Module 1 – Domain I - UH
Module 28 – Domain V: Finance & Materials
After reviewing Module 28 lecture, you should be able to:
1. Describe types of budgets.
2. Discuss methods of developing a budget.
3. Discuss components of budget development
4. Describe monitoring, evaluation, and control of financial status.
Budget Development/Resource Allocation
Types of budgets
• Operating –
o projects income and allocates funds needed to accomplish work
o guides day to day operation
o foundation of planning and control
o includes revenue, costs/expenses (labor, direct material, overhead, other expenses)
o Examples of operational budget line items include uniforms, utensils, glassware, plates, towels, cleaning supplies, food, and anything else used to maintain day-to-day operations.
o Revenue – a part of operational budget?
▪ estimated sales income; project the volume of good sold first, then set the price – as volume increases, the prices will decrease
▪ revenue budget should be projected first during the budget process
• Capital –
o expenditures for expansion, repairs, improvements, major equipment etc
o may include building or facility repairs or expansion
o based on capital expenditures
o these items can depreciate over time
o Examples of capital budget line items include replacement of foodservice equipment and expansion of kitchen space to include a prep area.
• Cash flow –
o estimated flow of cash in and out during a given period of time
• Master –
o includes operating, capital, revenue, and cash flow budgets
o estimated profit is provided as well
The 4 steps of preparing a budget are:
1. Develop a sales budget with an estimate of revenue
2. Develop an expenditure budget
3. Develop a cash budget including sales and expenditures
4. Develop a capital budget
Methods
• Incremental budget - budget based on last year's budget; specific amount is added to cover inflation
• Performance budget - preference is given to those who exceed projections for generation of sales
• Zero-based budget - made each year; funds allocated by justification of continuation of activities or beginning new activities
Components
• Direct costs - costs which can be associated with a specific department, service, etc.
• Indirect costs - costs which are not associated with a specific department (ie: overhead costs, taxes, etc.)
• Capital Expenditures - major improvements, expansions, and purchases or replacements of equipment, buildings & land
• Profitability ratios – measure the ability of an organization to generate profit in relation to sales or the investment of assets; profit or net income is the income remaining after all expenses have been deducted from income/revenue
o Profit Margin on Sales (AKA Profit Margin) = Net Income / Sales
• Revenue (sales) - total income from sales, services, etc.
• Gross profit – profit after subtracting the cost of good sold from the sales/revenue (before expenses)
• Cost of goods available for sale – beginning inventory plus purchases
• Cost of goods sold – COGAS minus ending inventory
• Net income – “Net income” is the phrase commonly used to refer to a company’s “profit.” It represents how much money the company has left over, if any, after it’s paid the costs of doing business — payroll, raw materials, taxes, interest on loans, depreciation rent, etc.
o Gross profit minus labor, overhead and operating expenses (salaries, benefits)
Financial Status: monitoring, evaluation, and control
Monitoring
• Financial Statements -aid in determination of financial condition and profitability; 4 principal documents are (1) Balance sheet, (2) income statement, (3) statement of cash flows, and (4) statement of retained earnings
o Balance Sheet - provides statement of assets, liabilities and owners equity.
▪ Asset – current (cash, accounts receivable, inventory, prepaid expenses), fixed (these will depreciate), and other
▪ Liabilities – current (accounts payable – rent, payroll) accrued (these you will eventually have to pay), Unearned revenue, long-term debt, other
▪ Equity – if assets are greater than liabilities, equity will be high; owners equity (business with 1 owner) or stockholders equity (business with more than 1 owner)
o Income Statement - Revenue less expenses for the period arriving at net income (or loss if expenses exceed revenue & income).
• Cost control formulas:
o meals per labor hour = total # of meals served
total # of labor hours
▪ I.E. 4,600 meals for February, 1,150 labor hours were used.
4,600/1,150 = 4 meals per labor hour. *If number of labor hours is not provided you may have to multiply the # of workers by each worker's hours worked to arrive at number of labor hours. 100 employees x 11.5 hours worked each = 1,150 labor hours.
o cost per meal = total cost
total # of meals prepared
Budget effectiveness
• cost benefit studies – decisions making technique; evaluate whether different options would return better results financially or operationally
o Cost Effectiveness: Cost vs. Results.
▪ Often, the desired outcome is not measured in dollars
▪ Cost effectiveness assists in determining a specific predetermined goal
▪ *Cost effectiveness is popular in public programs.
▪ Cost Effectiveness real world example. You are a dietitian forced to make budget cuts. You can keep one of two programs. A three day type 2 diabetes education class or individual type 2 diabetes counseling. To determine which program to cut you would conduct a cost effectiveness analysis. Which of the two groups have seen the least complications, better glucose control, and overall increased quality of life?
o Cost Benefit Analysis: Effort, time, and expense vs. benefits.
