  • Regression Analysis

10
Using the hi-lo method, estimate the monthly
FIXED R and M expense
  • Month Expense Rooms sold
  • Jan 6200 1860
  • Feb 6100 1820
  • Mar 7000 2170
  • Apr 7500 2250
  • May 8000 2480
  • Jun 8500 2700
  • July 7900 2790
  • Aug 8600 2800
  • Sep 7000 2100
  • Oct 6000 1900
  • Nov 6500 1800
  • Dec 5900 1330

11
High/ low method
  • R M
    expense Rooms sold
  • Highest month August 8,600
    2,800
  • Lowest month December 5,900
    1,330
  • Difference 2,700 1,470
  • To find variable cost per room sold
  • Mixed cost difference / Rooms sold difference
  • 2,700 / 1,470 1.84 Gives you variable cost per
    room
  • For every additional room sold, the hotel will
    incur
  • R M variable costs of 1.84
  • To find Decembers variable cost of R and M
  • December Rooms sold x Variable cost
  • 1,330 X 1.84 2,447
  • To find Decembers fixed cost of R and M TC
    VC FC
  • 5900 2447 3453

12
Using hi-lo method, what is the fixed costs of
13
(No Transcript)
14
Fixed vs. variable
Variable
Fixed
Indifference Point
15
Direct and indirect
  • Direct
  • Related to department
  • Department head responsible
  • Readily identifiable
  • Examples?
  • Indirect
  • Related to all operations
  • Higher up responsible
  • Not readily identifiable
  • Examples?

16
Overhead
  • All costs other than direct
  • Allocation
  • Square footage
  • Cubic footage
  • Number of employees
  • Revenue
  • Operating income

17
Controllable
  • All costs are controllable at some executive
    level
  • Department managers usually control short run
    costs
  • Corporate executives usually control long run
    costs

18
Differential costs
  • Costs that differ between two alternatives
  • Example?
  • Switch from an outside bookkeeper to doing it
    yourself on a computer
  • What would be the differential costs?

19
Relevant
  • Use only those costs that affect your decision
  • Costs that do not change are not relevant
  • Costs that have already been spent are not
    relevant
  • Costs that cannot be quantified are not relevant

20
Sunk
  • Costs that have happened in the past
  • Not relevant to the future

21
Opportunity costs
  • Revenue sacrificed by taking one alternative over
    another
  • Page 291

22
Average and incremental
  • Average
  • Total costs divided by total units
  • Incremental
  • Cost to produce one more unit
  • Could be substantial if you are at the extensive
    range of production

23
Standard
  • Forecast of costs under certain conditions
  • Used for budget purposes
  • Compared to actual to determine and investigate
    variances

24
In class problemUsing the high-low method, what
is the monthly fixed r m expense for the year?
  • Month Total r m exp Paid Occ
  • Jan 12,600 60
  • April 13,800 70
  • July 13,000 65
  • Oct 14,000 68

25
Homework (See above slide first)
  • Problems
  • 1, 2 (just part 1), 3, 6a, 9 (just part 1), 14

26
Problem 1 Ch. 6
  • Fixed
  • Variable
  • Step
  • Mixed
  • Variable
  • Fixed
  • Fixed
  • Mixed
  • Fixed
  • Variable

27
Problem 2
  • 1. Monthly fixed repair and maintenance
  • Determine the variable portion per 1 occupancy
  • Month expense sales
  • Hi April 13,800 70
  • Low Jan 12,600 60
  • Difference 1,200 10
  • cost difference / sales difference 1200/10 120
    per 1 occ
  • For each additional 1 of sales, it will add 120
    more of r and m cost
  • Determine the variable portion for January (cost
    x sales)
  • 120 x 60 7,200
  • Determine the fixed portion by subtracting the
    variable portion from the total expense for
    January TC FC VC becomes FC TC - VC
  • 12,600 7,200 5,400

28
Problem 3
  • 1. Payroll and related exp 20,000
  • Other expenses 1,450

  • 21,450
  • 2. Undistributed op exp 44,770
  • Fixed charges 17,450
  • Income taxes 15,136
  • Total overhead exp 77,356

29
Problem 6
  • A. Indifference point
  • Variable cost x Revenue Fixed Lease Cost
  • .05 x sales .02 12,000
  • .05 - .02 x sales 12,000
  • .03 x sales 12,000
  • sales 12,000 / .03
  • sales 400,000

30
In class One more Problem 6 type
  • Would you choose fixed lease or variable lease if
  • Fixed lease 38,000 per year or
  • variable lease 4 of sales
  • Variable cost x sales fixed lease cost
  • .04 x sales 38,000
  • Sales 38,000 / .04
  • Sales 950,000
  • Sales higher than 950,000 choose fixed,
  • lower than 950,000 choose variable

31
Problem 9
  • Part 1
  • COS -- Variable
  • Payroll costs -- Mixed
  • Supplies -- Variable
  • Utilities -- Mixed
  • Other op costs -- Variable
  • Bldg rent -- Fixed
  • Depreciation -- Fixed

32
Problem 14
  • 1 no sunk costs
  • 2 Irrelevant cost operator labor supplies
  • 3 Comparison
  • A
    B
  • Cost 10,000
    12,000
  • Salvage cost (1,000) (2,000)
  • Utilities 3,000
    2,400
  • Repairs 3,000
    2,700
  • Total 15,000
    15,100
  • 4 Recommend alternative A
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