Finance and Accounting in the Hospitality Industry

finance and Ac searching in the hospitality screeningIntroduction.According to the Barrows Powers (2009, pp. 3-5) hospitality industry has included hotels , restaurants and an separate(prenominal) related organisations to the nutrition industry and it has given more than emphasis on providing customer minute yields and helpings in order to gain profitability and customer satisfaction. Hence, the application of finance and accounting has been done a great deal to reach extinct such requirements for the hospitality industry.The applications of finance in the hospitality industry has been discussed at a lower place several ways of this assignment. Further it has foc recitationd to belowstand the sources of funding and income gene dimensionn for the backup and gains industries as well as understand the business line in terms of the element of damage. In addition that it has given more intention to evaluate the financial statements of the selected businesses which atomic number 18 in the hospitality industry. aside from that, this has emphasise the outline of the performance of the business by using ratio analysis techniques. Finally it has focused to apply the marginal apostrophizeing train to evaluate the short term sufficement decisions.Task 01.01.1 Sources of funding uncommitted to business and benefit industries.Sources of funds argon very primal to shape forethought decisions as well as long term strategies of some(prenominal) organisation. As per the Sharan (2005, pp. 210-218) quest funding methods should be noned.Retain emoluments.Increasing the gross and reducing the be this raft be cast up in a systematic manner. lingo Loans.It is advisable to go for a loan under lower involution rate. Because if the loan interest rate is higher than the comp any(prenominal)s requite on setment, then it allow for cause liquidity problems in the future.Bank Overdraft facilityThis is give in to higher interest rate and recommended y et for a limited time cessation.Issuing share to the publicOrdinary shares little woo to the organisation but more power has been given to them. scarce preference share has slight experiences all over the conjunction but subject to a higher cost to the organisation since they concur to pay pre-determined dividends on time.Franchise option.This is recommended to expand the business chain with an association with medium scurf merchants to promote companys products and goodwill.Hire purchase schemesThis also important to manage the gold flow situations of the organisation without investing higher capital for equipments plants.Lease SchemesThis also important if the company have not greater funds to invest for their assets. But this is subject to higher interest cost.Credit purchasesThis is important to manage the working(a) capital position of the organisation . Since agreement with many suppliers atomic number 50 be obtained credit utmost to pay the cost of goods purc hased.Debt FactoringThis important to get the notes in early by giving guidance chargers to the factoring company to collect their debts very quickly.SponsorshipThis is ideal by stash away funds from former(a)(a) organisations and giving chance to promote their names.As per the Banjerjee (2010, pp. 47-58) future(a) funding options also to be massive. unsecured bond issue to investorsRight issues to shareholders railway line AmalgamationMortgagesVenture capital strategies to expand the operations.01.2 Methods of generating income and contribution to business service operations.According to the Hayes Miller (2011, pp. 5-20) generating income and contribution to the hospitality industry can be determine in following way. gross bargainsIn the fictitious character of hospitality industry is concern such as hotels, are providing rooms, foods, beverages and other supportive services in order to commence income from that.Commission.This commission income will be received from the third party supplier to the organisation.SponsorshipThis will be received from other organisations to promote their names.GrantsGrants are receiving from the government , any other authority.Sub permitThis can be generated by sub letting the premises to external parties, such as fancy item shops , blossoming shops , jeweler shops, etc.Task 02.02.1 shares of be, gross profit and inter pitch footings for products services.Element of tollsAccording to the Davis Davis (2012, pp. 25-34 ), followings can be determine as the elements of cost in the hospitality industry.MaterialsMaterial cost is the cost factor in the nett product or services which incurred mainly to provide limited products and services.Eg Linen , Cutlery, Glassware , China , Silverware,ConsumablesConsumables are the main cost component in the final products in the hospitality industry. This requires further