Comprehensive Management Accounting Report: Hotel Indigo Analysis

This report provides a comprehensive overview of management accounting, focusing on its role in cost control and performance measurement within a business context, specifically using Hotel Indigo as a case study. It begins by defining management accounting and explores various systems, including cost accounting, inventory management, and job costing, highlighting their features, benefits, and limitations. Different management accounting reporting methods are then examined, such as cost reports, job cost reports, sales reports, budget reports, payroll reports, and performance reports, detailing their significance in providing managers with critical insights into product costs and business performance. The report then applies marginal and absorption costing methods to a dataset, comparing their impact on profit calculation and discussing their advantages and disadvantages. Finally, the report addresses the use of management accounting systems for financial control, emphasizing their importance in decision-making and overall business efficiency. The report underscores the importance of each reporting approach for the success of a business.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Explain management accounting and different management accounting systems.................1
P2Explain different methods used for management accounting reporting..................................4
P3 Preparation of income statement by using marginal and absorpion costing..........................6
TASK 3..........................................................................................................................................10
P4Advantage and disadvantage of different type of planning tools used for budgetary control
...................................................................................................................................................10
P5 Adoption of management accounting systems to respond to financial problems................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is the one of the domain that help firms in doing cost of
products and services in proper manner and keeping eye on changes that are happening in cost.
In the current report different management accounting systems are discussed in detail. In starting
part of the report management accouting and its systems are explained in detail and thereafter
different management accounting systems are discussed briefly. Apart from this, different
management accounting reporting methods are also discussed. Contents that are usually observed
in these management accounting reports and their usage is discussed in detail. In middle part of
the report, marginal and absorption costing methods are applied on data set and these methods
are evaluated. In this regard advantage and disadvantage of these methods is also discussed
briefly. At end of the report, mangement accounting systems used for financial control are
explained. In this way entire research work is carried out.
TASK 1
P1 Explain management accounting and different management accounting systems
From: Management accounting officer
To General manager of Hotel Indigo
Subject: Management accounting systems
Management accouning is the one of the part of accounting under which all cost related items
are included and cost of production is computed. Under management accounting firm
performance is measured in terms of cost control. There are different management accounting
systems that are taken in to account for recording and computation of cost in the business.
Each and every management accounting system have different features and have their own
benefits and limitations (Cuganesan, Dunford and Palmer, 2012). It depends on the firm that
which of accounting system it used in its business. It can be observed that cost accounting
system can be used by all sort of firms irrespective of their size . This is because in this overall
costing of business is done and every firm manager like to know about overall costing that
firm have to bear in its operations. By obtaining relevant information managers easily make
decisions. Similarly, in case firm prodcue goods for different firms then in that case job
costing is best option. Thus, it can be said that these accounting systems features are different
and due to this reason each of them have importance for managers.Varied management
1 | P a g e

accounting systems are explained below. Cost accounting systems: It is considered as one of the most important accounting
system and Hotel Indigo is using it in its business. Under this accounting system
simply expenses related to all product lines like different sort of rooms are added and
cost is computed. Means that product wise separate costing is not done and instead of
this overall cost for business is calculated (Richardson, 2012). Mentioned cost
accounting system is widely used by business firm because under this accounting
system firm comes to know about overall costing of business. Thus, on consistently
basis managers can make an idea whether cost in their business is increasing or
decreasing consistently. Inventory management systems: Inventory management system is another important
costing system because in this system simply cost related to inventory is taken in to
account in order to compute cost of the product. All sort of firms whether they are
small or large in size have their own inventory management system in their business.
Firms that are operating specially in manuacturing sector develop inevntory
management accounting system (What is management accounting systems, 2017). This
is because they in every few days order raw material from suppliers and have to bear
inventory storage cost in business. To make effective use of inventory in business it is
very important to keep record of inventory and this is done by using relevant
accounting system. It can be said that there is huge signiicence of inventory system for
managers.
2 | P a g e

