There are two types of guests, travelers and peasants.
Edit: I think you played correctly.
There is a specific provision for the Butcher on page 7 of the rulebook: "Warning: This effect only applies to Travelers in rooms, not to Peasants." So, no, you can NOT kill all peasants in a single move using the Butcher.
Other than that, the combo is correct. But beware: you always need enough room to bury all the corpses. Since a level 0 corpse doesn't bring you much money, it's not such a great idea to bury several of them under your annexes. Instead, it might be more interesting (and mean) to bury those low-value corpses under your opponents' annexes and force them to bury theirs under your annexes!