Significance of Management Accounting Tools in the Hospitality Industry

This report discusses the significance of management accounting tools in the context of the hospitality industry, with a focus on the Barry House hotel. It explains the different types of management accounting systems, such as inventory management and job costing, and their role in financial resource management. It also explores the benefits and drawbacks of budgetary control tools in planning and coordination.

Management Accounting

INTRODUCTION
In the present era, business organizations are facing high level high level of
competition which in turn places direct impact on their profitability aspect. Hence, it is highly
required for the firm to employ management accounting tools and techniques. Moreover,
managerial accounting and reporting provide manager with the valuable framework for
decision making. In this, by making thorough analysis of reports business entity can make
suitable changes in the existing framework and thereby aid in the growth of firm. The present
report is based on Barry house hotel that offers accommodation services to the customers at
suitable prices. Thus, the major focus of such report is to present the significance of
management accounting tools in the context of hospitability business unit. Further, it will also
shed light on the different types of budgeting system which in turn helps in making effective
use of financial resources.
P1 Explaining management accounting and its different types
Management accounting lays high level of emphasis on making use of financial data
and preparation of suitable reports. Hence, such reports provide high level of assistance to the
manager of firm in taking suitable decision that make contribution in the organizational
growth and development. For making accurate and timely day to day business decisions
manager of Barry House requires enough financial as well as statistical information. Hence,
the main objective of management accounting is to assists manager in devising and
evaluating goals. Thus, information that contains in the managerial report helps both higher
management and employees in taking strategic action (Kaplan and Atkinson, 2015). Along
with this, such accounting focuses on present performance and helps in making proper
forecast about the near future. It furnishes monetary and company goal driven information.
By considering all the above aspects it can be stated that Barry House hotel should employ
management accounting tactics which in turn helps in making competent framework.
There are several types of management accounting system that Barry House hotel
needs to undertake for making effectual use of finance is enumerated below:
 Inventory management system: Barry House hotel can ensure effectual use of
financial resources by using the inventory management system. In the present time,
business units which are operating in the hospitality sector has to offer more services
along with the accommodation (Wijaya and et.al., 2015). In this, managers of the

hotel unit has requirement to maintain proper inventory records. Moreover, holding
and ordering cost has greater influence on the profit margin of firm. Thus, by using
the inventory management system and software hotel unit can assess the stock level
which it needs to maintain within the firm. By undertaking such system manager can
avoid the situation of excessive inventory to a great extent. Further, manager of Barry
House hotel can also identify the level of inventory for which it needs to place order
by using economic order quantity method. This method of inventory management and
control is highly significant which in turn helps in tracking or maintaining the cost
level.
 Job costing system: This costing method involves the money which is incurred by the
firm on material, labor and overhead in relation to the specific job. By using such
costing method manager of Barry House can track the cost level. This in turn enables
business unit to take suitable action so cost can be reduced in later jobs. Such costing
method places high focus on maintaining the record of both direct and indirect cost
level. Example of direct cost includes pick and drop expenses, other material for the
welcome of guests etc (Fullerton, Kennedy and Widener, 2014).
On the other side, indirect expenses which hotel unit incurs include promotional,
electricity and other utility, miscellaneous expenses etc. In this, by making continuous
monitoring of expenses that is associated with specific job manager of Barry House can find
out most effectual ways to perform. For instance : By making assessment it has been assessed
that promotional expenses of hotel unit are increased significantly as compared to the
previous aspect. In this, by making in-depth investigation manager of the hotel unit can assess
the effectual mode of advertisement. In this way, by developing awareness among the people
regarding accommodation services hotel unit can enhances customer base and there by
profitability aspect.
 Price optimization system: This system is highly significant which in turn assists in
evaluating the responses of individual on varied price level. Now, people takes
decision about accommodation after conducting evaluation of price and services
offered. Along with this, such system also helps in getting information about the price
which customers are ready to pay for accommodation services (Fullerton, Kennedy
and Widener, 2013). In this way, price optimization system assists in evaluating the
demand and setting suitable price for the services offered. Thus, price optimization

