ib
1
, CHAPTER 1 m
&
Introduction
Problem 1.1: Solution m
& m&
a) Functional interdependency exists when the performance of one functional area is affec
m& m& m& m& m& m& m& m& m& ib m&
te d by the performance of a separate functional area. For example, in a hotel complex tha
m& m& m& m& m& m& m& m& m& m& m& m& m& ib m& m&
t is do minated by a casino, the success of the rooms and food and beverage departments w
m& m& m& m& m& m& m& m& m& m& m& ib m& ib m& m& m&
ill be affe cted by the success of the casino operations in attracting clients to the compl
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ex.
b) Functional interdependency is an important issue for the designers of a hotel’s system
m& m& ib m& m& m& m& m& m& m& m& m& m&
of a ccountability because care should be taken to hold a manager accountable for only th
m& m& m& m& m& m& m& m& m& m& ib m& m& m& m&
ose aspe cts of the hotel’s performance that he or she can influence. For example, the hea
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ds of rooms a nd food and beverage departments should not be held accountable for a decr
m& m& m& m& m& ib m& m& m& m& m& m& m& m& m& m&
ease in their room sales if it is caused by reduced casino activity.
m& m& m& m& m& m& ib m& m& m& m& m&
Problem 1.2: Solution m
& m&
a) The four main dimensions of sales volatility in the hotel industry are:
m& m& m& m& m& m& m& ib m& m& m&
1. economic cycle induced sales volatility, ib m& m& m&
2. seasonal sales volatility, m& m&
3. weekly sales volatility, m& m&
4. intra-day sales volatility. m& m&
b) The implications that these dimensions of sales volatility carry for hotel accounting sy
m& m& m& m& m& m& m& m& m& m& m& m&
ste ms are as follows:
m& m& m& m&
1. Economic cycle induced volatility: Hotel sales’ high susceptibility to general economi
m& m& m& m& m& m& m& m& m& m&
c c onditions highlights the importance of hotels carefully forecasting economic cycles
m& m& m& m& m& m& m& m& m& m& m& m&
as par t of the annual budgeting process.
m& m& m& m& m& m& m&
2. Seasonal sales volatility: Three accounting implications arise:
m& m& m& m& m& m&
• Seasonal sales volatility can be so severe to warrant temporary closure for some res
m& m& m& m& m& m& m& m& m& m& m& m& m&
or t properties. This possibility of having to make a closure decision signifies that
m& m& m& m& m& m& m& m& m& m& m& ib m& m&
cost a nd revenue data should be recorded in a manner that will enable a well infor
ib m& m& m& m& m& m& ib m& m& m& m& m& m& m& m&
med finan cial analysis of the pros and cons of closing.
m& m& m& m& m& m& ib m& m& m&
• Seasonal sales volatility can also pose particular cash management issues. During t
m& m& m& m& m& m& m& m& m& m& m&
he middle and tail- m& m& m&
end of the busy seasons, surplus cash balances are likely to result, while in the
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
off-
season and the build up to the busy season, deficit cash balances are likely to result.
m& ib m& ib m& m& m& m& m& m& m& m& m& m& m&
C areful cash budgeting will therefore need to be conducted.
m& m& m& m& m& m& m& m& m& m&
2
,Accounting Essentials for Hospitality Managers (C. Guildi
m& m& m& m& m& m& Solutions
ng)
Seasonal sales volatility will also affect price discounting decisions. To ensure suc
• m& m& m& m& m& m& m& m& m& m& m&
h d ecisions are well informed, careful forecasting as part of the annual budgetary
m& m& m& m& m& m& m& m& m& m& m& m& m& m&
proces s, will have to be conducted. m& m& m& m& m& m&
3. Weekly sales volatility: Accurate forecasting of weekly sales volatility will inform mana
m& m& m& m& m& m& m& m& m& m& ib
ge ment’s decision making with respect to the amount and timing of room rate discount
m& m& m& ib m& m& m& m& ib m& m& m& m& m&
ing, st affing needs as well as restaurant purchasing needs.
m& m& m& m& m& m& m& m& ib
4. Intra-day sales volatility: Intra-day demand volatility has led to widely-
m& m& m& m& m& m& m& m& m&
used pricing strategies such as “early bird specials” in restaurants and “happy hours” in bar
m& m& m& ib m& m& m& m& ib m& ib m& m& m&
s. Records concerning demand at different times of the day will have to be maintained in
m& m& m& ib ib m& m& m& m& m& m& m& m& m& m& m
or der to inform such hotel pricing issues.
