Bertille Pommier

651023
1516C

CBV SUMMARY

1
Table of Contents
Introduction ................................................................................................................ 3
1. Financial Accounting .................................................................................... 3
1.1 Definitions ..................................................................................................................... 3
1.2 Financial Statements ............................................................................................... 4
1.2.1 Balance Sheet ................................................................................................................ 4
1.2.2 Income Statement ....................................................................................................... 5
1.3 Cost of Sales Formula .............................................................................................. 6
1.4 Inventory Systems .................................................................................................... 6
1.4.1 Perpetual Inventory .................................................................................................... 6
1.4.2 Periodic Inventory ........................................................................................................ 6
1.5 Debits and Credits ..................................................................................................... 6
1.5.1 Double-Entry Accounting ........................................................................................... 6
1.5.2 Journals ............................................................................................................................ 7
1.6 The Accounting Cycle ............................................................................................... 8
1.7 The 21 Universal Transactions (for the hospitality industry) .............. 8
1.8 Corrections & Adjustments ................................................................................. 10
1.9 Closing Entries .......................................................................................................... 11
2. Managerial Accounting ............................................................................. 12
2.1. USALI ........................................................................................................................... 12
2.1.1 Income Statement ..................................................................................................... 12
2.1.2 Balance Sheet .............................................................................................................. 12
2.2. Ratios ........................................................................................................................... 12
2.3 Food & Beverage Standard Cost Tools and Selling Prices .................... 14
2.3.1 Standard Cost Tools .................................................................................................. 14
2.3.2 Calculating Selling Prices ........................................................................................ 15
2.4 Cost-Volume-Profit (CVP) Analysis ................................................................. 17
2.4.1 Basic Single-Product CVP Equation ..................................................................... 17
2.4.2 Basic Multiple-Product CVP Equation .................................................................. 18
2.5 Operating Leverage ................................................................................................ 19
2.6 Menu Engineering .................................................................................................... 19
2.7 Operational Budgeting .......................................................................................... 20
2.8 Revenue Variance Analysis ................................................................................. 21
3. Information and Communication Management (ICM) ............... 22
3.1. Technology ................................................................................................................ 22
3.2 The Balanced Score Card & KPIs ...................................................................... 28
4. Formulas .......................................................................................................... 31
4.1. Net Income ................................................................................................................ 31
4.2. Fundamental Accounting Equation ................................................................ 31
4.3. Cost of Sales Formula .......................................................................................... 31
4.4. Ratios ........................................................................................................................... 31
4.5. Standard Recipes ................................................................................................... 33
4.6. Pricing Methods ...................................................................................................... 33
4.7. CVP Analysis ............................................................................................................. 33
4.8. Variance Analysis ................................................................................................... 34

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Introduction

Creating Business Value

1. Understanding relations
2. Understanding patters
3. Understanding principles

Exam:
Financial Accounting – 40%
Managerial Accounting – 40%
ICM – 20%

à TED Talk “Weird, or just different?”

Branches of Accounting:
• Financial Accounting (external users: balance sheet and income statement)
• Managerial Accounting (internal: departments, goals)
• Cost Accounting (costs of production)

Accounting provides financial information to measure financial performance and make

decisions.

1. Financial Accounting
1.1 Definitions

Accounting: Involves the recording of business transactions, analysis business records

and reports and producing reliable information.

Accounts Receivable Turnover: A measure of the rapidity of conversion of accounts

receivable into cash; Revenue/Average Accounts.

Accrued Basis Accounting:

Additional Paid-In Capital: The amount paid by shareholders in excess of the par value.

Amortization: Depreciation of an intangible asset.

Average Collection Period: Average number of days it takes to collect all accounts
receivable; Accounts Receivable Turnover/365

Bookkeeping: Involves organizing and recording all business transactions in a company.

Business Transactions: Where business starts. It is any exchange of property, goods or

services for cash or a promise to pay. Every transaction affects at least two accounts.

Cash Basis Accounting:

General Ledger: The record of all financial transactions; includes all of the accounts.

Matching Principle: recognize all costs when occurred.

Menu Engineering: A manual or computerized method of menu analysis and item pricing
that consider both profitability and popularity of competing menu items.

Realization Principle: realize that the product has been consumed, a promise to pay can,
therefore, be considered as a sale.

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Retained Earnings: The lifetime profits of the business that have not been declared as
dividends to shareholders.

1.2 Financial Statements

Different Financial Statements:

• Income Statement
• Balance Sheet
• Statement of Retained Earnings
• Cash Flow Statement

Types of Accounts:
• Assets
• Liabilities
• Equity
• Revenue/Income
• Expenses

1.2.1 Balance Sheet

The Balance Sheet shows the financial position of a company on a specific point in time.

Assets (A) Liability (L)

Equity (EQ)

Fundamental Accounting Equation:

A = L + EQ

Assets

Current Assets Fixed Assets Intangible Other Assets

Cash Land Assets
Short-term Building Security deposit
investments Furniture Trademarks
Accounts Equipment Trade names
receivable Vehicles Goodwill
Inventories China Glassware

Current Assets = cash or can be converted to cash within a year.

Liabilities

Current Liabilities Long-term Liabilities

Accounts payable Long-term Loans
Sales Tax payable
Accrued expenses (invoices to be
received)
Advance deposits
Current maturities of long-term debt

Current Liabilities = loans to be paid within a year.

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Equity

Corporation Equity Accounts:

a) Common Stock Issued
Total legal (par) value of issued shares.

b) Additional Paid-In Capital

The amount paid by shareholders in excess of the par value.

c) Retained Earnings
Profit made by a company since it started.

Assets = Liabilities + Equity Balance Sheet

Income Statement + Revenues - Expenses

1.2.2 Income Statement

Profit or Loss statement

Statement of Income
à The Income Statement shows the result of operations for a period of time, no longer
than a year.

Revenue: Money generated through sales (F&B, Rooms, Gift Shop)

Expenses: Cost of sales, Operating expenses, Fixed expenses, Income Tax
à Net Income
R – E = NI

Shareholders = Stakeholders

Revenues
- Cost of Sales (direct costs, excluding labor costs)
= GROSS PROFIT
- Operating Expenses
= INCOME BEFORE FIXED CHARGES (operational income)
- Fixed Charges
= INCOME BEFORE INCOME TAXES
- Income Taxes
= NET INCOME

Operating Expenses Fixed Expenses Income Tax

Payroll and Payroll Taxes Rent Depends on the amount
Employee Meals Property Taxes of income before tax, the
Advertising Insurance type of business, the
Utilities (Gas, Water, Interest country
Electricity) Depreciation (tangible
Telephone/Internet goods)/Amortization
(intangible goods)

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1.3 Cost of Sales Formula

Cost of Sales is the cost of the raw inventory products that are sold to the guests.
Beginning of Food Inventory
+ Food Inventory Purchases
- Ending Food Inventory
= COST OF FOOD CONSUMED
- Employee Meals
= COST OF FOOD SOLD

à Waste, theft, transfers and complimentary foods are not taken into consideration in
the cost of sales formula.