▪ Performance is measured in monetary terms
• productivity studies - based on input versus output; evaluated quantitatively (meals/labor hr, minutes/meal, labor cost/meal served, etc)
Financial Statements & Costing
|Key Terms (Memorize): | |
|Balance Sheet: |Statement of Assets, Liabilities, and Equity. |
|Income Statement: |Statement of Revenue minus Expenses for a period of time (i.e. month or year) Total Sales minus |
| |Total Expenses for the period are recorded on the Income Statement. |
|Net Income: |Revenue - Expenses = Net Income (or profit) Net Income is a line item at the very bottom of the |
| |Income Statement. |
|Revenue: |Revenue: Amounts received from customers for goods sold or services rendered. e.g. Restaurant: |
| |Meals Sold Revenue. Dietitian Practice: Consultation Services Revenue. Book Store: Sale of Books |
| |Revenue. |
|Total Revenue: |Price * Quantity Sold = Total Revenue |
|Expenses: |The amounts incurred for producing revenues. Unlike assets, expenses do not benefit future time |
| |periods. Monthly electric bill, monthly water bill, monthly building rent, advertising expense, |
| |employee payroll, office supplies, etc. |
|Goods Available for Sale: |Beginning Inventory + Purchases = Goods Available for Sale Goods Available for Sale: Beginning |
| |inventory + purchases (net purchases, don't include purchases you made and later returned). |
|Cost of Goods Sold: |Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold Cost of Goods Sold (COGS): |
| |the total cost of inventory that a company has used/sold during a period. |
|Gross Profit: |Gross Profit = Sales Revenue - Cost of Goods Sold Net sales minus cost of goods sold equals gross |
| |profit. |
|Prime Cost: |Raw Material + Labor (i.e. Food & Beverage + Labor = Prime Cost) |
|Fixed Cost: |Remain constant regardless of the level of production (i.e. the building insurance is $1,000 every |
| |month no matter how many meals are prepared) |
|Variable cost: |Costs that change with the level of production (i.e. labor and raw material cost will increase as |
| |production increases - double production and variable costs double) |
|LIFO: |Costing method, the Last In are the First Out for costing purposes. The last inventory purchased |
| |will be the first inventory costed on the financial statements. |
|FIFO: |Costing method, the First In are the First Out for costing purposes. The first inventory purchased |
| |will be the first inventory costed on the financial statements. |
| |
|In general there are two main statements in accounting - the Balance Sheet and the Income Statement. Everything else is a spin off of |
|these two main statements. |
| |
|Let's take a look at an actual Balance Sheet : |
|ABC FOODSERVICE |
|Balance Sheet |
|February 31, 2000 |
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|ASSETS |
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|Current assets: |
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| Cash |
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|$7,500 |
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| Accounts Receivable |
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|11,500 |
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| Inventory (meals for sale) |
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|22,750 |
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| Prepaid Insurance |
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|5,800 |
|________ |
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| Total Current Assets |
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|$47,550 |
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| Property Plant and Equipment: |
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| Equipment |
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|$156,000 |
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| Less Accumulated Depreciation |
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|-27,500 |
|________ |
|$128,500 |
|________ |
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| Total Assets |
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|$176,050 |
|======= |
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|LIABILITIES & STOCKHOLDERS' EQUITY |
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|Current liabilities: |
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| Accounts payable (equipment loan) |
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|$36,500 |
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| Salaries Payable |
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|14,500 |
|________ |
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| Total current liabilities |
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|$51,000 |
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| Stockholders Equity: |
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| Capital Stock |
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|$100,000 |
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| Retained Earnings |
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|25,050 |
|________ |
|$125,050 |
|________ |
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| Total liabilities & equity |
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|$176,050 |
|======= |
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|Take a look at the balance sheet again. What are the three main categories? |
|The three main categories of a Balance Sheet are ASSETS, LIABILITIES, & EQUITY. |
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|All financial statements follow a standard convention regarding heading. At the very top of any financial statement you will find the |
|entity's name. Below the entity's name is the title of the Financial Statement, followed by a date (or for a period if Income |
|Statement). In this case ABC FOODSERVICE is the entity's name. The title of the statement = Balance Sheet |
|There is a fundamental equation for the Balance Sheet. Assets = Liabilities + Equity |
|In our example Total Assets = $176,050 (please look at this figure). Total Liabilities = $51,000 (again please look at the example). |
|Total Equity = $125,050 (please look at the Balance Sheet and find this figure). |
| |
|Now back to the Balance Sheet equation: Assets = Liabilities + Equity ... $176,050 = $51,000 + $125,050 *Notice Total Assets = $176,050|
|and Total liabilities & equity = $176,050 which says $176,050 = $176,050 (accountants really got creative when they named the Balance |
|Sheet...NOT!) |
| |
|If you were asked the question, "which statement utilizes the following equation: Assets = Liabilities + Equity?" - you could respond, |
|"Balance Sheet!" |
| |
|Notice that Inventory (food, beverages, items for sale) is on the Balance Sheet under the Assets section. An Asset is anything that has|