Figure 1Inventory management system
(Source: Burritt. and Schaltegger, 2010)
 Job costing systems: Job costing system is also considered as one of the most
important accounting sytems in the business. Under job costing system simply for
different sort of jobs costing is done separately. Job specially refers to the different
orders that are received from clients. Job costing system can be observe in case of cars
manufacturing companies where according to comfort cars stearing and other parts are
prepared by the firm for different companies (Burritt and Schaltegger, 2010). Cost of
each job separately computed help managers in estimating and identifying that in case
of which order cost is high and low and in which one high or low profit is earned.
Accordingly, managers make decisions in respect to their business. Price optimization: It is a mathematical model which help managers in determining
way in which customers will respond to different pricing of product. Under this it can
also be identified that at different costing levels what sort of response customers can
give to the firm product in terms of their purchasing behaviour. It can be said that this
system help managers in making perfect move in their business. Hotel Indigo can
follow price optimization system in its business and under this it can identify that for
different pricing of wide variety of rooms what may be response of customers. This
3 | P a g e

practice will help Hotel Indigo in making prudent business decisions without any
problem. It can be said that price optimization system have due importance for the
business firms.
P2Explain different methods used for management accounting reporting
From: Management accounting officer
To General manager of Hotel Indigo
Subject: Management accounting systems
Management accounting reporting is considered as one of the important approach through
which managers comes to know about different cost of varied products and business
performance in terms of cost control and variance that is between actual and determined
expenditures. Different methods used for management accounting reporting are explained
below. Cost reports: It is the common management accounting reporting tool because under
this report managers get an entire information about costing of products. In cost report
overall cost of production or service and cost by different products are revealed
separately (Busco and Scapens, 2011). Thus, it can be said that through cost report
managers get an entire overview of cost that is incurred in the business to provide
goods and services to the customers. Hotel Indigo managers time to time demand cost
report from their management accounting on weekly basis so that areas where expenses
are increasing at rapid pace can be identified and on time strategy can be formulated so
that cost can be controlled in business. Job cost reports: It is different reporting style and under this for each job separately
reporting is done. Hotel Indigo can do job cost report for its different sort of rooms like
luxury and simple rooms. It must be noted that different services may be provided in
these rooms to customers and due to this reason in order to measure profitability
reporting is necessary to be done separately. In individual reports entire detail in
respect to cost and revenue for each product is give. Due to this reaosn hotel managers
comes to know about performance of different product lines. Sales report: Sales report is prepared by all sort of restaurants irrespective of their size
whether they are small or big reporting of sales is required (Hopwood, Unerman. and
4 | P a g e

Fries, 2010). It can be observed that sales are reported on monthly basis in sales report
and from same managers comes to know about business performance during different
time period. Hotel Indigo also prepare sales report on monthly basis and if it is
identified that performance is not going in line to expectation then strict action is taken
to control situation. Budget report: Budget report reflect the report in which entire budget that was
prepared is presented and along with this real expenses that are made in the business
are also listed. Both real expenses and determined expenses are compared to identify
whether firm perform good or bad. Those expenses where limit is excedded are taken
seriously and by formulating strategy attempt is made to ensure that next time these
expenses will remain below line of expectation. Payroll report: Payroll report can also be considered as employee cost report becaue in
same information about amount that is paid to each employee is given (Malmi, 2010).
Apart from this, managers also get an information about overall employee cost that is
beared by the Hotel Indigo. In these reports information about incentives that are
received by employees is also given. Thus, through payroll report managers comes to
know about which of employees are performing best at workplace. Performance report: It is basically cost comparison report and under this actual
expenses that are made in the business are compared with the budgeted values. On the
basis of comparison performance of Hotel Indigo is measured and it is determined that
cost will be remain in control in business. Apart from this, in the report varied
expenses are compared with each other and on this basis it is identified that which sort
of expenses are highly made in the business. The results that are obtained from
performance report help managers in identifying areas where they need to work.
It can be said that all these reporting approaches have due importance for the managers
because under this they get a lot of information about areas where firm is weak and need to
pay due attention to improve performance. It can be said that all these reporting approaches
must be used by the business firms because by using same management attention can be
attracted towards the areas where they never before they wok (Merchant, 2012). Thus, in this
way all these reporting approaches play vital role in improving business performance to great
extent.
5 | P a g e

TASK 3
P3 Preparation of income statement by using marginal and absorpion costing
Table 1Actual net profit by absorption method
Particulars
Amoun
t
Amoun
t
Sales revenue 21000
Less:COGS 9100
Closing stock 1300
Variable cost of sale 7800
Gross profit 13200
Less: Variable expense 600
Fixed expenses 2000
Administration cost 700
Selling cost 600 3900
Net profit 9300
Table 2Actual net profit by marginal costing method
Particulars
Amoun
t
Amoun
t
Sales revenue 21000
Less: COGS 11200
Closing stock 1600
Less: Overabsorption cost 100
Production cost of sale 9500
Gross profit 11500
Less: Variable expensea 600
Fixed expenses 700
Selling cost 600 1900
Net profit 9600
Budgeted calculation
6 | P a g e

