Management Accounting Report: Financial Constraints of a Hotel

This report provides a detailed analysis of management accounting practices within the Charlotte Street Hotel, a small business operating in the UK hospitality industry. It begins with an introduction to management accounting and its importance in controlling costs and improving financial performance. The report then explores various management accounting systems and approaches, including inventory accounting, lean accounting, transfer pricing, and cost accounting, detailing their application and benefits for the hotel. It further examines different reporting techniques such as process costing, performance reports, revenue reports, and departmental reports. The core of the report focuses on the calculation of net income using both absorption and marginal costing methods, comparing the results and highlighting the differences. Finally, the report concludes by discussing the planning tools adopted by the hotel for budgetary control and expenditure management, providing a comprehensive overview of management accounting principles in a real-world context.

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting is a process of which is more or less related to the costing and
level of expenses of the company. With help of the management accounting the firm able to
determine lack of problems and constraints which are arises in the operation or production
process related to the costing. Further, it able to control over the extra expenses and improve
financial performance in adequate manner in its respective segment. In the current study there is
a small business is chosen which is operating in the hospitality industry of UK. Name of the
respective small firm is Charlotte street hotel which is located in London, UK. The report
describes different systems and approaches of management accounting along with their
requirement in Charlotte hotel to combat financial constraints. Further, it shows calculation of
net profit at the end of year by using two costing approaches such as marginal and absorption. At
the end, the report focuses on adopted planning tools by the hotel in order to control over the
budgetary as well as expenditures.
TASK 1
P1 Numerous kinds of systems or approaches of management accounting used by Charlotte
street hotel
Business Report
To,
Board of directors,
Charlotte street hotel,
Date: 15th July 2017
Subject: Various kinds of management accounting systems
Different kinds of approaches of management accounting are helpful for the company in
order to highly and effectually manage the overall business enterprise in proper way. The
Charlotte hotel of London uses some approaches to fulfil some financial related requirements
and needs by which it able to become more profitable. Higher the level of profit lead to attract
more number of customers and shareholders because they think that firm will be provide better
services and high dividend amount (Zimmerman and Yahya-Zadeh, 2011). Different
management accounting approaches or systems are enumerated below:
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 Inventory accounting: Very first management accounting approach which is used or
adopted by the Charlotte street hotel is inventory accounting. For the every business it is
very necessary to manage level of stock in the proper way because high stock has more
number of stock then it leads to reduce performance of the firm. When the Charlotte
hotel cannot able to use or utilize the level of inventory then it has to pay different costs
such as holding, carrying etc. In order to reduce level of stock and highly use in the
operation process company requires such kind of management accounting approach.
Higher the level of inventory is not better and effectual for any kind of business,
especially for those enterprises which operates in manufacturing segment. Lean accounting: Another approach of management accounting adopted in the business
process is lean accounting where it able to decline level of extra expenses. When another
expenses will be increase then performance of the Charlotte hotel reduces and as well as
affects on the image in the negative way (Burritt, Schaltegger and Zvezdov, 2011). On
the other hand, when there are expenditures are lower, then amount of profit will be
ultimately improved. Further, image will be create in the corporate world and local
community as well which lead to become a brand in the hospitality sector of the country
UK. It can be said that the accounting approach of lean is required to the Charlotte hotel
of London for make them more profitable and reduce or eliminate wastage products and
services. Transfer pricing: Moreover, according to the another approach i.e. transfer pricing
which helps to the hotel in order to purchase products as well as services at the low price
from the parent company. When Charlotte hotel purchases from another organisation
then it has to pay more sum of money to that seller firm which lead to increase total cost
of production as well as price of hospitality services. In order to this, it has been said
that prices of services are depends on the cost of production. The respective approach is
used in the manufacturing firms, construction company as well as production unit
because they need processed as well as raw material over the time.
 Cost accounting: Apart from above mentioned all the approaches another is cost
accounting method where total cost of products and services are mentioned (Renz,
2016). In this all types of costs and expenses are to be included as well as properly
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recorded in the structure form. Here manger of Charlotte hotel is very helpful to derive
total cost of the services offered by it to the customers.
It can be summarised from the above all the systems of management accounting that, all
are support to the cited hotel in terms of managing financial resources and assessing cost of the
production and services. Moreover, when cost and expenses are identified then decision for
pricing can be taken in fruitful manner. With the help of inventory accounting, Charlotte hotel
able to manage its stock level and utilise in optimum and profitable direction. Along with this,
by considering second system i.e. lean, firm is supportive for reducing damaged goods and
services, which is symbol of quality improvement. When talking about transfer pricing then it
can be said that, the hotel helpful in terms of reduce total cost of production at the workplace.