system helps in setting suitable structure and thereby assists in enjoying high level of
profitability aspect.
P2 Methods used for Management Accounting Reporting
As management accounting covers wide area of the organization thus reporting is the
major and important part which makes managers proficient and efficient in making sound
decisions which impact the business as a whole. Reporting system in management accounting
is not concerned with reporting of people to its seniors, rather it is concerned with the various
reports which are being prepared in management accounting practices. Thus various methods
which are used in reporting is:
 Sales Reports: Sales reports are of utmost importance for the business purpose
because these reports shows the actual profit making capability of the firm. Through
sales reports managers can forecast its future sales and try and understand the
behaviour of people who are buying their product or not. Sales reports help us in
understanding the behaviour people and making the decisions regarding future
production and demands of consumers. Through sale s reports management
accounting objectives can be achieved an efficient and effective manner.
 Job Cost Reports: Job cost is a different concept which includes a customer centric
product. In job cost reports the valuation of customized products for customer is
made. As in job costing every order is different from each other and making the
unique product required different type of material to gather and make that product
thus management accounting ensures that all the products part are equally accountable
and as the overall product is. Here the cost of the job which is taken into for making
the product is also evaluated and considered in making futuristic decisions.
 Performance Reports: Performance reports specifically depicts the results of
performance of the organization as whole as well as the each department performance
is depicted in these reports. As in this reports contribution to the profitability of the
firm from each of the unit or department is evaluated and an analysis is undertaken
comparing the past data or historic data which is used to make judgments about the
downward or upward trend and further strategic decisions are taken in order to move
towards the growth of the firm.
 Budgeting Reports: Budgeting Reports involves different types of budgets which
helps in making the firm compare actual with the standards and find out the factors or
elements which has created the deviations in actual and standards. Further the

budgeting reports may include the sales budgets, purchase budgets, expense budgets,
performance budgets, and many more. Thus making the power more easy and
reluctant. Budgeting reports puts a firm in a comfortable situation whereas they can
make decisions for the future.
Cost Reports: Cost reports includes different costs which has been incurred in the
particular period and this helps the firm in making different conclusions on cost
related matters. The reports are more of like cost related. Here in cost reports various
cost have been discussed which are: direct costs, indirect cost, historical cost, explicit
cost, sunk cost, implicit cost and many more. Through the reporting of different costs
a firm will be able to make futuristic decisions for firm as new projects will come thus
cost will change add the profitability scenarios will too.
P3 Calculating CPU and profit by using marginal s well as absorption costing system
 Marginal costing: This costing system helps business organization in identifying the
cost level when extra customers are served by it. Material, labor and overhead are the
main aspects of marginal costing system which in turn helps in making suitable
decisions. Along with this, fixed cost such as salaries’ of personnel, rent, depreciation
on assets etc. is the main elements that are considered by the manager to determine
the break-even point (Absorption and marginal costing, 2017). Hence, by deducting
the variable cost per unit from price per room manager of Barry House hotel cam
determine the level of contribution (Rubin, 2016). In this, fixed costs are the treated as
period cost which in turn helps in assessing the point of no profit no loss. Hence, by
using such system manager of Barry House hotel can assess the extent to which cost
varies according to the number of customers served.
 Absorption costing: Under such costing method, manager undertakes both fixed and
variable cost for evaluating the profit margin. In this, product or service absorbs both
fixed and variable cost to a great extent. By making use of absorption costing method
owner of Barry House can make evaluation stock and profit in the best possible way.
Such method assumes that fixed cost can be recovered to the significant level. Hence,
this full costing method avoids under and over valuation of stock. In this way, by
using absorption costing method Barry House hotel can present suitable view of
profitability.

Hence, by taking into account all the above mentioned aspects it can be presented that
Barry House should employ absorption costing method. By employing such technique
hotel unit can identify the appropriate profit margin.
Calculation of cost using absorption costing
Particulars
Budgete
d Actual
Varianc
e
Budgete
d
Actu
al
Varianc
e
Direct material cost 3600 4200 -600 3600 4200 -600
Direct labor cost 3000 3500 -500 3000 3500 -500
Variable production
overheads 1200 1400 -200 1200 1400 -200
Fixed production overheads 1800 2000 -200 7800 9100 -1300
Total cost of production 9600 11100 -1500 15600 18200 (2600)
Add: Opening stock 0
less: closing stock 2400
1585.7
1 814.29 1950 1300 650
Cost of sales 7200
9514.2
9 -2314.3 5850 7800 -1950
Selling cost per unit 16 15.86 0.14 13 13 0
The above mentioned table shows that standard and actual selling cost per unit
according to the absorption costing method is £16 and £15.86 respectively. On the other side,
marginal costing system entails that actual and budgeted cost is £13 respectively. Hence, by
setting selling price according to the absorption costing system Barry House hotel can get
desired level of profit margin.
Computation of net profit (Absorption costing method)
Particulars
Budgeted
figures (in £)
Actual
figures (in
£)
Sales revenue 14000 21000
less: Cost of goods sold (COGS) 7200.00 9514.29
Gross profit (GP) 6800.00 11485.71
Less: indirect expenditures
Variable sales overheads 450 600

