Any service-providing organization experiences myriads of challenges especially during recessions. Indeed, during recessions, organizations normally struggle with challenges of increased costs of production, reduced consumer spending and high costs of accessing credit. This means that, during recessions, finance is undutiful a mega challenge to service sector organizations. It is relevant that hotels adopt strategies that would enable them to cut on their costs forecasting expenses and sales precisely among other things. Luckily, in the wide spectra of viable options to help them precisely achieve these goals, management accounting exists. This paper in fact then concentrates on examining how management accounting functions may assist financial service organizations struggling with recession.
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Scholars of management accounting content that managerial accounting extends to three main crucial pillars. These pillars are strategic management, risk management, and performance management. The pillar of strategic management permits the roles of accounting management professional to include making the accounting management professional strategic partners of the organization they serve (Sebastian 2000, p.45). On the other hand, risk management entails “contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization” (Sharman 2003, p.5). Performance management focuses on the development of business decision, which makes it possible to manage cutely the performance of a firm. The Institute of Certified Management Accountants (ICMA), states, “a management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking” (Clinton & Anton 2006, p.788). In this light, the paper focuses on scrutinizing how management accounting functions assist a financially struggling service organization through introspection of various functions of management accounting in service sector organizations with a particular focus on hotel industry as an example of a service industry.
Management Accounting and Recession Hit Organizations
During recessions, organizations experience a reduction in business profits due to reduced economic activities, household incomes, inflation, and reduced employment opportunities. Indeed, one of the most pronounced impacts of recession to service sector organizations such as hotels or rather hospitality industry at large is decreased sales due to decreased consumer spending (Friedl et al 2005, p.102). Decrease in sales means that hospitality industries need to adjust their costs if they have to survive recessions (Harris & Hazzard1992, p.12). According to Horngren and Sundem, “managerial accounting is simply the system of recording and analyzing transactions for the purpose of making management decisions” (1999, p.53).
By conducting such analysis, the hotel managerial accountants can apply the concepts of managerial accounting to arrive at cost effective production decision. Additionally, managerial accounting is perhaps one of the substantial tools that can help organizations experiencing recession through provision of mechanisms of cutting down costs, minimization of wastages, stopping unproductive activities and identifying value adding new lines. In this section, the value of managerial accounting is considered in terms of how it may help hospitality industry overcome recessions through helping it in realizing investment appraisals and alternative sources of finance. This includes decision making under various situations, role of relevant costs and revenues information, cost volume profit analysis, budgeting as a tool of planning and control, and conducting financial analysis and financial health checks.
Investment appraisals and alternative sources of finance
Investment appraisal entangles evaluation of the attractiveness of any investment proposal by deploying various methods including average rate of return, payback period, internal rate of return and net present value among others. In this context, managerial accounting is deployed internally within an organization as a tool for profitability monitoring of the hospitality businesses establishments (Coltman1994, p.23). Elements of investment appraisal as core elements of managerial accounting are indeed crucial in forecasting the hotel business performance. This means that by using for example, break-even analysis, hotels managerial accountants are able to determine the quantities necessary for sale to ensure sustained performance of the business. More precisely during periods of economic recession most business normally do not predominantly focus on making profits but rather focus on ensuring that they do not get out of business due to losses attributed to low volumes of sales.
It is thus necessary that hotel break even during such times. Apparently, in investment appraisal considerations, the ability of the business to break even within minimal time is crucial since it gives a rough approximation of the time that the business would start making profit (Schmidgall 1997, p.67). Additionally as Caldwell (1994) informs “Systematic management reporting provides regular financial information covering short time periods (week or month) and which is analyzed to reflect the management of profit-generating centers within a business (such as rooms, or food and beverage departments in a hotel) and permits a close control of those units” (p.48). In this end, managerial accounting is an incredible tool for determination of optimal output levels of number of clients, room occupancy and cost volume analysis among other things requiring optimization. The viability of other alternative sources of finance to fund hotels is also dependent on the capacity of managerial accounting concepts to give the decision makers rough approximations of financial positions of the business in case it considers other options of accessing finance apart from the owner’s equity. As a way of example, credit can be a resourceful source of finance. However, on prevailing economic cycle, it may fail to be a beneficial source of finance. During recession, credit is normally expensive to access and in case it is acquired it may lead to making the business sink heavily in debts.