& m& m& m& m& ib m& m&
Problem 1.3: Solution m
& m&
Examples of business decisions requiring the use of financial accounting data include:
m& m& m& m& m& m& m& m& m& m& m&
(a) A bank manager deciding whether to lend money to a company.
m& m& m& m& m& m& m& m& ib m&
(b) A shareholder deciding whether to sell her shares due to a fear that the company
m& m& ib m& m& m& m& m& m& m& m& m& m& m& m
sh e has invested in might go bankrupt.
& m& m& m& m& m& m& m&
(c) A potential shareholder thinking about purchasing shares in a compa
m & m & m & m & m & m & m & m & m &
ny a nd interested in determining if the company is profitable.
m & m & m& m& m& m& m& m& m& m&
Examples of business decisions requiring the use of management accounting data include:
m& m& m& m& m& m& m& m& m& ib m&
(a) Determining whether accounts are being collected on time. m& m& m& m& m& ib m&
(b) Determining whether the business will have sufficient cash over the next year t m& m& m& m& m& m& m& m& m& m& m& m&
o a void the need to arrange a line of credit.
m& m& m& m& m& m& m& m& m& m&
(c) Determining whether a drinks vending machine or a confectionary m & m & m & m & m & m & m & m & m &
vendin g machine should be installed in a hotel’s foyer area. m& m& m& ib m& m& m& ib m& m&
(d) Determining what room rate to charge to achieve a target level of profit. m& m& m& m& m& m& ib m& m& m& m& m&
(e) Determining whether a seasonal hotel should be closed down during the qui m& m& m& m& m& m& m& m& m& m& m&
et se ason. m&
(f) Determining whether a restaurant manager is performing well. m& m& m& m& m& m& m&
Problem 1.4: Solution m
& m&
a) High product perishability signifies that an item cannot be held in inventory for sale at a
m& m& m& m& ib m& m& m& m& m& m& m& m& m& m& i
lat er time. Food items have a limited life in inventory because of their rapid physical det
b m& m& m& m& m& m& m& ib m& m& m& m& m& m& m& m&
eriorati on. Room nights and conference facilities cannot be placed in inventory because th
m& m& m& m& m& m& m& m& m& m& m& m& m&
ey relate to a particular time period that expires.
m& m& m& m& m& m& m& m&
b) The absolute perishability of rooms, conference and banquet facilities and the relative p
m& m& m& m& m& m& m& m& m& ib m& m&
eri shability of food underlines the importance of accurate hotel demand forecasting as part
m& m& m& ib m& m& m& m& m& m& m& m& m& m&
of the budgeting process. Generally, the most important aspect of forecasting is room occ
m& m& m& m& m& m& m& m& m& m& m& m& m&
upancy, a s room sales drive sales levels of other hotel services. Accurate restaurant foreca
m& m& m& ib m& m& m& m& m& m& m& m& m& m&
sting provide s the basis for maintaining a full menu of options while also minimising the c
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ost of food wasta ge.
m& m& ib m&
3
, Accounting Essentials for Hospitality Managers (C. Guildi
m& m& m& m& m& m& Solutions
ng)
Problem 1.5: Solution m
& m&
Fixed costs are costs that do not vary as a function of sales activity levels. Hotels involve c
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ons iderable investment in fixed assets such as buildings on prime land as well as extensiv
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
e furnis hings, fittings and equipment. This investment generates high rent and depreciatio
m& m& m& m& m& m& m& m& m& m& m& ib
n costs, wh ich together with significant salary costs, result in a high fixed cost structure
m& m& m& m& m& m& m& m& m& m& m& ib m& m& m& m
for hotels.
