HOTEL MANAGEMENT ACCOUNTING – HAC 2001 September 2010 – March 2011

TOPIC 1: Introduction to Management Accounting

1.1 Responsibilities of management accounting and the important of management accounting information.

• Management needs information in order to perform their basic function of planning, directing and motivating, and
controlling.
• The process of extracting this type of information is what has come to be termed as management accounting.
• All the activities are involve in the decision making process.

Planning
• Involve the formulation of corporate objectives taking into account the availability of the company’s resources.
• Prepare plans on a short-term basis such as one year or on a long-term basis such as five years.
• Expressed in the form of budgets and cover the following areas:

a) Forecasting selling price and volume.

b) Estimation of costs involved in producing the product.
c) Determining the amount of finance needed to finance production, sales and purchase of assets, etc.

Directing and Motivating

• Involve in mobilizing people in order to implement the company’s plans and rewarding them appropriately.
• Manager needs to oversee the day to day running of the company ensuring that it is running smoothly. For
example; prepare organization charts to show the delegation of duties and responsibilities within the company.
• Manager also will needs routine data such daily sales report, inventory report among others.

Controlling
• A function encompasses the comparison of actual performance with that of budgets in order to identify
performance gaps or variances.

1.2 Accounting conventions

• Methods or procedures employed generally by accounting practitioners.

Understandability This implies the expression, with clarity, of accounting information in such a way that it will be
understandable to users - who are generally assumed to have a reasonable knowledge of business and
economic activities

Relevance This implies that, to be useful, accounting information must assist a user to form, confirm or maybe
revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to
this business? Should I work for this business?)

Consistency This implies consistent treatment of similar items and application of accounting policies

Comparability This implies the ability for users to be able to compare similar companies in the same industry group and
to make comparisons of performance over time. Much of the work that goes into setting accounting
standards is based around the need for comparability.

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Reliability This implies that the accounting information that is presented is truthful, accurate, complete (nothing
significant missed out) and capable of being verified (e.g. by a potential investor).

Objectivity This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is
not biased towards a particular user group or vested interest

1.3 Cost concepts and classification

Cost
• “ amount of expenditure paid for, or incurred, on a specified object or activity”
Exp: A book which you have bought cost RM10; the cost to you was RM10.
• Profit is a prime objective of most firms. Thus costs are a major factor in determining the overall success of a firm,
as measured by its profit. Organizations need to understand their costs if they wish to improve their profit.

Cost Unit
• Cost is associated with the quantities of product produced or services rendered.
Exp: the cost of making one unit of table –that is the cost per unit.

Cost classification
• Reason to classify a cost is to:
a) To assess the impact of changes in output on the costs of production.
b) To calculate the costs of making a particular product in a multi-product company.
• To simplify the issue, it is assumed that costs can be classified as:
a. Fixed costs — costs that do not vary directly with output (e.g. rent)
b. Variable costs — costs that vary directly with output (e.g. wages of operatives)
c. Total costs — calculated by adding fixed costs and variable costs.
d. Direct costs _ cost which can be easily and conveniently traced to the particular cost object under
consideration (e.g. direct material, direct labor).
e. Indirect costs_ cost which cannot be easily and conveniently traced to the particular cost object under
consideration (e.g. glue, nails, supervisor salary,)

Cost estimation
• Management often needs to try to predict or forecast costs in its decision-making process and may try to find out
what the total cost of production, how much of the total cost is fixed and what the cost of production will be if the
output increase or decrease.
• Techniques to cost estimation:
a) Linear regression
TC= FC + VC (Q)
b) High-low method

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1.4 Product cost versus Period cost

All Cost

Product Period
Costs Costs

Manufacturing Costs Non-Manufacturing Costs

Direct Material Selling Expenses

Prime
Cost
Direct Labour
Administration
Conversion Expenses
Cost
Manufacturing
Overhead

Product cost
• The costs of manufacturing our products.
• These product costs are necessary and form and integral part of acquiring and making the finished product.
• Classification of product cost:
a) Direct material – e.g. plywood, wooden battens
b) Direct Labour – e.g. drillers, assemblers
c) Manufacturing overhead – e.g. lubricants, rental, and insurance.
• Total direct costs are collectively known as Prime Costs and total indirect costs are known as overhead.
• Thus product costs are the sum of Prime cost and overhead.
• Within Product cost, we have Conversion Costs: these are the cost incurred in the factory that is incurred in the
conversion of materials into finished goods.

Period Cost
• Are all non-manufacturing cost.
• Classification of period cost:
a) Selling expenses – advertising, market research cost.
b) Administration expenses – salaries, electricity.