Cost accounting helps to the organisation in order to analyse total expenses of hospitality
services. Therefore, management of the hotel easily able to meet take effective and profitable
pricing decisions at the end of year.
P2 Various techniques adopted by Charlotte street hotel in order to management accounting
reporting
In the every type of business reports are to be prepared for financial as well as non
financial matter which helps to assess performance of the firm by managers. In the current
criteria there are different kinds of reports are to be prepared by the Charlotte street hotel which
are such as follows: Report of process costing: Further, another report used by the hotel is process costing
report where expenses of each and every activity of production process are included. It
helps to the company in order to determine expenditures incurred in the every process of
operational activities. Further, these type of report is requires for the company for
assessing that which activity takes more amount of costs and expenses. When it able to
identify more cost incurring activity then can easily able to make corrective actions and
strategies against to such problems. Performance report: According to the respective management accounting report the hotel
able to determine that the firm is performing in the hospitality sector either positive and
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negative or well and poor. Positive or higher performance helps to create better and
positive image in the eyes of corporations as well as consumers. Further, higher profit
helps to provide more number of services with the high quality where number of
consumers and market share will be enhance. Here the hotel can easily measure actual
results with the estimated financial data where performance of the firm is to be easily
derived (van der Meer-Kooistra and Vosselman, 2012). Revenue report: Another kind of report of management accounting is related to sales or
amount of revenue generated by the firm at the end of particular financial year. Revenue
is the base of profit and loss account from which all the expenses such as direct, indirect,
variable and fixed overheads etc. are deducted. It shows Charlotte hotel is how much able
to generate level of revenue by using raw materials, processed goods, inventory, fixed as
well as total assets etc. Higher the revenue and lower the expenses are better for the
organisation and helps to increase profit and business performance as well in the
hospitality segment of UK. Other managerial reports: Moreover, there are various other management accounting
reports are to be used by the company such as Charlotte street hotel. Other different types
of reports are related to inventory or stock level, manufacturing of products and services,
budget amount etc. Departmental report: Under this kind of management accounting report, the firm analyse
about the department wise properly which is helpful in terms of take effective decision.
Further, within one department how many expenses and costs incurred are also easily
identified and then reduced by the Charlotte hotel. Job cost report: In this, cost and expenses of each and every job products and services
are recorded and then presented in the books of profit and loss account. It supports to take
decision of selling price of every job services. Inventory management report: In order to manage and record transactions regarding to
the stock, there are this specific report is made (Qian, Burritt and Monroe, 2011). Along
with this, valuation of the inventory is also measured using different methods like FIFO,
LIFO and weighted average.
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 Debtors receivable report: When the company sells its products and services on the
credit to its customers then they consider as a debtor for the hotel. After sometimes
amount credit selling is recorded under the debtors receivable report which treated in the
balance sheet. Performance report: In this, level of business performance within relevant industry is
recorded. For this generally standard or budgeted and actual figures are compared which
known as variance analysis. Operating budget report: In order to operate business and produce products and services
different kinds of operating expenses are incurred. This respective management
accounting report includes operating expenses are forecast for the next financial year.
 Product or service profitability report: Level of profit generated by the company from
selling goods and services in the market is recorded and treated in the income statement
of Charlotte hotel. Moreover, generally three types of profit are considered which are like
gross, operating and net yield.
TASK 2
P3 Computation of net income with help of absorption and marginal costing methods
The firm whether it operating in hospitality or any other industry determine net income or
profit at the end of year. Higher the net income shows that the business able to manage its direct
as well as indirect expenditures in the proper and appropriate way (Ramljak and Rogošić, 2012).
In order to derive net profit there are two approaches used by Charlotte street hotel which are
like as absorption method and marginal costing approach. On the basis of such approaches
calculation of net profit is shown as below:
Computation of net income accordance to absorption method:
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Computation of net income accordance to marginal method:
Interpretation
From the above mentioned income statements it can be interpreted that both the
statements provides different value of net income. In the first profit and loss account net profit
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generated by the enterprise is worth of 9600 GBP which is high compare to second account. In
the both profit and loss accounts net income differs due to using different financial cost or
expenditures. When the manager compute net profit with the help of marginal approach of
costing, final profit is derived worth of 9300 GBP. In accordance to absorption and marginal
approach total expense of production are such as 5100 GBP and 1800 GBP respectively. The
previous approach of costing covers overall expenditures which are incurred in production
process whether they are direct, fixed, variable or indirect (Lavia López and Hiebl, 2014). On the
other side, second approach uses only variable overhead as well as direct expenses which lead to
reduce total costs and increase net profit at the end of year.