|future benefit to the entity and is owned/controlled by the entity (entity being food service, business, hospital). Assets such as |
|cash, receivables, and inventory can be used by ABC FoodService for future financial benefit. We will visit inventory in more detail a |
|bit later. |
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|There are two main categories of assets: Current Assets and Fixed Assets (Fixed Assets = long term assets such as Property, Plant and |
|Equipment). Current Assets are those assets that can be quickly converted to cash. Fixed Assets are assets such as building and |
|equipment that are not readily converted to cash; fixed Assets are FIXED (buildings and equipment are NOT easily moved). Please look at|
|the assets section of the balance sheet to confirm this. |
| |
|A few key points regarding Assets: Any amounts incurred/paid to prepare the asset for ordinary and regular business use are considered |
|part of the asset's cost. Once the asset is "ready for service in a business setting" any amounts incurred to maintain it are expenses |
|and not added to the cost of the asset. Here's an example problem: |
| |
|stove purchased for $1500.00, delivery of stove $100.00, $225.00 for installation. What is the cost of this asset? Answer: $1825.00 |
|($1500.00 paid for the stove, $100.00 for delivery, and $225.00 for the installation). All of these amounts paid were necessary to get |
|the stove in a "ready for service state," hence they are part of the asset's cost. |
| |
|Once the stove is "ready for service in the business" amounts incurred to keep it running are expenses. An example of amounts that |
|should be expensed rather than added to the cost of the stove: electrician later, after initial installation, comes out to rewire |
|stove, or amounts paid for cleaning, painting, or moving the stove (after stove is "ready for business use") should be expenses for the|
|period and not added to the cost of the asset (stove). |
|Since we just touched on the definition of an asset let's go over liability. A liability is basically the opposite of an asset. A |
|liability is the probable future sacrifice of an asset. |
| |
|At this point you need not be overly concerned with Equity, Shareholders Equity, etc. Just know that it is part of the Balance Sheet |
|equation: Assets = Liabilities + Equity. When presented with the total Assets and Equity you could easily figure out the liabilities by|
|using the Balance Sheet equation. |
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|If you are still uncomfortable with the Balance Sheet take a break and revisit the lecture. Get a blank sheet of paper and copy the |
|balance sheet in this example. Use your calculator to add up Total Assets, Total Liabilities & Equity. Confirm the Balance Sheet |
|equation: Total Assets = Total Liabilities + Equity |
[pic]
|Moving on to the second major financial statement, the Income Statement. The Income Statement is used to measure how well an entity |
|(i.e. company, hospital, food service) is doing on a period to period basis (week to week, month to month, and year to year). |
| |
|An Income Statement really boils down to revenue - expenses. It's not that bad if you consider it has two major sections, Revenue |
|(Sales of products, goods, food, beverages, etc) and Expenses (inventory costs such as food & beverage costs, employee salaries, rent |
|expenses, etc). |
| |
|Wait a second how did, "inventory costs such as food & beverage costs," get moved from the Balance Sheet above to the Income Statement?|
|These items were just on the Balance Sheet? Answer - when these items are sold they move from the balance sheet to the income |
|statement. The Income Statement records the sale of the food & beverage as well as the cost of sale of the food and beverage. |
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|The Income Statement is also referred to as the P & L (profit and loss) or Statement of Operations. Don't let this confuse you. It |
|still means Revenue - Expenses = Income |
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|Let's take a look at an actual Income Statement (remember Income Statement is a Statement of Revenue - Expenses for a period of time |
|(i.e. month or year) |
|Total Sales minus Total Expenses for the period are recorded on the Income Statement. |
|Don't panic when presented a financial statement! Use the following approach: Start reading at the top. Systematically read everything |
|from left to right moving down one line at a time: |
|ABC FOODSERVICE |
|Income Statement |
|For the Year Ended December 31, 2000 |
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|Revenue |
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| Sales (meals) |
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|$378,000 |
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| Other income |
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|$0 |
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|Expenses |
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| Cost of Goods Sold (meals) |
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|$189,000 |
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| Marketing and administrative |
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|20,000 |
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| Rent |
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|30,000 |
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| Depreciation Expense |
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|15,600 |
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| Advertising and product promotion |
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|10,000 |
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| Research and development |
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|12,000 |
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| Wages |
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|44,400 |
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| Other expenses |
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|8,000 |
|________ |
|329,000 |
|________ |
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|Net Income (or Net Loss if expenses exceed revenue/income) |
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|$49,000 |
|====== |
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|The Income Statement is pretty straight forward. As we can see it measures total revenue (sales) less total expenses for a period |
|(week, month, or year in this case). |
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|Please look at the Income Statement and notice Cost of Goods Sold (meals). You might ask, "well if the Income Statement simply reflects|
