Lone Star Lodging

INTRODUCTION

Sitting at his desk reviewing the results of the last year, Jack Smith reflected on his second year as General Manager of the Lone Star Motel. Next week is the Regional Operations Review in nearby Lubbock, Texas, where managers from surrounding areas will gather with Victoria Jennings, Regional Vice President of Operations. Smith will need to summarize the hotels performance and, recalling variance analysis, thought this tool would be a rigorous way to conduct his analysis.

COMPANY BACKGROUND

The Lone Star Motel is a 126-room economy-lodging hotel in Amarillo, Texas. Built in 1980, it is part of Lone Star Lodging, a privately-owned hotel chain headquartered in suburban Houston, Texas. Lone Star Lodging operates a network of 207 hotels in four states: Texas, New Mexico, Oklahoma and Arkansas. About half of the hotels are owned and operated by the company

PRESENT SITUATION

Renovated two years ago, the hotel competes with 16 other economy-lodging hotels in a market that is more competitive than most. However, when thinking about its market share, company management actually considers three nearby hotels to be the hotels direct competitors. Sales data on regional and local competitors for the past five years are regularly obtained from an industry benchmarking firm (see Table 1). In the hospitality industry, average sales price is average daily rate (ADR), defined as the total room revenue divided by the number of rooms rented. Another industry-standard metric, occupancy, represents capacity utilization. Occupancy is defined as the total number of rooms rented (output) divided by the number of rooms available during the period (capacity). In preparing his budget, Smith expected the 2017 market size to be 10% higher than the 2016 market size. For 2017, the benchmarking firm reported that local competitors rented 77,291 rooms at an ADR of $59.80. Smith turned to the report detailing budgeted and actual revenue and expense data (see Table 2). Accounting provided Smith with the hours worked by hotel staff. The maintenance worker and general manager are normally full-time workers (that is, 40 hours per week, 50 weeks a year). All other workers are considered full time, though many of them work less than 40 hours per week (see Table 3).

In preparing the budget, Smith planned on housekeeping staff using a standard time of 30 minutes per room with a wage rate of $7.00 per hour. The head housekeepers wage was budgeted at $9.50 per hour and usually works 40 hours. With a small staff, the head housekeeper also cleans rooms. Her productivity appears lower (that is, cleans fewer rooms) because of her supervisory duties (inspections and employee training) and the need to complete the room inventory form. Accordingly, during slow periods, the head housekeeper may work fewer hours. Smith anticipated having one person staffing the front desk at all hours. With the exception of the general manager, employees do not get paid vacation time. Further, with high turnover, most employees do not receive benefits (healthcare and retirement contributions). Table 4 shows the monthly budget Smith developed to submit to corporate accounting as his required annual budget. A description of accounts is given in the Appendix. Next week is Smiths operations review meeting with Victoria Jennings. Having gathered all the data needed for a comprehensive variance analysis, he would like your help doing the calculations, interpreting the numbers, and preparing his report and presentation.

Required Question

Conduct a comprehensive Variance analysis. Use the data provided to prepare a report and presentation for the operations review meeting with Victoria Jennings. The analysis report to contain:

1. Briefly explain the budgeting process.

2. Mention the differences between a flexible budget and a static budget. Which one will you prefer? Why?

3. Prepare a Static Budget variance analysis report (using the static budget given in Table 2)

4. Prepare a Flexible Budget variance analysis report (with the flexible budget). For this first, you have to create a Flexible Budget by inserting each line item in the monthly budget from Table 4 - for this, you have to classify the items in (Table 4) into Fixed and Variable you are required to provide discussions about your rationale for each account classification. (For the purpose of simplicity, all those expenses that do not change directly and proportionally to the change in the level of activity may be taken as fixed expenses. Do not complicate yourself by trying to apply data given in Table 3 and other additional information given in the text of the case study while preparing the flexible budget).