processing to retrovert the final product to the customers.Eg foods and BeveragesLabourLabour cost is the cost which are incurred for the main operational functions of providing final product or services of the organisation.Eg wages paid to waiters, kitchen staff front onwardice staffOverheadsOverheads are costs which incurred for indirect materials , indirect labour and other indirect cost. These costs cannot be identified specifically with the final product or service.Eg Salary of admin department, electricity, stationery marketing determine and flagrant gain ground MarginAccording to the Kotas R. (1999 , pp 99-107) set methods used by the hospitality industry can be identified as follows.Pricing in Tourism ( Peak / Peak off trading price ) change price on peak seasons lively by adding a higher acknowledgeup to the operational cost as merchandising price. trance in peak off seasons it is adjusting by reducing mark up and offering discounts for the selling price spell concerning the competition in the market.Conventional Pricing Method. ( Rate of return pr icing )Here, it is emphasised that displace separate contribution margins to the different revenue segments ( such as foods, beverages, room, other operational segments ). after(prenominal) that it has to select the profit maximize contribution rate. Finally, the selling price will be ground on the selected profit maximising sales mix. Gross Profit will be computed by deducting cost of sales from sales.Absorption Pricing MethodHere, protean cost per building block has to be computed first and by and by that overhead cost to be intent to the social unit cost. Finally markup to be added to the summation cost to set as the selling price in order to gain required profit. portion Pricing Method. ( Marginal being)It is required to categorise the cost as variable restore. Then the variable cost per unit has to be computed and based on the variable cost per unit, required contribution to be decided to pull in selling price. There is no absorption of overheads and fixed cost to the unit cost of the product. The Gross profit margin will compute after deducting the variable cost of the sales.Backward Pricing Method.This is a method of adjusting the operating cost to a fixed rate. In this case local or national trade organisations has decided fixed selling price and other members have to be accepted this price . Once they need to change this rate, meet again and decide the parvenue price.Product and Service following. exchange price decided by adding a predetermined percentage of service charge to the unit cost, after adding the profit mark up to the unit cost.02.2 Methods of controlling furrows and cash in a business services environment. rip ControlsProper entrepot controlling is the way to smooth functioning of periodical operations working capital management in an organisation. According to the Ryan B. (2004, pp 355-361) following scrutinise controls are recommended.Compute economic order quantity direct and re order level of the inventory.R equired to avoid the unnecessary stock purchases .Create Just in Time inventory management system. cordial reception industry, mostly dealt with the perishable goods (foods beverages). Therefore it is ideal to maintain a JIT inventory system to eliminate the wastages, losses, and inventory handling cost. carrying into action of ERP software class for the inventory management.This ensures the updated accurate information linkage within the organisation to sign up proper inventory related decision on time.In other hand Warren et al (2008, pp 270 271) emphasise important ii controls over inventories.Safeguarding the stock from damage and theft.By restricting the store area only to authorised staff members, and it encourages to lock the high value items in a locker while usage of a camera system and security. insurance coverage the stocks in the financial statements.It is required to conduct a physical stock count at the socio-economic class end and take the tokens into account s, while identifying any mismatch between system physical figures.Cash ControlsHolding considerable cash amount is encouraged to conduct smooth functioning of working capital management. According to the Needles and Powers ( 2011, pp 399 403) there should be following controls over the cash.Implementation of dual control over the cash.It is important to give authorisation for two persons to verify handle the cash balances to eliminate the cash thefts or manipulations. preparedness of affirm reconciliations.Required to identify the reasons for the differences in cash book figure with bank statement balance.Conduct a physical cash count in random basis.This will help to minimise the misconduct by the staff who has handled the cash.Task 03.03.1 Final accounts analysis of Valentina Hotel Ltd.03.1.1 Source and