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occur in the related independent variables. For
example, if a hotel's rooms department experienced
an increase in its fixed costs, an independent
variable, the additional rooms required to be sold
to absorb this increase, a dependent variable, could
be computed by dividing the fixed cost increase by
the contribution margin of the rooms department.
Contribution margin is the selling price of a room
minus the variable costs of selling it. This assumes
that these two other independent variables, the
selling price of the room and its variable cost,
remain constant
Profit sensitivity analysis is used in cost volume
profit analysis and breakeven point analysis. It
involves identifying all costs as fixed or variable.
Fixed costs are those that remain constant over a
relevant range of activity. Costs such as property
tax, interest expense, hotel management salaries
and depreciation are common examples of fixed
costs. Variable costs are those that remain constant
on per unit basis but change in total relative to
sales. Examples of variable costs are those of food
or beverages sold, and perhaps management fees
and other similar expenses that could be determined
as a percentage of sales. The remaining
costs are mixed costs. The majority of costs in a
hospitality operation are mixed, having both a
fixed and variable component. Examples are
repair, maintenance and utilities. In order to
perform breakeven point analysis and cost±
volume±profit analysis, mixed expenses must be
broken down into their fixed and variable components.
Once the fixed and variable components are
identified of all costs, sensitivity analysis provides
the opportunity to measure the affect of the change
on dependent variables as a result of changes in
independent variables.
There are at least three ways that mixed costs
can be segregated into their fixed and variable
components: the high-low two-point method, a
scatter diagram and regression analysis. Both the
high-low and scatter diagram methods are rough
approximations. The preferred method of segregating
a mixed cost into its fixed and variable
components is through the use of regression
analysis, which computes the best straight line
through an array of data.
Further reading
Schmidgall, R. �1997) Hospitality Industry Managerial
Accounting, 4th edn, East Lansing, MI: Educational
Institute of the American Hotel and Motel
Association.
profit variance analysis
profit variance analysis 467
STEPHEN M. LEBRUTO, USA
Profit variance analysis is a management analysis
tool providing departmental managers with information
relative to revenues and expenses directly
under their control. The three types of variances
are revenue, expense and variable labour. Variances
occur when the actual amount is greater
than or less than a predetermined budgeted
amount. A variance is either favourable or
unfavourable. Revenue variances are favourable
when the revenue exceeded the standard to which
it was being compared. Expense or variable labour
variances are favourable when the expense or
variable labour were less than the standard to
which they were being compared.
Most of the variance in revenue occurs because
of differences in price and volume. A restaurant
may budget revenue of $100,000 based on a
forecast of 10,000 covers �volume) times a forecast
of check average of $10 �price). The actual revenue
may be $88,000. The restaurant served 11,000
customers at an average check of $8. The revenue
variance would be $12,000 unfavourable. Price
variance is computed by taking the budgeted
volume �10,000) and multiplying it by the difference
between the actual price and the budgeted
price � $2). The price variance was $20,000
unfavourable. Volume variance is the budgeted
price �$10) times the difference between the actual
volume �11,000) and the budgeted volume �10,000).
The volume variance was $10,000 favourable.
Most of the variance in expenses occurs because
of differences in costs and volume. A hotel may
budget guest room supply costs of $20,000 based
on a forecast of 10,000 rooms sold times a forecast
cost of $2 per room. The actual expense may be
$18,000. The hotel sold 8,000 rooms at a cost of
$2.25 per room. The expense variance would be