MANAGE AND CONTROL OPERATIONAL COSTS

MANAGE AND CONTROL OPERATIONAL COSTS
D2.TFA.CL7.05 Trainer welcomes students to class.

Subject elements This unit comprises three Elements:
Element 1: Identify the context of operational costs Element 2: Manage operational costs Element 3: Control operational costs Trainer advises this Unit comprises three Elements, as listed on the slide explaining: • Each Element comprises a number of Performance Criteria which will be identified throughout the class and explained in detail • Trainees can obtain more detail from their Trainee Manual(TM) • At times the course presents advice and information about various protocols but where their workplace requirements differ to what is presented, the workplace practices and standards, as well as policies and procedures must be observed. Discuss housekeeping issues such as times of attendance, expected classroom behavior, contact details, any resources required such as a calculator. Explain that the trainees will be assessed and the requirements of those assessments.

Assessment Assessment for this unit may include: Oral questions
Written questions Work projects Workplace observation of practical skills Practical exercises Formal report from supervisor Trainer advises that assessment for this Unit may take several forms all of which are aimed at verifying they have achieved competency for the Unit as required. Trainer indicates the methods of assessment that will be applied to them for this Unit.

Element 1: Identify the context of operational costs
1.1 Define the meaning of cost to the organisation 1.2 Distinguish between the classifications of costs experienced by the organisation 1.3 Identify examples of actual costs experienced by the organisation 1.4 Identify the decision making process that relates to cost within the organisation 1.5 Identify the cost controls provided by budgeting Trainer identifies for trainees the Performance Criteria for this Element, as listed on the slide.

Element 1: Identify the context of operational costs
1.6 Differentiate between budget types and identify their application within the organisation 1.7 Identify the budget cycle 1.8 Identify the budgets that exist within the organisation 1.9 Determine the current status of existing budgets Trainer identifies for trainees the Performance Criteria for this Element, as listed on the slide.

1.1 Define the meaning of cost to the organisation
Therefore the meaning of cost can be viewed in different ways by different people. The meaning of cost may be seen as: Regarding cost as an asset Seeing assets as potential costs Differentiating between costs and expenditure Cost challenges in the tourism industry Trainer to lead discussion to arrive at examples from students’ experience of each of these three meanings of a “cost” Trainer to facilitate a brainstorming session to develop a long list of cost challenges in the tourism industry

1. 2. Distinguish between the classifications
1.2 Distinguish between the classifications of costs experienced by the organisation Whilst each tourism organisation will have their own specific types of individual costs, depending on the products and services they sell, most expenses will fall into one or more of the following 'classification' of costs: Budgeted cost Uncontrollable costs Actual cost Controllable costs Direct costs Indirect costs ….see trainee manual for additional points Discuss each of the different types of costs and have trainees complete Activity 2. Ask trainees to share their examples with the group.

1. 2. Distinguish between the classifications
1.2 Distinguish between the classifications of costs experienced by the organisation Indicate whether you think the following costs are fixed (F), variable (V) or mixed (M). Commissions Electricity Office salaries - paid fortnightly as part of annual income Direct labour Cost of goods sold Insurance Telephone Depreciation Staff motor vehicle expenses Advertising Cleaning Accounting Lease of tour buses Rent Legal fees Maintenance of equipment Activity 3 from Trainee manual Complete and discuss as necessary

1.3 Identify examples of actual costs experienced by the organisation
Managers can find it useful to divide the business into segments or activity centres of two types. Profit Centre Cost Centre Discuss Profit and cost centres referring to Activity 4. Ensure trainees consider the differences between a small owner operated agency and an organisation. Have trainees list the differences and share back with the group. Complete Activity 5

1.3 Identify examples of actual costs experienced by the organisation
Most large businesses will produce an extensive and comprehensive list of budget codes, which are, in fact, the budget lines. For example a ‘Training budget’ may have budget lines or codes for all the expenses that are expected to be incurred for training purposes. Budget codes Cost of goods sold Bad debts Discuss budget codes as necessary If possible have examples of budget codes. Discuss the cost of goods sold and complete activity. Trainer may choose to provide more examples of this activity. Confirm trainee understanding of writing ‘off debt’ and the procedures many businesses now have in place to minimise this loss such as pre-payment, COD cash on delivery, time allowance for clearance of cheques, preference for credit card or other electronic payment.