5. Your comments based on the above analysis for the operations review meeting with Victoria Jennings.

Table 1: Local and Regional Competitor Sales Data Note: ADR is average daily rate and is measured as total revenue divided by the number of rooms rented (i.e., sales price). Occupancy is measured as rooms rented divided by the total number of rooms available 100 (i.e., capacity utilization). Table 2: 2017 Profit-and-Loss Summary for the Amarillo Property Table 2: 2017 Profit-and-Loss Summary for the Amarillo Property Panel B: Expenses Note: All monetary values are represented in U.S. dollars. Table 2: 2017 Profit-and-Loss Summary for the Amarillo Property Table 3: Employee Information by Job Type \begin{tabular}{lcc} Employee ID & Hours Worked & Hourly Wage Rate \\ \hline General Manager & & \\ 44215 & 2,040.0 & $13.45 \\ Front Desk Employees & & \\ 251256 & 2,077.1 & $8.98 \\ 488442 (front desk supervisor) & 2,087.5 & $9.72 \\ 743796 & 1,610.1 & $8.45 \\ 766468 & 1,520.0 & $8.55 \\ 871219 & 1,425.1 & $8.60 \\ 980511 & 517.1 & $8.30 \\ Head Housekeeper & & \\ 134076 & 2,291.3 & $9.70 \\ Housekeepers & & \\ 172931 & 1,462.2 & $8.15 \\ 215403 & 1,627.8 & $8.10 \\ 219100 & 1,249.2 & $8.10 \\ 264365 & 1,117.2 & $7.60 \\ 306002 & 1,188.0 & $7.65 \\ 322777 & 1,151.5 & $7.55 \\ 352605 & 423.6 & $7.40 \\ 586120 & 43.7 & $7.30 \\ 693453 & 245.7 & $7.35 \\ 696487 & 155.5 & $7.25 \\ 724731 & 73.4 & $7.25 \\ 729577 & 511.1 & $7.60 \\ 748933 & 111.6 & $7.25 \\ 772040 & 121.4 & $7.30 \\ 805364 & 282.4 & $7.30 \\ 828589 & 125.4 & $7.25 \\ 863038 & 63.6 & $7.25 \\ 882112 & 21.9 & $7.25 \\ 885651 & 235.4 & $7.30 \\ 901105 & 124.2 & $7.25 \\ 911934 & 320.0 & $7.35 \\ Maintenance Staff & 1,966.3 & $11.99 \\ 289183 & 367.4 & $17.56 \\ \hline 166365 (regional support) & & \\ \hline \end{tabular} Noce: Due to the rounding, the tocal cost is different from incone starement amounts. All monetary values are represented in U.S. dollars. Table 4: Jack Smith's Monthly Budget Worksheet Table 4: Jack Smith's Monthly Budget Worksheet (continued) Note: All monetary values are represented in U.S. dollars. Table 4: Jack Smith's Monthly Budget Worksheet (continued) Table 4: Jack Smith's Monthly Budget Worksheet (continued) Note: All monetary values are represented in U.S. dollars. APPENDIX. ACCOUNT DESCRIPTIONS Staff Incentives. Amounts paid for anything that incentives hotel staff. For example, many general managers provide pizza parties on employee birthdays, or lunch on busy days. REVENUE ACCOUNTS Employee Relocation Expense. Amounts paid to reimburse Room Rentals. Revenue derived from room rentals. It is the employees who relocate to a new property. This amount is average daily rate times rentals. usually zero, and the company only pays to relocate a general Revenue Allowance. Revenue allowances are refunds offered manager (a rare event). at the property at time of departure. Internet Access. Revenue derived from the sale of daily Training is provided for general managers and managers-inguest Wi-Fi/Internet access. training. Vouchers. Revenue from guests paying for their stay with guest vouchers. Workers Compensation. The amounts charged to workers' Laundry. Revenue from customer use of coin-operated any expenses that develop over time. Amounts are actuarial laundry equipment (washer and dryer). estimates and, while budgeted by the general manager, the Vending. Revenue received from customer purchases at onmanager does not determine the amounts. site vending machines. Health Insurance. Amounts paid for employee group health insurance. Since benefits are provided after 6 months of service, most staff do not participate in the insurance plan. EXPENSE ACCOUNTS (This is because employee turnover in low-skill, hospitality General Manager. Wages paid to the general manager. jobs is very high; at the Amarillo property, turnover for Managers receive free, on-site housing and utilities (electric, housekeeping staff was 211% in the prior year.) telephone, cable TV). Retirement Plan Contribution Expense. Amounts paid by Front Desk Staff. Wages paid to employees working the front the company for employee retirement contributions. As with desk for customer check-in. health insurance, few employees are with the hotel long Total Housekeeping. Wages paid to employees that clean the enough to participate in the plan, and contributions are often rooms and clean laundry. solely for the general manager (where job tenure averages about 2.8 years). Maintenance Wages. Wages paid to an on-site maintenance worker. Group Life Insurance. Expenses related to the provision of group life insurance. As with the prior two benefits plans, Regional Maintenance Support. Wages for the regional group life insurance is typically