Importance of Costs and Volume in Financial Management of Travel and Tourism Businesses

This assignment discusses the importance of costs and volume in financial management of travel and tourism businesses using International Airlines Group (IAG) or Thomas Cook as a case study. It also analyzes pricing methods and factors influencing profit in the travel and tourism sector. The assignment includes tasks on management accounting information and its use as a decision-making tool. It also includes a ratio-based analysis of Thomas Cook Group PLC Limited.

Contents
Introduction.................................................................................................................................................2
Task 1...........................................................................................................................................................3
P1.1 explain the importance of costs and volume in financial management of travel and tourism
businesses using International Airlines Group (IAG) or Thomas Cook as your case study.......................3
P1.2 analyse pricing methods used in the travel and tourism sector using International Airlines Group
(IAG) or Thomas Cook Group Plc as your case study................................................................................5
P1.3 analyse factors influencing profit for travel and tourism businesses using International Airlines
Group (IAG) or Thomas Cook Group as your case study..........................................................................6
Task 2...........................................................................................................................................................8
P2.1 explain different types of management accounting information that could be used in travel and
tourism businesses using International Airlines Group (IAG) or Thomas Cook Group Plc as your case
study........................................................................................................................................................8
P2.2 assess the use of management accounting information as a decision-making tool for International
Airlines Group (IAG) or Thomas Cook Group Plc......................................................................................9
Task 3.........................................................................................................................................................10
P3.1. Ratio based analysis of Thomas Cook Group PLC Limited.............................................................10
Task 4.........................................................................................................................................................13
P4.1 Analyse sources and distribution of funding for public and non-public tourism development......13
Conclusion.................................................................................................................................................17
References.................................................................................................................................................18
1

Introduction
A travel and tourism company has been taken into consideration according to this assignment,
named as Thomas Cook Group Plc which has started its operations in the year of 1841,
headquartered at Peterborough, having current employee strength of 27000 employees and the
shares are being traded on London Stock Exchange. The organization provides a range of
products and services which includes cruise lines and passenger airlines, hotels and resorts and
holiday packages. It holds the position of leading market globally with a sales figure of about
£8.5 billion in the year of 2014. It operates from the main markets like Airlines Germany,
Northern Europe, Greater parts of United Kingdom, Continental Europe and other fifteen sources
of markets globally.
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Task 1
P1.1 explain the importance of costs and volume in financial management of
travel and tourism businesses using International Airlines Group (IAG) or
Thomas Cook as your case study
The type and nature of cost and the relationship with the volume enables a manager to measure
the risk and take the necessary actions accordingly, both the cost and volume are important in
order to manage the financial operations of the company.
Cost: The expense that has been incurred by an organization for the production of goods is
considered as cost. In case of travel and tourism company the cost is incurred for the products
and services provided to the customers. In order to take decisions, a travel and tourism company
can use various types of cost. Based on various elements like traceability and form of activity, a
cost is divided (Brigham and Houston, 2004).
Degree of traceability:
1. Direct cost: The cost included in products and services which are easily recognized and
measured are termed as direct costs as the costs are related to the production directly and
are included in the product price. Direct cost is the complete accumulation of direct
labour, direct material and direct expenses. For a travel and tourism company the direct
costs are like the salary of the crew line members (Yu-Lee, 2001).
2. Indirect costs: indirect costs are the costs which are related indirectly to the production
and hence, cannot recognize or identified directly. Indirect cost is the accumulation of
indirect material, indirect labour and indirect expenses. Advertisement expenses are an
example of indirect expenses for a travel and tourism company (Ansari, 1997).
.Change in activity:
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1. Fixed cost: fixed costs are the cost which doesn’t change throughout the year according
to the production and remains constant or fixed. Even the company is running in loss, in
that situation also the company has to bear the related fixed costs. Office expenses like
rent, electricity bills, etc. comes under the heading of fixed costs.
2. Variable costs: variable costs are the cost which changes according to the changes occur
in the production process as this cost is variable in nature. For a travel and tourism
company, the fuel used for the airlines comes under the variable cost heading (Mowen,
1986).