1.4 Inventory Systems

1.4.1 Perpetual Inventory

Constantly updated, computer-based system.
As soon as the inventory is used to make a sale, it is recorded as a cost of sales.

Advantages: Ability to determine cost of sales immediately, better control, time-efficient,

computerized
Disadvantages: More costly

1.4.2 Periodic Inventory

Not constantly updated, no system in place to keep track of the inventory during the
month. It is cheaper than a perpetual system, but it depends on the variety of goods
available and whether it frequently changes.
The inventory is counted at least once at the end of the month. No entry will be made for
the expenses that were incurred when sales were recorded. There is less control over the
inventory.

Advantages: Less costly than a perpetual inventory system

Disadvantages: No cost of sales determined, less control over inventory, no ability to
determine purchase specifications, subject to errors

1.5 Debits and Credits

T-accounts are the representation of the accounting folders (Bank, Accounts Payable…)
The Balance Sheet shows the balance in the bank, the folder shows the business
transactions. Every account has its own T-account.
All T-Accounts = General Ledger

Analysis of Business Transactions:

- Which accounts are affected?
- What is the effect?
- What is the account type?

1.5.1 Double-Entry Accounting

à Verifies the correctness of amounts, equality of debits and credits. Built-in checks and
balances.
à Basis for financial information and statements.
à Preserves audit trail.
à Fits in with the golden accounting rule.

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 NORMAL BALANCES

DEBIT CREDIT

ASSETS LIABILITY
EQUITY

EXPENSES REVENUES

Debits = Credits

Debit = More of an Asset (Cash goes up)

Credit = Less of an Asset
Contra-Accounts: bookkeeping accounts that have a reverse effect in their account
classification. It is used to reduce the value of a related account.
- Assets
- Equity
- Revenue

1.5.2 Journals

Kept daily, recording all the business transactions in debits and credits. Journals are to
later be recorded in the accounts of the General Ledger.

Example:
1) A vehicle is bought in cash for $1000
2) Inventory is bought on account for $750

Debit Credit
1. Vehicle 1000
Cash 1000
2. Inventory 750
Accounts Payable 750

Example:
A customer pays $60 for a meal, including $10 in Sales Tax.
Account Category Effect Debit/Credit
Cash Asset Increase Debit
Food Sales Revenue Increase Credit
Sales Tax Payable Liability Increase Credit

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1.6 The Accounting Cycle

Business Transaction
Journalize
Post to T-Accounts
Balance per T-Account
Prepare Trial Balance
Prepare Financial Statements
Closing Temporary Accounts via Closing Entries
Preparing Post-Closing Trial Balance

Posting to T-Accounts = Write down the opening balance first, left for debit/right for
credit.
Balance per T-Account = Total debit-credit (if debit>credit)/credit-debit (if credit>debit)
Trial Balance = Summary of accounts and debit or credit, in order: A, C-A, L, EQ, R, EXP.
Does not necessarily show all mistakes (use of the wrong account…)
Revenue – Expenses = Net Income (Placed in Retained Earnings in the Balance Sheet)

Accrual Basis Accounting: Recording of transactions when revenue is earned (Realization

Principle) and when expenses are incurred (Matching Principle), used by most businesses
and GAAP compliant.

Cash Basis Accounting: Recording of transactions when revenues are received and when
expenses are paid, only suitable for small businesses and not GAAP compliant.

Special Journals put together transactions that are similar (Cash Payments, Cash
Receipts, Accounts Payable & Accounts Receivable)

1.7 The 21 Universal Transactions (for the hospitality industry)

#1: Current rent ($1500) paid by check:

Cash Asset Decrease Credit
Rent Expense Expense Increase Debit

#2: Rent for the next month ($1500) paid by check:

Cash Asset Decrease Credit
Prepaid Rent Asset Increase Debit

#3: Rent for the current month ($1500) paid by check:

Cash Asset Decrease Credit
Rent Expense Expense Increase Debit

#4: A guest pays $53 cash for a meal, including $3 for sales tax:
Cash Asset Increase Debit
Sales Tax Payable Liability Increase Credit
Food Sales Revenue Increase Credit

#5: A guest pays $53 on an open account for a meal, including $3 for sales tax:
Accounts Receivable Asset Increase Debit
Food Sales Revenue Increase Credit
Sales Tax Payable Liability Increase Credit

#6: The restaurant receives a $53 check the next week:

Cash Asset Increase Debit
Accounts Receivable Asset Decrease Credit

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#7: A hotel buys $65 worth of food provisions for its storeroom and pays cash on
delivery. Perpetual inventory:
Food Inventory Asset Increase Debit
Cash Asset Decrease Credit

#8: A hotel buys $1200 worth of food provisions for its storeroom and pays on an open
account. Perpetual inventory:
Food Inventory Asset Increase Debit
Accounts Payable Liability Increase Credit

#9: The hotel remits a $1200 check to the supplier:

Cash Asset Decrease Credit
Accounts Payable Liability Decrease Debit

#10: A hotel buys $55 worth of food provisions for its storeroom and pays cash on
delivery. Periodic inventory:
Cash Asset Decrease Credit
Food Purchases Expense Increase Debit

#11: A hotel buys $900 worth of food provisions for its storeroom and pays on open
account. Periodic inventory:
Accounts Payable Liability Increase Credit
Food Purchases Expense Increase Debit

#12: Ken invests in a new company $55,000 cash, plus land $40,000 and building
$175,000:
Cash Asset Increase Debit
Land Asset Increase Debit
Building Asset Increase Debit
Capital Equity Increase Credit

#13: Mae invests in a new company $50,000 for 4,000 stocks of $1 par common stock:
Cash Asset Increase Debit
Common Stock Issued Equity Increase Credit
Additional Paid-In Capital Equity Increase Credit

#14: Deb invests $50,000 in a new company for 4,000 shares of no par common stock:
Cash Asset Increase Debit
Common Stock Issued Equity Increase Credit

#15: Ann invests $50,000 in a new company for 4,000 shares of no-par common stock
that has a stated value of $8 per share:
Cash Asset Increase Debit
Common Stock Issued Equity Increase Credit
Additional Paid-In Capital Equity Increase Credit

#16: Issues from the storeroom total $15,000 for the month. This amount represents
food the kitchen uses to generate and prepare employee meals. Perpetual inventory:
Cost of Food Sales Expense Increase Debit
Food Inventory Asset Decrease Credit

#17: Of the previous example, $300 was used for free employee meals ($200 RD and
$100 F&B):
RD meals Expense Increase Debit
F&B meals Expense Increase Debit
Cost of Food Sales Expense Decrease Credit

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#18: Issues from the storeroom total $15,000 for the month. This amount represents
food the kitchen uses to generate and prepare employee meals. Periodic inventory:
No bookkeeping entry for issues under a periodic inventory system.