|Revenue - Expenses what is all this "Costing" business about?" |
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|Great Question! After the Revenue (Sales) section of the Income Statement comes the Expenses. It is necessary to determine how much |
|expense (or cost) was encountered when selling all of the meals for the period (in this case year). |
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|Let's break down Sales - Cost of Product/Goods Sold (fancy term for expenses directly attributed to sales) into a simple example. |
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|ABC FoodService sells one meal to a customer for $6.00 This $6.00 would be reflected on the Income Statement below Revenue in the Sales|
|(meals) column. |
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|We know Revenue - Expenses = Net Income. Considering ABC FoodService's $6.00 sale does this mean they have Net Income of $6.00? |
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|No! ABC FoodService only wishes Net Income was $6.00! We must take into account the COST of the meal sold. |
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|To make the meal so it could be sold to the customer it cost us $3.00 ($1.50 for the food and $1.00 for the employee labor and .50 for |
|the beverage). |
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|In this example our Cost of Product/Goods Sold is $3.00 Do you know what our Net Income would be if these were the only items on our |
|Income Statement? $3.00 ($6.00 sale - $3.00 Cost of Goods Sold = $3.00 Net Income) |
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|Ok I think we've focused on that one example enough. Now consider the ABC FoodService Balance Sheet & Income Statement above. |
| |
|Let's review some financial statement problems. Please read the question, look at the statement and work the problem on blank scratch |
|paper WITHOUT looking at the answer). Scroll the screen to the point where only the Question appears (and the answer is hidden). |
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|1Q. What is the total sales figure for ABC FoodService for the year ended December 31, 2000? |
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|A. $378,000 - simple question, just look at the income statement. |
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|2Q. If ABC FoodService had an equal amount of sales every month in 2000, how many meals did they sell each month if each meal sold for |
|$6.00? |
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|A. 5,250 - Meal Sales $378,000/$6.00 per meal = 63,000/12 months = 5,250 |
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|3Q. How many meals did ABC FoodService sell in 2000 if they sold each meal for $5.50? |
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|A. 68,727 meals were sold in 2000. Look at the income statement, Sales Meals $378,000/$5.50 per sale = 68,727 meals sold for $5.50 |
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|4Q. On the ABC FoodService Balance Sheet above, how many meals are available for sale if each meal has a cost of $4.00? |
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|A. 5,688 meals are in inventory. Inventory of $22,750/$4.00 per meal = 5687.5 (round up one for .5 or higher - round down for .4 or |
|less). |
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|5Q. What is the Total Current Liabilities for ABC FoodService & which statement would you find this on? |
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|A. Total Current Liabilities for ABC FoodService is $51,000 as shown on the Balance Sheet. |
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|6Q. Is Equipment a current asset? |
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|A. No, property, plant and equipment are NOT current assets. They are assets (Fixed Assets) however because they are owned by ABC |
|FoodService and can be used for future economic benefit. |
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|This would be a good time to discuss COST and COSTING METHODS. |
[pic]
|COST & COSTING METHODS: |
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|Do you recall that our prepared meal sat on the Balance Sheet as Inventory until it was sold? Now what happened to it after it was |
|sold? |
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|The $6.00 sale was recorded on the Income Statement and the $3.00 COST was transferred from the Balance Sheet Inventory to the Expenses|
|(Cost of Goods Sold) on the Income Statement. Cost of Goods Sold tells us how much of our inventory was used considering sales for the |
|period. |
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|Remember the equation for |
|COGS: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. |
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|Here's an example: |
|1Q. How much food did ABC FoodService use in production during the month of October? |
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|October food purchases: 14,450 |
|Inventory Sept. 30: 2,400 |
|Ending Inventory October 30: 4,800 |
|October sales: 26,500 |
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|A. 12,050 |
|This question is basically asking us for Cost of Goods Sold during October. We know the COGS is Beginning Inventory + Purchases = Goods|
|Available for Sale - Ending Inventory = Cost of Goods Sold. 2,400 + 14,450 = 16,850 - 4,800 = 12,050. |
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|Notice that Inventory Sept. 30: 2,400 is also October's Beginning Inventory. Next, "October food purchases: 14,450." Goods Available |
|for Sale: 16,850 = 2,400 + 14,450. Now the only thing left to do is subtract the October 30 ending inventory from Goods Available for |
|sale: 16,850 - 4,800 = 12,050 Cost of Goods Sold. |
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|A suggested problem solving approach for this type of question is to write down the information on scratch paper in chronological order|
|starting with the dates on the left hand side of the paper. In the above example write down the event occurring first: Sept. 30 2,400 |
|now skip a space or two and write down the next piece of information (in date order) October food purchases: 14,450...skip a space and |
|write October Sales: 26,500 and finally October 30: 4,800. This method should help you "see" the question's logic. Try it! |
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|There are a couple of key terms you need to memorize regarding cost: |
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|Variable Costs - costs that change with the level of production |
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|Our meals have variable cost components. If one meal is produced then the cost is $3.00, but if two meals are produced...what is the |
