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, CHAPTER 1 m
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Introduction
Problem 1.1: Solution m
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a) Functional interdependency exists when the performance of one functional area is affec
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te d by the performance of a separate functional area. For example, in a hotel complex tha
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t is do minated by a casino, the success of the rooms and food and beverage departments w
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ill be affe cted by the success of the casino operations in attracting clients to the compl
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ex.

b) Functional interdependency is an important issue for the designers of a hotel’s system
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of a ccountability because care should be taken to hold a manager accountable for only th
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ose aspe cts of the hotel’s performance that he or she can influence. For example, the hea
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ds of rooms a nd food and beverage departments should not be held accountable for a decr
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ease in their room sales if it is caused by reduced casino activity.
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Problem 1.2: Solution m
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a) The four main dimensions of sales volatility in the hotel industry are:
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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
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ste ms are as follows:
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1. Economic cycle induced volatility: Hotel sales’ high susceptibility to general economi
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c c onditions highlights the importance of hotels carefully forecasting economic cycles
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as par t of the annual budgeting process.
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2. Seasonal sales volatility: Three accounting implications arise:
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• Seasonal sales volatility can be so severe to warrant temporary closure for some res
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or t properties. This possibility of having to make a closure decision signifies that
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cost a nd revenue data should be recorded in a manner that will enable a well infor
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med finan cial analysis of the pros and cons of closing.
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• Seasonal sales volatility can also pose particular cash management issues. During t
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he middle and tail- m& m& m&



end of the busy seasons, surplus cash balances are likely to result, while in the
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off-
season and the build up to the busy season, deficit cash balances are likely to result.
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C areful cash budgeting will therefore need to be conducted.
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,Accounting Essentials for Hospitality Managers (C. Guildi
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Seasonal sales volatility will also affect price discounting decisions. To ensure suc
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h d ecisions are well informed, careful forecasting as part of the annual budgetary
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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
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ge ment’s decision making with respect to the amount and timing of room rate discount
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ing, st 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-
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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
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or der to inform such hotel pricing issues.
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Problem 1.3: Solution m
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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.
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(b) A shareholder deciding whether to sell her shares due to a fear that the company
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sh e has invested in might go bankrupt.
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(c) A potential shareholder thinking about purchasing shares in a compa
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ny a 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. 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.
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(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
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a) High product perishability signifies that an item cannot be held in inventory for sale at a
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lat er time. Food items have a limited life in inventory because of their rapid physical det
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eriorati on. Room nights and conference facilities cannot be placed in inventory because th
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ey relate to a particular time period that expires.
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b) The absolute perishability of rooms, conference and banquet facilities and the relative p
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eri shability of food underlines the importance of accurate hotel demand forecasting as part
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of the budgeting process. Generally, the most important aspect of forecasting is room occ
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upancy, a s room sales drive sales levels of other hotel services. Accurate restaurant foreca
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sting provide s the basis for maintaining a full menu of options while also minimising the c
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ost of food wasta ge.
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, Accounting Essentials for Hospitality Managers (C. Guildi
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Problem 1.5: Solution m
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Fixed costs are costs that do not vary as a function of sales activity levels. Hotels involve c
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ons iderable investment in fixed assets such as buildings on prime land as well as extensiv
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e furnis hings, fittings and equipment. This investment generates high rent and depreciatio
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n costs, wh ich together with significant salary costs, result in a high fixed cost structure
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for hotels.
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Problem 1.6: Solution m
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a) Major hotel activities include room housekeeping, restaurant food preparation and servi
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ce as well as bar service. Despite the advent of the machine and computer age, the physic
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al aspe ct of all of these activities has changed little over the last fifty years, as they contin
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ue to have a high labour component.
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b) High labour intensive activities in hotels signifies the importance of performance measu
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re s that focus on labour productivity. Such performance indices include restaurant covers
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per e mployee hour worked and restaurant sales per employee hour worked. Monitoring d
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ifference s between actual labour cost and budgeted labour cost represents another dimensi
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on of labour cost management. An appropriate analysis of the difference between budgete
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d and actual lab our cost enables a distinction to be drawn between labour rate and labo
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ur efficiency factors.
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Problem 1.7: Solution m
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Financial accounting concerns the preparation of financial reports for external users such
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as shareholders, banks and government authorities. In order for these financial reports to b
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e mea ningful, it is important that they are produced in a standardised way and are seen to
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be reliable
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. Management accounting concerns the provision of financial information to internal man
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ag ement. This information is designed to help managers in their decision making and cont
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rol of businesses. Financial information sought by hotel managers includes determining t
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he cost of providing a meal to inform the menu pricing decision, determining how many d
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elegates need to attend a conference in order to achieve break even, and determining wha
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t level of profit is made by each selling unit of a hotel to inform any rationalisation decis
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ion to drop a unit. The provision of all these types of financial information falls within the
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scope of management acc ounting.
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Problem 1.8: Solution m
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The main accounting information users are:
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• 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.
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