Administrative overheads 800 700
Selling cost 400 600
Total indirect expenditures 1650 1900
Net profit 5150.00 9585.71
Profit margin (per unit ) 11.44 15.98
Income statement on the basis of marginal costing method
Particulars Budgeted Actual
Sales revenue 14000 21000
less: Cost of sales (see above) 5850.00 7800.00
Variable sales overheads 450 600
Total variable cost (TVC) 6300.00 8400.00
Contribution (Sales – variable cost) 7700.00 12600.00
Less: Fixed expenses
Administrative overheads 800 700
Selling cost 400 600
Total fixed cost (TFC) 1200 1300
Net profitability (Contribution – fixed expenses) 6500.00 11300.00
Profitability per unit 14.44 18.83
The above depicted statement clearly shows that profit per unit is lower in the case of
full costing as compared to marginal. Profit per unit in the case of marginal costing method is
£15.98 respectively. On the other side, in absorption costing method profit margin per unit

accounts for £18.83 respectively. In this, profitability is higher in MC because it avoids FC.
All such aspects clearly exhibit that absorption costing method is highly effectual as
compared to other alternative methods.
P4 Presenting the benefits and drawbacks of planning tools
Budgetary control system is highly concerned with making control on cost level. Such
process starts with the preparation of budget and ends with the analysis of variances. In this,
manager of the business unit makes assessment of actual performance or results in against to
the budgeted figures. Hence, by comparing actual and standard amount management team
can easily find out discrepancies. Budgetary control tool and its outcome help in taking
remedial measure or action on time (Hope and Fraser, 2013). Hence, it is the continuous
process and provides high level of assistance to the manager of Barry house hotel in making
planning and co-ordinate the activities in an effectual way. Advantages and drawbacks of
budgetary control too such as variance analysis are enumerated below:
Benefits
 Maximization of profit level: Tool of budgetary control offers high level of benefits
to the firm in relation to the effectual panning and co-ordination between the
activities. Hence, by employing budgetary control tool business entity of Barry House
hotel can exert control on various expenses related to capital and revenue aspect.
 Devising clear goals: In the case budgetary control, each department is given with
specific targets which they need to achieve (Callaghan, Hawke and Mignerey, 2014).
On the basis of such aspect, all the personnel make their efforts to act in accordance
with the predetermined standards or goals.
 Measurement of departmental performance: Tool of budgetary control may be
served as a measure which in turn helps in measuring and evaluating the performance
of each department. By making comparison of actual performance with the planned
output or figure manager of Barry House can assess the level of deviation. In this,
performance report of each department is provided to the management so that they
can take effectual measure.
 Determination of weakness: Such measure enables firm to highlight the areas of
weakness of each department. This in turn indicates the area on which higher
management needs to concentrate his efforts (Ndungo, Tobias and Florence, 2016).