|cost? Yes, $6.00 - as the amount of production increases then so will variable costs. Simple concept really. |
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|Fixed Costs - costs that DO NOT change (remain constant), regardless production level |
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|Can you think of any costs that remain constant regardless the level of production? Rent is fixed, insurance is fixed; regardless of |
|how many meals are produced the rent expense will be the same, FIXED, every month. No matter how many or how few meals are produced the|
|insurance will remain the same, FIXED, every month. |
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|Prime Cost = Raw Material + Labor. |
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|In our example prime cost = ? |
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|If you said $3.00 you are correct! Raw Material (the meal) = $1.50 Food + .50 for the drink PLUS the labor which is $1.00 If you |
|memorize the definition of Prime Cost you should be fine. |
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|Here is another prime cost example: |
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|You are being asked to cut one of the following entrees out of the menu. Which of the following provides the lowest profit based on the|
|following monthly sales data? |
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|Item |
|Units Sold |
|Sale Price |
|Labor Cost |
|Prime Cost |
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|Fish & Chips |
|750 |
|$4.00 |
|$1.00 |
|$2.00 |
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|Bean Burrito |
|650 |
|$3.00 |
|$0.75 |
|$1.50 |
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|Caesar Salad |
|950 |
|$5.00 |
|$3.00 |
|$4.00 |
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|Stir Fry |
|550 |
|$5.50 |
|$2.00 |
|$3.00 |
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|Answer: You should remove the Caesar salad from the menu. It has the lowest profit compared to all the other items. *Notice that this |
|problem provided labor cost which is a component of prime cost & therefore labor cost is not used to arrive at the answer. |
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|Fish & Chips: 750 *(4 – 2); Profit $1500 = $3,000 - $1,500 |
|Bean Burrito: 650 * (3 – 1.50); Profit $975 = $1,950 - $975 |
|Caesar Salad: 950 * (5 – 4); Profit $950 = $4,750 - $3,800 |
|Stir Fry: 550 * (5.50 – 3); Profit $1,375 = $3,025 - $1,650 = $1,375 |
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|LIFO = Last In First Out - to understand what this means here is a quick example. |
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|Let's say we made the following food purchases for our meals: |
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|January 15: 100 sandwich ingredients @ $1.50/per sandwich ingredient, total purchase = $150.00 |
|January 20: 100 sandwich ingredients @ $1.40/per sandwich ingredient, total purchase = $140.00 |
|January 25: 100 sandwich ingredients @ $1.45/per sandwich ingredient, total purchase = $145.00 |
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|January 30, we sold 150 meals for $900 = ($6.00/meal X 150 sales) |
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|In our costing example earlier you may recall we said our meal cost was $3.00 which included food cost of $1.50. Now look at the 300 |
|purchases above occurring on different dates for differing amounts. Considering the 300 purchases of raw material (sandwich |
|ingredients), if we sold 150 sandwiches we COULD NOT say our food cost was $1.50 for each meal...because some of the sandwich |
|ingredients used cost us less than $1.50 (sandwich ingredients purchased on January 20 = $1.40/each, and on January 25, = $1.45/each). |
|The LIFO method says we must cost the 150 sales as follows, "Last In First Out (by date)" - so what would our food cost be using LIFO |
|for the sale of 150 sandwiches? |
|It would be 100 @ 1.45 + another 50 @ 1.40 for a total of $215.00 ($145.00 for the last 100 and $70 for the previous 50). |
|*Note that $215.00 was the cost of goods sold and this amount was transferred from the balance sheet to the income statement. |
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|In the same example, if you were asked for ending inventory value and the problem stated the LIFO costing method was being used (as |
|stated in this example) then the ending inventory value would be $220.00 = ($435, total available for sale, -$215 cost of goods sold |
|using LIFO). |
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|That is LIFO, Last In are the First Out for costing purposes. |
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|FIFO = First In First Out for costing purposes. Here’s an example using FIFO |
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|The FIFO method says we must cost the 150 sales as follows, "First In First Out" - so what would you food cost be using FIFO for the |
|sale of 150 sandwiches? It would be 100 @ $1.50 (January 15 - First In) + 50 @ $1.40 (next in line for First In) for a total food cost |
|of $220. |
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|FIFO - First In are The First Out (by date) for costing purposes. |
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|1Q. Considering the purchases above, what would be the average cost of all 300 meals purchased? |
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|A. |
|100 x $1.50 = $150 |
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|100 x $1.40 = $140 |
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|100 x $1.45 = $145 |
|________________ |
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|300 $435 |
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|$435/300 = $1.45 per meal using an average costing model. |
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|2Q. What would ABC FoodService's total costs be if: |
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|Variable Costs = $3,000 |
|Fixed Costs = $2,200 |
|Assets = $176,050 |
|Liabilities = $50,000 |
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|A. Total Costs = $5,200 (Variable Costs of $3,000 + Fixed Costs of $2,200) |
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|Weighted Average = Cost of Goods Available for Sale divided by Units Available for Sale. |
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|Beginning inventory January 1: 100 #10 cans peaches @ $7.10/per can, total purchase = $710.00 |
|Purchase January 11, 100 #10 cans peaches @ $7.20/per can, total purchase = $720.00 |
|Purchase January 21, 100 #10 cans peaches @ $7.50/per can, total purchase = $750.00 |
| |
|Ending inventory January 29, 55 #10 cans peaches |
| |
|1Q. What is the per unit #10 can cost using the Weighted Average method? |
