Analysis of Management Accounting Systems at Covent Garden Hotel

This report provides a comprehensive analysis of management accounting practices within the Covent Garden Hotel, a small firm operating in London's hospitality industry. The report begins by outlining various management accounting systems, including throughput accounting, cost accounting, process costing, transfer pricing, inventory accounting, and lean accounting, detailing their specific requirements and applications within the hotel. It then examines different management accounting reporting methods such as budget reports, payroll reports, sales reports, job cost reports, manufacturing reports, and cost accounting reports, explaining how each method contributes to understanding the hotel's financial performance. Furthermore, the report delves into the calculation of net income using both marginal and absorption costing techniques, comparing the outcomes and highlighting the differences in their approaches to cost allocation. The document also differentiates between marginal and absorption costing methods, including the expenses considered in each, and how they affect profit measurement. The report concludes with a discussion of planning tools and methods for addressing financial challenges in the business environment, providing valuable insights for managing the financial aspects of the hotel.

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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