The Cahirsiveen house hotel has had a good year in 2006 when comparing against its budget targets. Overall sales exceeded budget by 9.2%. Operating profit exceeded target by 20% (1636-1362.5/1362.5) and actual ROCE was 10.5% compared to the budget target of 8.75%

The ROCE increased due to two factors

a)      The hotel generating more sales and this was reflected in a higher capital employed turnover figure which was 0.38 exceeding the target of 0.35. Thus for every € invested in the business the company is generating €0.38 in sales. This is a good performance as hotel industry average tends to average around 0.33. This performance is also reflected in the higher occupancy levels as well as higher sales per available room.

b)      The company’s actual operating profit margin for 2006 was 27.5% exceeding the budget target of 25%. Thus as well as generating more sales the company is achieving higher profits on those sales. The operating profit margin increased due to two reasons.

·         The company achieving a higher gross profit percentage of 76% compared to the budget target of 75%. This is due to the following

o       The company achieving a higher ARR and REVPAR than budget

o       A change in the sales mix where room sales increased as a proportion of total sales. Budgeted rooms sales as a percentage of total sales was 46%, actual rooms sales as a percentage of total sales reached 50%. As room sales generate higher gross profit margins the overall gross profit and gross profit percentage will increase. This is also reflected in the department contribution percentage which reached 64% compared to the budget target of 60% for accommodation.

·         The company expenses to sales percentage fell compared to budget. Undistributed operating expenses were budgeted at 41% of sales. The actual figure was 39.16%. Most of these expenses would be classified as fixed costs and thus would not be expected to vary in proportion to sales. Thus if sales increase significantly the expenses to sales percentage should fall. Thus we can say this fall the expenses to sales is due to increased sales rather than reduced expenses. Other department expenses were budgeted at 9% of sales whereas the actual figure amounted to 9.6%.

 The following profit statement illustrates the differences between budget and actual figures

·         From the ratios one will notice that total labour costs as a percentage of sales was budgeted at 35% whereas actual was 36.5%. Management should investigate this variance, assess the causes and monitor this expenses item. One will notice that the actual figure for total cost per available room (€43,140) exceeds the budget figure (€40,875) by €2,265 or 5.5%. This is mainly due to the labour costs as discussed above. 

 Overall management and the owners must be quite happy with the profitability and operating performance of the business. One can see that sales and profit per employee are significantly better than the budget targets and this is reflected in higher profit margins and return on capital. Management however should question the setting of the budget targets and assess if too much slack was introduced to ensure the target was more easily achieved.