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AccountingEssentialsforHospitality Managers (3rd edition
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CHAPTER 1 ib




Introduction
Problem 1.1: Solution ib ib




a) Functional interdependency exists when the performance of one functional area is affecte
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d by the performance of a separate functional area. For example, in a hotel complex that is do
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minated by a casino, the success of the rooms and food and beverage departments will be affe
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cted by the success of the casino operations in attracting clients to the complex.
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b) Functional interdependency is an important issue for the designers of a hotel’s system of a
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ccountability because care should be taken to hold a manager accountable for only those aspe
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cts of the hotel’s performance that he or she can influence. For example, the heads of rooms a
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nd food and beverage departments should not be held accountable for a decrease in their room
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sales if it is caused by reduced casino activity.
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Problem 1.2: Solution ib ib




a) The four main dimensions of sales volatility in the hotel industry are:
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1. economic cycle induced sales volatility, ib ib ib ib



2. seasonal sales volatility, ib ib



3. weekly sales volatility, ib ib



4. intra-day sales volatility. ib ib




b) The implications that these dimensions of sales volatility carry for hotel accounting syste
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ms are as follows:
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1. Economic cycle induced volatility: Hotel sales’ high susceptibility to general economic c
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onditions highlights the importance of hotels carefully forecasting economic cycles as par
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t of the annual budgeting process.
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2. Seasonal sales volatility: Three accounting implications arise: ib ib ib ib ib ib



• Seasonal sales volatility can be so severe to warrant temporary closure for some resor ib ib ib ib ib ib ib ib ib ib ib ib ib



t properties. This possibility of having to make a closure decision signifies that cost a
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nd revenue data should be recorded in a manner that will enable a well informed finan
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cial analysis of the pros and cons of closing. ib ib ib ib ib ib ib ib



• Seasonal sales volatility can also pose particular cash management issues. During the ib ib ib ib ib ib ib ib ib ib ib ib



middle and tail- ib ib



end of the busy seasons, surplus cash balances are likely to result, while in the off-
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season and the build up to the busy season, deficit cash balances are likely to result. C
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areful cash budgeting will therefore need to be conducted. ib ib ib ib ib ib ib ib




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,Accounting Essentials for Hospitality Managers (C. Guilding)
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Seasonal sales volatility will also affect price discounting decisions. To ensure such d
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ecisions are well informed, careful forecasting as part of the annual budgetary proces ib ib ib ib ib ib ib ib ib ib ib ib



s, will have to be conducted. ib ib ib ib ib



3. Weekly sales volatility: Accurate forecasting of weekly sales volatility will inform manage
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ment’s decision making with respect to the amount and timing of room rate discounting, st
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affing needs as well as restaurant purchasing needs.
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4. Intra-day sales volatility: Intra-day demand volatility has led to widely-ib ib ib ib ib ib ib ib ib



used pricing strategies such as “early bird specials” in restaurants and “happy hours” in bar
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s. Records concerning demand at different times of the day will have to be maintained in or
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der to inform such hotel pricing issues.
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Problem 1.3: Solution ib ib




Examples of business decisions requiring the use of financial accounting data include:
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(a) A bank manager deciding whether to lend money to a company. ib ib ib ib ib ib ib ib ib ib



(b) A shareholder deciding whether to sell her shares due to a fear that the company sh
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e has invested in might go bankrupt. ib ib ib ib ib ib



(c) A potential shareholder thinking about purchasing shares in a company a i b i b i b i b i b i b i b i b i b i b



nd interested in determining if the company is profitable.
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Examples of business decisions requiring the use of management accounting data include:
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(a) Determining whether accounts are being collected on time. ib ib ib ib ib ib ib



(b) Determining whether the business will have sufficient cash over the next year to a ib ib ib ib ib ib ib ib ib ib ib ib ib



void the need to arrange a line of credit. ib ib ib ib ib ib ib ib



(c) Determining whether a drinks vending machine or a confectionary vendin i b i b i b i b i b i b i b i b i b



g machine should be installed in a hotel’s foyer area.
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(d) Determining what room rate to charge to achieve a target level of profit. ib ib ib ib ib ib ib ib ib ib ib ib



(e) Determining whether a seasonal hotel should be closed down during the quiet se ib ib ib ib ib ib ib ib ib ib ib i b



ason.
(f) Determining whether a restaurant manager is performing well. ib ib ib ib ib ib ib




Problem 1.4: Solution ib ib




a) High product perishability signifies that an item cannot be held in inventory for sale at a lat
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er time. Food items have a limited life in inventory because of their rapid physical deteriorati
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on. Room nights and conference facilities cannot be placed in inventory because they relate to
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a particular time period that expires.
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b) The absolute perishability of rooms, conference and banquet facilities and the relative peri
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shability of food underlines the importance of accurate hotel demand forecasting as part of the
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budgeting process. Generally, the most important aspect of forecasting is room occupancy, a
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s room sales drive sales levels of other hotel services. Accurate restaurant forecasting provide
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s the basis for maintaining a full menu of options while also minimising the cost of food wasta
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ge.


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, Accounting Essentials for Hospitality Managers (C. Guilding) ib ib ib ib ib ib Solutions




Problem 1.5: Solution ib ib




Fixed costs are costs that do not vary as a function of sales activity levels. Hotels involve cons
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iderable investment in fixed assets such as buildings on prime land as well as extensive furnis
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hings, fittings and equipment. This investment generates high rent and depreciation costs, wh
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ich together with significant salary costs, result in a high fixed cost structure for hotels.
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Problem 1.6: Solution ib ib




a) Major hotel activities include room housekeeping, restaurant food preparation and service
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as well as bar service. Despite the advent of the machine and computer age, the physical aspe
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ct of all of these activities has changed little over the last fifty years, as they continue to have a
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high labour component.
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b) High labour intensive activities in hotels signifies the importance of performance measure
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s that focus on labour productivity. Such performance indices include restaurant covers per e
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mployee hour worked and restaurant sales per employee hour worked. Monitoring difference
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s between actual labour cost and budgeted labour cost represents another dimension of labour
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cost management. An appropriate analysis of the difference between budgeted and actual lab
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our cost enables a distinction to be drawn between labour rate and labour efficiency factors.
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Problem 1.7: Solution ib ib




Financial accounting concerns the preparation of financial reports for external users such as
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shareholders, banks and government authorities. In order for these financial reports to be mea ib ib ib ib ib ib ib ib ib ib ib ib ib



ningful, it is important that they are produced in a standardised way and are seen to be reliable
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. Management accounting concerns the provision of financial information to internal manag
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ement. This information is designed to help managers in their decision making and control of
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businesses. Financial information sought by hotel managers includes determining the cost of
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providing a meal to inform the menu pricing decision, determining how many delegates need
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to attend a conference in order to achieve break even, and determining what level of profit is
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made by each selling unit of a hotel to inform any rationalisation decision to drop a unit. The
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provision of all these types of financial information falls within the scope of management acc
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ounting.


Problem 1.8: Solution ib ib




The main accounting information users are:
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• Managers within the company being accounted for. Managers use accounting i ib ib ib ib ib ib ib ib ib ib



nformation in planning and controlling business activities. ib ib ib ib ib ib




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