structure of the struggle balance.Sources of the trial balance are concerned, Kotas and Conlan ( 2007, pp. 101-115) it has been categorised under three ledgers , namely gener al ledger, sales ledger and the purchase ledger. Purchased ledger consists the personal accounts of suppliers (Creditors). Sales ledger relates to personal accounts of customers (Debtors). While general ledger consists impersonal accounts. such as nominal accounts and real accounts. Nominal accounts refer to income and expense accounts. While real accounts refer to the assets and equity accounts.The structure of the trial balance is concerned , Jagels (2007, pp. 20-21) it has been categorised under the following way. circulating(prenominal) Assets Fixed Assets Contra Assets flow liability Long Term LiabilityOwners great Contra CapitalContra tax grossExpensesTherefore the trial balance consists of accounts which having debit credit balances and which all of them are summed up at the end.The trial balance of Valentina Hotel Ltd can be summarised as follows. underway Assets Bank / Cash / DebtorsFixed Assets Contra Assets Building / Equipment / Acc. Depreciation true Liability CreditorsLong Term Liability Long term bank loan / DebenturesOwners Capital Ordinary share capital / Retained ProfitContra Revenue Opening StockRevenue SalesExpenses Salaries / Loan interest / Marketing / life force / Communication / Rates Insurance / Purchases03.1.2 Evaluation of final accounts03.1.2.1 Income Statement.Income Statement of Valentina Hotel Ltd for the yr ended 28th February 2010. 000 000Sales 2, 040Less bell of SalesInventory (01/03/2009) 49Purchases 1, 3601,409Less Inventory ( 28/02/2010) (51) (1,358)Gross Profit 682Admin Operating ExpensesBusiness rates insurance ( 67 3) 64Wages salary (262 + 5) 267Depreciation ( 250 * 25%) 62.5Communication expenses 36Energy Cost 49 (478.5)Selling Distribution ExpensesMarketing 79 (79)Finance ExpensesDebenture interest (200 *6%) 12Loan interest 4 (16)Profit Before Taxation ( PBT) 108.5Less Income Tax (39)Profit After Taxation (PAT) 69.5Less Dividend declared ( 100*0.15 ) (15)Retain profit for the period 54.503.1.2.1 Balance Sheet.Position Statement of Valentina Hotel Ltd as at 28th February 2010.Assets 000 000 000Non Current Assets Cost Acc. Dep. NBVBuildings 400 400Equipments 250 112.5 137.5650 112.5 537.5Current AssetsInventory (28 / 02 / 2010) 51Debtors 92Pre -paid Insurance 3Bank 3Cash 1 clTotal Assets 687.5Equity LiabilityEquity ReserveStated Capital ( 1 Ordinary shares) 100Reserves Retained Earnings ( 157 + 54.5 ) 211.5 311.5Non Current Liabilities6% Debentures 200Long Term Bank Loans 60 260Current LiabilityCreditors 45Wages salary account payable 5Debenture interest payable 12Income tax payable 39Dividend payable 15 116Total Equity Liabilities 687.503.2 Budget and variableness analysis of Valentina Hotel Ltd.03.2.1 dish and purpose of figureary controls.According to the Needles et al (2010, pp. 966) budgetary control is the use of a comprehensive system of budgeting to aid the management in carrying out its function such as planning , coordination and controls.Purpose of Budg etary Controls.The purpose of budgetary controls can be recognised, according to the Kotas R. (1999, pp. 177-180) in following manner.Achieving business targets. Delegating responsibilities to the staff.Optimum resource usance. To take corrective actions.Well coordination of work. As a basis of future constitutionUse as a basis of performance measurementProcess of Budgetary ControlsAccording to the Needles et al (2010, pp. 966-969) budgetary control process can be identified as follows.Period of Budget.This may be one year or some time it can be continuous from previous time to next time. begin of Budget.Selecting a suitable method to use a budget. Such as zero based budgeting .Implementation of Budget.Implementation should be done after preparing approving the budget for the period.Performance Measurement.Measure the actual performance with budget during the budgetary period.Identification of differences in actual with budgeted performance.By conducting a form analysis.Take cor rective action.Corrective procedures required to produce the performances which are impending to the budgeted performance.03.2.2 Variance analysis.Computation of RM VariancesRaw Material Total Variance = normal Cost Actual Cost= ( 10,000* $ 10) $ 98, 600= $ 1,400 F / +Raw Material Price Variance = Qty. Used ( well-worn Price Actual Price )= ( 11,700 * $ 10 ) $ 98,600= $ 18,400 F / +Raw Material Usage Variance = Std. Price ( Standard Usage Actual Usage )= $ 10 ( (10* 1,000) 11,700 )= $ 17,000 (A) / Analysis of partitionsIt has shown $ 1,400 favourable thorough raw material variance from the budgeted figures. It indicates that actual material cost is less than the budgeted material cost and it is in the, within the