Cost accounting system

Direct materials xxxx

Direct labours xxxx
Prime cost xxxx
Manufacturing overhead xxxx
Total cost xxxx

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1.5 Theory of constraints (Limiting factor)

• A limiting factor is any factor which in scare supply and which stop the organization from expanding its activities
further, that is, it limits the organization’s activities.
• The limiting factor for many trading organizations is sales volume because they cannot sell as much as they would
like.
• Other factor may also be limited, especially in the short term, for example, machine capacity or the supply of
skilled labor may be limited for one or two periods until some action can be taken to alleviate the shortage.
• A constraining factor of production reflects an opportunity cost for the organization because the constraints
prevent it from expanding its activities and increasing profits.
• Constraints can be removed by:
a) Increasing the supply of the constraining factor of production by reducing downtime arising from this resource
through effective scheduling and buffering this resource and by continuous improvement.
b) Reducing demand on the constraining factor of productions by reengineering product and processes so that they
use less of the factor of productions.
• Concept of contribution can be used to make decisions about the best use of a limited recourse.
• Decisions involving a single limiting factor.
• If organization is faced with a single limiting factor, for example machine capacity, then it must ensure
that a production plan is established which maximizes the profit from the use of the available capacity.
• The machine capacity must be allocated to those products which earn the most contribution per machine
hour.
• In making capacity rationing decisions, management should always apply the general rule of ranking the products
according to their “contribution per limiting factor”. If this done, the selected mix of product chosen will maximize
profit.
• Four steps process can apply the general rule of maximizing the contribution per limiting factor as follow:
• Identify the contribution per unit. The contribution per unit is the unit sales price less the unit variable
cost. In calculating contribution per unit, always exclude any fixed costs that may be provided in a total
cost analysis.
• Calculate the amount of scarce resources a unit of each product or service requires. The amount of scarce
resources can be stated either in physical terms (machine hours) or in monetary term (cost of raw material
required for product).
• Calculate the contribution per limiting factor for each unit or service – by dividing contribution per unit
by the amount or scarce resource required.
• Ranks the products (or service) in descending order of contribution per limiting factor. This ranking then
form the basis of selecting product to be produced by starting from the top of the list, working downwards
until all capacity has been utilized.

1.6 Basic terminology of management accounting

• Material – consist of raw materials such as bulbs, batteries, wheels, microchips, etc.
Cost of material can be obtained by multiplying quantities and prices of the material.
• Labor – consist of the wages and salaries of production, selling, administration and managerial staff.
Cost of labor can be obtained by multiplying the wages and salary with
time taken to perform the task.
• Expenses _ payment for goods, services and charges such as stationary, power, rent, insurance, property taxes,
royalty and licensing fees.
• Overhead – Expenditure on labour, material and services which cannot be economically identified with a specific
saleable cost unit. Mean that any cost which cannot easily be analyzed and matched to output.

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• Budget – a quantitative statement for a defined period of time, which may include planned revenues, expenses,
assets, liabilities and cash flow.
• Asset – the equipment, land and stock of materials, finished products, and money used by the enterprise.
• Fixed asset – such as land, machines and vehicles which are kept by the business and not held for resale or
convention into products.
• Current asset – such as cash, amount owed to the business (debtor’s balances) or stocks of material and finished
products.
• Liability – any amount owed by a business to someone else.
• Current liability – amounts owed to firms which have provided goods and services on credit (creditors), bank
overdraft and the taxes which are owing to the state.
• Long-term liability – long term borrowing and mortgage.
• Capital – amount invest in the business.
• Profit – different between income and the cost of achieving that income.
• Gross profit – different between sales and the cost of those sales.
• Net profit – gross profit less the general expenses of running the business.

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HOTEL MANAGEMENT ACCOUNTING – HAC 2001 September 2010 – March 2011

Exercises
Question 1(Theory of constraints)

A company produces three products using three different machines. The following information is available for a period.

Product X Y Z Total
Contribution RM 12 RM 10 RM 6
Machine hour required per unit:
Machine 1 6 2 1
Machine 2 9 3 1.5
Machine 3 3 1 0.5
Estimated sales demand 200 200 200
Required machine hours
Machine 1 1,200 400 200 1,800
Machine 2 1,800 600 450 2,850
Machine 3 600 200 100 900

Machine capacity is limited to 1,600 hours for each machine.

Required;
Which of the above machine is the limiting factor? Prepare the optimum production plan for the company.

Question 2(Theory of constraints)