1. 4. Identify the decision making process
1.4 Identify the decision making process that relates to cost within the organisation Decision making process considerations Cost spending principles Developing relevant cost elements and performance outcomes Determine how funds will be spent Apply CBA Review the decision making process considerations from TM and ensure all trainees understand them. Have discussion regarding spending principles and own experience with product/service levels experienced in businesses on both personal or work level. Discuss cost elements and resources in relation to small and large businesses and complete Activity 7 Consider how funds will be spent and allocated in a business and complete Activity 8. This activity could be done for more than one item. Discuss CBA in relation to business. It may be worthwhile having trainees identify we also use this in our personal lives with many purchases. Complete Activity 9

1.4 Identify the decision making process that relates to cost within the organisation Application of CVP analysis To determine the price for a product, you will need to assess What customers are willing to pay What your competitors are charging How much profit you wish to make What would happen if you increase the sales price Your market share objective Brainstorm the types of products and services you may have in a business that need to be priced. Ensure trainees understand the formula for reaching the ideal selling price point. Individually or in pairs have trainees select 2-3 of the products/services brainstormed on the board and complete Activity 10 for each one. Share the results.

1.4 Identify the decision making process that relates to cost within the organisation Determine depreciation schedules Negotiate cost with suppliers Determining how assets will be acquired Review the information from the Trainee manual for the above listed topics, having discussion and providing examples as required. Allow time to work individually or as otherwise directed by trainer to complete Activities using the resource identified in Activity 8. Have trainees share their information to the group to demonstrate understanding. Finally discuss the ways in which funds are allocated to budgets referring to key points from the Trainee manual.

1. 5. Identify the cost controls provided by. budgeting 3. 1
1.5 Identify the cost controls provided by budgeting Set budgetary limits and objectives for individual cost-related budgets The role of budgeting cannot be understated in ensuring costs associated with an organisation are identified, monitored and evaluated against pre-determined benchmarks. Definition of budget A budget is a statement of management’s planned outcomes for the business, expressed in dollars or quantities to achieve its objectives for a precise period of time Refer to TM for further information on each point. In discussion format have trainees provide examples to demonstrate their understanding of bullet points listed for understanding budget strategies (the why, what, how) and correct or clarify any uncertainties.

1.5 Identify the cost controls provided by budgeting Set budgetary limits and objectives for individual cost-related budgets Expressing budget limits and objectives Budgetary limits and objectives may include: A nominated monetary amount A nominated physical quantity in a non-monetary budget Acceptable parameters for budget performance, including red flag signals KPI’s for evaluating budget performance in the short and long-term Refer to TM for further information on each point. In discussion format have trainees provide examples to demonstrate their understanding of bullet points listed for understanding budget strategies (the why, what, how) and correct or clarify any uncertainties.

1.5 Identify the cost controls provided by budgeting Set budgetary limits and objectives for individual cost-related budgets Understanding budget strategies Planning Allocating resources Projecting revenue Projecting expenses Developing controls Establishing monitoring activities and systems Creating reporting protocols Responding to variations Refer to TM for further information on each point. In discussion format have trainees provide examples to demonstrate their understanding of bullet points listed for understanding budget strategies (the why, what, how) and correct or clarify any uncertainties.

1.5 Identify the cost controls provided by budgeting Set budgetary limits and objectives for individual cost-related budgets Budgeting strategies Smaller business – less people, less conflicts and opinions to manage Larger organisation: Different opinions Competing demands between departments Small organisation - same person prepares and uses the budget. Potential disagreements during the review and analysis of data are minimised. Larger organisation - the process of reviewing and analysing data can lead to disagreements over the best way to set the budget to meet the business' objectives. It is very important that department and activity centre managers gain the co-operation of colleagues affected by the budget. The larger the organisation, the more demand each department or activity centre has on the resources of the business. Co-operation is always best when stakeholders are consulted and included in the budget process.