Difference of two methods of deriving net profit
Absorption costing approach Marginal costing approach
The approach of costing all kinds of
expenditures are included for determine net
profit is known as absorption approach of
costing.
On the other side, method or approach where
only two types of expenses are used to
determine net profit which are such as direct as
well as variable overheads.
Value of net or final yield is less when the
Charlotte uses the respective method of
costing.
As per the marginal approach profit of at the
end is higher compare to another mentioned
method.
Value of inventory or stock is directly affects
to the profitability level in same direction when
the company adopt costing approach i.e.
absorption (Marginal Costing Vs. Absorption
Costing, 2017).
In this type of costing method, profit level is to
be determined and denoted as a profit volume
ratio.
In such approach segregation of overheads is in
terms of production, selling as well as
distribution, administration etc.
Here overhead expenses are segregated in two
parts which are fixed and variable. Further,
only variable overheads are used to derive cost
and profit of services offered by Charlotte
hotel.
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Here profit is measure in terms of profit or
final yield of production and services.
Under the marginal approach profit is to be
measured in terms of contribution of services
or per unit or room (Chenhall, 2012).
TASK 3
P4 Benefits and disadvantages of planning tools for budgetary control
Business Report
To,
Board of directors,
Charlotte street hotel,
Date: 15th July 2017
Subject: Merits and drawbacks of budgetary control planning techniques
In the business scenario planning phase plays a key role because without appropriate
planning overall business process affects in negative way and financial performance as well.
Budgetary control is a process in which the management check and take follow up of various
financial activities that whether firm generates profit or loss. In context to control over the
budget and improve cash balance different tools of planning used by Charlotte street hotel.
There are mainly three kinds of techniques are adopted by the respective hotel which are such
as follows:
 Budget
 Investment appraisal or financial tools
 Financial ratio analysis
Explanation or description of above mentioned planning tools is given as below:
Budget:
At the very first the hotel uses budget for make effectual plan of financial resources as
well as control over the budgetary process. It is the process where numerous kinds of data and
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informations related to finance are estimated for the future accounting periods. When it is able
to analyse future financial data then can improve net cash balance as well as performance of the
firm in the overall hospitality industry of UK (Bebbington, Unerman and O'Dwyer, 2014).
There are various types of statements for budget are prepared which shows different estimations
such as related to cash, material, items to produce, revenue has to earn etc. Examples of budget
are analysed as below:
Budget for cash balance
Particulars Amount (in GBP)
Inflows
Sales 9524
Long term debt 8520
Collection of cash 5642
Total inflows (A) 23686
Outflows
Selling expenses 5698
Rental expenses 3684
Amount of insurance 2857
expenses of maintenance 2649
Expenses of utility bills 1964
Other costs 980
Total outflows (B) 17832
Net Cash balance (A-B) 5854
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Budget for production level
Particulars Product
Forecasted sales units 7980
Forecasted stock for end of the year 130
Number of items which requires in further month 8110
Less: Available stock at the opening of year 80
Number of items which needs to produce in further month 8030
In the above example there are two types of budgets are shown like as budget for cash as
well as output level. These shows in the next or upcoming month management of Charlotte
street hotel needs to earn cash worth of 5854 GBP. Further, at this cash balance total incomes as
well as disposals are estimated worth of 23686 GBP and 17832 GBP respectively. Moreover,
another budget of output indicates that firm requires to produce 8030 units of services for the
next month. When the Charlotte street hotel uses budget then it has some benefits and
drawbacks as well which are enumerated below:
Benefits of budget:
 It is the most widely used tool because it provides better and reliable financial data for
the further months or year in accordance to past financial data (Lim, 2011).
 With help of the budget respective hotel is highly able to manage risk for generating
more amount of return in business.
 In regard to this, finance managers can provide resources of financial to every
organisational functions such as HR, IT, research and development, marketing etc. in
proper way.
 Helps for assessing current as well as future financial performance.
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