Decision making under various situations and role of relevant costs and revenues information
Within the hotel industry relevant costs and revenue, information is worth considering while making decisions. Arguably, a decision is merely a call to make a choice between two or more competing potential choices. Any accounting management information system that is capable of meeting its objectives precisely needs being relevant. This implies that “management accounting information produced for each manager must relate to the decisions which he or she will have to make” (Ilvento 1996, p.45). Relevant cost and revenues information are in fact costs and revenues information profiling good managerial accounting information system. They are costs that are appropriate to particular management decision (Broadbent & Cullen 2003, p.29). Arguably, in service sector industry such as hotel industry struggling with advents of recession, relevant costs and revenues information plays proactive roles while making decisions under a myriad of situation.
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This is in the sense that “before the management of an enterprise can make an informed decision on any matter, they need to incorporate all of the relevant costs which apply to the specific decision at hand in their decision making process” (Caldwell 1994, p.56). From this argument, inclusions of costs that are not relevant or exclusion of relevant cost results in making management to base its decisions on information that is misleading with ultimatums of wrong decision making. This may on the worst scale make an organization sink into loses and hence lose its market share and ultimately wide up its operations. To prevent this from happening, managerial accounting has an important part to play within the hotel industry (Atrill & McLaney 2006, p.103). Managerial accounting can make sure that all the information relevant for decision-making is actually relevant, accurate and timely. When this role is cutely articulated to the hotels decision-making process, the hotel management can make quick responsive decisions to circumstances that may lead to its departure from business especially during times of recession.
Cost volume profit analysis
Cost volume profit analysis (CVP) is an essential component of managerial cost accounting that aid in making short runs decisions and aid in making elementary instructions. CVP is ideally an expansion of concepts of break-even analysis. Managerial accounting deploys the CVP in determination of the critical point at which revenues equals the total costs. At this point neither profit nor loss is made. As Chadwick (2000) noted, “breakeven point is the initial examination that precedes more detailed CVP” (p.98). For a hotel experiencing recession, CVP emerges as a subtle tool for making short-term appropriate decisions. In particular, the breakeven point is critical for such an industry since during recession the main endeavor is usually to put in place mechanisms that would ensure that an organization makes sales just sufficient to service all its expenses (costs). The formula applied in managerial accounting for CVP analysis is: px = vx + FC + Profit; where p is price per unit, v is variable cost per unit, x is units produced and sold, and FC is total fixed cost (Atrill & McLaney 2005, p.64). From this formula, it is clear that apart from determination of the breakeven point, CVP endeavors to determine the appropriate sell mixes, variable cost per unit, unit selling prices, volume of level of activity and total fixed cost.
Budgeting as a tool of planning and control
Budgeting is critical tool employed in managerial accounting to facilitate planning. Apart from planning, budgeting also facilities control. Through budgeting, any organization including a hotel needs to “decide which function is most important and then resolve a number of formulation issues” (Churchill 1984, p.5). In an attempt to cope with recession, organizations use budgeting in their planning for several reasons. From one dimension, planning comprises frameworks on which decision-making is pegged on in the quest to achieve organizational goals, strategies and even objectives. In this context, “most companies use budgets to evaluate, to some extent, division managers’ performances and tie bonuses to the attainment of targeted goals” (Porteous & Tapadar 2005, p.77). Planning makes the hotel managers sufficiently aware that current decisions have plausible impacts for tomorrow’s business existence. Consequently, within the hotel industry planning is critical for the industry’s capacity to achieve both long terms and short term organizational objectives and goals. Managerial accounting apparently deploys many strategies of planning and hence its integration in the management of hotels facing recession is critical for their ability to come out safely out of recession.
Financial analysis and financial health check
Recession creates uncertainties on the performance of a business. It is thus essential that managers are able to determine the financial health of the business. Strategy Corporate Finance (2011) argues that “control of the finances of a business is critical to a company’s survival, growth and profitability and that the key factors are setting out trading and cash flow budgets for the business over the twelve month cycle and regular monitoring of performance and updating of budgets” (Para.1). Directly congruent with this argument, in order to arrive at appropriate decision it is important that decision makers within hotel industry have realistic forecasts of sales, overheads, cash flows, purchases net margins and various costs. With such forecasts, according to Strategy Corporate Finance (2011), organization managers are able to make “critical decisions about the future of the company, such as levels of employment, investment, salaries, sales, stock levels, debtors and creditors, and overdraft requirements among others”(Para. 2). Indeed, management accounting arm of the organization is responsible for making such forecasts. Consequently, by deploying management accounting hotels likely to suffer negatively from recession can endure recession by taking appropriate decisions based on forecasts to adjust on their cost so that the costs do not outdo the business revenues during the recession.