Activity Scenarios Advantages Disadvantages
1. Hotel manager completes the budget and hands to activity centre managers 2. Hotel manager, activity centre managers, and the accountant meet as a committee to prepare budgets 3. The accountant knows best, prepares the budgets for the Hotel manager, who in turn approves them for use for activity centre managers 4. Activity centre managers generate the budgets, who use the accountant to co-ordinate the activity, with final approval given by the Hotel Manager 5. Accountant prepares draft budgets for activity centre managers, who amends if and when necessary Consider budget approaches. In small groups, complete the table. Each group member should imagine themselves to be either the Hotel manager, activity centre managers or the accountant as appropriate to each scenario. This will help trainees to explore the different advantages and disadvantages each approach offers. Suggested prompts to help trainees listed by scenario number: How might activity centre managers feel about being handed a budget and told to comply with it? How will the Hotel Manager make sure that stakeholders comply with the budget? How does each party manage the communication process? How do they feel about consulting all stakeholders rather than making the decision themselves? Do you think the accountant has the best knowledge about your business to undertake this task by themselves? As the Hotel Manager,would you like to be excluded from the budget process? As activity centre managers, are you comfortable spending all your time this way? Complete Activity 14

1. 6. Differentiate between budget types and identify
1.6 Differentiate between budget types and identify their application within the organisation Identify the budgets that exist within the organisation Expenditure budget Capital expenditure budget Departmental budget Fixed budget Flexible budget Operating budgets Sales budget Labour budgets Material budgets Inventory budgets Overhead budgets Budgeted financial performance statement Cash flow budgets Master budgets Project budget Purchases budget Budgeted statement of financial position Review each type of budget as necessary ensuring trainee understanding of application in small and large businesses. Complete Activity 15 & 16

Activity - Department budgets and Profit and Cost centres
Senior Managers and Owners Food and Beverage Bar Restaurant Room service Rooms Front Office Reservations Concierge Housekeeping Supervisors Room and Laundry attendants Maintenance Engineers Tradesmen Finance Accountants Clerical staff Sales and Marketing Sales Managers Marketing assistants Trainer - This is an example of a summarised organisational chart for a hotel. Trainer can also provide own chart if it is more relevant for trainees. Working individually or in small groups, trainees perform the following tasks: List the budgets that would be prepared based on departments. Classify each department as either a profit or cost centre. Does this change the budgets that are created from question 1? Trainer – Food and Beverage and Front office are the only profit centres. This means that a departmental budget is prepared for the Rooms department but Activity centre segmentation means that a separate budget is prepared for Front Office and Housekeeping. Trainers may also prompt trainees to think about summary budgets – where would sales information be summarised from? What about Labour?

1.7 Identify the budget cycle
Setting a budget cycle makes management more aware of their goals, including the operation’s potential and costs, for a specific period of time. Importance of budget cycles Budget cycle activities Discuss each of these points as necessary referring to notes in TM. Show next slide- Budgeting cycle.

Take corrective action Establish goals and objectives
The budgeting cycle Collect information Prepare budget Evaluate performance Take corrective action Improve budget Establish goals and objectives Budgeting cycle The purpose for this diagram is to highlight to trainees that budgeting is a continuous process that all business’ follow whether they realise it or not. Complete Activity 17 The following slides are available for use at the discretion of the trainer and may be useful to clarify draft budget format.