#19: An operation purchases $875 worth of office supplies on an open account. Asset
method:
Accounts Payable Liability Increase Credit
Inventory Asset Increase Debit

#20: A check is issued for $1,200 on 3/1/X1 in payment of a property insurance policy
with a term of 3/1/X1 to 3/1/X2:
Cash Asset Decrease Credit
Prepaid Insurance Asset Increase Debit

#21: It is now 3/31/X1. The insurance accountant submits the following adjustment:
Prepaid Insurance Asset Decrease Credit
Insurance Expense Expense Increase Debit

1.8 Corrections & Adjustments

Corrections: If a mistake was made during posting, a new entry must be made to reverse
the effect of it.

Preparing Adjustments: Put the General Ledger up to date with items that are not
included in the day-to-day transactions. Only with Accrual Basis Accounting, taking into
consideration the realization and matching principles.

Major Adjustments:

Employee Meals
Debit “Employee Meals”
Credit “Cost of Sales”
Supplies Used (Room Amenities…)
Debit “Room Supplies Inventory”
Credit “Room Supplies Expense”
Prepaid Insurance
Debit “Insurance Expense”
Credit “Prepaid Insurance”
Depreciation
Debit “Depreciation Expense”
Credit “Accumulated Depreciation” (contr-A account)
Breakages
Debit “Breakage Expense”
Credit “Inventory” (assets)
Accrued Payroll
Debit “Payroll Expense”
Credit “Accrued Payroll”
Cost of Sales in a Periodic System
Accrued…Expense

The corrections and adjustments are made at the end of the month/year.

Depreciation:
The value lost over a specific period of time.
It is a minus in the Assets and the Equity because it is an expense.
à Land is never depreciated.

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Accumulated Depreciation (in Balance Sheet) is the accumulated values lost over the
total lifetime of the asset.

Acquisition Price (always on Assets part)

- Accumulated Depreciation
= NET BOOK VALUE

Linear Depreciation is when the depreciation is the same every year.

Once the book value is 0, the expense does not appear anymore.

1.9 Closing Entries

At the end of the month or the year:

ASSETS LIABILITY EQUITY

130 100 80 10
100

30

REVENUE EXPENSES

100 100 80 80

0 0

Revenue & Expenses are ready for the next month/year. The values are “transferred” to
Retained Earnings.
Assets, Liability, Equity: Opening Balances for the next month/year.

After the Closing Entries have been posted, the Post-Closing Trial Balance is compiled
and shows the balances of the Balance Sheet accounts only.

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 2. Managerial Accounting

2.1. USALI

USALI Formatted Accounts: Uniform System of Accounts for the Lodging Industry

2.1.1 Income Statement

Operated Departments: Revenue-Generating Departments

Rooms, Food, Beverages, Telecommunications, Parking…
Undistributed Operating Departments: Supporting Departments and Functions
Administrative & General, HR, IT, Security, Maintenance, Transportation…
Fixed Charges
Management fees, Rent, Property taxes, Insurance, Depreciation…

Revenue
- Direct Operating Expenses
Departmental Operating Income
- Overhead Expenses (Undistributed & Fixed)
Net Income

2.1.2 Balance Sheet

Assets (Current & Non-Current)

Liability (Current & Long-Term)
Equity

2.2. Ratios

à Important information that may not be apparent or obvious on financial statements.

à Used by managers to monitor a performance and evaluate success in meeting goals.
à Used by creditors to evaluate the solvency of a business and to assess the risk of
future loans and liabilities.
à Used by investors and potential investors to evaluate performance and ability to meet
the specific goals.

Ratio comparison: Creating Business Value by comparing ratios from a past period, from
industry averages and budgeted or planned ratios.

Fives classes:
- Liquidity; ability of a company to pay short-term debts
- Solvency; ability of a company to pay long-term debts
- Activity; how well the assets of the company are used
- Profitability; how is the company’s profit
- Operating; how efficient the operations are

Liquidity
1) Net Working Capital = CA – CL
2) Current Ratio: CA / CL
Higher than 1 = The company is able to pay its debts.
Owners and Stockholders prefer a low current ratio as investments in non-current assets
are more productive than current assets.
Creditors prefer a high current ratio as it assures the ability of the company to pay their
debts.
3) Acid Test Ratio: (Bank + Acc. Receivable + ST Investments) / CL
Measures liquidity by only considering quick assets.

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Solvency
4) Solvency: TA / TL
A hospitality company is solvent when its assets exceed its liabilities.
Leverage à Use of debt to finance the assets
Owners prefer a low solvency ratios and use of leverage to maximize their return on
investments.
Creditors prefer a high solvency ratio as it means there is a greater margin in case of
great losses.
5) Debt to Equity: TL / EQ
Compares the hospitality company’s debt to its net worth (equity).
Shows the ability to withstand adversity and meet its long-term debt obligations.
Owners prefer to maximize their return on investments by using leverage.
Creditors prefer a lower debt-equity ration because the risks are reduced.

Activity
6) Paid Occupancy %: Rooms Sold / Rooms Available
Occupancy for rooms and seat turnover for restaurants.
Enables the tracking of operating results of hospitality companies.
Market Share = Number of rooms in a hotel calculated as a percentage of the total rooms
in the hotel’s market area.
Market Penetration: Percentage of demand for rooms for a hotel within a particular
market set.

Profitability
7) Return on Equity: NI / Average Total Equity
Average Total Equity: Average of owner’s equity of beginning and end of the year.
Compares the profit of the hospitality company to the owner’s investments.
8) Return on Assets: NI / Average Total Assets
Average Total Assets: Average assets of beginning and end of the year.
Indicator of the profitability of the hospitality company’s assets.
Compares bottom-line profit to the total assets.
A low ROA may result from low profits or excessive assets.
A high ROA suggests that assets require replacement in the near future or that additional
assets need to be added to support growth in revenues.
9) Profit Margin: NI / Revenue
Ability to generate profit on sales.
If the profit is lower than expected, then expenses and other areas should be reviewed.
10) Operating Efficiency: GOP / Revenue
Measures management’s performance.
GOP = Subtracting expenses generally controllable by management from revenues.
Does not include fixed charges.