Volume: The volume includes the following:
1. Break Even Analysis: The breakeven point is regarded as the level where the cost and
the revenue are equal. The percentage filled up seats is taken into consideration as load
factors while measuring the breakeven of Airlines Company. A company needs the break
even analysis in order to calculate the margin of safety as it reflects the stronger part of
the organization in terms of the amount of gain or loss being incurred by the company. As
the break even analysis only analyses the related cost of sales and ignores the demand
side, it can be considered as the supply side analysis (Cafferky and Wentworth, 2010).
There are several variables on which the break even analysis is based on, such as:
A. Total variable cost: It is the cost which changes with the extra unit production.
B. Selling price per unit: The costs which are provided by the customers against the
services they are provided with.
C. Total fixed cost: The costs which are related to the first unit of production.
D. Forecasted net profit: The difference between the total cost and total revenue.
2. Cost volume profit analysis: In case of taking short run decisions the cost volume
profits are necessary. The utilization of information being provided by the break even
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analysis is enhanced by the cost volume profit analysis (Shim and Siegel, 2000). The cost
volume profit analysis is calculated with the help of the following formula:
Profit = (P – V) x Q – F
Where
P= selling price per unit
V=Variable cost per unit
F=total fixed costs
Q= quantity
The Thomas Cook group can calculate its profit with the help of this analysis by evaluating the
number of unit along with its cost.
P1.2 analyse pricing methods used in the travel and tourism sector using
International Airlines Group (IAG) or Thomas Cook Group Plc as your case
study
As the pricing strategy allows the organization for earning more profits with more attracting
customers, it is necessary for the organization. For this reason the Thomas Cook Group used the
pricing strategy which is as follows:
Commission:
Recently in order to make bookings on behalf of the tourism organizations, a third party is hired.
The charges for the bookings on behalf of the organization which the third party makes are called
as commissions. In order to earn this amount from the customers, the Thomas Cook Group Plc
adds the charges being made for the third party with its products and services.
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Package deals:
This strategy is recently used in order to earn more profits. Thomas Cook Group has also adopted
this strategy with sharing hands with the local business concerns in order to provide the
customers full package. This strategy is used as the extra service added with the actual services
being provided which provides more comfort for the employees and full satisfaction for the
customers. A company can earn profit without being providing any discount for the customers.
This adds to one of the main advantages of the strategy.
Premium pricing:
This strategy is used in order to earn more profits as this strategy includes pricing the products
and services at a premium price as the customers think that the costly services are qualitative and
the cheaper services are of low quality. So this strategy is considered to be the best strategy for a
company to earn more profits (Lewis, 2011).
Seasonal variation:
In order to cope up with the rising demand of customers, companies generally adopts this kind of
strategies. According to this strategy the company mixes its products and services according to
the needs and choices of customers’ changes. For this reason Thomas Cook Group has adopted
this strategy in order to satisfy the customers fully.
Price lining:
It is done with a stable set of product and service price for creating the level of quality in the
mind of the customers.
P1.3 analyse factors influencing profit for travel and tourism businesses using
International Airlines Group (IAG) or Thomas Cook Group as your case study
The Thomas Cook Group Plc is determined by the influencing factors which are as follows:
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Commission: The inbound tour operators, the travel agents are always paid by the Thomas Cook
Group Plc as commissions for the services they have provided and is also discussed in pricing
strategy for the customers. The pricing strategy of different channels varies from each other
which affects the profitability of the business, this inclusion creates problem for the company.
With the help of the management information the company makes policies and takes proper
decisions. The management information help the company also in making important decisions
like budgeting, cash flowed, etc. (Adongo, Stork and Hasheela, 2005).
Discounting: As the company can gain profit and even face loss in this strategy, this is
considered to be the most important and crucial factor and this requires an accurate decision. The
main twist in this factor is if the company doesn’t offer any discount then it doesn’t look
attractive for the customers and if the company avails more than required discount then it may
lead to incur loss. So while finalizing the decisions regarding this factor, the conditions should be
taken into account and planning should be done accordingly (Adongo, Stork and Hasheela,
2005).
Package deals: Generally the airway companies provide the deals which cover the packaging
system to the hotels. This system or deal includes the number of days stayed, food facilities, the
tourist places being visited by the customers, etc. the net rate of placing better package pricing
can be availed by providing the facilities to the tourism company dealing other complementary
tourism agencies (Adongo, Stork and Hasheela, 2005).