only provided to the general maintenance person when on-site. manager. Incentive Pay (Staff). Amounts paid to motivate employees. Supplies. Expenses for all supplies. In prior years, supplies \begin{tabular}{l|l} This is usually zero. & were listed in one category, but after the 2017 budget was \end{tabular} Bonus Expense, General Manager. Bonus expense paid to prepared, the company developed several sub-accounts for the general manager when specific performance targets are supplies. Supplies at most hotels include guest amenities met. Bonus amounts are fixed for each goal, and 90% of (soap, shampoo and hand cream), cleaning chemicals (carpet general managers receive their full bonus (bonuses are highly and floor cleaners and surface cleaners), postage, uniforms, achievable). freight, coffee and linens. Payroll Tax Expense. Amounts paid for payroll taxes. It is Memberships and Subscriptions. Amounts paid for 8.5% of amounts paid to employees. memberships (such as for the local chamber of commerce). Vacation Expense. Amounts accrued to pay for the general Travel. Amounts paid to reimburse employees who travel for manager's vacation. company business. Most of the time the only reimbursement is for personal use of the car to make the daily cash deposit at Holiday Expense. Amounts accrued to pay for the general the bank (mileage multiplied by the IRS-approved mileage manager's paid holidays. reimbursement rate). Off-site travel is rare as regional managers visit properties for performance reviews and support. Pool. All amounts paid for maintaining the swimming pool. Credit Card Chargeback. Amounts refunded to credit card companies. These occur because of fraudulent credit card use and customer complaints (i.e., the firm grants a refund the pool, and so on. several days after the visit). Electrical and Fire. All costs related to the repair and Credit Card Fees. Amounts paid to credit card companies for maintenance of electrical and fire safety equipment. processing credit cards. Typically, this averages about 3% of the transaction cost. At most properties, more than 70% of Plumbing. All expenses related to repairs and maintenance transactions are settled in cash. of plumbing and related fixtures (e.g., showers, bathtubs and toilets). Guest Vouchers. Guests who received a voucher for compensation are able to use that voucher for a free night's Supplies. Amounts paid for supplies related to repairs and stay at any branded hotel in the network. The hotel who maintenance (e.g., duct tape, silicone and nails). hosts a guest with a voucher records the revenue, the property that issued the guest voucher is charged for the all expenses related to repairs and maintenance that are guest visit, and its expense is recorded to this account. not classified in any of the other accounts for repairs and Refunded Rentals. These amounts are for customer refunds maintenance. that occur off-property, often weeks after a guest's visit. Almost always, these refunds are handled by the customer in guest rooms (outlets, lighting, air conditioner, etc.), in the service staff at the corporate headquarters. Functionally, it is lobby, for exterior lighting (parking lot, corridors), and in the \begin{tabular}{l|l} no different in financial impact than a revenue allowance. & laundry room. \end{tabular} Natural Gas. Amounts paid for natural gas. Natural gas is used for the boiler (water) and dryer (laundry). Rooms are heated using electricity. ABOUT IMA* (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA , the association of accountants and financial professionals Water. Amounts paid for water. Water is used in guest rooms, in business, is one of the largest and most respected associations the washing machine, the pool, and for watering the lawn. focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through Garbage Collection. Garbage is picked up twice a week research, the CMA (Certified Management Accountant) by a licensed waste hauler from waste containers located program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global at a corner of the property. Garbage is usually limited to a handful of providers, some of which are national firms. network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Sewer. Amounts paid to the city for hook-up to the city sewer system. Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, Salt (Water Softener). Amounts paid for salt used in a water and Middle East/India. For more information about IMA, softener. Telephone. All costs related to telephone equipment repairs and monthly telecommunications fees. Satellite Television Subscription Fees. Expenses for subscription of television programming delivered by a satellite provider. Utility Fees. Amounts paid to utilities firms for connection and service fees. Table 1: Local and Regional Competitor Sales Data Note: ADR is average daily rate and is measured as total revenue divided by the number of rooms rented (i.e., sales price). Occupancy is measured as rooms rented divided by the total number of rooms available 100 (i.e., capacity utilization). Table 2: 2017 Profit-and-Loss Summary for the Amarillo Property Table 2: 2017 Profit-and-Loss Summary for the Amarillo Property Panel B: Expenses Note: All monetary values are represented in U.S. dollars. Table 2: 2017 Profit-and-Loss Summary for the Amarillo Property Table 3: Employee Information by Job Type \begin{tabular}{lcc} Employee ID & Hours Worked & Hourly Wage Rate \\ \hline General Manager & & \\ 44215 & 2,040.0 & $13.45 \\ Front Desk Employees & & \\ 251256 & 2,077.1 & $8.98 \\ 488442 (front desk supervisor) & 2,087.5 & $9.72 \\ 743796 & 1,610.1 & $8.45 \\ 766468 & 1,520.0 & $8.55 \\ 871219 & 1,425.1 & $8.60 \\ 980511 & 517.1 & $8.30 \\ Head Housekeeper & & \\ 134076 & 2,291.3 & $9.70 \\ Housekeepers & & \\ 172931 & 1,462.2 & $8.15 \\ 215403 & 1,627.8 & $8.10 \\ 219100 & 1,249.2 & $8.10 \\ 264365 & 1,117.2 & $7.60 \\ 306002 & 1,188.0 & $7.65 \\ 322777 & 1,151.5 & $7.55 \\ 352605 & 423.6 & $7.40 \\ 586120 & 43.7 & $7.30 \\ 693453 & 245.7 & $7.35 \\ 696487 & 155.5 & $7.25 \\ 724731 & 73.4 & $7.25 \\ 729577 & 511.1 & $7.60 \\ 748933 & 111.6 & $7.25 \\ 772040 & 121.4 & $7.30 \\ 805364 & 282.4 & $7.30 \\ 828589 & 125.4 & $7.25 \\ 863038 & 63.6 & $7.25 \\ 882112 & 21.9 & $7.25 \\ 885651 & 235.4 & $7.30 \\ 901105 & 124.2 & $7.25 \\ 911934 & 320.0 & $7.35 \\ Maintenance Staff & 1,966.3 & $11.99 \\ 289183 & 367.4 & $17.56 \\ \hline 166365 (regional support) & & \\ \hline \end{tabular} Noce: Due to the rounding, the tocal cost is different from incone starement amounts. All monetary values are represented in U.S. dollars. Table 4: Jack Smith's Monthly Budget Worksheet Table 4: Jack Smith's Monthly Budget Worksheet (continued) Note: All monetary values are represented in U.S. dollars. Table 4: Jack Smith's Monthly Budget Worksheet (continued) Table 4: Jack Smith's Monthly Budget Worksheet (continued) Note: All monetary values are represented in U.S. dollars. APPENDIX. ACCOUNT DESCRIPTIONS Staff Incentives. Amounts paid for anything that incentives hotel staff. For example, many general managers provide pizza parties on employee birthdays, or lunch on busy days. REVENUE ACCOUNTS Employee Relocation Expense. Amounts paid to reimburse Room Rentals. Revenue derived from room rentals. It is the employees who relocate to a new property. This amount is average daily rate times rentals. usually zero, and the company only pays to relocate a general Revenue Allowance. Revenue allowances are refunds offered manager (a rare event). at the property at time of departure. Internet Access. Revenue derived from the sale of daily Training is provided for general managers and managers-inguest Wi-Fi/Internet access. training. Vouchers. Revenue from guests paying for their stay with guest vouchers. Workers Compensation. The amounts charged to workers' Laundry. Revenue from customer use of coin-operated any expenses that develop over time. Amounts are actuarial laundry equipment (washer and dryer). estimates and, while budgeted by the general manager, the Vending. Revenue received from customer purchases at onmanager does not determine the amounts. site vending machines. Health Insurance. Amounts paid for employee group health insurance. Since benefits are provided after 6 months of service, most staff do not participate in the insurance plan. EXPENSE ACCOUNTS (This is because employee turnover in low-skill, hospitality General Manager. Wages paid to the general manager. jobs is very high; at the Amarillo property, turnover for Managers receive free, on-site housing and utilities (electric, housekeeping staff was 211% in the prior year.) telephone, cable TV). Retirement Plan Contribution Expense. Amounts paid by Front Desk Staff. Wages paid to employees working the front the company for employee retirement contributions. As with desk for customer check-in. health insurance, few employees are with the hotel long Total Housekeeping. Wages paid to employees that clean the enough to participate in the plan, and contributions are often rooms and clean laundry. solely for the general manager (where job tenure averages about 2.8 years). Maintenance Wages. Wages paid to an on-site maintenance worker. Group Life Insurance. Expenses related to the provision of group life insurance. As with the prior two benefits plans, Regional Maintenance Support. Wages for the regional group life insurance is typically only provided to the general maintenance person when