Operating
11) ADR: Rooms Revenue / Rooms Sold
Compare with the rate budgeted as a goal for the rooms department’s operations during
the period.
12) RevPAR: Rooms Revenue / Rooms Available = Occ. % / ADR
13) RevPAC: Rooms Revenue / Total Customers
Measures the overall revenue received from the average hotel guest.
Used for decision-making situations affecting operations
14) Sales Mix %: Item Sales/Total Sales
15) Cost of Sales %: Cost of Sales / Revenue

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2.3 Food & Beverage Standard Cost Tools and Selling Prices

Calculate standard portion cost à Determine selling prices of menu items à Optimize
menu profitability à Making annual budgets

à Calculating costs and determining selling prices by analyzing standards.

Control Points in F&B Operating Activities:

Menu Planning
Purchasing
Receiving
Storing
Issuing
Preparing
Cooking Production Activities
Holding
Serving
Service
Guest Satisfaction

2.3.1 Standard Cost Tools

- Standard Recipes
Formulas for producing a food or beverage item (summary of ingredients, required
quantity of each, specific preparation procedures, portion size, portioning equipment,
garnish, other information)

Developing Standard Recipes:

a) Determine desired yield
b) List all ingredients in the order they are used
c) Decide whether to use weights, measures or both
d) Express all quantities in practical units of measurement
e) Record procedures in detailed, concise and exact terms
f) Consider sanitation problems that can arise
g) Provide directions for portioning
h) Refine with input from production staff
i) Test

Recipe Cost Factor (CF): May be used to convert new AP prices:

à CF = Cost per EP/Price per AP

- Standard Portion Costs

Calculated on the basis of a standard recipe, the ingredient costs are calculated using
actual inventory price lists & the total recipe ingredient costs are divided by the number
of portions yielded.
Standard Portion Cost = Total Cost of Ingredients Required/Total Number of Portions in
Recipe

- Standard Purchase Specifications

Define the quality of menu items on the basis of size, weight, count and other factors,
ensure the right quality products are consistently available for production and service
areas, and purchase specifications are only as good as the thoroughness of the receiving
staff.

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 - Standard Yields
Taking waste into consideration: actual yield should approximate standard yield if
properly trimmed, cooked and portioned. The yield of a recipe is the number of portions
that are prepared by using the recipe.

EP = Edible Portion (Servable Weight)

AP = As Purchased (Original Weight)
Yield = EP/AP, in percentage
Production Loss = AP - EP

Recipe Adjustment Factor: used to increase/decrease yield from a standard recipe, and
to modify the standard recipe by multiplying each ingredient by the adjustment factor
(AF). The most accurate recipe total volume does not change substantially.

à Increase/Decrease Recipe Portions: AF = Desired Yield/Original Yield

à Increase/Decrease Recipe Portion Size: AF = Desired Amount/Original Amount

Cost per Servable Kilo = AP Price/Yield Percentage

Quantity to Purchase = Total Quantity EP Required/Yield Percentage

- Standard Portion Size

The actual weight/size/volume of a served product (EP)

Standard Food Cost:

Determined after all standard tools have been implemented, measured by food cost
percentages and expressed as percentage against sales. The higher the level of
service/additional offerings, the lower the food cost percentage.

For beverages: take into consideration standard glassware and ice size.

2.3.2 Calculating Selling Prices

Subjective Pricing Methods Objective Pricing Methods

Reasonable Price: what is “fair” Mark-Up by Multiplier
Highest Price: highest price guests would Contribution Margin
pay
Loss Leader: generating traffic Ratio
Intuitive Price: guessing, trial, error Prime Costs

Mark-Up by Multiplier:

- Ingredients Mark-Up Method

Step 1: Calculate the Multiplier, considering: Food Cost Percentage = COS/Total Revenue
1 / Desired Food Cost Percentage = Pricing Factor
Step 2: Menu Item Portion Cost * Pricing Factor = Selling Price
OR: Menu Item Portion Cost/Desired Food Cost Percentage = Selling Price

Disadvantages:
The multiplier is often a subjective decision, the impact of sales mix, variations in labor
and energy costs to produce items, transfers to and from the food department, theft,
over-portioning and spoilage and minor costs which add up over time are not taken into
consideration.

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 - Prime-Ingredient Mark-Up Method

Step 1: Calculate the Multiplier.

1 / (Prime Ingredient as Percentage of Total Revenue) = Pricing Factor
Step 2: Prime Ingredient Portion Cost * Pricing Factor = Selling Price

- Mark-Up with Accompaniment Costs Method

Step 1: Calculate average accompaniment cost

COS Accompaniment/Number of Guests = Average Accompaniment Cost
Step 2: Add the average accompaniment cost to real prime ingredient cost
Average Accompaniment Cost + Actual Prime Ingredient Cost = Menu Item Cost
Step 3: Multiply Menu Item Cost by Pricing Factor
Menu Item Cost * Pricing Factor = Selling Price

Contribution Margin:

Goal is to ensure every guest generates the contribution margin (in euro) required by the
budget.

Step 1: Determine the average CM required per guests by adding non-food costs to
required profit and dividing it by the number of expected guests.
(Non-Food Costs + Profit Requirements)/Total Amount of Expected Guests =
Average CM per guest
Step 2: Determine the base selling price by adding required average CM per guest to an
item’s standard food cost.
Average CM per guest + Menu Item Portion Cost = Selling Price

Ratio Pricing Method:

Step 1: Determine the ratio of food costs to all other costs plus profit requirements.
(All Non-Food Costs + Profit Required)/Total Food Cost = Ratio
Step 2: Calculate the amount of non-food costs and profit required for a menu item.
Ratio * Menu Item Portion Cost = Required Amount of Non-Food Costs per Item
Step 3: Determine the base selling price by adding result of Step 2 to the menu item
portion cost.
Required Amount of Non-Food Costs per Item + Menu Item Portion Cost = Selling
Price

Disadvantages:
The method does not compensate for higher labor costs. The assumption of equal share
of non-food cost and profit for each meal, the difference between food and beverage and
the difference in separate operating centers are not taken into consideration.

Prime Costs:

- Simple Prime Costs Method

Step 1: Determine the labor cost per guest by diving labor costs by the number of
expected guests.
Labor Cost/Number of Expected Guests = Labor Cost per Guest
Step 2: Determine the prime costs per guest by adding the labor cost per guest to the
menu item’s food cost.
Labor Cost per Gest + Menu Item Portion Cost = Prime Cost per Guest
Step 3: Determine the base selling price considering: Prime Cost Percentage = (COS +
Labor Costs)/Total Revenue
Prime Cost per Guest/Desired Prime Costs Percentage = Selling Price

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Considerations:
The pricing is based on the market: competition, volume of business, supply and
demand, price elasticity of demand.

