Cost Accounting (14th Edition)

6
Master Budget and Responsibility
Accounting
182
Learning Objectives
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
responsibility accounting
6. Recognize the human aspects of
budgeting
7. Appreciate the special challenges
of budgeting in multinational
companies
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
September 2009.)
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
approved budget.