Limitations of Management Accounting
Amid the numerous benefits that an organization can leap from embracing concepts of management accounting in the service sector, the discipline experiences some limitations. The first limitation is that the concept of relevant cost and revenue information is largely based on “the quantitative aspects of decisions” (Artill & McLarney 2005, p.107). This limitation arguably is critical since qualitative aspects of various decisions are equally important in the decision making process. In fact according to Fields, Lys and Vincent “no decision should be made in practice without full consideration being given to both qualitative and quantitative aspects” (2001, p.283).
The fact that management accounting focus more on quantitative aspects while making certain managerial decisions infers that in the hotel industry, some factors that are immeasurable by dollars and or cents are negated yet they can immensely affect the performance of the hotel industry organizations. As a way of example, from management accounting financial rationale it sounds substantive to relocate a hotel to a region where wages are low. This would indeed be advocated for given the need to cut cost to enhance a hotel’s ability to endure recession. Upon relocation, management accounting is at a position to compute the savings of wages that occur and precisely compute the myriads of costs increases that may arise including import duties and shipping costs among others. On other hand, unfortunately, it fails to factors in saving attributed to goodwill of various community members, and or public relations challenges encountered in the new location.
Another limitation managerial accounting is that it is subjective in nature. Subjectivity is more pronounces when metric and methodologies performance measurement is considered. In this context, Barton (2001) argues out that “the accountant’s personal beliefs and biases can have an impact on the way performance is measured” (p.17). This is particularly problematic when it comes to achievement of the roles of management accounting in an organization. As a way of exemplification, a management accountant required to measure workers productivity in a hotel may focus predominantly on outputs and neglect the worker’s inputs. This profoundly affects by far the overall productivity of the worker as determined by management accounting. Consequently, the organization in question is impacted negatively since the information garnered is not the best. On the other hand, conflict of interest may arise especially where workers have the perception that they are not evaluated fairly (Horngren & Sundem 1999, p.100: Palmrose, Richardson & Scholz 2004, p.4). In the context of an organization experiencing recession, the organization may suffer even more due to decreased morale of the workers, which often leads to low out per worker.
Moreover, some scholars argue that management accounting is not standardized. For instance, Badertscher (2011) argues, “financial accounting is highly standardized, with financial accountants using guidelines such as Generally Accepted Accounting Principles (GAAP)” (p.1491). In contrast, management accounting lacks standard procedure applicable across all organizations. This ideally means that an accountant may come up with his or her own metric of an organization evaluation meaning that deductions reached through such metrics differs. Therefore, evaluations and financial bench markings ends up being highly inconsistent. Lack of or inadequate standards infer then that accountants in the discipline need to develop extra knowledge for them to interpret accounting systems developed by their colleagues.
Therefore, based on the expositions made in the paper about management accounting, it becomes evident that management is a crucial subject that organizations need to have for their smooth running. Management accounting, alternatively referred to as managerial accounting, concerns itself with provisions and deployment of accounting information by various organizational managers to enable them arrive at subtle decisions often permitting them to better their management coupled with control functions. In this context, the paper presents management accountants as values creators within an organization. Management accounting has then been argued as being more concerned about decisions that would affect an organization in future rather than concentrating on score keeping professional aspects of an accountant. Additionally, the paper argues out that management accounting may enormously help a hotel undergoing recession.
This is possible through provisions of mechanisms of investment appraisals and alternative sources of finance, decision making under various situations and role of relevant costs and revenues information; cost volume profit analysis, making it possible to employ budgeting as a tool of planning and control, and in conducting financial analysis and financial health checks. However, even in the light of this pivotal instruments provided by management accounting, the paper also holds that management accounting presents some limitations. In this ends it has been argued that management accounting lacks standardization, is subjective and its concepts of relevant costs and revenue information are highly dependent on quantitative aspects. However, management accounting remains as a subtle way of ensuring that service sector industries such as hotels endure recession.
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