Pricing Considerations:
Base selling price is a starting point from which other factors must be considered. These
factors affect the final selling price. The pricing should be based on the market
(competition, volume of business, supply and demand, price elasticity of demand)

Special Pricing Considerations:

Final Adjustments: Benchmarking, Ambiance and Service Commitment à Adding Value
Psychological Pricing

2.4 Cost-Volume-Profit (CVP) Analysis

Types of Expenses:
- Fixed (does not change within a set period of time, generally a year)
- Variable (energy, cost of food sales…)
- Semi-Variable: Mixed (Fixed + Variable; phone plan) & Step (variable depending
on a scale)
Total Costs = Fixed Costs + Variable Costs
Breakeven Point: Intersection of sales and total costs

Basic Assumptions of the CVP Analysis:

- Fixed costs remain fixed
- Variable costs fluctuate in a linear fashion
- Revenues are directly proportional to volume
- Mixed costs can be divided into Fixed and Variable
- All costs can be assigned to individual operated departments
- Considers only quantitative factors

Identifying Fixed & Variable Costs: The High-Low Two-Point Method

Using data of two extreme points in time: High & Low Month
Low Month High Month Difference
Revenue 150,000 200,000 50,000
Costs 120,000 140,000 20,000
40%
Variable Costs 60,000 80,000
Fixed Costs 60,000 60,000

2.4.1 Basic Single-Product CVP Equation

In = SX – VX – F

In = Net Income
S = Selling Price per Unit
V = Variable Costs per Unit
F = Fixed Costs
X = Number of Units Sold

Contribution Margin: CM = S – V
Contribution Margin Ration: CMR = (S – V)/S, in percentage

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BEP (Breakeven Point in Units) = F/(S-V) = F/CM
BER (Breakeven Point in Revenue) = F/CMR

At Breakeven (when profit = 0):

F = SX – VX
S = (F/X) + V
V = S – (F/X)
X = F/(S-V) = BEP

2.4.2 Basic Multiple-Product CVP Equation

R = F/CMRw

R = Revenue at BEP
F = Total Fixed Costs
CMRw = Weighted Average CMR

Calculate CMRw:
- Calculate CMR of each product
- Calculate the weight of each product (revenue share of total revenue)
- Apply the weights to the CMR’s

Using the Equations for Profitability:

à Calculate the revenue needed to make a targeted profit:
(Fixed Costs + Required Profit)/CM = Unit Sales Required
(Fixed Costs + Required Profit)/CMR = Revenue Required

18
2.5 Operating Leverage

Definition: The extent to which an operation’s expenses are fixed rather than variable.

High Leverage:
- High fixed costs
- Low variable costs
- High CMR
- High Risk and Potential Rewards
Hospitality business, airlines usually have a high operating leverage.

Low Leverage:
- Low fixed costs
- High variable costs
- Low CMR
- Low Risk and Potential Rewards

Hospitality: Rooms = High OL // F&B = Low OL

2.6 Menu Engineering

Factors:
- Guests’ wants/needs/expectations
- Production costs
- Ingredient availability
- Quality of menu item (flavor, consistency, texture, form, shape, nutritional
content, visual appeal, aromatic appeal, temperature)

Areas Affected by the Menu:

- Product control procedures
- Cost control procedures
- Production requirements
- Equipment needs
- Sanitation management
- Layout and space requirements
- Staffing needs
- Service requirements
- Revenue control procedures

Menu Changes:

External Factors Internal Factors

Consumer Demands Facility’s Meal Pattern
Economic Conditions Concept/Theme
Competition Operational System
Supply Levels Menu Mix
Industry Trends

Definition: A menu management application used for evaluating decisions regarding

current and future menu pricing, design and contents, to ensure the menu consists of the
most profitable items.

19
Popularity: how frequently the items are ordered
à Popular if equal or higher than 70% of the fair share of all menu items.
Fair Share = Total # of items sold/# of items available

Profitability: contribution margin

à Profitable if the CM is equal or higher than the average CM of the menu.

High Popularity Plow Horses Stars

Low Popularity Dogs Puzzles

Low Profitability High Profitability

Stars
- Maintain Rigid Specifications
- Place in Highly Visible Location on the Menu
- Test for Selling Price Inelasticity
- Use Suggestive Selling Techniques

Plow Horses
- Increase Prices Carefully
- Test for Demand
- Relocate Item to Lower Profile on the Menu
- Shift Demand to more Profitable Items
- Combine with Lower Cost Products
- Assess the Direct Labor Factor
- Consider Portion Reduction

Puzzles
- Shift Demand to these Items
- Consider a Price Decrease
- Add Value to the Items

Dogs:
- Remove from the Menu
- Increase the Selling Price

2.7 Operational Budgeting

Budget is a financial plan, which provides estimates of future revenue and expenses.
- Sophisticated, statistical methods
- Simple forecasting sales and revenue
The format is not standard and depends on the kind of business.
- Simple one-page statement
- More detailed spreadsheet

Operational budgeting
à Forces management to look forward and anticipate the future (shape internal towards
external environment)
à Examining, comparing and selecting alternative courses of action (pricing alternatives,
marketing, staffing)
à Enables the setting of prices that deliver required income levels (in relation to the
expenses)
à Provide a standard of comparison for future performance, enabling control
à Motivational (through bonuses…) and involving many levels of management
à Enables communication channels to deploy objectives (top-down) and proposals
(bottom-up)

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Process of Budgeting:
1- Financial Objectives (maximizing long-term profit)
Start of budgeting process (be a low cost operator, provide high quality service at
premium prices)

2- Revenue Forecasts (Incremental Budgeting: Taking historical results and

changes into account)
Economic environment, marketing plans, historical results

3- Expense Forecasts (expected costs)

Expected cost increases, labor cost increases

Variable expenses are estimated by using the forecast of revenue or activity as a basis.
Some variable expenses are directly proportional to revenue (COS as a % of revenue).
Some variable expenses are directly proportional to activity (Room cleaning determined
by # of rooms sold)
Fixed charges estimated using experience and expected changes.

4- Net Income Forecast

2.8 Revenue Variance Analysis

Variance is the difference between the actual revenue and the budget set. It is expressed
in money or percentage.

If higher than 4%, it is considered significant and, therefore, requires analysis and
corrective action.

Price Variance:
PV = (Actual Price – Budgeted Price) x Budgeted Volume
à What would have the impact been if the budgeted volume was achieved.

Volume Variance:
VV = (Actual Volume – Budgeted Volume) x Budgeted Price
à What would have the impact been if the budgeted price was achieved.