The draft budget Policies and guidelines Estimate revenue and expenses
Consultation Circulate draft Finalise budget Distribute final budget Trainer to take students through the process of drafting a budget, relating this first to a domestic situation, such as a family’s home budget. Trainer to then relate the process to a travel agency or tour operation

25 tours (previous period)
The draft budget Budgeted sales: An example: Budget data 25 tours (previous period) 28 tours Price per tour 110 24 Clients per tour Number of tours per year 25 Number of clients each tour 20 Price per client per tour 100 Sales Budget 50,000 Note to trainer: Each column represents a change to previous period’s numbers. The example on the next 3 slides changes one piece of information. Trainer should work through at least one example with trainees but can modify the exercise to give trainees opportunities to practice this skill. Number of tours x number of clients x price per client = Sales budget

The draft budget Budgeted sales An example: Budget data 25 tours (previous period) 28 tours Price per tour 110 24 Clients per tour Number of tours per year 25 Number of clients each tour 20 Price per client per tour 100 Sales Budget 50,000 28 20 100 Trainer should work through at least one example with trainees but can modify the exercise to give trainees opportunities to practice this skill. 56,000 Number of tours x number of clients x price per client = Sales budget

The draft budget Budgeted sales: An example: Budget data 25 tours (previous period) 28 tours Price per tour 110 24 Clients per tour Number of tours per year 25 28 Number of clients each tour 20 Price per client per tour 100 Sales Budget 50,000 56,000 25 20 100 110 Trainer should work through at least one example with trainees but can modify the exercise to give trainees opportunities to practice this skill. Trainees need to be aware that they will create a budget in their assessment tasks. 55,000 Number of tours x number of clients x price per client = Sales budget

The draft budget Budgeted sales: An example: Budget data 25 tours (previous period) 28 tours Price per tour 110 24 Clients per tour Number of tours per year 25 28 Number of clients each tour 20 Price per client per tour 100 110 Sales Budget 50,000 56,000 55,000 24 20 100 110 Trainer should work through at least one example with trainees but can modify the exercise to give trainees opportunities to practice this skill. 52,800 Number of tours x number of clients x price per client = Sales budget

The draft budget Budgeted expenses:
An example – Sales budget value of 56,000 Budget data Sourced data Wages 30% Rent 11,000 Advertising 1% Sales budget 56,000 56,000 28% 10,000 1.5% Total expenses 16,800 16,800 16,800 11,000 11,000 The sales budget is set at 56,000. Each expense is calculated, column by column for ease of explanation. 560 28,360 Sales x expense % = Total expense

The final budget An example: Line item Amount Sales 56,000 Less: Wages
16,800 Rent 11,000 Advertising 560 Total expenses 28,360 Total Profit or Income 27,640 Sales minus expenses = Total profit or income This is created from the revenue and expense calculations on previous slides.

1.9 Determine the current status of existing budgets
Budget reviews are common place in some businesses and not in others as part of a continuous improvement cycle. Benefits of regular reviews Stakeholders involved in budget reviews Budget review questions Discuss relevant points from TM as necessary. Explain the term ‘in camera’ Complete Activity 18 (ask trainees to identify the size of the business they have in mind for question 2) and have trainees share their answers with the group to gauge understanding. Ensure all work projects have been completed and handed into trainer ensuring cover page details are attached for assessment tracking. Review the summary page for Element 1 to confirm what has been completed for this element.

Element 2: Manage operational costs
2.1 Develop or confirm procedures for managing cost 2.2 Develop or confirm documentation required to support and record cost allocations to budgets 2.3 Develop or confirm cost analysis and verification procedures 2.4 Develop or confirm cost-related reporting procedures Trainer identifies for trainees the Performance Criteria for this Element, as listed on the slide.

2.1 Develop or confirm procedures for managing cost
Managing cost procedures Controlling inventory Managing purchases Identifying purchase specifications Refer to TM for the many examples and have brief discussion about how each one can easily get out of control if not managed effectively. Brainstorm the types of stock a tourism operation or agency would be ordering. Consider value of item, anything perishable, potential petty theft items, record of inventory, issuing control Complete Activity 19 Discuss Managing Purchases. Refer to ‘Systems for purchases’ and ‘Payment and scope of authority’. What knowledge or experience can trainees share? Complete Activity 20 Discuss purchasing specifications and how this may be relevant in a tourism role. Complete Activity 21 in groups as directed by trainer and allowing time for any relevant research. Have trainees share their answers with the group.