| |
| |
|A. $7.27 calculated as follows: $2180/300 = $7.27 |
| |
| |
|2Q. What is the cost of the ending inventory using the Weighted Average method? |
| |
| |
|A. $399.85 calculated as follows: $7.27 x 55 #10 cans = $399.85 |
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|DEPRECIATION |
| |
|Do you recall the "Accumulated Depreciation" line item on the Balance Sheet? As Fixed Assets, such as equipment, wear out over time |
|they must be costed accordingly. They are said to be "depreciated" with a predetermined depreciation amount expensed on the income |
|statement every month. Without diving too deep into accounting please look over the following depreciation method - Straight Line |
|Depreciation. |
| |
|Straight Line Depreciation example. ABC FoodService purchased equipment for making meals. The cost associated with the wear and tear on|
|the equipment over time is called depreciation. The depreciation is expensed on a monthly (or yearly) basis on ABC FoodService's Income|
|Statement. |
| |
| |
|A common depreciation method for determining how much depreciation expense should be recorded each period (month, quarter, year, etc.) |
|is Straight Line Depreciation. After the depreciation method is determined other important information includes useful life of the |
|fixed asset and salvage value (how much is it worth at the end of it's useful life? e.g. Junk Yard gives us $75.00). |
| |
|Here's an example: |
| |
|The ABC FoodService equipment cost $156,000 and has an estimate useful life of 10 years. The equipment is recorded on the Balance Sheet|
|for the full price paid (please look at the balance sheet). Using the Straight Line method of depreciation we would allocate cost (on a|
|monthly basis) as follows: |
| |
|Useful life = 120 months (10 years x 12 months in a year) |
|Purchase price of equipment = $156,000 |
|Estimated salvage value of equipment = $0 |
|Monthly Straight Line depreciation = $1,300 |
| |
|1Q. What would the yearly depreciation expense be for ABC FoodService based on the Straight Line depreciation method (using the |
|information above)? |
| |
| |
|A. $15,600 calculated as follows: |
| |
|Monthly depreciation = $1,300 x 12 months in a year = $15,600 |
| |
| |
|Here's another depreciation example problem: |
| |
|The fixed asset in question is a stove with a salvage value of $100.00. The stove's useful life is 10 years. The price tag of the stove|
|on the showroom floor is $3270.00. It costs $335.00 to deliver the stove and another $185.00 to install it. $375.00 was spent to |
|purchase ready made apple pies that will be cooked in the stove and sold to customers once it is installed. |
| |
| |
|1Q.What is the monthly depreciation expense of the stove if straight line depreciation is used? |
| |
| |
|A. $30.75 depreciation expense per month. |
| |
|Here's how we arrived at $30.75: |
| |
|#1. Determine the asset/stove's cost: $3790.00 = ($3270 + $335.00 + $185.00) *remember the cost of the fixed asset recorded on the |
|Balance Sheet includes everything paid/incurred to get it in "ready for business condition." The apple pies are not part of the asset's|
|cost since they are not needed to "ready the stove for service in a business setting" AND they will be gone in the near future (fixed |
|assets are long term) and the pies should be offset against revenue as expenses. |
| |
|#2. Determine the asset's useful live and salvage value: 10 years and $100.00 |
| |
|#3. Convert the 10 years into months. 120 months = (10 years x 12 months) |
| |
|#4. Fixed asset cost less/minus salvage value is: $3690.00 = ($3790.00 - $100 salvage value) |
| |
|#5. $3690.00/120 months = $30.75 |
|This concludes the lecture portion of the Financial Statements and Costing area. Please be sure and memorize all of the key terms at |
|the beginning of this lecture. |
[pic]
| |
|Here are some extra questions for your review (Do NOT look at the answers until you've worked the problem - use a pencil, non ruled |
|scratch paper, and a small calculator just like an exam). |
| |
|1Q. If ABC FoodService has fixed costs of $10,000 and variable costs are $3.25 per |
|sandwich, what would the total variable costs be for 110 sandwiches? |
| |
| |
|A. $357.50 ~ (variable costs of $3.25 x 110 sandwiches = $357.50) |
| |
| |
|2Q. Using the information in the question above what would the total cost be for 110 sandwiches? |
| |
| |
|A. $10,357 ~ (Total Cost = Fixed Cost $10,000 + Variable Cost $357.50) |
| |
| |
|3Q. What would the total cost be for 130,500 sandwiches? |
| |
| |
|A. $434,125 ~ (Total Cost = Fixed Cost $10,000 + Variable Cost $424,125 |
| |
| |
|4Q. Which statement has Current Assets such as cash, inventory, and prepaid items? |
| |
| |
|A. Balance Sheet |
| |
| |
|5Q. What is a Balance Sheet? |
| |
| |
|A. Statement of Assets, Liabilities & Equity. |
| |
| |
|6Q. Which statement would you find sales of beverage on? |
| |
| |
|A. Income Statement. The Income Statement reports all sales and expenses for a period. |
| |
| |
|7Q. Which statement would you find sales of meals on? |
| |
| |
|A. Income Statement. The Income Statement reports all sales and expenses for a period. |
| |
| |
|8Q. Which of the following is not a current asset? Cash, Inventory, Accounts Receivable, Building. |
| |
| |
|A. Building is an asset, but NOT a current asset. Building is a FIXED asset. Current assets are assets that can be QUICKLY sold off for|
|cash. |
| |
| |
|9Q. Which statement would you find meals available for sale? |
| |
| |
|A. Balance Sheet, current assets section because current assets such as meals inventory can be converted to cash quickly (can easily |
|sell). |
| |
| |
|10Q. Which financial statement would you find sold meals on? |
| |
| |
|A. Income Statement under the revenue section. |
|Now that you have read the lecture, consider the following: |
|Describe types of budgets. Include: |
|What items would you find on an operational budget? |
|Name some examples of capital expenditures. |
|What budget should be created first? |
|Which budget includes all other budgets? |
|Discuss methods of developing a budget. |
|Which budget is based on last year's budget? |
|Which budget requires justification for every item each year? |
|Discuss components of budget development. Include: |
|What are costs that can be associated with a specific department? |
|Electricity, administrative salaries & other overhead items are what kind of cost? |
|Sales price minus cost of item sold = what? |
|Sales price, sales income, income, payment received for services, fees received, are all what? |
|Describe monitoring, evaluation, and control of financial status. Include: |
|monitoring |
|budget effectiveness |
|What is the difference between cost effectiveness and cost benefit analysis? When would you use each of these? |
