Question

PERFORMANCE EVALUATION

Julie Miller supervisor of housecleaning for Hotel Minto, was surprised by her summary report for March given below.

Hotel Minto Housekeeping Performance Report For the month of March
Actual	Budget	Variance	%Variance
$198,511	$186,400	$12,111 U	6.497% U

Julie was disappointed. She thought she had done a good job controlling housekeeping labor and towel usage, but her performance report revealed an unfavorable variance of $12,111. She had been hoping for a bonus for her good work, but now expected a series of questions from her manager.

The cost budget for housekeeping is based on standard costs. At the beginning of a month, Julie receives a report from Hotel Minto’s Sales Department outlining the planned room activity for the month. Julie then schedules labor and purchases using this information.

The budget for the housekeeping was based on 8,000 room nights. Each room night is budgeted based on the following standards for various materials, labor, and overhead:

Shower supplies	3 bottles @ $0.35 each
Towels	1 @ $2.25
Laundry	10 lbs @ $0.35 a lb.
Labor	½ hour @ $14.00 an hour
VOH	$7.00 per labor hour
FOH	$6 a room night (based on 8,000 room nights

With 8,900 room nights sold, actual costs and usage for housekeeping during April were:

$9,311 for 26,500 bottles of shower supplies

$17,502 for 7,900 towels

$31,882 for 88,500 lbs. of laundry

$60,200 for 4,350

$30,150 for total VOH

$49,466 for FOH

Required:

You have been asked to re-evaluate Julie’s performance.

Prepare a report to Julie’s boss demonstrating and explaining your findings; including your suggestions for performance evaluation methods and measures in the future.

Answer 1

Report to Julie’s boss demonstrating and explaining the findings; including the suggestions for performance evaluation methods and measures in the future
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Budget vs Actual:
Account	Actual	Budget	Variance	U/F
Shower supplies	9,311	8,400	(911)	U
Towels	17,502	18,000	498	F
Laundry	31,882	28,000	(3,882)	U
Labor	60,200	56,000	(4,200)	U
VOH	30,150	28,000	(2,150)	U
FOH	49,466	48,000	(1,466)	U
Total	198,511	186,400	(12,111)	U
Workings notes:
Shower supplies	=3*0.35*8000 =	8,400
Towels	=1*2.25*8000 =	18,000
Laundry	=10*0.35*8000 =	28,000
Labor	=0.5*14*8000 =	56,000
VOH	=0.5*7*8000 =	28,000
FOH	=6*8000 =	48,000
A cost center is a part of a department, department is part of an entity. Essentially, cost center is the smallest segment of an entity. A department's budget when broken down by the functions (as cost centers) helps analyse the data more efficiently. Julie, the housekeeping supervisor, having the data for each cost centers can look at which costs are controllable, if the increase in costs due to increase in prices or reduction in efficiencies or is it simply because of increased output (in this case it is room nights). Such analysis can also throw light on the quality controls in each of these functions, can help finding out if there are any fraudulent activities that are occuring.
Flexible Budget of Housekeeping department	Actual	Flexible Budget	Variance	Price Variance	Efficiency Variance
Shower supplies	9,311	9,345	(34)	36.00	-70
Towels	17,502	20,025	(2,523)	(273.00)	-2250
Laundry	31,882	31,150	732	907.00	-175
Labor	60,200	62,300	(2,100)	(700.00)	-1400
VOH	30,150	31,150	(1,000)	(300.00)	-700
FOH	49,466	53,400	(3,934)	(3,934.00)	0
Total	198,511	207,370	8,859	(4,264)	(4,595)
Workings:
a. Flexible budget - similar to budget, replaced the room nights 8,000 by the actual room nights, 8.900
b.
Price Variance = Actual Quantity * (Actual price - Standard price)
	Actual Quantity		Actual price	Std price	Price Variance	U/F
Shower supplies	26500	Bottles	0.35	0.35	36.00	U
Towels	7900	towels	2.22	2.25	(273.00)	F
Laundry (In lbs)	88500	lbs	0.36	0.35	907.00	U
Labor	4350	hours	13.84	14.00	(700.00)	F
VOH	4350	hours	6.93	7.00	(300.00)	F
FOH	8900	room nights	5.56	6.00	(3,934.00)	F
Efficiency Variance = Standard price * ( Actual quantity - Standard quantity)
	Std Price	Actual Qty	Std Qty	Eff Variance	U/F
Shower supplies	0.35	26500	26700	-70	F
Towels	2.25	7900	8900	-2250	F
Laundry (In lbs)	0.35	88500	89000	-175	F
Labor	14.00	4350	4450	-1400	F
VOH	7.00	4350	4450	-700	F
FOH	6.00	8900	8900	0
Actual price per bottle = 9,311/26,500
Actual price per towel = 17,502/7,900
Laundry = =31882/88500
Labor = =60200/4350
VOH = 30150/4350
FOH = 49466/8900
Standard quantity:
Bottles = 3*8900 ; Towels = 1*8,900 ; Laundry (lbs) = 10*8,900 ; Labor = 0.5*8,900 ; FOH (Actual room nights) = 8,900
Performance analysis:
Price variance - Most of the price variances are favorable, except shower supplies and laundry. Shower supplies is an immaterial variance. The price variance in laundry is about a cent per pound of laundry. Julie or the procurement will have to look more into this and re-negotiate prices, if possible to improve the results
Efficiency variances - All are favourable, which means the increase in costs is mainly due to increase in room nights which is a favourable event. As long as the rooms are priced right, the hotel will not incur any losses due to the increase in costs in Housekeeping. Julie definitely needs to be appreciated for a good performance.