Assessment 2 Budget Project
Scenario:
You are the General Manager at The Restaurant QAT at a Newmarket hotel, and you are meeting the Head Chef to discuss the financial quarterly budget (April - June)
The previous budge /actuals from Jan - Mar (below) has been given to you, with the March totals yet to be entered.
The financial controllers are expecting an increase of the January – March budget of 10% which is the increase that is expected in business and this increase percentage is to be the same for April to June budget.
However, they are not aware of certain issues or circumstances regarding operations and you are to provide a memo to the financial controllers and the Head Chef regarding these issues.
The issues are as follows;
- Due to the weather the hotel occupancy bookings for the months of April – June is less 10% from last year, as it is colder than previous years,
- The hotel is upgrading 15 rooms out of 50 so this will also impact on the occupancy rates as these renovations will take place in the April to June period.
- As winter approaches some suppliers have indicated that their vegetable prices will increase,
- There are 25% less conference bookings over the next three months, however two weddings have been booked in, with each wedding being 100 persons attending.
- A new hotel (67 rooms) is due to open up in June, which has two restaurants opening up inside at the same time and they have opening specials in the first week of June.
You tasks:
- Consult with the head-chef on the changes to be included in the next budget and write a memo of the details and analysis of the factors that may impact on the particular budget, stating what areas may be affected and to what extent.
| Detailed written memo: Students, please note: Examples may include: Increase in wages for staff is required due to a conference or function that is occurring in the months, and any other areas that need to be addressed. The monthly figures may need to increase or decrease due to these changes which you will need to make clear of why the changes. Also state an estimated percentage change that you think may be more practical. |
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- Following your consultation, you are required to complete a draft budget which reflects the details you have provided in your memo and allowing for a decrease the percentage that you have decided on and present it to your trainer for feedback
| Restaurant Draft Budget | April | % | May | % | June | % |
| Total Revenue | $ | 100.0 | $ | 100.0 | $ | 100.0 |
| Total Food Revenue | $ | $ | $ | |||
| Total Beverage Revenue | $ | $ | $ | |||
| Cost of Sales Food | $ | $ | $ | |||
| Cost of Sales Beverage | $ | $ | $ | |||
| Salaries & Wages - Preparation | $ | $ | $ | |||
| Salaries & Wages - Service | $ | $ | $ | |||
| Gross Profit on Sales | $ | $ | $ |
- Provided the details of feedback and changes that were requested.
Fill the table below
| Feedback / Reasons for changes | Adjustments | Final decision |
| Examples may include: season change, competitor opening up etc. | Student is to provide the reasonable amount of adjustment Example: percentage reduction etc. | This will need to be demonstrated with the student to ascertain their understanding of negotiation with financial controllers (Verbal discussion) |
- The financial controllers and the Head Chef have agreed to most of the proposed changes except the May budget, they are wanting an 8.5% increase in Total Revenue.
Based on the final decisions received, complete the final budget.
| Restaurant Final Budget | April | % | May | % | June | % |
| Total Revenue | $ | 100.0 | $ | 100.0 | $ | 100.0 |
| Total Food Revenue | $ | $ | $ | |||
| Total Beverage Revenue | $ | $ | $ | |||
| Cost of Sales Food | $ | $ | $ | |||
| Cost of Sales Beverage | $ | $ | $ | |||
| Salaries & Wages - Preparation | $ | $ | $ | |||
| Salaries & Wages - Service | $ | $ | $ | |||
| Gross Profit on Sales | $ | $ | $ |
- Monitor the budget against the actual budget monthly
After the budget has been finalised and the three months is up, the final figures have beenreleased.
Using your figures of your final budget, compare the budget vs actuals and provide your findings in the table below.
| Restaurant Final Budget | April | % | Budget | May | % | Budget | June | % | Budget |
| Total Revenue | $167,000 | 100 | $170,539 | 100 | $173,607 | 100 | |||
| Total Food Revenue | $144,097 | $146,047 | $ | ||||||
| Total Beverage Revenue | $23,793 | $24,493 | $ | ||||||
| Cost of Sales Food | $55,045 | $52,138 | $55,373 | ||||||
| Cost of Sales Beverage | $5,948 | $6,123 | $5,987 | ||||||
| Salaries & Wages - Preparation | $19,545 | $21,555 | $18,818 | ||||||
| Salaries & Wages - Service | $37,609 | $39,325 | $35,398 | ||||||
| Gross Profit on Sales | $ | $ | $ |
| Month | Budgeted figures | Actual figures | Findings/Reasons | Variance (Favourable or Unfavourable) |
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- Each change actioned taken as a result of underperformance (unfavourable) must be documented in the log below
| Log: |
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- On completion of the budget cycle, provide a summary report for the budget performance. What are your recommendations for the next cycle based on your monitoring and reviews?