|Financial Statements |
|What is the difference between a balance sheet & income statement? |
|How is net income arrived? What statement shows net income? |
|What makes up prime cost? |
1. Which of the following includes revenue and costs?
a. capital budget
b. revenue budget
c. cash flow budget
d. operational budget
2. Which of the following may include building or facility repairs or expansion?
a. capital budget
b. revenue budget
c. cash flow budget
d. operational budget
3. Which of the following includes estimated sales income?
a. capital budget
b. revenue budget
c. cash flow budget
d. operational budget
4. Which of the following estimates flow of cash in and out during a given period of time?
a. revenue budget
b. operational budget
c. capital budget
d. cash flow budget
5. Which of the following provides estimated profit?
a. chief budget
b. operational budget
c. master budget
d. revenue budget
6. A budget based on last year with specific amount added to cover inflation is known as:
a. incremental budget
b. zero-based budget
c. operational budget
d. performance budget
7. A budget in which preference is given to those which exceed projections for generation of sales is known as:
a. incremental budget
b. performance budget
c. operational budget
d. zero-based budget
8. Costs for canned vegetables would be categorized as:
a. indirect cost
b. revenue
c. direct cost
d. profit margin
9. Electricity for the production area of the foodservice is categorized as:
a. indirect cost
b. revenue
c. profit margin
d. direct cost
10. The amount made from a catering service minus all costs is known as:
a. indirect cost
b. direct cost
c. profit margin
d. revenue
11. Total income made from a catering service is known as:
a. profit margin
b. indirect cost
c. direct cost
d. revenue
12. You spend $2390.32 on 518 meals. What is the cost per meal?
a. $2.41
b. $5.89
c. $4.61
d. $10.43
13. Over a 7 hour period of time, 8 employees prepare 518 meals. What is the meal per labor hour?
a. 15.85
b. 9.25
c. 7.31
d. 10.77
14. Over a 5 hour period of time, 15 employees prepare 1031 meals. What is the meal per labor hour?
a. 13.75
b. 17
c. 9.31
d. 10.85
15. Which of the following provides statement of assets and liabilities?
a. balance sheet
b. financial statement
c. cost-benefit study
d. revenue budget
16. Which of the following is the first step to prepare a budget?
a. develop an expenditure budget
b. develop a cash budget
c. develop a capital budget
d. develop a sales budget
17. Which of the following is the final step to prepare a budget?
a. develop a sales budget
b. develop an expenditure budget
c. develop a capital budget
d. develop a cash budget
18. When planning this year's budget, your goal is to avoid any preference to last year's activities or events. You choose:
a. performance budget
b. zero based budget
c. operational budget
d. incremental budget
19. When planning this year's budget, your goal is to continue successful activities from the past year. You choose:
a. zero based budget
b. performance budget
c. operational budget
d. incremental budget
20. A master budget includes all of the following except:
a. operational budget
b. capital budget
c. revenue and cash flow budgets
d. incremental budget
21. Estimated sales from your foodservice café would be found on which budget?
a. operation
b. cash flow
c. revenue
d. zero based
22. Expansion plans for your foodservice production area would be found on which budget?
a. capital
b. cash flow
c. incremental
d. revenue
23. Which of the following is not a direct cost?
a. labor
b. fresh vegetables
c. foodservice equipment
d. taxes
24. Which of the following evaluates whether different options would produce better results financially or operationally?
a. productivity studies
b. cost benefit studies
c. cost studies
d. labor studies
25. Which of the following is based on input versus output?
a. cost benefit studies
b. labor studies
c. cost studies
d. productivity studies
|Module 28 – Domain V Quiz |
|Finance & Materials |
|[pic] |
|1. Which of the following includes revenue and costs? Incorrect |
|a. capital budget |
|b. revenue budget |
|c. cash flow budget |
|d. operational budget |
|Operational budget is the foundation of planning and control; includes revenue and costs. |
|[pic] |
|2. Which of the following may include building or facility repairs or expansion? Correct |
|a. capital budget |
|b. revenue budget |
|c. cash flow budget |
|d. operational budget |
|Capital budget is the foundation for growth, repairs, etc.; may include building or facility repairs or expansion. |
|[pic] |
|3. Which of the following includes estimated sales income? Correct |
|a. capital budget |
|b. revenue budget |
|c. cash flow budget |
|d. operational budget |
|Revenue budget is the estimated sales income. |
|[pic] |
|4. Which of the following estimates flow of cash in and out during a given period of time? Correct |
|a. revenue budget |
|b. operational budget |
|c. capital budget |
|d. cash flow budget |
|Cash flow budget is the estimated flow of cash in and out during a given period of time. |
|[pic] |
|5. Which of the following provides estimated profit? Correct |
|a. chief budget |
|b. operational budget |
|c. master budget |
|d. revenue budget |
|Master budget includes operational, capital, revenue, and cash flow budgets; estimated profit is provided as well. |
|[pic] |
|6. A budget based on last year with specific amount added to cover inflation is known as: Correct |
|a. incremental budget |
|b. zero-based budget |
|c. operational budget |
|d. performance budget |
|Incremental budget is a budget based on last year's budget; specific amount is added to cover inflation. |
