Basic Management Accounting for the Hospitality Industry

Michael Chibili

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000035933
• Edition: 2
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

Basic Management Accounting for the Hospitality Industry

uses a step by step approach to enable students to independently master the field.

This second edition contains many new themes and developments, including:

• the essence of the International Financial Reporting Standards (IFRS)
• integration of the changes caused by the evolution of the Uniform System of Accounts for the Lodging Industry (USALI)
• the extension of price elasticity of demand, and addition of income and cross elasticities
• the addition of break-even time (BET) as an additional method of analysing capital investments

Up-to-date and comprehensive coverage, this textbook is essential reading for hospitality management students. Additional study and teaching materials can be found on www.hospitalitymanagement.noordhoff.nl

1

Introduction to management accounting

1.1 Setting the scene

1.2 Understanding the hospitality industry

Information is very important for the management process and accounting is one of the main information systems that can be found in an organization. It is as such necessary that managers within an organization obtain a basic understanding of accounting for them to be able to effectively and responsibly carry out their management functions. The information needs to come from all the areas of their management activities as well as used in all the related areas. Section 1.1 sets the scene: by showing how information is generated and used within an organization; by differentiating management from financial accounting; by introducing the basic principles of accounting; and by introducing the management accounting process. In Section 1.2 the hospitality industry is introduced with the aim of highlighting some of its special characteristics as well as how it is organized.

1.1 Setting the scene

Organizations of very different types affect us on a daily basis by providing all the goods and services needed for our existence. All these different types of organizations have two things in common. First, every organization will have its set of goals or objectives. An example is that of the Compass Hotels Ltd. They state their goals and objectives in the following way: “Our goals and objectives are straightforward and seek to ensure we run a professional, profitable and ethical company, building relationships with suppliers and investors, driving business in the hotels and developing the business as a whole”. In these goals, they have highlighted some important aspects of their relationship with all their major stakeholders (professional – management and employees; profitable – shareholders; ethical – all stakeholders) as well as mentioning their suppliers and investors. Second, for an organization to be able to meet their established goals, its managers will need information. This section attempts to show why this information is needed, who uses it, as well as establish the general characteristics of the hospitality industry. The structure of the subsections is as follows:

1.1.1 Information needs – management and external users

1.1.2 Financial accounting and management accounting

1.1.3 Basic principles of accounting

1.1.4 The management accounting process

1.1.1 Information needs – management and external users

Before proceeding with the discussion on managements’ need for, and use of information, accounting will be defined. Accounting is generally concerned with the reporting, summarizing and recording in monetary terms the transactions of an individual or an organization. A basic definition of accounting as provided by the American Institute of Certified and Public Accountants (AICPA) in 1941 is “the art of recording, classifying, and summarizing, in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the results thereof”. However, this definition of accounting left some issues that could not be fully understood. In this regard, the American Accounting Principles Board in 1970 defined accounting as a service activity: “Its function is to provide quantitative information primarily financial in nature, about economic entities that is intended to be useful in making economic decisions and in making reasoned choices among alternative courses of actions”.

To the individual, accounting information can be used in planning future spending levels, planning the acquisition of additional finance, controlling spending levels, and making decisions on how best to spend their money. As such, at this level accounting basically has 3 functions which are; planning, controlling and decision support.

On the contrary, at the level of an organization, accounting is used to control its activities, plan the acquisition of finance, plan future activities, and finally report upon the activities and successes of the organization to other users.

The users of accounting information can be broadly split into two major categories; the internal users and the external users. The internal users would basically be the management of the organization. They will need this information due to the following reasons: planning; controlling; stewardship; and decision making. This type of accounting is by nature mostly managerial and would differ depending on the type of organization. The external users would generally be limited to the other major stakeholders of a company. These will include the employees of a company, the owners, lenders, suppliers, customers, the local community, and the government. Generally, these stakeholders are provided with accounting information through the establishment of annual reports. This type of accounting would on the contrary be mostly financial in nature.

1.1.2 Financial accounting and management accounting

Financial accounting is that area of accounting mostly concerned with the preparation of financial statements destined for decision makers. These decision makers may include shareholders, suppliers, financial institutions, employees, local authorities, and government agencies. The fundamental need of financial accounting is to bring to a minimum any possible conflicts between principals and agents by measuring and monitoring the agent’s performance and reporting the results to the interested users on an annual or more frequent basis. There are many similarities between financial and management accounting, because they all collect data from a company’s basic accounting system. This basic accounting system is a system of procedures, personnel and computers used to accumulate the financial data from within a company. It should be noted that financial accounting is generally regulated by various standards at the international level. Exhibit 1.1 shows in a table form the basic differences between financial accounting and management accounting arranged around some simple features.

Management accounting is much more concerned with the provision and use of accounting information to managers within an organization. This permits the managers to be able to make informed business decisions and as such become better equipped in their management and control functions. As opposed to financial accounting, management accounting information is usually confidential and used by management alone. Secondly, it is forward looking, historical, and computed using extensive management information systems and internal controls instead of complying with accounting standards, be they national or international.

Management accounting experience and knowledge can be obtained from various fields and functions within a company such as information management, treasury, auditing, marketing, valuation, pricing, logistics, etc. Some of the primary services performed by management accountants can comprise the following: cost allocation; annual budgeting; capital budgeting; product profitability; cost benefit analysis; cost-volume-profit analysis; variance analysis; cost analysis, etc.

Exhibit 1.1 Comparison between financial accounting and management accounting

Features	Financial Accounting	Management Accounting
Who	Principally outsiders to the organization (investors, creditors, the state, analysts, and reporters)	Principally insiders of the organization (the management and operators)
What	General information on the whole organization	Internal information on the subunits of the organization
Type	Financial and monetary data	Economic, financial, and physical data such as data related to employees, sales volumes, and customers etc.
Rules	Regulated by the various accounting standards’ boards and based on the GAAP	Unregulated but mostly based on cost/benefit analysis
Characteristics	Factual information based on reliability, objectivity, accuracy, and consistency	Estimated information to ensure efficiency, relevance and timeliness
Time	Historical perspective	Historical, current as well as forward looking such as sales budgets and cash flow forecasts
Format	Determined by different regulatory elements such as company law, accounting standards and the stock exchanges	No pre-determined format but aligned to the specific wishes of management
Frequency	Delayed with emphasis on annual reports	Continuous reporting

1.1.3 Basic principles of accounting

The basic accounting principles form the foundation of the understanding of accounting methods. These are called the generally accepted accounting principles (GAAP) and they provide the basis for the preparation of financial statements. Below are the most important principles, followed by an introduction of the USALI and IFRS:

Cost principle

This principle indicates that a transaction should be recorded at its acquisition price or cash cost and this should represent its accounting value. It is difficult for example to compare income statements for different periods during periods of long-lasting inflation or deflation. There are however some exceptions such as in the case of valuing inventory for resale, which can be done in terms of current currency values instead of the historical value.

Business entity principle

This principle indicates that accounting and financi...