Price-Volume Variance:
P-VV = (Actual Price – Budgeted Price) x (Actual Volume – Budgeted Volume)

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 3. Information and Communication Management (ICM)

3.1. Technology

Information Management is useful to analyze trends, competition, suppliers, weather,

investors, user reviews…
à A company with a good and efficient information management system is a healthy
company.
à An organization is an information processing machine.

ICM is needed in all departments: HR, Front Office, Housekeeping, Sales, Finance,
Marketing… which are all related in hospitality businesses. Information is crucial and
needs to be accurate.

Data is different than Information. Data = Number, Information = What conclusions can
be drawn from the data?

POS: Point of Sale

PMS: Property Management System
Business Process: things that need to be organized such as a sale, which add value to
the organization, can be organized and described:
- Assigned Responsibilities
- Information input and output
- Flow Chart
Organized = Measurable = Improvable = Enabling Decision-Making
Examples: Checking-in, Reservations, Accounts Payable…

What information do departments need?

- Housekeeping - Front Office

Room Status (SO, CO…?) Room Status
Inventories (amenities) Guest Information
SOPs Reservations
Schedules Prices
Billing Information
SOPs
Touristic Information

à Use of PMS with:

Reservation Module
Rooms Management Module
- Room Status
- Room Rates
- Room Assignment
- Guest Data
- Housekeeping functions
- Reports
Guest Accounting Module
- Type of accounts (folios)
- Account Postings
- Account Auditing
- Account Settlement
- System Update and Reports

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RMM: Rooms Management Module
Functions: Identify current room status, assist in assigning rooms to guests at check-in,
provide in-house guest information, organize housekeeping activities, provide auxiliary
services, generate timely reports for management.

- Room Status
Occupied
Complimentary (occupied but no charge)
Stay Over (SO)
On-Change (not occupied but not cleaned yet)
Do Not Disturb
Sleep-Out (bed has not been used)
Skipper (guest has left the hotel without paying)
Sleeper (guest has left but the room status update was not done properly)
Vacant and Ready
Out-of-Order
Lock-Out
Did-Not-Check-Out (left without informing FO, but has settled his account)
Due Out
Check-Out
Late Check-Out

- Housekeeping Functions
Forecasting the number of rooms to be cleaned
Identifying rooms to be cleaned
Scheduling room attendants
Assigning workloads
Measuring productivity

- Reports
Rooms allotment report
Expected arrival/departure report
Registration process report
Rooms activity forecast
Actual departures report
Housekeeping assignment report
Housekeeper productivity report
Rooms productivity report
Rooms history report

- Guest Accounting
Individual folios
Master folios
Non-guest folios
Employee folios
Control folios
Semi-permanent folios
Permanent folios

- Front Office Audit

Automated systems enable the FO auditor to spend more time auditing transactions and
related activities and less time performing postings and bookkeeping entries. Monitoring
account balances and verifying account postings require a standardized procedure that
compares guest ledger and non-guest ledger audit data with the FO daily report for
balancing.

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 - Account Settlement
The ability to prepare clear itemized guest statements may significantly reduce guest
disputes relative to folio postings. PMS update routines can be programmed to generate
a printed set of folios for guests expected to check-out that day. Pre-printing the folios
significantly speeds up the check-out process and minimizes guest discrepancies.

- F&B
Reservations and Tables
Inventory (perpetual or periodic)
Menu and Prices
Orders
Table Status
Billing
SOPs
(Perpetual Inventory: each dish of the menu is recorded in the system with how much of
each ingredient is used)

à Use of POS:
- Menu Item File
- Labor Master File
- Inventory File
- Automated Beverage Control Systems

- Sales & Banqueting (Events)

Function Room Status
Sales Funnel to predict sales for the year
Revenue/Yield Management
Group Guest Rooms Sales
Function Room Sales (Trace File, Account File, Master Card File)
Sales Performance Reports

à Use of PMS with:

Group Guest Room Sales
Function Room Sales
- Trace Files (used to follow up on accounts)
- Account Files (started at initial contact with account, traces disappear at the end
of the day)
- Master Card Files (created for each new potential guest, containing basic
information for sales efforts)
Sales Performance Reports
Revenue Management

- Accounting/Finance Management
Accounts Payable (Module; posts vendor invoices, monitors vendor payment discount
periods, determines amounts due, generates checks for payments, facilitates the
reconciliation of used checks, generates management reports)
Accounts Receivable (Module; maintains account balances, processes billings, monitors
collection activities, monitors aging of accounts receivable, generates an audit report of
accounts receivable transactions)
Payroll Information/Accounting (Module; maintains employee master file, calculates
gross and net pay for salaried and hourly employees, generates paychecks, produces
payroll tax register and related reports, prepares labor cost reports for management)
Reports/Financial Reporting
Inventory Accounting (value of it) to limit it in order to keep money available
Purchasing
IT

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Customer Master File (Account number, name, address, phone number, email address,
website address, contact person, type of account, credit limit, last payment date, last
payment amount, credit history
Vendor Master File (Vendor account number, name, contact name, address, phone
number, email, website, vendor payment priority, discount terms, discount account
number, invoice reference number, payment due date, year-to-date summary)

Physical and Perpetual Inventory System

Physical Inventory = Periodic; staff count items in storage periodically.

Perpetual Inventory = The Back Office inventory module maintains an inventory status
file that keeps a running balance of the quantity issued/stored items.

FIFO, LIFO, weighted average inventory valuation

FIFO = First In, First Out

LIFO = Last In, First Out
Weighted Average method values inventory by considering the quantity of products
purchased at different unit costs. This method weights the costs to be averaged based on
the quantity of products in storage at each cost.
à Does not relate to the actual flow of items through the storeroom. It refers to
the financial value of inventory.

E-Procurement

The online purchasing of goods and services. Using a web browser, buyers are able to
review product catalogs, identify vendor services, conduct product comparisons, place
orders and settle transactions.

Customizable systems with touchscreens, order entry, settlement, menu item file for the
inventory, labor master file, inventory file, automated beverage control systems (in bars)

Interfaces: Since two systems cannot simply communicate with each other, an interface
is used. Interfaces link different systems to the PMS.

Different Interfaces:
- CRS: Central Reservations System
- POS: Point of Sale
- CAS: Call Accounting System
- ELS: Electronic Locking System
- EMS: Energy Management System
- Guest Operated Devices
- Auxiliary Guest Services
- GDS: Global Distribution System
- Booking Engines

F&B; Kitchen, Restaurant = POS

Rooms Division; A/R, General Cashier, Reservations, Reception, Housekeeping = PMS
General cashier checks night audit and both POS and PMS figures (verifying cash).
A/R checks POS and PMS on accounts that still need to be paid (reminders…)
A/P and Purchasing = Back Office System & Purchase/Inventory System, connected to
the PMS.
Financial Controller verifies all numbers and checks budgets; he is responsible for all
financial data.
HR = Salary System, also connected to PMS + HR System (Employees, numbers, payroll,
training…)

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A Back Office System consists of: Accounts Receivable, Accounts Payable, Payroll
Accounting, Inventory Accounting, Purchasing, Financial Reporting.

