Variance Assignment:
Part 1: https://docs.google.com/spreadsheets/d/1AtgwAXfyhoE-01dIB_BoPPguc4IrZBAGCv1-181ydag/edit?usp=sharing
Part 2 - All variance numbers are made up numbers for the whole class:
Static Budget Variance - the difference between the actual budget and the static budget (the assumed budget).
Marriott had a total variance of $583,280,300 which is very unfavorable. This showcases that accounted costs for the hotel was much more than budgeted, meaning the hotel did not plan its budget out well.
Possible scenario - the reason why this was such a significant unfavorable variance is because hotel occupancy was much lower than what was expected. The hotel expected to make much more from guests, however, they only had 330,122 rooms full when they expected 426,324. The reason for this decrease in guests staying at the hotel is because after COVID-19 demand at hotels has gone down.
Volume Variance - this is the difference between measured and expected sales (flexible budget - static budget).
Marriott had a volume variance of $1,783,326, which was favorable. Even though the company lost money with revenue, Marriott had less dollars spent towards labor hours than was expected at the beginning of the year. Also, fortunately, meal costs were a lot less than expected per meal which is great.
Possible scenario - the reason why this was a favorable variance is because even though the business is in great debt, it is at less of a debt than what was expected for the year. This showcases that Marriott operations are poor and that when less rooms are full, the organization actually does not dig itself into as bad of a hole since being in full operations leads them to debt.
Flexible Budget Variance - this is comparing the actual results (expenses+revenues) to the flexible budget amounts for that activity level.
Marriott had a flexible budget variance of $585,063,626 which was unfavorable. The issue with this variance is that the actual amount of labor hours was significantly more than expected, meaning the hotel planned poorly and lost a ton of money.
Possible scenario - Even though the hotel was not at full capacity, the hotel overworked staff and had too many staff on hand, leading the business to waste a lot of money on what could be helping the business out. The labor costs were higher than expected and so was the rent, meaning that this negatively affected the business.
Price/Spending Variance - the difference in how much something actually costs and the previous predicted costs are.
Marriott had a price/spending variance of $280,551,450.60 which was unfavorable. The reason for this being unfavorable is that the labor hours and the rent had strong unfavorable values while the meals had a favorable value, however, it was not strong enough to increase profit.
Possible scenario - the price/spending variable was unfavorable because the costs exceed the budgeted costs. A possible reason for this is that the assumed labor cost would be $60.18 per housekeeping hour but the number was way higher at $550.46.
Efficiency or Overhead Variance - this showcases how effective the allocation base was used to produce the actual output (for example labor hours).
Marriott had an overall unfavorable efficiency/overheard variance at $226,752,563,85. Rent and revenues is not included in this calculation. This meant that the actual overhead costs exceeded what was expected.
Possible scenario - the reason why Marriott had an unfavorable efficiency/overhead variance is because they planned for 773,009 housekeeping labor hours and they actually used 912,615 labor hours. This meant that Marriott had to pay workers for more hours and the budget rate for paying workers was significantly higher than expected.
Other Projected Profits - overall this Marriott business is not doing great. They go into even less debt when they have less rooms operating since they can't handle having more labor on hand or more meals being cooked. This means that their budgeting strategy is not great.
How Variances are Related to Each Other
Variances are related to each other since they are all interconnected. The static budget variance is broken up into volume variance and flexible budget variance. The flexible budget variance is also split into the price variance and the efficiency variance, thus showing that all the variances are related to each other. Also, by looking at the variance tree, it is clear that the overhead spending variance is related to price variance (direct costs). Also with the tree, the direct costs efficiency variable is related to the overhead efficiency variable. The tree represents that the lower level variances effect the upper level variances and vice versa.
Addressing the Unfavorable Variances:
Static Budget Variance - In order to combat the static budget variance being unfavorable it is essential to understand that labor costs are too high, meaning they are paying workers a lot and are having them work many hours. Paying a worker $550.46 an hour is so much money. Labor costs may exceed the budget due to overtime, so Marriott needs to do a better job since they are poor at scheduling. Marriott should work with a scheduling team in order to optimize scheduling and skill level.
Flexible Budget Variance - In order to also combat the flexible budget variance being unfavorable it is important to understand that rooms booked were lower than what was guessed, meaning total revenue was below expectations, causing an unfavorable revenue variance. Even though costs do adjust with a flexible budget, fixed costs stay consistent, meaning the business wasn't making profit. Since revenues are lower than expected, Marriott needs to work on marketing and gaining more customers. Marriott could offer long term promotions or discounts in order to incentive more guests. Fixed costs such as rent stay relatively high even if less people are staying in the hotel. Marriott could work to negotiate contracts and request temporarily lower property taxes due to low occupancy.