Management Accounting for Covent Garden Hotel

This assignment delves into the application of various management accounting systems at the Covent Garden Hotel. It examines how systems like throughput, cost, process costing, inventory, lean accounting, and transfer pricing contribute to the hotel's efficiency and profitability in London's hospitality sector. The analysis also highlights the use of budgeting, capital budgeting methods, and ratio analysis for financial planning. Furthermore, it explores the different perspectives offered by marginal and absorption costing methods on net profit calculation.

MANAGEMENT
ACCOUNTING

INTRODUCTION
In the corporate world, management accounting plays a vital role to manage and run an
enterprise in a proper and smooth manner. There are various kinds of accounting tools and
techniques that are helpful for the entrepreneur up to a great extent. Without process of
management accounting, a businessman is unable to manage the firm and generate higher and
effective sales along with revenues at the end of a particular period of time. The present case is
based on Covent Garden Hotel (CGH) which is a small firm and operates in the hospitality
industry of London. The report describes about numerous kinds of accounting systems for
managing the business process. In addition to this, it provides information related to different
accounting reports to analyse and know financial performance of Covent Garden Hotel. Besides
this, it shows the difference between marginal costing and absorption technique to calculate net
income. Further, current study analyses about various planning tools and techniques as well as
methods to combat the financial obstacles and problems that occur in business environment.
TASK 1
P1 Explanation of requirements of different types of management accounting systems in Covent
Garden Hotel
To,
General Manager and Board of Directors,
Covent Garden Hotel,
Date: 28th June 2017.
In the accounting and financial world there are different types of methods and systems
are used by the company. Here the Covent Garden Hotel uses some management accounting
systems for various requirements are purposes. These all systems are enumerated below: Throughput accounting: The management accounting system is basically related with
the raw material rather than costing or any other aspects. It helps to identify constraints
or problems related to required raw material, turnover of employees or labour as well as
wastage occurs in firm by which capacity of plant hampers (Kaplan and Atkinson,
2015). The basic requirement for the Covent Garden Hotel of throughput accounting
system is to reduce problems as well as constraints related to such mentioned aspects in
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appropriate way. Further, it leads to increase number of finished goods in same
resources and improve effectively and productivity of hotel in the overall hospitality
industry of London. Accounting of cost: In this type of system the hotel is able to know cost and expenses
which are incurred while making services for customers. Further, very basic requirement
of the cost accounting is to determine total cost of services offered by the firm. On the
basis of determining cost selling prices of each service or each room is to be calculated
by the management and able to sell in the market. Process costing: It is a method which shows cost of production occurs in each and every
manufacturing activity or process. With help of this the hotel can produce better
accommodation services for the tourists and customers as well. With this management
able to identify lack of cost in every business process further can take corrective actions
and make strategies against it (Fullerton, Kennedy and Widener, 2013). Hence, it
requires for reducing cost of every business activity and make them more efficient with
same quantity of raw materials. Transfer pricing: As per the respective system of management accounting raw material
and goods are transfer from parent company to subsidiary firm and reverse as well.
When subsidiary firm purchases services from main or parent entity then prices are less
in comparison to purchase from outsiders. Further, it leads to reduce total cost of
services and prices as well. Ultimately more number of tourists or consumers ready to
consume Covent Garden Hotel's accommodation services. Hence, requirement of attract
more number of users and enhance revenue at the end of specific period is to be
achieved by the company. Inventory accounting: Moreover, another used management accounting system by
Covent Garden Hotel is inventory accounting which helps to measure and control over
the stock at the end of financial period. Apart from this, by such system management
able to utilize its inventory in proper manner to generate more sales and revenue (Tools
and techniques of Management Accounting, 2017). Further, it can be said that the hotel
uses inventory management for making firm more efficient and achieve goals and
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targets of the firm in hospitality sector of London.