Including any changes that need to be made and why
| Recommendations: |
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- Lovisa Holdings Limited (hereafter known as “Lovisa”) is a fashion jewellery retailer whose ordinary shares are listed on the Australian Securities Exchange (ASX). According to the ASX announcement on Date: 19/02/2020 and Headline: 1H FY20 Half Year Results Presentation (“Presentation”), Lovisa planned to continue opening new stores. However, the subsequent COVID-19 pandemic and the emphasis on conserving cash has resulted in Lovisa scaling back its planned capital expenditure. Nevertheless, management is confident that one particular planned new stand-alone store in the Sydney suburb of Luddenham, close to the new Western Sydney Airport that is currently under construction, still has huge potential. It is your task as an aspiring financial manager to quantify the potential benefits, and advise if the new store is in the best interests of Lovisa’s shareholders. 2. The two major cash outflows associated with a new store are the cost of the building and the fixtures and fittings such as display cabinets. The directors are accountable to the shareholders and so a financial analysis is necessary to be confident that the investment in the new Luddenham store is justified. The following paragraphs contain a substantial amount of information that has been gathered from across the business and it is your responsibility as a financial manager to determine which information is relevant to the analysis. 3. The capital cost of the Luddenham building is expected to be $1.4 million today. Lovisa has $7.2 million cash and it plans to use $500,000 of this amount to pay for the building which will reduce the cost to just $900,000. If the new store is built, some redundant jewellery equipment must be sold. The equipment had a total capital cost in 2016 of $600,000 and for tax purposes have a ten-year life. The equipment can be sold today for $130,000 and Lovisa will use the sale proceeds to distribute a $130,000 dividend to its shareholders today. 4. According to the Presentation Lovisa depends on a successful supply chain management strategy to ensure “replenishment and newness” of its inventory. To speed up this process Lovisa commissioned a $375,000 internal review of its warehouses and factories. There is debate among management about whether the cost of this review should be classified as a tax-deductible expense in the financial analysis. 5. The annual sales for a new store are always difficult to predict and even more so in the midst of the COVID-19 pandemic. As a starting point, you decide to calculate the sales for an average store in Australia and New Zealand. You read the Presentation to identify the following two figures for HY20: a) Sales for “Australia / NZ” b) Total number of stores for “Australia” and “New Zealand” You use these two figures to calculate an average revenue per store for HY20
6. Since Lovisa plans to build the new store in the year 2020, for capital budgeting purposes assume the first year of sales revenue occurs in 2021. However, due to the COVID19 pandemic, management is very cautious about forecasting sales. Lovisa, like any sensible business, plans for the worst and assumes that sales will take a number of years to recover to normal levels. This conservatism leads to the assumption that the cash sales for the Luddenham store for the entire 2021 calendar year is equal to the average revenue per store figure for HY20 as calculated in paragraph five. However, sales will rebound strongly from 2021 and increase by 35% p.a. for the next three years. From 2024 the annual sales growth rate is expected to be 12%. 7. The Presentation states the dollar values of Cost of Sales (i.e., COGS) and Revenue. Your analysis assumes that costs of goods sold at the Luddenham store are the same proportion as the ratio of Cost of Sales to Revenue figures on the slide discussing Gross Margins. Fixed costs at the Luddenham store in 2021 are $140,000. Management is confident that “operating costs remain under control” (Slide 9) and that they will be able to contain the increase in fixed costs to 2% p.a. for each subsequent year. If the Luddenham store is built, Lovisa anticipates that total cash operating expenses will equal 26% of sales. 8. If Lovisa proceeds with the Luddenham store, the sales team has asked about the impact on sales at the nearby Penrith Lovisa store. Based on the experience of other new store openings, Lovisa anticipates that the Penrith store’s annual sales will reduce by $85,000 each year. Managers propose to ignore this figure because it doesn’t affect the sales predictions at the planned Luddenham store. 9. For taxation purposes the new building has a twenty-year life. However, Lovisa will perform the financial analysis of the Luddenham store over a ten-year period. The new store requires $300,000 of display cabinets. The Australian Taxation Office (ATO) confirms that display cabinets have an eight-year tax life. In Lovisa’s experience, display cabinets can be operated effectively for a full ten years before they need replacing. Lovisa’s management accountants depreciate all non-current assets over an operational six-year life. 10. Lovisa’s Information Technology division has spent $130,000 in recent years developing an E-commerce platform (see slide 15). This project has been operational for one year and already generated sales of $880,000 in 2019. Directors suggest the $130,000 development expense be treated as a cash outflow in 2020 for the analysis of the Luddenham store, as it has not been accounted for in any other budget. 11. Lovisa will borrow $1.2 million today to finance the Luddenham store. The ten-year interest-only loan has annual interest repayments of $48,000 (assuming a 4% p.a. rate). Lovisa’s accountant confirms that interest payments are classified as a business expense and are therefore tax deductible. 12. To promote the new Luddenham store the marketing department proposes $85,000 of advertising to coincide with the store’s opening in 2020. Because this expense will reduce the new store’s profitability in 2020, managers have suggested that the advertising expense be spread out over the new store’s ten-year useful life. The ATO states that expenses associated with the Luddenham store’s grand opening can be claimed as a business expense in the year incurred. Lovisa’s total advertising budget for 2020 is $3.4 million and predicted to increase by $200,000 each year. If the Luddenham store opens, the annual advertising budget will remain unchanged. For cost accounting purposes Lovisa must allocate overheads across each business unit. Lovisa’s total store network is 439 and it is proposed that the Luddenham store