By this, manager of Barry House can improve the performance of department whose
output is less than stipulated.
 Reduction in cost level: One of the main objectives of every business organization is
to make reduction in cost level and attain high level of profit margin. Hence,
management team can meet such objective by taking correction earliest. System of
budgetary control offers opportunity to the firm to timely find out the deficiency level
so performance can be balanced in line with the objectives. In the absence of such
techniques deficiencies are identified at the end of accounting year rather than
periodically.
Drawbacks
 Negative impact on efficient performers: High variance level places negative impact
on the skilled as well as talented personnel (Nieman and Fouché, 2016). Moreover,
inappropriate financial framework accounts for high deviations which in turn
negatively influence the motivational aspect of personnel.
 Uncertainty regarding future aspect: In the recent times, it is not highly easy for the
business entity to make prediction of future expenses appropriately. For instance: To
entice the sales during non-peak season Barry House hotel needs to spend high on
promotional aspects. Hence, uncertain business situation highly limits the significance
of budgetary control system. Moreover, in the lack of having suitable financial
framework it is not possible for the firm to assess suitable deviations.
 Revision of whole budget: Manager revises the whole budget according to the level of
deviations assessed (Perin and et.al., 2016). Such activity requires more time and
expenses which is highly crucial for higher management team.
Further, several budgeting systems are available to Barry house hotel that can be used by
it for budget preparation and control is as follows:
Zero base budgeting (ZBB): It is modern budgeting techniques which focuses on making
proper use of financial resources. Such budgeting technique aids in the planning as well as
decision making to a great extent. ZBB technique reverses the working process or aspect of
traditional budgeting significantly. According to such technique manager of Barry House
should prepare budget by taking into consideration the zero as a base (Kaplan and Atkinson,
2015). This aspect shows that manager makes financial plan or framework without
considering past year budget. In this, manager of budgeting department primarily assess the

activities which they need to perform. Thereafter, manager makes evaluation of the ways
through activities can be performed in a cost effectual manner. In this way, by evaluating
each alternative aspect manager makes allocation of cost. Thus, each line of item is clearly
explained and justified in this budgeting which presents fair view of financials.
Advantages
 Promotes efficiency
 Facilitates optimum allocation of funds
 Avoidance of redundant business practices (Wijaya and et.al., 2015)
 Ensure proper co-ordination and communication within the departments
Disadvantages
 Highly time consuming
 Manager assigned with the responsibility to prepare plan according to zero base
budgeting requires high level of expertise.
Activity based budgeting: Under such method, cost is assigned and allocated by assessing
its relationship with the different activities. ABB system helps in promoting the efficiency
level of business operations and functions. Moreover, in this manager primarily makes
assessment of activities and their cost driver. Thereafter, managers make forecast the number
of units of cost driver which is required to identify the activity level (Activity based
budgeting, 2017). In this way, by calculating the cost driver rate manager of Barry House
hotel can identify cost per unit. Hence, ABB has following advantages and disadvantages are:
 Advantages: Activity based technique provides high level of assistance to the firm in
making allocation of overhead in an effectual way. Hence, such budgeting system
presents clear picture of financials. Thus, by preparing budgeting framework
according to such technique Barry House can make effectual use of financial
resources.
 Disadvantages: In the case of activity based budgeting, business entity requires
deeper understanding about cost driver. If manager of Barry House hotel do not have
about the areas where money goes and the manner in which it is used then such
process would not be effective. Along with this, manager requires high level of
training to prepare effectual framework (Fullerton, Kennedy and Widener, 2014).
Moreover, each individual do not have ability to develop highly competent monetary

plan according to ABB. Hence, training activity imposes high cost in front of business
unit.
Traditional or incremental budgeting: It is the common approach that is used by the large
number of business units. Hence, by making slight changes in the previous year framework
according to the market trend business entity can prepare new budget. Hence, by making
comparison of standard results with actual output owner of Barry House can identify
deviations. Hence, by using deviations entrepreneur can prepare effective financial plan.
 Advantages: High level of simplicity is one of the main benefits of incremental
budgeting system. Hence, by making evaluation of past years framework owner of the
hotel can develop new framework (Fullerton, Kennedy and Widener, 2013). Further,
incremental budgeting system ensures high level of operational stability. In addition
to this, such budgeting system also helps in building and maintaining funding stability
to a great extent.
 Disadvantages: Budgetary slack is one of the main drawbacks of incremental system.
Moreover, usually business unit allocates low amount to revenue and high to the
expenditure. Due to this, manager usually finds positive variance in the outcome.
Further, such budgeting system assumes only minute changes in the current
framework as compared to the preceding work (Incremental budgeting system, 2017).
Hence, it is one of the main drawbacks which business entity needs to keep in mind
while making financial planning. Moreover, in the dynamic business arena it is
possible to predict changes in the expenditure levels.
Manager of Barry House also should place emphasis on adopting modern technique of
budgeting such as zero base. Hence, by employing such tool manager can frame effectual
budget and thereby would become able to analyze variances in the best possible way (Rubin,
2016). In this way, by taking suitable decision regarding monetary aspect manager of Barry
House can grab future opportunities which make contribution in the attainment of success.
P5 Management Accounting Systems to Respond Financial Problems
Since a organization is a big enterprise consist of different set of departments and in
which various issues arises which creates different financial problems and thus here
management accounting plays his role defining various systems which can respond to
financial problems effectively and efficiently and they are:

1. Throughput accounting system : It is a term of management accounting which are
used for the performance measurement. Throughput accounting is way to measure all
financial aspect in an organisation. It mainly discuss on cash factor. Throughput
accounting is differ from the cost account in cost accounting we measure overall cost
investing in company but in throughput account mainly focus on cash , which means
mainly focus on what revenue ratio is generate and how much we lose. Throughput
accounting helps to measurement of overall financial performance. Throughput
accounting is provide proper accounting performance measurement. In this costing
system solving problems and this process will be help to provide proper information
to performance. Where as in this system management helps to provide performance
measurement and help to managed their overall performance level in an organisation.
This model is also helping in financial problems which can be occur in organisation.
It is a effective way to resolving any kind of problem in an organisation.
2. Lean accounting system: lean accounting is a term of management accounting
where managed all over the manufacturing environment. And in this accounting
system management will focus on the cost factor. Like indirect cost or direct cost. In
this accounting system measure all of the occurring cost in an organisation (Ambe
2016). This accounting system is less complex accounting system. Lean accounting is
managed by the managers and make sure about the reduce all in direct expenses in an
organization. Lean accounting is focus on reducing indirect cost and increase
productivity. Control over the lean production company increase their performance
and increase revenue. It helps to reduce indirect expense and help to control stock
production inventory.
3. Transfer pricing: In this accounting system company transfer its product to
subsidiary company, whereas company transact with the other subsidiary company.
Transfer price is also known as transfer cost. Most of the time transfer cost increase
addition cost and time consuming. Extra manpower will be required to execute this
system. Transferring cost accounting system is expensive system rather than others.
Transfer pricing system help to provide raw material to subsidiary firm, and it can
also help to solve financial problem in an organisation.
Key performance indicators: In the context of hotel unit, sales, profit, quality etc. are the
main KPI’s on which company is required to make focus on. Thus, by setting KPI’s and
measuring the actual performance in against to the same manager of Barry House would
become able to assess the area that require improvement.

Budgetary targeting: It is one of the most effectual techniques which in turn provide high
level of assistance in resolving financial problems and issues. On the basis of such technique,
by making comparison of standard figures with the actual performance manager of the firm
would become able to assess deviation. For instance: Manager of Barry House hotel has
setting down standard regarding expenses is £3500 respectively. On the other side, actual
expenses incurred by hotel unit during a month accounts for £3800. In this, through
comparing budgeted figures with the actual expenses manager of the firm found that negative
deviation of £300 occurs. In this situation, through investigating causes and taking timely
measures business organization can easily respond financial problems and thereby would
become able to attain success.
Hence, by considering all the above depicted aspects it can be said that KPI’s and
budgetary control technique is highly effectual which in turn helps in coping up with the
financial issues in a prominent way.
CONCLUSION
From the above report, it has been articulated that Barry House hotel can build or
sustain competitive edge by taking into account the system of management accounting.
Besides this, it can be inferred that by using price optimization system business entity can
develop suitable policies. Hence, by offering facilities at suitable price level Barry House
hotel can maximize customer base and profitability aspect. Further, it has been articulated
that by employing suitable budgeting technique Barry House can make control on the level of
overspending. It can be stated that management accounting includes several tools and
techniques which in turn provides direction to the manner in decision making. Moreover, by
using capital budgeting tool business entity can make investment in the appropriate proposal.
Further, by using accounting reports manager can make suitable changes in the framework as
per the identified output level.

REFERENCES
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Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices.
Journal of Operations Management. 32(7). pp.414-428.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2013. Management accounting and
control practices in a lean manufacturing environment. Accounting, Organizations and
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Rubin, I. S., 2016. The politics of public budgeting: Getting and spending, borrowing and
balancing. CQ Press.
Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the
annual performance trap. Harvard Business Press.
Callaghan, S., Hawke, K. and Mignerey, C., 2014. Five myths (and realities) about zero-
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Ndungo, J. M., Tobias, O. and Florence, M., 2016. EFFECT OF CREDIT ACCESS
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