& m&
Problem 1.6: Solution m
& m&
a) Major hotel activities include room housekeeping, restaurant food preparation and servi
m& m& m& m& m& m& m& ib m& m&
ce as well as bar service. Despite the advent of the machine and computer age, the physic
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
al aspe ct of all of these activities has changed little over the last fifty years, as they contin
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ue to have a high labour component.
m& m& m& m& m& m&
b) High labour intensive activities in hotels signifies the importance of performance measu
m& m& m& m& ib ib m& m& m& m& m&
re s that focus on labour productivity. Such performance indices include restaurant covers
m& m& m& m& m& m& m& m& m& m& m& ib
per e mployee hour worked and restaurant sales per employee hour worked. Monitoring d
m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ifference s between actual labour cost and budgeted labour cost represents another dimensi
m& m& m& m& m& m& ib m& m& m& m& m&
on of labour cost management. An appropriate analysis of the difference between budgete
m& m& m& m& m& ib m& m& m& m& m& m&
d and actual lab our cost enables a distinction to be drawn between labour rate and labo
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ur efficiency factors.
m& m&
Problem 1.7: Solution m
& m&
Financial accounting concerns the preparation of financial reports for external users such
m& m& ib m& ib m& m& m& m& m& m& m&
as shareholders, banks and government authorities. In order for these financial reports to b
m& m& m& ib m& m& m& m& m& m& m& m& m&
e mea ningful, it is important that they are produced in a standardised way and are seen to
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
be reliable
m&
. Management accounting concerns the provision of financial information to internal man
m& m& m& m& m& m& m& m& ib m& m&
ag ement. This information is designed to help managers in their decision making and cont
m& m& m& m& m& m& m& m& m& m& m& ib m& ib
rol of businesses. Financial information sought by hotel managers includes determining t
m& m& m& m& m& m& m& m& m& m& m&
he cost of providing a meal to inform the menu pricing decision, determining how many d
m& m& m& m& m& m& m& m& m& m& m& m& ib m& m&
elegates need to attend a conference in order to achieve break even, and determining wha
m& m& m& m& m& m& m& m& m& m& ib m& m& m&
t level of profit is made by each selling unit of a hotel to inform any rationalisation decis
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ion to drop a unit. The provision of all these types of financial information falls within the
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
scope of management acc ounting.
m& m& m& m& m&
Problem 1.8: Solution m
& m&
The main accounting information users are:
ib ib m& m& m&
• Managers within the company being accounted for. Managers use accountin m& m& m& m& m& m& m& m& m&
g i nformation in planning and controlling business activities.
m& m& m& m& m& m& m& m&
4
1
, CHAPTER 1 m
&
Introduction
Problem 1.1: Solution m
& m&
a) Functional interdependency exists when the performance of one functional area is affec
m& m& m& m& m& m& m& m& m& ib m&
te d by the performance of a separate functional area. For example, in a hotel complex tha
m& m& m& m& m& m& m& m& m& m& m& m& m& ib m& m&
t is do minated by a casino, the success of the rooms and food and beverage departments w
m& m& m& m& m& m& m& m& m& m& m& ib m& ib m& m& m&
ill be affe cted by the success of the casino operations in attracting clients to the compl
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ex.
b) Functional interdependency is an important issue for the designers of a hotel’s system
m& m& ib m& m& m& m& m& m& m& m& m& m&
of a ccountability because care should be taken to hold a manager accountable for only th
m& m& m& m& m& m& m& m& m& m& ib m& m& m& m&
ose aspe cts of the hotel’s performance that he or she can influence. For example, the hea
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ds of rooms a nd food and beverage departments should not be held accountable for a decr
m& m& m& m& m& ib m& m& m& m& m& m& m& m& m& m&
ease in their room sales if it is caused by reduced casino activity.
m& m& m& m& m& m& ib m& m& m& m& m&
Problem 1.2: Solution m
& m&
a) The four main dimensions of sales volatility in the hotel industry are:
m& m& m& m& m& m& m& ib m& m& m&
1. economic cycle induced sales volatility, ib m& m& m&
2. seasonal sales volatility, m& m&
3. weekly sales volatility, m& m&
4. intra-day sales volatility. m& m&
b) The implications that these dimensions of sales volatility carry for hotel accounting sy
m& m& m& m& m& m& m& m& m& m& m& m&
ste ms are as follows:
m& m& m& m&
1. Economic cycle induced volatility: Hotel sales’ high susceptibility to general economi
m& m& m& m& m& m& m& m& m& m&
c c onditions highlights the importance of hotels carefully forecasting economic cycles
m& m& m& m& m& m& m& m& m& m& m& m&
as par t of the annual budgeting process.