MIS: Management Information System

A system designed to provide managers with the necessary information needed to plan,
organize, staff, direct and control operations.
- Monitor progress towards achieving organizational goals
- Measure performance
- Identify trends and patterns
- Evaluate alternatives
- Support decision-making
- Assist in the identification of corrective action

Database Management: Applications that allow users to catalog and store information
about their businesses for future use.

Database: Collection of related facts and figures designed to serve a specific purpose.
Example: personal checkbook, address books, dictionaries, online search engines…

CRM: Customer Relationship Management

The process of using significant guest information to understand an individual guest,
contact that guest, and sell additional hospitality products and services that directly meet
the guests’ needs.

ERP: Enterprise Resource Planning

Benefits of an ERP:
- Information consistency and accuracy across hotel departments.
- Simplified cross-departmental coordination and workflow execution.
- Streamlined tasks, which frees the hotel staff to focus on activities that require
personalized attention.
- Easier goal setting and monitoring of goals achievement.
- Agile infrastructure that identifies and fixed problems rapidly.
- 1 Database, 1 overview
- Less error than in a PMS because less travelling of information (no data
inconsistency or redundancy)
- The hotel only has to interact with one vendor, as there is one single solution for
all operations.
- Higher level in data hierarchy = better decision-making.
- Dashboard for quick assessment of health of the organization.
à Advanced version of a PMS

Disadvantages of an ERP:
- Very risky because all departments use the same system at the same time.
- Departments cannot choose which system they would prefer to use.
- Very expensive
- Inflexibility
- Very long implementation
- Hard to set up in large institutions
- Hierarchical rigidity and centralized control and management

Difference between PMS and ERP:

PMS:
Large application that is cumbersome
Error-prone as information moves from one department to the next
Labor-intensive, with extensive manual processes that can drain both time and money

26
Requires interacting with multiple vendors for different point solutions

ERP:
Allows for hotel to interact with single vendor, as there is a single solution for multiple
operations
Fixed costs which are more manageable

Best-of-Breed Model:

A best of breed system is the best system in its referenced niche or category. Although it
performs specialized functions better than an integrated system, this type of system is
limited by its specialty area.
To fulfill varying requirements, organizations often use best of breed systems from
separate vendors. However, maintaining multiple systems provides little cross
connectivity, which creates maintenance and integration challenges.

Best of breed systems are best applied to one or a few functions, facilitating system
maintenance. However, as an organization expands and requirements multiply, best of
breed systems may not be able to handle new requirements, forcing the addition of
another system. In this type of scenario, the best course of action is to employ an
integrated system that can handle most requirements, allowing best of breed systems to
handle items requiring focused performance and specialization.

Advantages:
• Updates and building blocks may be rolled out without affecting other systems.
• Because the function of a system is geared to a specific purpose, it is easier to
update and able to quickly respond to market changes.
• Specialized functions include more options and solutions and provide specific
knowledge regarding specific functions.

Disadvantages:
• Vendors of best of breed systems are often small organizations that do not
understand the requirements of larger organizations.
• Integration with other systems is a highly complex process.
• Sharing data across different systems may be difficult.

Business Processes & Systems Used:

Operation Business Process Information System Used

Accounts Payable Paying suppliers, checking BO System/Finance System
inventory
Banqueting Reservations for meeting Sales & Catering System
rooms, setting up rooms
Revenue Manager Setting daily rates, RM System
communicating availability
Front Office Check-in, check-out, billing PMS
Restaurant Serving dinner, preparing POS
food
Payroll Paying salaries, checking HR System
attendance
Purchaser Checking inventory, Inventory & Purchasing
ordering new supplies System/POS

27
3.2 The Balanced Score Card & KPIs

Key Performance Indicators, creating the balanced score card.

Small goals for all hotel employees related to appraisal and bonuses to achieve strategic
goals in the long run.

Each KPI consists of:

- Objectives
- Measures
- Targets
- Initiatives
- Strategic Objectives

“What get measured, gets managed.”

Leading & Lagging Indicators

- Lagging: Used to measure performance, backward focused, measuring
performance of data which was already captured.
- Leading: Predicting the outcomes, measures that lead to “drive” the performance

Goals & Objectives should be based on lagging indicators.

A good balanced score card should have an appropriate mix of outcomes (lagging) and
performance drivers (leading) of the business unit strategy.

Pyramid: how to implement strategy in the company, with corporate values and strategy
maps. It is almost impossible to complete and would create the absolutely perfect
company.

The Pyramid (up to down):

Vision à Mission à Values à Strategy à Strategy Map à Balanced Score Card à
Cascading Measures à Strategic Management System

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The Balanced Score Card is balanced because not only financial matters are looked at,
In this order:
à Finance: To succeed financially, how should we appear to our shareholders?
à Customer Perspective: To achieve our vision, how should we appear to our customers?
à Internal: To satisfy our shareholders and costumers, what business processes must we
excel at?
à Learning & Growth: To achieve our vision, how will we sustain in our ability to change
and improve?

Finance:
- Accounts Receivable Turnover: Measures the rate at which outstanding accounts
are collected.
- Inventory Turnover: Measures how often in-stock inventory is sold off in a given
year.
- Net Profit Margin: Measures how effective the business is at generating profit on
each dollar of revenue brought.

Customer Perspective:
- Number of Customers
- Trip Advisor
- Number of Customers per Employee
- Loyalty
- Marketing Expenses
- Market Share Percentage
- Average Annual Sales Volume per Customer
- Specific Weight of Concluded Agreements in the Total Number of Contacts with
Customers
- Customer Satisfaction
- Number of Lost Customers

Internal:
- Employee Satisfaction
- Supply Management
- Ratio of Timely Completed Orders
- Average Time from Placing the Order to its Completion
- Efficiency of Information Systems
- Emission of Hazardous Substances to the Environment

Learning & Growth:

- Expenses for Research & Innovation
- Number of Employees in Management Development Programs
- Length of Research and Innovation Projects
- Number of Rational and Creative Ideas per Employee
- Average Training Cost per Employee

Data Hierarchy:
Data
- Understanding Relations
Information
- Understanding Patterns
Knowledge
- Understanding Principles
Wisdom

29
Uses:
- Clarify and gain consensus about strategy
- Communicate strategy throughout the organization
- Identify and align strategic initiatives
- Perform periodic and systematic strategic reviews
- Obtain feedback to learn about and improve the strategy

How it works:
- Senior executive management translate the business units strategy into strategic
objectives
- To set financial goals: revenue, market growth, profitability or cash flow
- With objectives established, the organization identifies the objectives for its
internal business processes
- The balanced score card highlights those processes, which are most critical

Objectives:
- The process of the balanced score card clarifies the strategic objectives and
identifies the critical few drivers of these objectives
- The balanced score card objective becomes a joint accountability of the senior
executive team, enabling it to serve the organizing framework for a broad array of
important team-based management processes

ð The Balanced Score Card creates a shared model of the entire business, to which
everyone has to contribute.