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Task 2
P2.1 explain different types of management accounting information that could
be used in travel and tourism businesses using International Airlines Group
(IAG) or Thomas Cook Group Plc as your case study
In order to take proper decisions for the organization a management accounting information is
needed. It provides the required financial data needed for decision making.
Cash flow forecast:
For identifying the requirements relating to cash flows in advance for the Thomas Cook Group
for a particular time period, the cash flow forecast is needed. The process of cash flow
forecasting enables an organization to recognize the future decrease in cash balance in advance
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and regarding the pricing strategies as well, the employees will be paid correctly or not. Though
the Thomas Cook Group is able to run its business smoothly without any obstacle, the
forecasting helps in planning upcoming expenses, purchases and also the areas where investment
of excess cash can be made (Dropkin and Hayden, 2001).
Statistical information about sales cost and profit:
In order to stay competitive in the market, the future planning must be done accordingly.
Planning for the operations of an organization to be taken place in the future can be done through
anticipating this process. The outcomes of the future operations are forecasted in advance with
the help of trend analysis. Past revenue, sales and growth statistics are taken into consideration
while calculating with the help of trend analysis.
Variance analysis:
Actual realized expenses and the budget expenses are compared while calculating the variance
analysis. The variance is used for the correction if there is any mistake. Raw material
consumption, material hours, man hours, production time, etc. is included in variance analysis
(Harris and West, 1997).
Budget analysis:
Budgeting takes place after forecasting and helps in framing an appropriate plan for the future.
Allocation of capital money for different operations for carrying out in future is called as
budgeting. Through budgeting the future costs and budgeting are estimated.
Marginal costing:
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With the production of one more unit of a product, the increase or decrease of the total cost
which a business incurs is defined as the marginal cost. The calculation of the relation between a
change in cost and a change in quantity is termed as marginal cost. This computation doesn’t
include the fixed costs (Lucey, 2002).
P2.2 assess the use of management accounting information as a decision-
making tool for International Airlines Group (IAG) or Thomas Cook Group Plc.
The management accounting system is important in decision making for an organization. The
organization takes the following decision depending on the management accounting system:
1. In order to stay competitive in the market in future the organization needs to forecast
sales, revenue and cost. The future policies and goals are also can be determined with the
help of the management accounting system.
2. The management accounting system helps in allocating the resources accordingly. The
management accounting system also helps in making decisions regarding the optimum
product mix and the investment plans for new plants and properties.
3. The decisions regarding the raising of funds are also made with the help of management
accounting information. The future financial needs are determined by the budget forecast
and variance analysis.
4. In order to finance the daily operations the funds that are used are termed as working
capital. The proper arrangement of working capital is done with the help of the
management accounting system (Epstein and Lee, 2007).
.
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Task 3
P3.1. Ratio based analysis of TUI Travel PLC Limited
The financial position of the organization can be disclosed to the stakeholders through various
financial statements like profit and loss account, income statement etc. In order to determine the
financial and operational position of the company, TUI Group uses the ratio analysis financial
statement in order to aware the stakeholders about the financial position of the company which
will be favourable towards the company. The stakeholders will also be aware about .the current
market position of the organization (Costantini, 2006).
2012 2013
Profitability
Gross profit
net profit
11.2
-0.22
11.0
0.02
Liquidity
Current ratio
Quick ratio
0.59
6.35
0.61
6.57
Debt equity 0.86 0.89
Efficiency Ratio
Assets
Inventory
Capital gearing
stock turn over
Debtors collection period
Creditors payment period
1.37
147.65
3.810094637
142.8596491
1.294326241
12.08000737
1.39
143.36
4.750319775
142.9217391
1.303712523
18.43210027
Current ratio:
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The relation between the current assets and liabilities are shown with the help of current ratio.
The current ratio shows the potential of the company in terms of its liquidity position of the
business and determines the capability to fund the company’s short term obligations and debt
handling. After making the calculation it is realized that the current ratio of TUI group in the year
2013 has increased from 0.61 by 0.59 in comparison with the previous year. It clearly reflects
that the liquidity position of TUI group has enriched in 2013 compared to the previous year.