2.1 Develop or confirm procedures for managing cost
Managing cost procedures Tenders - (activity) Maintaining current, accurate and relevant data relating to items and prices Purchase orders Payment systems Credit policies and procedures for clients Cash payments - (activity) Petty cash - (activity) Cash budgets Labour costs Payroll - (activity) Fixed assets - (activity) For the following cost procedures engage trainees by having them deliver the training. Divide the group into groups of 2-3. Allocate topics. Ask trainees to read the associated information and prepare a training session for the group. Any Activities in the TM are to be included with the topic . Allocate an appropriate time allowance for delivery based on the number and size of topic/s. Provide a time frame for preparation and any other research. After each presentation have question time. Trainer can cover any key points missed or clarify as necessary information.

2. 2. Develop or confirm documentation
2.2 Develop or confirm documentation required to support and record cost allocations to budgets Every purchase should be supported by some form of documentation or record to provide evidence the purchase is a valid one and has been appropriately paid. Importance of financial recording and documentation system Types of expense documents Discuss points as necessary confirming trainee understanding. Conduct a quick quiz on terminology. Complete Activity 26 Activity 26a in Trainer guide can be printed and issued as an additional activity.

2.3 Develop or confirm cost analysis and verification procedures
Cost analysis and verification procedures may include: Monitoring of budgetary activity Validating costs allocated to budget lines Allocating indirect costs to correct revenue areas Calculating budget variances Undertaking cost-per-item calculations, including product, service or package Comparing current statistics to previous periods Tracking costs As mentioned in TM these points are covered in other areas of TM in more detail. Discuss as necessary and complete Activity 27. Trainees to share answers as decide by trainer.

2.4 Develop or confirm cost-related reporting procedures
All businesses require management to prepare a report on budget performance, and to generate suggestions for future action or budget settings. Establish cost related reporting procedures Objectives of reliable reporting procedures Methods to check reliability of reporting procedures Report schedules Distribution of reports Identify key points within the notes and discuss as necessary. Any samples that can be shown would be helpful for trainees. Enquire if trainees have any knowledge or experience with financial reports. Complete Activity 28 Ensure all work projects have been completed and handed into trainer ensuring cover page details are attached for assessment tracking. Review the summary page for Element 2 to confirm what has been completed for this element.

Element 3: Control operational costs
3.1 Set budgetary limits and objectives for individual cost-related budgets 3.2 Monitor performance of cost-related budgets 3.3 Take action to address negative variances 3.4 Take action to maintain positive variances or acceptable budget performance Trainer identifies for trainees the Performance Criteria for this Element, as listed on the slide.

3.2 Monitor performance of cost- related budgets
The monitoring of expenses is a more complex issue than the monitoring of income because there are potentially more things to be considered. Importance of monitoring financial performance Areas of financial analysis Monitor performance activities Using budget reports Reviewing payments made Comparing actual costs incurred to forecasted estimates Highlight and discuss key points from the TM. Gauge trainee experience in this area. Have sample budget for review where possible Complete Activity 29 and have trainees share and explain their answers

3.3 Take action to address negative variances
There will nearly always be a variation between the two sets of figures. In general terms, in practice: An increase in costs is unfavourable A decrease in costs is favourable There are certain circumstances, however, in which these generalities do not apply. Discuss the points within the intro regarding false economies in budget reductions and favourable variations as referred to in the last statement on this slide

Investigating variances Should we investigate every variance? Time and resource constraints Some variances are easily explained Management by exception Tolerance limits Only variances above the tolerance limits are investigated Benchmarking Organisations have policies that managers can follow detailing the size of the variance that is acceptable and variances that should be investigated further. This is called a tolerance limit. Tolerance limits are generally expressed as percentages. Sometimes businesses also compare their variances with competitors or accepted best practice to see if there are any deviations above the tolerance limit. Usually unfavourable variances above the tolerance limit are investigated. Managers may use a questionnaire or checklist that they refer to in order to assist them in deciding which variances to investigate. This document usually takes the form of a set of questions that can be both general and specific. Activity: Trainer should direct trainees to think about the kinds of differences, variances or deviations that could occur in a Tourism business. Questions should cover both revenue and expenses. Trainer may decide to allow trainees to work in groups and present to the class or research this activity and come back and present to the class.