Figure 2Actual marginal costing
Figure 3Budgeted value of marginal costing
7 | P a g e

Interpretation
Marginal costing is the one of the important costing technique and under this only
variable expenses are taken in to account in order to compute cost and calculating profit in the
business. Absorption costing is another technique that is used to compute cost and profit in the
business. Under absorption costing both fixed and variable cost are taken in to account in order
to compute cost of product. It can be observed from the table given above that net profit in case
of marginal costing method is 9600 and same in case of absorption costing method is 9300. It
can be observed that in case of marginal costing there is high profit then absorption costing
method (Morales and Lambert, 2013). This is because it can be observed that in case of
absorption costing both fixed and variable expenses are included and due to this reason profit
amount reduced. Contrary to this, in case of marginal costing method only variable expenses are
taken in to account. Due to this reason there is high amount of profit in case of marginal costing
then absorption costing method. Firms can use both approaches in their business to compute cost
of the product. This is because fixed cost is not incurred by the firm every month or quarter.
Even though fixed expenses are included in cost computation and due to this reason it is not
possible to measure profit amount accurately in case of absorption costing method. In case of
marginal costing only variable expenses are taken in to account and due to this reason accurately
cost is computed in case of marginal costing method. Thus, there are many firms who prefer to
use marginal costing method then absorption costing method. However, absorption costing
method can not be considerd bad method because under this fixed cost is included
(Papaspyropoulos and et.al., 2012). In most of years business firm make single capital
investment and due to this reason it is very important to use absorption costing method so that it
can be identified that what sort of impact fixed cost have on the overall profitability of business.
Thus, it can be said that there is importance of both marginal and absorption costing method for
the business firms. It depends on the firm that which of the costing method it used in its business.
It can be said that managers must use both techniques at the workplace so that more acurate and
reliable decisions can be made by the managers.
Advantage of marginal costing
 Marginal costing approach is simple and can easily apply by any person for costing
purpose.
8 | P a g e

 Fixed cost of current year is not taken in to account in next year time period and due to
this reason double counting does not happened specially when no fixed cost is bear by
firm in its business.
 Contribution that is computed act as important tool that is used for making decisions at
workplace. It can be said that there are lots of positive sides of marginal costing for firms.
Disadvantags of marginal costing
 In marginal costing method total cost can not be classified in category of fixed and
variable expenses.
 It is difficult task to determine variability of semi variable costs (Quinn, 2014).
Advantage of absorption costing method
 Major advantage of absorption costing method is that fixed cost is taken in to account.
 Absorption costing is usedf for purpose of stock valuation.
Disadvantage of absorption costing method
 Fixed cost is periodic cost and it does not produce no future benefits. Hence, it is not of
big use for accounting purpose.
TASK 3
P4Advantage and disadvantage of different type of planning tools used for budgetary control
Budgetary control is the one of the imporant fucntion of management and it include
several tools and methods. There are some of advantages and disadvantages of these planning
tools which is explained below. Capital budgeting method: Capital budegting method is the one of the most important
method that is used as planning tools for budgetary control. In capital budgeting method
estimation is made about cash inflow and outflow and accordingly budget is prepared
( Richardson, 2012). On this basis it can be said that capital budgeting method act as
planning tool for budgetary control.
Table 3Payback period calculation
Project A Project B
Initial
investment -1500
1 500 -1000 400
2 600 -400 600
3 700 300 800
9 | P a g e

4 800 1100 1100
5 900 2000 1300
Table 4Calculation of ARR
Project A Project B
Initial
investment 1500 1500
1 500 400
2 600 600
3 700 800
4 800 1100
5 900 1300
0 0
Total 3500 4200
Average 700 840
ARR 46.67% 56.00%
Table 5Calculation of NPV
Project A
Pv @
10% Present value Project B PV @ 10%
Present
value
Initial
investment 1500 1500
1 500 0.909 455 400 0.909 363.64
2 600 0.826 496 600 0.826 495.87
3 700 0.751 526 800 0.751 601.05
4 800 0.683 546 1100 0.683 751.31
5 900 0.621 559 1300 0.621 807.20
6 0 0.564 0 0 0.564 0.00
Total 2582 3019
NPV 1082 1519.07
Table 6Calculation of IRR
Project A Project B
Initial
investment -1500 -1500
1 500 400
2 600 600
3 700 800
4 800 1100
10 | P a g e