controls. Further there is a $ 18,400 favourable raw material price variance from the budgeted figures. This indicates that the actual price is less than the budgeted price. However it has $ 17,000 adverse raw material usage variance from the budgeted figures. Th is means, RM usage are in out of the controls.Suggestions for appropriate future management actionsTake corrective actions to eliminate the over usage of RM.Setting new procedures to fell the wastage of RM.Implement new controls to monitor the RM usages.Check whether such variance is controllable or not. If it is controllable, then corrective action to be taken. If not a revision of standards is recommended.Task 04.04.1 proportionality analysis of Audalucia Hotel.Profitability RatioGross Profit Ratio of the company has been declined by 15.14% ( addition A) compared to the 18.33 % of this year with 21.60 % of last year. Net Profit Ratio also declined by 30.56% ( accompaniment A) compared to the 3.59 % of this year with 5.17 % of last year. Apart from that Return On Capital active (ROCE) also decreased by 31.73% ( Appendix A) compared to the 8.24 % of this year with 12.07 % of last year. This incurred overdue to increase in expenses cost of sales.Liquidity RatiosCurrent Rat io of the company has been increased by 0. 52 times ( Appendix A) compared to the 3.68 1 of this year with 3.16 1 of last year. Quick Ratio decreased by 0. 50 times ( Appendix A) comparisons to the 2.43 1of this year with 2.93 1 of last year. This incurred due to over fund usage on closing stock.Efficiency RatiosInventory swage Ratio of the company has been decreased by 36.25 times ( Appendix A) compared to the 17.37 times of this year with 53.62 times of last year. Inventory Turnover Period has been increased by 14 long time ( Appendix A) compared to the 21 days of this year with 7 days of last year. Debtors Turnover Period has been decreased by 7 days ( Appendix A) compared to the 39 days of this year with 46 days of last year. Creditors Turnover Period has been decreased by 5 days ( Appendix A) compared to the 25 days of this year with 30 days of last year. This incurred due to over fund utilisation on stock, increase of debtors creditors.Investors / pecuniary Ratio sEarnings Per Share (EPS) of the company has been decreased by 0.21 ( Appendix A) compared to 0.25of this year with 0.46 of last year. This has incurred due to low profit earned during the period and new share issue.04.2 Appropriate future management strategies for business and service operation.Following strategies to be taken by the management to eliminate the discrepancies identified in the ratio analysis.Reducing the selling price volume of sale should be increased to gain higher revenue.Unnecessary fund utilisation on the stock should be reduced. The JIT stock system to be utilise to minimise the stock handling cost.Take necessary steps to reduce the expenses in regularly.Negotiate with suppliers to obtain longer credit period while asking lower credit period to the customers.Follow proper cash flow management procedure within the organisation.Implement new procedures to describe the customers to the company to increase the sales while conducting discounts promotions.No n Current Asset should have used in very efficient effective manner to generate income from it.Task 05.05.1 Categorisation of costs of Leicester Square Hotel.Fixed CostAs per the Horngren et al (2009, pp 28-29) fixed cost is the cost which remained unchanged in total for a given period regardless of changes in volume or activity.Eg Fixed Cost of the hotel operation 1,600,000 inconsistent CostAccording to the Drury ( 2008, pp. 32-34) variable cost is the cost which changes in direct proportion to the volume of the activity.Eg VC of Food sales per room 7VC of Beverage sales per room 2.4 turnout variant CostAccording to the Kinney Raiborn ( 2011, pp. 28-29) semi- variable cost is the cost which consists twain fixed and variable components for a given activity. It remains as fixed up to a certain level and beyond that it will be variable based on the volume or activity.Eg Variable Cost per occupied room 15VC of Minor operations departments per room 1.205.2 Cost / Profit / Volume analysis of Leicester Square Hotel.Computation of Contribution per product / customer ( in )Description Room Foods Beverages Minor Dept. TotalSelling Price 120 20 8 2 150Variable Cost (Appendix B) (15) (7) (2.4) (1.2) (25.6)Contribution 105 13 5.6 0.8 124.4(Per product/customer)Net Profit Computation ( in )Sales ( 150 * 100 * 365) = 5, 475,000Less Variable Cost (25.6 * 100 * 365) = ( 943,400 )Contribution (124.4 *100* 365 ) = 4, 540,600Less Fixed Cost = ( 1,600,000 )Net Profit = 2,940,600Break Even Point ComputationBEP ( in units ) = Fixed CostContribution per customer= 1,600,000124.4= 12,861.74 12, 862 ( Customers )BEP ( in ) = BEP ( in units ) * Selling Price= 12,862 * 150= 1,929,300Cost -Volume -Profit RelationshipValue( 000 )TR Total Revenue ( 5,475 )(5,475)Profit ( 2,940.6)ProfitBEP BEP(1,929) VC ( 934.4)Loss FC ( 1,600 )(Customers )0 BEP ( 12,862 ) (36,500)According to the Blocher et al (2006, pp 238-241) Cost-Volume -Profit analysis is the method of analysing h ow operating decision and marketing decision affects the net income based on the relationship between cost ( VC FC), volume (output level ) and selling price.The hotel is required to sell 12,862 rooms to the customers to make breakeven point of sales. According to the Hansen et al ( 2009, pp. 591-595) Breakeven point is the level at which revenue is equal to the total cost and the profit is zero. Since they can obtain 1,929,300 revenue to cover the total cost and beyond that they can earn profit from any additional customers. If the hotel futile to achieve 12,862 customers per annum, they have to suffer with losses. The Hotel can earn contribution of 124.4 from every customer and if they achieve the expected sales level of 36,500 customers , they can achieve 2,940,600 profit for the period.05.3 Justification of short term management decisions based on CPV analysis.Margin of Safety ( in units ) = Expected Customers BEP Customers= ( 365 * 100) 12,862= 36,500 12,862= 23,638Ma rgin of Safety ( in ) = Margin of Safety ( in units ) * SP= 23,638 * 150= 3,545,700Degree of Operating leverage = Contribution MarginNet Profit= 4,540,6002,940,600= 1. 54 ( low insecurity )According to the Blocher et al (2006, pp 249-252) margin of safety is the amount or units of sale above the sales. In that case hotel can generate 3,545,700 turnover by 23, 638 customers. It indicates that this hotel investment is worth.As per the Hansen et al ( 2009, pp. 597-598) degree of operating leverage is the ratio of contribution to the profitability. In this case, it shows a lower leverage of 1.54 since it generates lower chance to the future profitability of the hotel. Therefore it is justifiable that management has been taken an optimized and a worth decision regarding this investment.Conclusion.According to the given cases of this assignment is concerned it is derive that practical application of theories in hospitality management is really of the essence(p) in order to obtain pr oper decisions to improve the profitability, avoid control deficiencies and smooth functioning of routine operation of the business.References.Book ReferencesBanjerjee, B. (2010), Financial policy and management news report, 7 th ed. Prentice Hall Ltd, pp. 47-58.Barrows, C. W. Powers, T. (2009), Introduction to the hospitality sedulousness, 7 th ed. antic Wiley Sons Inc., pp. 3-5.Blocher, E.J., Chen, D., Cokins, S Lin, F. (2006), Cost direction a strategic emphasis, 3 rd ed. Tata Mc Grow Hall, pp. 238-252.Davis, C. E. Davis, E. (2012), Managerial Accounting, John Wiley Sons Inc., pp. 25-34.Drury, C. (2008), concern and Cost Accounting, 7 th ed. Cengage Learnings, pp. 32-34Hansen, D. R., Mowen, M. M. Guan, I. (2009), Cost Management accounting control, 6 th ed. Cengage Learnings, pp. 591-598.Hayes, D. K. Miller, A. (2011), Revenue Management for the Hospitality Industry, John Wiley Sons Inc., pp. 5-20.Horngren, C. T., Datar, S. M., Foster, G., Rajan, M. V. Ittner, C. (2009), Cost Accounting a managerial emphasis, 13 th ed. Pearson Prentis Hall Ltd, pp. 28-29.Jagels, M. G. (2007), Hospitality Management Accounting, 9 th ed. John Wiley Sons Inc., pp. 20-21.Kinney, M. R. Raiborn, C. A. ( 2011), Cost Accounting foundations evolutions, 9 th ed. Cengage Learnings, pp. 28-29.Kotas, R. Conlan, M. (2007), Hospitality Accounting, 5 th ed. Thomson Learning, pp. 101-115.Kotas, R. (1999), Management Accounting in Hospitality Tourism, 3 rd ed. Thomson Learning, pp. 99-180.Needles, B. E., Powers, M. Crosson, S. V. (2010), Financial and Managerial Accounting, 9 th ed. Cengage Learnings, pp. 966-969.Needles, B. E. Powers, M. (2011), Principals of Financial Accounting, 11 th ed. Cengage Learnings, pp. 399- 403.Ryan, B. (2004), Finance and Accounting for Business, Thomson One Business School, pp. 355- 391.Sharan, V. (2005), Fundamentals of Financial Management, 2 nd ed. Pearson Educations Ltd, pp. 210-218.Warren, C. S., Reeve, J. E. Duchac, J. E. (200 9), Financial Management Accounting, 11 th ed. Cengage Learnings, pp. 270-271. mesh ReferencesAccounting Ratio Analysis , online, Available from http//http//www.ratioanalysis.net Accessed on 25th November 2012 .Industry Information, online, Available from http//http//www.instituteofhospitality.org/info_services Accessed on 25th November 2012 .Hospitality Industry News, online , Available from http//www.bha.org.uk/ form/news Accessed on 24 th November 2012 .Bibliography.Brigham, E. F. Houston, J. F. 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