Balanced Score Card + KPIs = Executive Dashboard

30
 4. Formulas
4.1. Net Income

!"# %&'()" = +","&-" − /01"&2"2

Revenues
- Cost of Sales (direct costs, excluding labor costs)
= GROSS PROFIT
- Operating Expenses
= INCOME BEFORE FIXED CHARGES (operational income)
- Fixed Charges
= INCOME BEFORE INCOME TAXES
- Income Taxes
= NET INCOME

4.2. Fundamental Accounting Equation

3 = 4 + /6

4.3. Cost of Sales Formula

Beginning of Food Inventory

+ Food Inventory Purchases
- Ending Food Inventory
= COST OF FOOD CONSUMED
- Employee Meals
= COST OF FOOD SOLD

4.4. Ratios

Liquidity

1) Net Working Capital

!"# 7(89:&; <=1:#=> = <3 − <4

2) Current Ratio

<-88"&# +=#:( = <3 <4

3) Acid Test Ratio or Quick Ratio

6-:'9 +=#:( = ?=&9 + @A %&,"2)"&#2 + 3''(-&#2 +"'":,=B>" <4

Solvency

4) Solvency Ratio

@(>,"&'C = A3 A4

31
 5) Debt-Equity Ratio

D"B# − /E-:#C +=#:( = A4 A/6

Activity

6) Paid Occupancy

F=:G H''-1=&'C F"8'"&#=;" = +(()2 @(>G +(()2 3,=:>=B>" ∗ 100

Profitability

7) Return on Equity

+"#-8& (& /E-:#C = !"# %&'()" A(#=> 3,"8=;" /E-:#C

8) Return on Assets

+"#-8& (& 322"#2 = !"# %&'()" A(#=> 3,"8=;" 322"#2

9) Profit Margin

F8(L:# M=8;:& = !"# %&'()" A(#=> +","&-"

10) Operating Efficiency

N8(22 H1"8=#:&; F8(L:#

H1"8=#:&; /LL:':"&'C = A(#=> +","&-"

Operating

11) ADR

3D+ = +(()2 +","&-" !-)B"8 (L +(()2 @(>G

12) RevPAR

+",F3+ = +(()2 +","&-" !-)B"8 (L +(()2 3,=:>=B>"

+",F3+ = 3D+ ∗ H''-1=&'C +=#"

13) RevPAC

A(#=> +","&-" L8() N-"2#2

+",F3< = !-)B"8 (L N-"2#2

14) Sales Mix

D"1=8#)"&#=> +","&-"
@=>"2 M:0 = A(#=> +","&-"

32
 15) Cost of Sales Percentage

<(2# (L @=>"2
<(2# (L @=>"2 F"8'"&#=;" = A(#=> +","&-"

Yield = EP/AP, in percentage

Production Loss = AP - EP
Cost per Servable Kilo = AP Price/Yield Percentage
Quantity to Purchase = Total Quantity EP Required/Yield Percentage

4.5. Standard Recipes

O:">G = /F 3F
F8(G-'#:(& 4(22 = 3F − /F
<(2# 1"8 @"8,=B>" P:>( = 3F F8:'" O:">G F"8'"&#=;"
A(#=> /F +"E-:8"G
6-=&#:#C #( F-8'ℎ=2" = O:">G

4.6. Pricing Methods

1) Mark-Up by Multiplier Pricing Method

M->#:1>:"8 = 1 D"2:8"G R((G <(2# F"8'"&#=;"

@">>:&; F8:'" = M"&- %#") <(2# ∗ M->#:1>:"8

2) Contribution Margin Pricing Method

!(& R((G <(2#2 + +"E-:8"G F8(L:#

+"E-:8"G 3,"8=;" <M = !-)B"8 (L /01"'#"G N-"2#2
@">>:&; F8:'" = M"&- %#") <(2# + +"E-:8"G 3,"8=;" <M

3) Ratio Pricing Method

R((G <(2#2 + F8(L:# +"E-:8"G

+=#:( = A(#=> R((G <(2#2
+"E-:8"G 3)(-&# (L !(& R((G <(2#2 = M"&- %#") <(2# ∗ +=#:(
@">>:&; F8:'" = M"&- %#") <(2# + +"E-:8"G 3)(-&# (L !(& R((G <(2#2

4) Prime Cost Pricing Method

4=B(8 <(2# 1"8 N-"2# = 4=B(8 <(2#2 !-)B"8 (L /01"'#"G N-"2#2

F8:)" <(2# 1"8 N-"2# = 4=B(8 <(2# 1"8 N-"2# + M"&- %#") <(2#
F8:)" <(2# 1"8 N-"2#
@">>:&; F8:'" = D"2:8"G F8:)" <(2# F"8'"&#=;" (<H@% + 4=B(8 <(2#%)

4.7. CVP Analysis

1) Single Product Equation

%& = @V − WV − R

33
 2) Contribution Margin

<M = @ − W
<M+ = @ − W @
<M+X = <M+1 ∗ +","&-" @ℎ=8"1 + <M+2 ∗ +","&-" @ℎ=8" 2 + ⋯

3) Breakeven Point

?/F = R <M

4) Breakeven Revenue

?/+ = R <M+

4.8. Variance Analysis

1) Price Variance

FW = 3'#-=> F8:'" − ?-G;"#"G F8:'" ∗ ?-G;"#"G W(>-)"

2) Volume Variance

WW = 3'#-=> W(>-)" − ?-G;"#"G W(>-)" ∗ ?-G;"#"G F8:'"

3) Price-Volume Variance

FWW = 3'#-=> F8:'" − ?-G;"#"G F8:'" ∗ (3'#-=> W(>-)" − ?-G;"#"G W(>-)"

4) Total Budget Variance

?-G;"# W=8:=&'" = 3'#-=> +","&-" − ?-G;"#"G +","&-"

?-G;"# W=8:=&'" = FW + WW + FWW

34