Variance analysis Variances are:
Expressed as monetary units, percentages or sales volume Favourable – beneficial, positive Unfavourable – need investigation Evaluated according to the effect on profit Note to trainer: Take time to explain the concepts of favourable and unfavourable. It is best to avoid the terms “positive or negative” and “good or bad.” Variances themselves are neither of these – they either indicate a contribution to profit or have reduced profit. Description Actual over budget Actual under budget Sales and Profit Improve profit Favourable Reduce profit Unfavourable Expenses Reduce profit Unfavourable Improve profit Favourable

Variance analysis 2 main calculations: Horizontal analysis
Actual results and budgeted numbers for EACH line item in financial data is compared Actual minus budget = Variance in monetary unit Variance divided by budget x 100 = Variance percent Line item Budget Actual Variance Variance % Favourable Unfavourable Sales 56,000 58,200 2,200 3.93% Wages 16,800 18,900 2,100 12.5% Trainer takes trainees through calculations. A full report on variances can show whether there are any serious problems between actual and budgeted results and where any problems are located. Note to trainer: Trainer may give trainees a three step approach to variance analysis: 1. Calculate the variance 2. Decide if variance is favourable or unfavourable 3. Investigate variance if required.

Variance analysis 2 main calculations: Vertical analysis
EACH line item calculated as a percentage of sales Line item divided by sales x 100 = Variance Budget and actual reports are calculated separately Line item Budget Variance Actual Sales 56,000 100% 58,200 Wages 16,800 30.0% 18,900 32.47% Rent 11,000 19.64% 18.9% Advertising 560 1.0% 800 1.37% Total Expenses 28,360 50.64% 30,700 52.75% Profit or Income 27,640 49.36% 25,300 43.47% Owners and managers often budget expenses as a percentage of sales. So these percentages can also be used to compare budget and actual results. Trainer takes trainees through calculations. The example given is consistent with the final budget example used earlier. Note to trainer: Budget line items are divided by budgeted sales and actual line items by actual sales. Complete Activity 30

Investigating variances Management of significant deviations Changes to the internal or external environment outside the control of the business Revise budget Changes that are within the control of the organisation Identify cause Investigate reason Implement remedy or change Examples are given in the training manual of different variances, causes and remedies. Trainer may use some of their own examples using current local data. Review key points as necessary and the following 3 slides Complete Activity 31

Further analysis Trends and Patterns: Consistent over time Indicate a change in internal or external environment Investigation to identify cause Revise budget or action to remedy (Continued) Trainer explains and encourages questions and discussion.

Further analysis Changes to the internal environment: Upselling sales Additional tours added to travel packages by sales staff Room service packages offered on arrival Loss of key staff Unplanned financial commitment Trainer explains and encourages questions and discussion.

Generic actions Specific actions to address negative variances For unfavourable variances in cost of goods sold For unfavourable variances in labour costs For cash flow/liquidity problems Revising budget and activities Re-allocating funds Reporting and making recommendations for negative variations Critical points about making recommendations Management concerns Discuss and highlight key points as necessary. Trainer may relate actions back to Activity 31.

3. 4. Take action to maintain positive. variances or acceptable budget
3.4 Take action to maintain positive variances or acceptable budget performance Where positive variances are identified, it is important that these are carefully reviewed to understand what has lead to this positive outcome. Actions to maintain positive variances Refer to Trainee manual Investigating positive variance is as important as investigating negative ones. Discuss the points in TM and the importance of each. Complete Activity 32 Ensure all work projects have been completed and handed into trainer ensuring cover page details are attached for assessment tracking. Review the summary page for Element 3 to confirm what has been completed for this element.

The End This unit comprised three Elements:
Identify the context of operational costs Manage operational costs Control operational costs You have now completed this unit and the trainer will provide details on assessment. Good Luck. Trainer advises learners on what assessment is required and how it is to be conducted.

MANAGE AND CONTROL OPERATIONAL COSTS

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