Acid test ratio:
The acid test ratio is also popularly known as quick ratio. It projects the relation between the
liquid assets which are easily convertible to cash and the current liabilities. This reflects the
ability of the company in order to pay all the debts out of its liquid assets. As per the above
calculation it has ascertained that in 2013 the quick ration has increased by 6.57 by 6.35.
Return on net assets:
The income of the company which is generated from its assets during a financial year is shown
by a profitability ratio which is the return of net assets. The ratio of the annual net incomes and
the total assets of a company are measured as return on net assets. The return on net asset of the
TUI group has remained fixed on both of the years and the operational value of the company also
doesn’t increase.
Debtor’s collection period
The debtor’s collection period ratio helps in gauging the performance of the company. The time
period in which the recovery of the credit is done i.e. the accounts receivable is collected is
determined by this ratio. The debtor’s collection period of this company and the improvement of
the company within a couple of years is determined with the help of this ratio. The debtors
collection period was 12.08000737 in the 2012 which was increased by 18.43210027 in 2013
Creditor’s payment period:
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The least amount of time period taken by the company in order to pay its debt to the creditors is
determined with the help of this ratio. It is quite clear that if the company take minimum time to
pay the creditors, more creditors will honestly give them time and supply in the future.
Inventory turnover ratio:
The performance of the organization is reflected by the evaluation of the times of selling the
inventory is also shown in a time period is shown by this ratio. For the computation of the
inventory turnover ratio the costs of goods sold is compared to the average inventory for a
period. As per the above analysis it has shown that inventory was decreased by 143.36 which
was 147.65 in the year of 2012.
Gross profit ratio:
The linkage between the revenues generated from the gross profit and the net sales is taken into
account in order to calculate the gross profit ratio. The profitability position of the company is
identified by computing the performance of the company relating to its operations. The gross
profit TUI group was 11.2 in the year of 2012 which has decreased in 2013.
Net profit ratio:
In order to reflect the profitability of the organization in a whole the net profit ratio is calculated
by subtracting the expenditure relating to operations and the income tax from the gross profit
ratio and also by omitting the non-operational expenses. A better net profit ratio shows that the
company is in a favourable condition. According to the analysis carried on for the TUI, the net
profit ratio has projected a sharp increased by 0.02 as compare to the year of 2012 by -0.22.
Capital gearing ratio:
In order to ascertain the structure of capital relating to the company, the capital ratio is
calculated. The evaluation is done by isolating the shareholders fund with the amount of dividend
paid. It is shown after the analysis that the TUI group has utilized a considerable amount of debt
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funds which could lead the company in facing troubles further and lessen the earnings of the
shareholders can be decreased. In the 2013 capital gearing has increased by 4.750319775 and in
2012 it was 3.810094637.
Task 4
P4.1 Analyse sources and distribution of funding for public and non-public
tourism development
Various organizations such as accommodation, transportation, travel sectors etc. are included in
the travel and tourism company and require some financial sources to run their activities for
development. So, the organization requires some channels in order to raise funds. There are
various available sources in the market with the help of which a company can raise its funds.
Thomas cook group should adopt same in order to raise its funds. The sources can be segregated
into two different forms i.e. internal and external source.
Internal source:-
The internal sources such as retained profits, debt collection, sale of stock, owner’s contribution
and sale of fixed assets helps the organization in order to raise the funds from its internal sources.
The internal sources are discussed below:
1. Retained profits- retained profits arte the medium or long term source of raising funds
and can be availed only by the companies which are operating their activities for more
than a year. From the profit earned, the company takes the full portion of the profits as a
replacement forgiving it as dividend to the shareholders. It is a cheaper source of finance
as the dividends paid out are tax free as it is already a taxed source. The company doesn’t
repay the fund as it is an internal source and also comes with an interest free facility. But
there are some limitation like the company does not utilize the whole amount of its
earnings as only a portion of profit can be retained. A net earnings of around 46.12
million in 2013 has been made by the Thomas cook group, and it is able to retain a part of
the whole amount for investing in other projects like cross railway project, development
of heritage sites, environmental improvement etc. (Marsh, 2012).
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2. Debt collection-Debt collection is short terms source of raising funds with the help of
which an organization can raise funds by acquiring money from their debtors. This
facility can be availed only by the organization who have debtors. The organization
doesn’t have to pay any additional expenses but there is a risk of getting the debts unpaid
(Marsh, 2012).