 Lean accounting: According to lean accounting method the managers of Covent Garden
Hotel able to reduce cost of production by eliminate wastage services which occurs in
the firm. Apart from this, it provides various information as well as data which are
related to earning profit as well as making effective decisions for business. The
company uses the system for reducing various kinds of wastage products and obstacles
related to manufacturing process. Further, improve quality of accommodation and other
services as well in the hospitality segment.
Regards: Management Accounting Officer
P2 Various methods of management accounting reporting for Covent Garden Hotel
To,
General Manager and Board of Directors,
Covent Garden Hotel,
Date: 28th June 2017.
In an organisation, it necessary to make appropriate reports related to financial
transactions to know business performance in the industry. There are different kinds of methods
or report are used by the Covent Garden Hotel in order to management accounting reporting.
The methods are described below: Budget report: On the basis of respective report the Covent Garden Hotel able to know
that how much fund to be require for next month or year to produce particular number of
units. It shows various reports and informations such as related to cash, production units,
raw material required, revenue needs to generate etc (Schaltegger, Gibassier and
Zvezdov, 2013). These report are helps to the Covent Garden Hotel in order to manage
the company and make strategies according to it as well. Payroll report: The respective report is related to salary and wages which are provided
to the labours and employees of hotel. Amount of this report is recorded on daily and
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monthly basis when Covent Garden Hotel pays wages and salary respectively. Further,
total amount of the payroll report treated as a salary expense in the profit and loss
account of the hotel. Sales report: As per the respective management accounting reporting method the
Covent Garden Hotel record sales and revenue generated by the hotel in specific period
of time. It includes total revenue which is earns by selling services to the customers.
Here any kind of costs are not deducted and the total amount of sales report is treated in
the income statement as a revenue or sales. With this Covent Garden Hotel can know
that firm is up to which extent able to generate revenue at the end of particular time
(Aksoylu and Aykan, 2013). Job cost report: In this type of report of management accounting cost of every business
process is supposed to transacted or recorded. Here expenses of each and every batch or
process are determined which helps to the Covent Garden Hotel in order to know
expenses of every job or batch in the company. This report is submitted to management
and checked by them, in this if it identifies problems then take corrective actions to
overcome such problems of Covent Garden Hotel. Manufacturing report: The system or report shows about the units or items which are
produced in the operation process. Higher number of finished goods and services and
lower the raw material shows that Covent Garden Hotel is efficient to produce services.
Further, in this report cost of raw material, expenses which are occurred in
manufacturing process etc. includes. The total amount of production is to be recorded at
here and helps to the Covent Garden Hotel in order to make report properly. In the
accounting report the amount is to be treated as production costs in the profit and loss
account of Covent Garden Hotel (Ng, Harrison and Akroyd, 2013).
 Cost accounting: At the last cost accounting report shows summation of all kinds of
expenses which comes into consideration in the business. Here expenditures of the
above mentioned all reports are included and derive cost of services which are the
Covent Garden Hotel going to offer its customers. On the basis of such costs
management of Covent Garden Hotel take effectual pricing decisions for sale such
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services in the market.
Regards: Management Accounting Officer
TASK 2
P3. Calculation of net income with the help of marginal and absorption costing method
Net income is a final outcome which derives after deducting all direct and indirect
expenses. From this the management of Covent Garden Hotel able to know its financial
performance and formulate better strategies to generate higher income (Siverbo, 2014). There are
mainly techniques which are used by CGH to compute net profit such as absorption and marginal
are given as below:
Calculation of net profit or income with help of marginal costing technique:
Table 1: Income statement according to marginal method of costing
Calculation of net profit or income with help of absorption costing technique
Table 2: Income statement according to absorption method of costing
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From the above computed net profit through two costing methods, it can be assessed that
both the techniques provide different value of net income. It has been analysed that net income
generated by firm with the help of marginal method is worth of £9300. On the other side, from
absorption method net profit is calculated worth of £9600. It can be clearly visualized that when
management uses marginal method then net income is higher as compared to another costing
tool. Main reason of occurring such difference is that marginal technique consists only of
variable expenses of production. Moreover, another mentioned technique includes all direct,
variable, fixed as well as overheard expenses that occur in the production or operation process
(Noreen, Garrison and Brewer, 2014). Due to such reasons, total expenditures also differ on both
the marginal and absorption tools of the costing method.