m& m& m& m& m& m& m&
2. Seasonal sales volatility: Three accounting implications arise:
m& m& m& m& m& m&
• Seasonal sales volatility can be so severe to warrant temporary closure for some res
m& m& m& m& m& m& m& m& m& m& m& m& m&
or t properties. This possibility of having to make a closure decision signifies that
m& m& m& m& m& m& m& m& m& m& m& ib m& m&
cost a nd revenue data should be recorded in a manner that will enable a well infor
ib m& m& m& m& m& m& ib m& m& m& m& m& m& m& m&
med finan cial analysis of the pros and cons of closing.
m& m& m& m& m& m& ib m& m& m&
• Seasonal sales volatility can also pose particular cash management issues. During t
m& m& m& m& m& m& m& m& m& m& m&
he middle and tail- m& m& m&
end of the busy seasons, surplus cash balances are likely to result, while in the
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
off-
season and the build up to the busy season, deficit cash balances are likely to result.
m& ib m& ib m& m& m& m& m& m& m& m& m& m& m&
C areful cash budgeting will therefore need to be conducted.
m& m& m& m& m& m& m& m& m& m&
2
,Accounting Essentials for Hospitality Managers (C. Guildi
m& m& m& m& m& m& Solutions
ng)
Seasonal sales volatility will also affect price discounting decisions. To ensure suc
• m& m& m& m& m& m& m& m& m& m& m&
h d ecisions are well informed, careful forecasting as part of the annual budgetary
m& m& m& m& m& m& m& m& m& m& m& m& m& m&
proces s, will have to be conducted. m& m& m& m& m& m&
3. Weekly sales volatility: Accurate forecasting of weekly sales volatility will inform mana
m& m& m& m& m& m& m& m& m& m& ib
ge ment’s decision making with respect to the amount and timing of room rate discount
m& m& m& ib m& m& m& m& ib m& m& m& m& m&
ing, st affing needs as well as restaurant purchasing needs.
m& m& m& m& m& m& m& m& ib
4. Intra-day sales volatility: Intra-day demand volatility has led to widely-
m& m& m& m& m& m& m& m& m&
used pricing strategies such as “early bird specials” in restaurants and “happy hours” in bar
m& m& m& ib m& m& m& m& ib m& ib m& m& m&
s. Records concerning demand at different times of the day will have to be maintained in
m& m& m& ib ib m& m& m& m& m& m& m& m& m& m& m
or der to inform such hotel pricing issues.
& m& m& m& m& ib m& m&
Problem 1.3: Solution m
& m&
Examples of business decisions requiring the use of financial accounting data include:
m& m& m& m& m& m& m& m& m& m& m&
(a) A bank manager deciding whether to lend money to a company.
m& m& m& m& m& m& m& m& ib m&
(b) A shareholder deciding whether to sell her shares due to a fear that the company
m& m& ib m& m& m& m& m& m& m& m& m& m& m& m
sh e has invested in might go bankrupt.
& m& m& m& m& m& m& m&
(c) A potential shareholder thinking about purchasing shares in a compa
m & m & m & m & m & m & m & m & m &
ny a nd interested in determining if the company is profitable.
m & m & m& m& m& m& m& m& m& m&
Examples of business decisions requiring the use of management accounting data include:
m& m& m& m& m& m& m& m& m& ib m&
(a) Determining whether accounts are being collected on time. m& m& m& m& m& ib m&
(b) Determining whether the business will have sufficient cash over the next year t m& m& m& m& m& m& m& m& m& m& m& m&
o a void the need to arrange a line of credit.
m& m& m& m& m& m& m& m& m& m&
(c) Determining whether a drinks vending machine or a confectionary m & m & m & m & m & m & m & m & m &
vendin g machine should be installed in a hotel’s foyer area. m& m& m& ib m& m& m& ib m& m&
(d) Determining what room rate to charge to achieve a target level of profit. m& m& m& m& m& m& ib m& m& m& m& m&
(e) Determining whether a seasonal hotel should be closed down during the qui m& m& m& m& m& m& m& m& m& m& m&
et se ason. m&
(f) Determining whether a restaurant manager is performing well. m& m& m& m& m& m& m&
Problem 1.4: Solution m
& m&
a) High product perishability signifies that an item cannot be held in inventory for sale at a
m& m& m& m& ib m& m& m& m& m& m& m& m& m& m& i
lat er time. Food items have a limited life in inventory because of their rapid physical det
b m& m& m& m& m& m& m& ib m& m& m& m& m& m& m& m&
eriorati on. Room nights and conference facilities cannot be placed in inventory because th
m& m& m& m& m& m& m& m& m& m& m& m& m&
ey relate to a particular time period that expires.