on-site. manager. Incentive Pay (Staff). Amounts paid to motivate employees. Supplies. Expenses for all supplies. In prior years, supplies \begin{tabular}{l|l} This is usually zero. & were listed in one category, but after the 2017 budget was \end{tabular} Bonus Expense, General Manager. Bonus expense paid to prepared, the company developed several sub-accounts for the general manager when specific performance targets are supplies. Supplies at most hotels include guest amenities met. Bonus amounts are fixed for each goal, and 90% of (soap, shampoo and hand cream), cleaning chemicals (carpet general managers receive their full bonus (bonuses are highly and floor cleaners and surface cleaners), postage, uniforms, achievable). freight, coffee and linens. Payroll Tax Expense. Amounts paid for payroll taxes. It is Memberships and Subscriptions. Amounts paid for 8.5% of amounts paid to employees. memberships (such as for the local chamber of commerce). Vacation Expense. Amounts accrued to pay for the general Travel. Amounts paid to reimburse employees who travel for manager's vacation. company business. Most of the time the only reimbursement is for personal use of the car to make the daily cash deposit at Holiday Expense. Amounts accrued to pay for the general the bank (mileage multiplied by the IRS-approved mileage manager's paid holidays. reimbursement rate). Off-site travel is rare as regional managers visit properties for performance reviews and support. Pool. All amounts paid for maintaining the swimming pool. Credit Card Chargeback. Amounts refunded to credit card companies. These occur because of fraudulent credit card use and customer complaints (i.e., the firm grants a refund the pool, and so on. several days after the visit). Electrical and Fire. All costs related to the repair and Credit Card Fees. Amounts paid to credit card companies for maintenance of electrical and fire safety equipment. processing credit cards. Typically, this averages about 3% of the transaction cost. At most properties, more than 70% of Plumbing. All expenses related to repairs and maintenance transactions are settled in cash. of plumbing and related fixtures (e.g., showers, bathtubs and toilets). Guest Vouchers. Guests who received a voucher for compensation are able to use that voucher for a free night's Supplies. Amounts paid for supplies related to repairs and stay at any branded hotel in the network. The hotel who maintenance (e.g., duct tape, silicone and nails). hosts a guest with a voucher records the revenue, the property that issued the guest voucher is charged for the all expenses related to repairs and maintenance that are guest visit, and its expense is recorded to this account. not classified in any of the other accounts for repairs and Refunded Rentals. These amounts are for customer refunds maintenance. that occur off-property, often weeks after a guest's visit. Almost always, these refunds are handled by the customer in guest rooms (outlets, lighting, air conditioner, etc.), in the service staff at the corporate headquarters. Functionally, it is lobby, for exterior lighting (parking lot, corridors), and in the \begin{tabular}{l|l} no different in financial impact than a revenue allowance. & laundry room. \end{tabular} Natural Gas. Amounts paid for natural gas. Natural gas is used for the boiler (water) and dryer (laundry). Rooms are heated using electricity. ABOUT IMA* (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA , the association of accountants and financial professionals Water. Amounts paid for water. Water is used in guest rooms, in business, is one of the largest and most respected associations the washing machine, the pool, and for watering the lawn. focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through Garbage Collection. Garbage is picked up twice a week research, the CMA (Certified Management Accountant) by a licensed waste hauler from waste containers located program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global at a corner of the property. Garbage is usually limited to a handful of providers, some of which are national firms. network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Sewer. Amounts paid to the city for hook-up to the city sewer system. Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, Salt (Water Softener). Amounts paid for salt used in a water and Middle East/India. For more information about IMA, softener. Telephone. All costs related to telephone equipment repairs and monthly telecommunications fees. Satellite Television Subscription Fees. Expenses for subscription of television programming delivered by a satellite provider. Utility Fees. Amounts paid to utilities firms for connection and service fees