In a firm, most of the entrepreneurs use second one costing technique i.e. absorption for
determining the net profit. Very basic reason for using such technique is that it helps to cover the
overall cost of production and firm is able to know actual profitability scenario of company in
the hospitality industry of London.
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Differentiate between marginal as well as absorption costing techniques
Marginal costing technique Absorption costing technique
Under the technique of costing that is marginal,
only variable expenses are to be considered for
determining net profit at the end.
In the absorption costing, variable as well as
fixed overheads and expenses are also
considered by cost centre of Covent Garden
Hotel.
Expenses which are included in marginal
costing tool are like:
 Direct labour
 Direct material
 Variable overhead costs of production
In this, different types of expenditures are
included which are given as below:
 Direct labour
 Direct material cost
 Variable overheads
 Fixed costs
 Administrative expenses
 Selling and distribution costs
 Insurance, rent and taxation amount,
etc.
As per this method profit of the firm is to be
measured with help of profit volume ratio (P/V
ratio).
Here, profit includes total costs by which
profitability affects in a negative manner and is
lower as compared to another method (Jacobs
and Cuganesan, 2014).
In the respective method, inventory amount is
supposed to carry forward in financial
statements of next accounting year.
In absorption costing tool, amount of inventory
is carried forward in the future financial
statements.
The method is used by company such as Covent
Garden Hotel because of taking report and
analysing internal system and performance as
According to this, management of respective
firm of hospitality sector is able to analyse
report and financial performance of external
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well as company (Krishnan, 2015). system.
TASK 3
P4 Benefits and drawbacks of different kinds of planning techniques
In the business environment, planning has an important role for making effective and
proper plan of the firm to make it more efficient. There are numerous kinds of techniques that are
the most helpful for Covent Garden Hotel to make successful plan up to a high extent. The tools
are explained below along with their benefits and limitations:
Budget: Key planning tool is budget which is used by the management in order to predict
about the future financial informations. With help of this the Covent Garden Hotel is able to
make effective plan in different criterias such as cash balance, production units required to
produce, revenue needs to generate, requires raw material etc. for current and next period. In
addition to this, different types of budgets are to be framed such as cash, production, material,
sales and revenue etc (Panaretou, Shackleton and Taylor, 2013).
Various benefits and limitations of the budget are as follows:
Benefits:
 Budget is tool of planning orientation and helps to make highly appropriate financial plan
for current and future periods in Covent Garden Hotel (Agarwal, 2016).
 It shows both sides on the firm such as income side and expense side as well.
 Covent Garden Hotel is able to allocate cash as well as financial resources to each
organisational functions on the basis of available cash flow.
 Further, it helps to make the plan for collecting fund from different source of finance.
 It is very cost conscious method so management of Covent Garden Hotel able to control
and reduce over the cost of production. It helps to evaluate business performance with help of budgeted data as well as actual
results.
Limitations:
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 It's a very time consuming method and sometimes reduce efficiency of the individuals
who are working finance department.
 Highly experienced along with better skilled employee is required who charge higher
salary from Covent Garden Hotel (Ball, 2013).
 On the basis of budget the manager of Covent Garden Hotel allocate financial resource to
every department but manager of particular department sometimes re quire more or less
money by which disputes can be arise. It considers as well as deal with the financial treatment, further, it ignores different
subjective problems and issues of the firm.
