Management Accounting Report: Cost Analysis & Profit Implementation

This management accounting report provides a detailed analysis of cost drivers and cost behavior, distinguishing between fixed and variable costs. It includes an identification of cost drivers within a hospitality context, specifically examining internet charges, complimentary breakfasts, electricity, insurance, marketing, super-annuation, telephone expenses, and waste removal. The report features a break-even analysis, calculating the break-even point for a hotel and suggesting strategies to reduce it, such as optimizing employee wages, limiting breakfast options, and converting fixed telephone charges to variable. Furthermore, it discusses target profit implementation, comparing different options for achieving a desired profit level through room bookings, and concludes that choosing options with lesser number of rooms being occupied will lead to more generation of revenue for the hotel. Desklib offers a wealth of resources for students, including solved assignments and past papers.

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Contents
Introduction:......................................................................................................................................3
Cost driver and cost behaviour:.........................................................................................................3
Target profit implementation:.........................................................................................................12
References:......................................................................................................................................14

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Introduction:
This report briefly discusses about the cost drivers & cost behaviours and how the same can
be identified for calculation of production cost of any product. There are two types of cost in
production of any product which is fixed cost & variable cost. Both have been briefly
explained along with determination of breakeven analysis of the company as per the
requirements.
Cost driver and cost behaviour:
There are many of the costs that are faced by the company and these are further broken down
into 2 main categories, the first being fixed costs and these second being variable costs.
The fixed costs are the costs that do not vary with the level of output achieved. These are also
termed as the sunk costs since these are the costs in respect of which obligation has already
been decided. The examples include rent, buildings etc.
The following is the chart which shows in the fixed costs:

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Then the second are the variable costs. These are the costs that vary with the level of the
output achieved. These are other than the sunk costs. The examples include labour, capital
etc.
Variable costs are costs that vary with output. Generally variable costs increase at a constant
rate relative to labour and capital. Variable costs may include wages, utilities, materials used
in production, etc (Fundamental finance, 2018).
The following is the variable expense chart:
The following is the desired identification:
1. The internet charges are paid weekly and it doesn’t change irrespective of the usage: these
are the charges that will have to be paid no matter if the same are used or not. Since,
the obligation of the same has already been decided, hence, this would be termed as
the Fixed Cost.
2. The restaurant can cater for more than 3000 customers at a time irrespective of the
booking. The complimentary breakfast will cost them the same irrespective of the
customer numbers: the customers could be 30, 3 or 3000, the cost incurred by the
restaurant would be the same. Since, the obligation of the same has already been

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decided, hence, this would be termed as the Fixed Cost.
3. The electricity charges, water charges and laundry expenses are un-predictable thus the
management has only gone with an estimate in this cost. Thus, it can vary according
to the usage: the electricity, water and the laundry expenses are unpredictable and
always vary with the number of guests that are catered. Hence, this would be termed
as the Variable cost. The cost driver would be the electricity, water units consumed
and for laundry expenses, it would be the number of clothes washed.
4. The insurance is charged monthly and its constant: since this charge is constant, hence, the
obligation to pay these must have already been decided, so the cost would be termed
as the Fixed Cost.
5. Marketing charges are not constant as they vary season to season: since this charge would
vary, the expense depends on one season to another. Hence, this would be termed as
the Variable Cost. The cost driver would be the season.
6. Super-annulation charges for both the employees are charged at 9.5% on their total pay:
since this charge is constant, hence, the obligation to pay these must have already
been decided, so the cost would be termed as the Fixed Cost. This expense pertains to
the employees of the company and since these employees are permanent, they will
have to be paid even if they generate no revenue for the hotel.
7. Telephone expenses is charged weekly basis: if these expenses would vary with the number
of the calls made, then these expenses would be Variable costs. The cost driver
would be the number of calls made.
8. Waste removal charges are paid weekly: these charges are fixed in nature and hence, these

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charges would be fixed, no matter the amount of waste excreted by the hotel.
Break-even analysis:
Break even analysis is not much of a business goal. It is the amount of the revenue when it is
able to cover its expenses. The formula of this is Fixed expenses/Contribution per unit.
There are some of the costs that increase with the level of sales such as the materials
production labour etc. these are termed as the variable costs. Then there are some of the
expenses that do not rise with the level for sales achieved (Small business chron, 2018).
This analysis is helpful in the following:
 Price setting implications: once a person knows the about the points of break even,
he is able to get into the long term pricing strategies for the company. Once he has
already paid in the initial investment, then he could earn even more by keeping his
process the same. Once the initial investment has been recovered, then even of the
owner keeps the prices the same, then he would be able to earn more amount of
profits for each unit. An increased amount of profit could also be achieved once the
prices have been lowered and when one is not able to pay off the initial investment of
debt that has been taken. The lowering down of the prices could help in resulting
more amounts of sales which would I turn mean more profits even when the profit per
unit is less.
 Marketing considerations: the break-even point must be calculated every time one
person offers a sale of a discount. In case, the money is being spent for the purposes
of promoting any product, then the addition being made to the promotion of the
current exposure to the overheads for the given period of time would help in the
determination of the new break-even point. This could also help in dividing in the
promotion by the number of the additional number of the units of the profiting that

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would be extracted from the sales and then the same could be applied to the cost per
unit.
 Financial strategies: there is yet another way of reaching this break even pint. One
could increase the amounts of the sales, raise the prices for the purposes of increasing
the margins of the profits, reduce in the profits that could help in the generation of
more amounts of profits and lessen the amounts of the expenses. One could also
lessen down the expenses through the way of cost cutting measured, depreciating the
assets that are sued for the purposes of generating in the sales and reduce in the
interest bearing debt or also, invest in the cash that has been generated in excess of the
capital gains that has been earned on that money. Understanding and knowing the
break-even points will lead the business to a very big place (Patil, 2018).
 Investment implications: the investors that would like to invest in the company
would never want to know the potential return on their respective investment and they
would allow not to know the return that they would be able to earn on the same. There
are some companies that take several years before they make profits and then there
are companies that might lose on profits in the early few years and then pick
themselves up and start to generate in profits from their business operations. When
any companies is profitable which is based upon the operations, then it would not
require in cash for the purposes of investing in the company. But even then, the
profitability from these business operations, the company could still carry on their
initial investment when it needs to pay back the profits earned from their business
operations (Damschroder, 2009). Hence, the company will not have made nay profit
whatsoever for its investors. These people would want to know the break-even points
for the purposes of planning in their investment that they have made into the company
(Financial accountancy, 2018).