3. Sale of stock- sale of stock is regarded as an internal source of fund that different
companies avail to fuel its expenditures. Different organizations are found to sale their
unsold stock at a lower rate in order to generate funds that will help an organization in
covering its expenditures. For instance, being an airlines company Thomas Cook can
raise required amount of funds by selling its tickets which are left unsold, the tickets in
that case are required to be sold at a lesser cost and that would generate lesser funds for
the organization. This process would enable the organization in reducing its unsold stock
while earning a required amount of funds (Marsh, 2012).
4. Owner’s contribution- for the steady growth of an organization the owner’s fund is
regarded as a helpful source of finance. The owner’s fund is the funds contributed by the
owner out of his own account. The owner’s fund can provide support in an organization
in funding its expansion, but generally this source of finance that can be utilized as a
start-up capital. Owner’s capital is regarded as a less risky source of finance as it is the
owner’s own funds and are not required to be repaid (Marsh, 2012).
5. Sale of fixed Assets- Sale of fixed cost is regarded as a source of funds that will help an
organization funding its expenses for a medium time period; the organization raises its
funds by selling the fixed assets. Tourism industry also adopts this as a source of raising
their required funds. The fixed assets that can be considered in the travel and tourism
industries are old airplanes or furniture’s used in the hotels, selling useless buildings. As
the unused assets got sold out, it is considered as one of the better sources but it also
carries some restrictions such as some business does not have an adequate amount of
fixed asset (Marsh, 2012).
External source:-
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The external sources enable an organization in acquiring cash from the external sources relating
to an organization and include the sources like bank overdraft, leasing, trade credit etc.
Bank overdraft-It is a source of finance through which an organization withdraws an amount
which is greater than the amount existent in its bank account. For availing the bank overdraft
facility an organization is required pay interest agreed upon the excess amount that it has
overdrawn from the bank. Bank overdraft is a short term source of finance and it is cheaper that
other forms of bank loan (Arrowood, 2006).
1. Leasing- By renting the assets of an organization for a particular period of time, leasing
is considered as a medium term source of finance through the company can earn money.
It is one of the better ways of raising finance as well as for budgeting and on the other
hand it can be expensive too. Thomas cook group can lease their buses and aircrafts, air
tankers etc. in order to raise funds.
2. Trade credit- Trade credit is a source of funds where an organization buys anything
which is required without incurring the payment immediately with a trade credit limit of
about 1 month in general. It is considered as a better way of raising funds and includes
several advantages as it doesn’t include any interest to be paid by the organization if the
credit has been paid off within the agreed time. It is also good for the cash flow of the
organization as the goods are sold immediately after that the payment is incurred. The
company should have cash at the time of the payment and this criteria has to be taken
care off (Arrowood, 2006).
3. Hire purchase-It is almost same as leasing and also considered as a short term source of
raising funds with a difference that the company retains the right of owing the asset only
after the repayment of money. In hire purchase, the company has to pay a certain amount
of money before starting the payment on a monthly basis as instalments. It is a better way
of raising funds with a disadvantage of being an expensive source as it includes a
lucrative interest rate.
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4. Share issue-Sharing of issues like equity issues is considered so be the long term source
of raising funds where the organization issues equity shares in order to raise funds and
financing their operational activities. The organization doesn’t have to repay money as
well as interest. Just like other sources this source also has some demerits like the
organization has to share the profits as dividends to the stakeholders and it also includes
the risk of dilution of the control over the business.
5. Mortgage-It is considered as the long term source where a company takes loan from
banks by depositing any of its properties with a more or less same amount. The mortgage
process includes an advantage that after the repayment of loan the company retains back
the ownership of the property being engaged in the process. However if the company
fails to repay the amount there is a risk of losing the property. Thomas cook can raise
funds by providing any of their useless property.
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Conclusion
Every business concern requires decision making system in order to take appropriate steps
towards success. A proper decision making system is also required by a travel and tourism
company which provides them appropriate information to acquire growth. Cost volume profit
analysis is included amongst the various skills and techniques which are being used in taking
effective decisions. A decision making process also requires certain accounting information
related to the management other than this. In order to survive in the market every organisation
needs the sources of raising funds as an organisation cannot run its operational activities without
funds.
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