Cash budget
A budget statement which supports to the Covent Garden Hotel in terms of assessing
future cash position along with expenses and incomes is considered as cash budget. Generally all
the firms prepare such kind of budget because by predetermining level of liquidity, management
easily able to make decisions appropriately. Hypothetical example of the cash budget is stated
along with its benefits and drawbacks below:
Particulars Amount (in GBP)
Cash incomes
Revenue 850
Loan from bank 400
Cash collection of debtors 350
Total cash incomes (A) 1600
Cash disposals
Rental expenses 350
Premium on insurance 180
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Maintenance expenses 240
Cost of product designing 125
Other expenses 90
Total cash outflows (B) 985
Net Cash balance (A-B) 615
Advantages of cash budget:
 The stated budget is highly helpful for the Covent Garden Hotel in order to concentrate
on those activities and tasks which are not going to through the prepared plan or
schedule. Here it able to identify that which kind of activity takes more amount or
expenses and hamper to the cash position.
 Through this budget, the company able to enhance its level of effective communication
which is supportive for establish the effectual relationship among employees and
employers within workplace of the hotel.
 Along with this, by using budget of cash position the management able to make better
and appropriate coordination between various functions of organisation. When among all
the functions and departments there is highly appropriate coordination established then it
will be able to become more productive within industry of hospitality.
 Cash budget is the helpful and significant tool for the cited entity in terms of thinking
about the future expenses as well as required financial resources. Such condition is helps
to select method and sources of raising capital and fund in the company along with its
cost aspects. If it founds that costs and expenses are enhanced on consistent basis within entity then
able to reduce as well as handle the financial resources with the optimum utilisation.
Disadvantages of cash budget:
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 The success or achievement of goals as well as objectives of the Covent hotel is overall
depends on the staff of operation department as well as overall corporation process. If the
staff is not able to give better efficiencies, then cannot meet with the forecasted cash
position within workplace.
 In the working environment to prepare as well as operate in proper and effective manner
cash budget is highly expensive which lead to create burden on the hotel and hamper
profitability.
 Such kind of budget is to be made within entity on the subjective estimates rather than
specific facts and figures. Moreover, it is not possible that estimations are always correct
and appropriate as well as easily achieved by the Hotel. In order to make the budget of cash or liquid position more time is taken and due to
which it can be said that it is highly time consuming method. Therefore, more time lead
to reduce efficiency and productivity of the individuals within working environment
which affects to the business profit.
Budget statement of production
In the budgeting section, the statement which gives information about the units of
producing products and services for the next fiscal period is known as production budget. With
this kind of budget the Covent Garden Hotel able to determine the production level which
supports to reduce the stock level within workplace. Illustration of production budget along with
merits and demerits explained below:
Particulars Product
Budgeted sales units 1600
Add: Expected closing stock 130
Number of units required next month 1730
Less: Available opening stock 80
Required units to produce in next month 1650 units
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Benefits of production budget:
 Very basic advantage of the production budget is that it helps to the Covent Garden Hotel
that how much number of services needs to produce foe the further financial period.
 When the production level is assumed and estimated by the company properly then can
know that how much raw materials will be necessary to purchase. Further, as per the
requirements and necessity Hotel will be produce products and services which is sign of
reducing the stock within workplace.
 The company able to utilise the plan, equipments as well as machinery up to the
maximum level with the help of production budget in the working environment. It is highly supportive for the hotel in order to use labour hours effectively as well as
reduce those expenses which not generate any kind of productivity.
Limitations of production budget:
 In contrary to this, for make the desired production units it is highly mandatory to utilise
the available resources in the adequate as well as optimum manner. In this condition, if
the employees and operation staff not able to optimum and adequate utilisation of the
available raw materials and resources then cannot achieve the objectives.
 After the market research the management assess level of production for the next year
and start to manufacture goods and services in accordance to that. Moreover, if the firm
assumes that demand will be enhance but due to recession it goes down. Therefore, hotel
cannot sale all the products and services which lead to increase stock of goods in the
firm.