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The following is the desired break-even analysis:
(Amounts in $)
Particulars VC FC Total
Full time wages
18,000.0
0
Casual employees wages
12,000.0
0
Internet charges
600.0
0
Free breakfast charges
2,000.0
0
Electricity
5,600.0
0
Water expenses
2,800.0
0
Public liability insurance
720.0
0
Marketing charges
1,200.0
0
Laundry expenses
350.0
0
Superannuation charges for 1,710.0

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full time employees 0
Superannuation charges for
casual employees
1,140.0
0
Telephone expenses
120.0
0
Waste removal expenses
960.0
0
Total estimated expenses
23,090.0
0
24,110.0
0
47,200.0
0
Particulars
(Amounts in
$)
Revenue per night
per room 302.00
Number of rooms 300.00
Number of days 7.00
Total revenue 6,34,200.00
Particulars
(Amounts
in $)

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Total revenue
6,34,200.0
0
Less: variable costs
23,090.0
0
Contribution
6,11,110.0
0
Contribution per
room
291.0
0
Break even point in
room
Fixed
costs/Contribution
per room
82.8
5
Or 83
rooms

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Hence, from the above, one could conclude that the break-even room for the hotel is 108
rooms.
The following are some of the ways through which break even points could be reduced
resulting to more profit:
1. The full time wages of the employee could be reduced by offering them alternate jobs
to the employees. This is in the sense that one employee could be made to work jobs
or overtime could be given to them which would help the hotel in the reduction of the
costs.
2. The breakfast charges could be reduced by giving them limited number of options of
food. This is in the sense that the food items that are usually not opted for by the
guests could be eliminated altogether, thereby reducing in the entire cost of it
(Kocher, 1999).
3. The full time wages of the employee could be reduced by offering them alternate jobs
to the employees. This is in the sense that one employee could be made to work jobs
or overtime could be given to them which would help the hotel in the reduction of the

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costs. This would also lead to reduction of other fixed costs such as the
superannuation costs related with the employees (Grol, 2001).
4. The telephone charges instead of being fixed cost be made variable which would
depend upon the number of calls being made by the guest.
The above would lead us in the calculation of the margin of safety which would help us in
comparing in the amounts of the revenue that have been eared or the units that would be
required in for the purposes of covering in the fixed along with the variable costs. It could be
stated that the company would have to rent out about 83 rooms in order to achieve a no profit
or no loss situation.
Target profit implementation:
The concept of target profit implementation means that any company would desire in the
profits so that he is able to continue his business in the near future.
The following is the calculation of the profit for the hotel:
Particulars Option 1 Option 2
Contribution margin
per room
291.0
0
291.0
0
Total amount of fixed
costs
24,110.0
0
24,110.0
0
Estimated profit
50,000.0
0
30,000.0
0
Estimated room 254.6 185.9

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booking 7 5
Or 255 Or 186
Conclusion: from the above, it could be said that the company would benefit off if it goes for
option B since the proposals states that option A would require in more number of rooms and
the option B would require in lesser number of rooms (Accounting for management, 2018). If
the hotel for more number of rooms, then the hotel will have no opportunity to generate in
more revenues whereas if it goes for option B, (Francke, 2008) it would lead to lesser number
of rooms being occupied which would in turn lead to more generation of revenue for the hotel
(Small business chron, 2018).

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References:
Assumptions, Limitations and Significance of Break Even Analysis. (2018). Retrieved from
http://www.financialaccountancy.org/marginal-costing/assumptions-and-limitations-of-break-
even-analysis/
The Importance of Breaking Even in Business Finance. (2018). Retrieved from
https://smallbusiness.chron.com/importance-breaking-even-business-finance-63132.html
Variable Cost & Fixed Cost - Economics. (2018). Retrieved from
http://economics.fundamentalfinance.com/micro_costs.php
Damshroder, L. (2009). Fostering implementation of health services research findings
into practice: a consolidated framework for advancing implementation science.
Damshroder, L. (2009). Fostering implementation of health services research findings
into practice: a consolidated framework for advancing implementation science.
Differential Power Analysis. (1999). Retrieved from
https://link.springer.com/chapter/10.1007/3-540-48405-1_25
Factors influencing the implementation of clinical guidelines for health care
professionals: A systematic meta-review. (2008).
JOURNAL ARTICLE Successes and Failures in the Implementation of Evidence-Based
Guidelines for Clinical Practice. (2001). Retrieved from
https://www.jstor.org/stable/3767643
Margin of safety - explanation, formula and examples | Accounting for Management.
(2018). Retrieved from https://www.accountingformanagement.org/margin-of-safety/

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Margin of Safety vs. Profit. (2018). Retrieved from
https://smallbusiness.chron.com/margin-safety-vs-profit-56126.html
Moving target classification and tracking from real-time video - IEEE Conference
Publication. (2018). Retrieved from
https://ieeexplore.ieee.org/abstract/document/732851/