m& m& m& m& m& m& m& m&
b) The absolute perishability of rooms, conference and banquet facilities and the relative p
m& m& m& m& m& m& m& m& m& ib m& m&
eri shability of food underlines the importance of accurate hotel demand forecasting as part
m& m& m& ib m& m& m& m& m& m& m& m& m& m&
of the budgeting process. Generally, the most important aspect of forecasting is room occ
m& m& m& m& m& m& m& m& m& m& m& m& m&
upancy, a s room sales drive sales levels of other hotel services. Accurate restaurant foreca
m& m& m& ib m& m& m& m& m& m& m& m& m& m&
sting provide s the basis for maintaining a full menu of options while also minimising the c
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ost of food wasta ge.
m& m& ib m&
3
, Accounting Essentials for Hospitality Managers (C. Guildi
m& m& m& m& m& m& Solutions
ng)
Problem 1.5: Solution m
& m&
Fixed costs are costs that do not vary as a function of sales activity levels. Hotels involve c
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ons iderable investment in fixed assets such as buildings on prime land as well as extensiv
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
e furnis hings, fittings and equipment. This investment generates high rent and depreciatio
m& m& m& m& m& m& m& m& m& m& m& ib
n costs, wh ich together with significant salary costs, result in a high fixed cost structure
m& m& m& m& m& m& m& m& m& m& m& ib m& m& m& m
for hotels.
& m&
Problem 1.6: Solution m
& m&
a) Major hotel activities include room housekeeping, restaurant food preparation and servi
m& m& m& m& m& m& m& ib m& m&
ce as well as bar service. Despite the advent of the machine and computer age, the physic
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
al aspe ct of all of these activities has changed little over the last fifty years, as they contin
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ue to have a high labour component.
m& m& m& m& m& m&
b) High labour intensive activities in hotels signifies the importance of performance measu
m& m& m& m& ib ib m& m& m& m& m&
re s that focus on labour productivity. Such performance indices include restaurant covers
m& m& m& m& m& m& m& m& m& m& m& ib
per e mployee hour worked and restaurant sales per employee hour worked. Monitoring d
m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ifference s between actual labour cost and budgeted labour cost represents another dimensi
m& m& m& m& m& m& ib m& m& m& m& m&
on of labour cost management. An appropriate analysis of the difference between budgete
m& m& m& m& m& ib m& m& m& m& m& m&
d and actual lab our cost enables a distinction to be drawn between labour rate and labo
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ur efficiency factors.
m& m&
Problem 1.7: Solution m
& m&
Financial accounting concerns the preparation of financial reports for external users such
m& m& ib m& ib m& m& m& m& m& m& m&
as shareholders, banks and government authorities. In order for these financial reports to b
m& m& m& ib m& m& m& m& m& m& m& m& m&
e mea ningful, it is important that they are produced in a standardised way and are seen to
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
be reliable
m&
. Management accounting concerns the provision of financial information to internal man
m& m& m& m& m& m& m& m& ib m& m&
ag ement. This information is designed to help managers in their decision making and cont
m& m& m& m& m& m& m& m& m& m& m& ib m& ib
rol of businesses. Financial information sought by hotel managers includes determining t
m& m& m& m& m& m& m& m& m& m& m&
he cost of providing a meal to inform the menu pricing decision, determining how many d
m& m& m& m& m& m& m& m& m& m& m& m& ib m& m&
elegates need to attend a conference in order to achieve break even, and determining wha
m& m& m& m& m& m& m& m& m& m& ib m& m& m&
t level of profit is made by each selling unit of a hotel to inform any rationalisation decis
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
ion to drop a unit. The provision of all these types of financial information falls within the
m& m& m& m& m& m& m& m& m& m& m& m& m& m& m& m&
scope of management acc ounting.
m& m& m& m& m&
Problem 1.8: Solution m
& m&
The main accounting information users are:
ib ib m& m& m&
• Managers within the company being accounted for. Managers use accountin m& m& m& m& m& m& m& m& m&
g i nformation in planning and controlling business activities.
m& m& m& m& m& m& m& m&
4