P5 Comparing different management accounting systems for overcome financial problems
Financial Report
To,
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General Manager and Board of Directors,
Covent Garden Hotel,
Date: 21st April 2017
The above mentioned systems shows that Covent Garden Hotel requires these in order to run
the firm in smooth manner and make effective plan as well as business decisions. Along with
this these all the systems are helpful to combat financial obstacles occurs in business process
which are describes below: Accounting process of cost: It helps to determine total cost of production which comes
into consideration for produce products and services within firm. By this the
management of hotel can easily know that which activity takes and incurs higher cost
and expenses (Kanellou and Spathis, 2013). In the Covent Garden Hotel usually cost of
production increases which make big offence to enhance financial performance in
hospitality industry. Hence, the cost accounting method helps to the firm in order to
reduce and resolve cost related problems. Transfer pricing: In this the company sell its goods and services in form of raw material
and finished goods internally. Here cost charges by the manager of parent company at
the lower rate in comparison to sell other companies. Further, if subsidiary entity
purchase raw material or processed goods from another firm then charges are higher.
Ultimately cost of finished goods increases and prices reduce which affects financial
stability in adverse manner. While selling services by Covent Garden Hotel to its
subsidiary hotel then it will easily able to reduce total cost of finished services which are
offered to customers. This system is used by most of the companies to overcome from
financial problems and enhance efficiency and productivity as well in the industry. Enterprise resource planning (ERP) software: Apart from above mentioned both the
management accounting systems, there is a computerized system is also helpful for the
Covent Garden Hotel (Aksoylu and Aykan, 2013). It is one type of software where all
the financial transactions are recorder in proper manner which helps to identify
problems within Covent Garden Hotel. After identify it able to take corrective actions
and make effectual business plan and strategies to reduce it. In the business world,
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mostly firms are using the software for recording past and current data as well as making
strategies on the basis of it. Lean accounting: With this it able to know that in which business process or activity
cost is increasing as well as helps to improve quality of services as well. Here
management of the Covent Garden Hotel is easily able to reduce cost by producing
higher quality of hospitality services such as accommodation etc. Ultimately more
number of customers will attract and increase sales and revenue. It affects financial
position in positive manner and reduce problems related to finance (Kaplan and
Atkinson, 2015).
 Process costing: According to the management accounting system process costing the
Covent Garden Hotel able to determine cost of each business activity and process which
are needed to produce services. Further, financial problems and obstacles related to
every business activity will be easily resolve and performance gets improve.
 Apart from such all the mentioned methods and systems of the management accounting
there are some others also used by the Covent Garden Hotel in order to asses and
identify financial obstacles and then take actions to reduce as well as eliminate it. The
other techniques and methods available and used by Covent Garden Hotel for such
purposes are like as balanced scorecard, financial governance, key performance
indicators, benchmarking etc. By these all the firm analyse that in profitable or non
profitable condition it performs. If it not performs well then able to determine causes
and factors which are accountable for financial problems and reduce performance in the
hospitality industry. Hence, by considering such kinds of systems at the workplace all
kinds of financial problems as well as constraints are to be eliminate in appropriate and
smooth way.
Regards: Management Accounting Officer
CONCLUSION
From the above carried out analysis it has been assessed that it is very necessary for
managers in order to manage their financial and accounting systems which helps to generate
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higher sales and profit. Further, different management accounting systems likes as throughput,
cost, process, inventory, lean accounting as well as transfer pricing all are requires for Covent
Garden Hotel to make the business more efficient in hospitality sector of London. Along with
this, through such systems hotel able to combat and resolve financial obstacles which pocuurs in
business process. Furthermore, it can be concluded that marginal and absorption both the costing
method provides different value of net profit because it considers variable costs as well as
variable and fixed expenses respectively. Moreover, the Covent Garden Hotel uses mainly three
tools to make financial plan which are like as budget, capital budgeting methods as well as ratio
analysis.
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