|[pic] |
|7. A budget in which preference is given to those which exceed projections for generation of sales is known as: Correct |
|a. incremental budget |
|b. performance budget |
|c. zero-based budget |
|d. operational budget |
|Performance budget is a budget in which preference is given to which exceed projections for generation of sales. |
|[pic] |
|8. Costs for canned vegetables would be categorized as: Correct |
|a. indirect cost |
|b. revenue |
|c. direct cost |
|d. profit margin |
|Direct costs are costs which can be associated with a specific department, service, etc. |
|[pic] |
|9. Electricity for the production area of the foodservice is categorized as: Correct |
|a. indirect cost |
|b. direct cost |
|c. revenue |
|d. profit margin |
|Indirect costs are costs which are not associated with a specific department; includes overhead costs and taxes. |
|[pic] |
|10. The amount made from a catering service minus all costs is known as: Correct |
|a. indirect cost |
|b. direct cost |
|c. profit margin |
|d. revenue |
|Profit margin is the revenue less all costs of a specified good or service. |
|[pic] |
|11. Total income made from a catering service is known as: Correct |
|a. profit margin |
|b. indirect cost |
|c. direct cost |
|d. revenue |
|Revenue is the total income from sales, services, etc. |
|[pic] |
|12. You spend $2390.32 on 518 meals. What is the cost per meal? Correct |
|a. $2.41 |
|b. $5.89 |
|c. $4.61 |
|d. $10.43 |
|Cost per meal = total cost divided by the total number of meals prepared; 2390.32 divided by 518 = 4.61. |
|[pic] |
|13. Over a 7 hour period of time, 8 employees prepare 518 meals. What is the meal per labor hour? Correct |
|a. 15.85 |
|b. 9.25 |
|c. 10.77 |
|d. 7.31 |
|Meal per labor hour = total number of meals divided by (number of employees x hours of labor); 518 divided by (8 x 7) = 9.25. |
|[pic] |
|14. Over a 5 hour period of time, 15 employees prepare 1031 meals. What is the meal per labor hour? Correct |
|a. 13.75 |
|b. 10.85 |
|c. 17 |
|d. 9.31 |
|1031 divided by (15 x 5) = 13.75 |
|[pic] |
|15. Which of the following provides statement of assets and liabilities? Correct |
|a. balance sheet |
|b. financial statement |
|c. cost-benefit study |
|d. revenue budget |
|A balance sheet provides statement of assets, liabilities, and owners equity. |
|[pic] |
|16. Which of the following is the first step to prepare a budget? Correct |
|a. develop an expenditure budget |
|b. develop a cash budget |
|c. develop a capital budget |
|d. develop a sales budget |
|The 4 steps of preparing a budget are: 1. Develop a sales budget with an estimate of revenue, 2. Develop an expenditure budget, 3. |
|Develop a cash budget including sales and expenditures, 4. Develop a capital budget. |
|[pic] |
|17. Which of the following is the final step to prepare a budget? Incorrect |
|a. develop a sales budget |
|b. develop an expenditure budget |
|c. develop a capital budget |
|d. develop a cash budget |
|The 4 steps of preparing a budget are: 1. Develop a sales budget with an estimate of revenue, 2. Develop an expenditure budget, 3. |
|Develop a cash budget including sales and expenditures, 4. Develop a capital budget. |
|[pic] |
|18. When planning this year's budget, your goal is to avoid any preference to last year's activities or events. You choose: Correct|
|a. performance budget |
|b. zero based budget |
|c. operational budget |
|d. incremental budget |
|Zero based budget is made each year; funds allocated by justification of continuation of activities or beginning new activities. |
|[pic] |
|19. When planning this year's budget, your goal is to continue successful activities from the past year. You choose: Incorrect |
|a. zero based budget |
|b. performance budget |
|c. operational budget |
|d. incremental budget |
|Performance budget occurs when preference is given to activities that exceed projections for generation of sales. |
|[pic] |
|20. A master budget includes all of the following except: Incorrect |
|a. operational budget |
|b. capital budget |
|c. revenue and cash flow budgets |
|d. incremental budget |
|Incremental budget is a budget based on last year's budget; specific amount is added to cover inflation. |
|[pic] |
|21. Estimated sales from your foodservice café would be found on which budget? Correct |
|a. operation |
|b. cash flow |
|c. revenue |
|d. zero based |
|Revenue budget is the estimated sales income. |
|[pic] |
|22. Expansion plans for your foodservice production area would be found on which budget? Correct |
|a. capital |
|b. cash flow |
|c. incremental |
|d. revenue |
|Capital budget is the foundation for growth, repairs, etc.; may include building or facility repairs or expansion. |
|[pic] |
|23. Which of the following is not a direct cost? Correct |
|a. labor |
|b. fresh vegetables |
|c. foodservice equipment |
|d. taxes |
|Direct costs are costs which can be associated with a specific department, service, etc. |
|[pic] |
|24. Which of the following evaluates whether different options would produce better results financially or operationally? Incorrect|
|a. productivity studies |
|b. cost benefit studies |
|c. labor studies |
|d. cost studies |
|Cost benefit studies evaluate whether different options would return better results. |
|[pic] |
|25. Which of the following is based on input versus output? Correct |
|a. cost benefit studies |
|b. labor studies |
|c. cost studies |
|d. productivity studies |
|Productivity studies are evaluated quantitatively; based on input versus output. |
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