Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Week 1: Introduction to Hospitality Accounting
01 January 2021

09:25 PM

Assignment

30%

Test ( Jan30 )

10%

Mid Term ( Mar13 ) 20%

Introduction to Accounting

Final Exam

40%

Hospitality definition
• Hospitality
➢ The friendly and charitable reception and entertainment of guests or strangers
➢ A specific segment of the travel and tourism industry
• Main subsectors under travel and tourism industry
➢ Accommodations
➢ Food services
➢ Air travel
What is accounting?
• Definition of Accounting
➢ Accounting is the recording of financial transactions along with storing, sorting, retrieving, summarising, and presenting th e results in various reports and
analyses
➢ Accounting is also a field of study and profession dedicated to carrying out those tasks
Example of Financial Accounting
• One part of accounting focuses on presenting the financial information in the form of general-purpose financial statements ( balance sheet, income statement,
etc
...
Perform transaction analysis
2
...
Prepare an unadjusted trial balance
4
...
Adjust the ledger account
6
...
Prepare a post-closing trial balance
8
...
Prepare the balance sheet
Timing of the Accounting Cycle
• The accounting cycle is started and completed within an accounting period, the time in which financial statements are prepared
• Accounting periods vary and depend on different factors; however, the most common type of accounting period is the annual period
• During the accounting cycle, many transactions occur and are recorded
At the end of the year, financial statements are generally prepared

BHH 1103 Page 1

• At the end of the year, financial statements are generally prepared
• Public entities are required to submit financial statements by certain dates
• Therefore, their accounting cycle revolves around reporting requirement dates
Accounting Period
• Refer to a specific period of time for an organization for a purpose of preparing a financial report
• Examples:
➢ A business starts on 1 January 2019 and closes its account on 31 December every year
...
Therefore, Accounting period = 1 July 2018 unt il 30 June 2019

Business or Accounting Transactions
• Refer to financial events / activities which affects an organization
• Cash Transaction
➢ Any business transaction with immediate payment
• Credit Transaction
➢ Any business which payment is postponed to a future date
Accounting Classification
• Assets - Resources owned by the business
➢ Non-current Assets
➢ Characteristics:
▪ Useful life > 1 year
▪ Not for resale
▪ Used in running the daily business operation
 Intangible Fixed Assets
→ It exist but cannot be seen and cannot be touched
→ Example: Franchise, Brand, Trademark, Copyright, Goodwill, Patent
 Tangible Fixed Assets
→ Its physical existence can be seen and can be touched
→ Example: Motor Vehicles, Buildings, Furniture and fittings, Office Equipment, Computer Equipment, Land, Premise, Machinery
 Investment
→ Amount of money put in long term project or Acquire ordinary shares in another company to get a long term return
→ Example: Fixed deposit in Maybank, Unit trust ( ASB, ASN, ASK, ASD, ASS ), Shares acquired from Telekom Bhd to get dividend
➢ Current Assets
➢ Characteristics:
▪ Useful life < 1 year
▪ Easily converted into cash
▪ Easily changing form
▪ Example: Cash / Bank, Stock, Debtors or Account Receivables
• Capital / Owners Equity
➢ Resources supplied by the owner to the business for the acquisition of assets
➢ Example: Owner brought in motor vehicle amounting RM 50,000 into the business
...
g
...
After 7 days no discount given but must settled debts within 30 days
➢ Trade Discounts
▪ Given for bulks buying
▪ No Double entry
▪ Shown as deduction from total selling price in the invoice
• Movement of Inventory
➢ Increase
▪ Purchase
▪ Return Inwards
➢ Decrease
▪ Sales
▪ Return Outwards
▪ Drawing of Goods
Sales
• Cash Sales

RM
Dr
...
Sales ( or Sales Revenue )

XXX

Being sale of goods on cash basis
• Credit Sales

RM
Dr
...
Sales ( or Sales Revenue )

XXX

Being sale of goods on credit
Sales Returns and Sales Allowances
• Sales Returns
➢ Also called return inwards
Returns of previously purchased goods by a customer
BHH 1103 Page 3

➢ Returns of previously purchased goods by a customer
➢ Cancel part or all of a sale
• Sales Allowances
➢ Occurs when the customers agrees to keep the goods
➢ Reduction made in the original sales price
• Sales Discounts
➢ Credit Notes - Business documents that lists the information regarding a sales return or a sales allowance
➢ Debit Notes - Customer take the initiative to inform the supplier that goods purchased are to be returned
• Cash Sales
RM

Dr
...
Cash

XXX

Being return of goods by customer
• Credit Sales

RM
Dr
...
Account Receivables

XXX

Being return of goods by customer
Purchases
• Cash Purchases

RM
Dr
...
Cash

XXX

Being purchases paid in cash
• Credit Purchases

RM
Dr
...
PQR Manufacturing ( AP )

XXX

Being purchases on credit
Transportation Costs
• Cost of transportation of the goods from the supplier to his premises
• Transportation inwards expense / transportation-in expense / freight inwards / carriage inwards
• Parts of the cost of the purchases
• E
...
Suppose XYZ wholesale stores paid cash of RM 300 for goods purchased

RM
Dr
...
PQR Manufacturing ( AP )

XXX

Being purchases paid in cash
Other Purchases Costs
• Insurance expense on purchases
• Custom duties on purchases
• Taxation on purchases

Purchases Returns and Purchases Allowances
• Purchases Returns
➢ Also called return outwards
➢ Returns to the supplier of previously purchased goods by a customer
➢ Cancel part of all of the purchase
• Purchases Allowances
➢ Occurs when the buyers agrees to keep the goods
➢ Reduction made in the original purchase price
• Cash Purchases
RM

Dr
...
Purchases Returns & All

XXX

Being return of goods to suppliers
• Credit Purchases
RM

Dr
...
Purchases Returns & All

XXX

Being return of goods to suppliers
Determination of the Costs of Goods Sold

Week 2 Introduction to Hospitality Accounting - Spreadsheet
BHH 1103 Page 4

Week 2 Introduction to Hospitality Accounting - Spreadsheet

Books of Original Entry
• Is a separate book for each kind of transactions
• Purpose: to group entry of similar nature into one classification because there are certain types of transactions occur more frequently than others
• Also known as:
➢ Book of Prime Entry
➢ Specialized Journal
Advantages
• Time Saving
➢ Reduce the amount of posting that is necessary for process transactions
• Work Done Faster
➢ Allow segregation of duties as one clerk will be responsible for one journal
• Provide References
➢ The nature of transactions will determine the journal in which it will be entered
• General Ledger free from unnecessary detail
➢ General ledger records less accounts since individual Debtors ( account receivables ) and Creditors ( account payables ) are maintained in the Subsidiary
ledger

Types of Journal
• Sales Journal ( SJ ) - to records sales of goods on credit
• Purchase Journal ( PJ ) - to record purchases of goods on credit
• Return Inwards Journal ( RIJ ) - to record return of goods previously sold on credit
• Return Outwards Journal ( ROJ ) - to records return of goods previously purchased on credit
• Cash Receipts Journal ( CRJ ) - to record cash and cheques received
• Cash Payment Journal - to record cash and cheques paid
• General Journal ( GJ ) - to record transactions other than in 6 Journals above such as purchased fixed assets on credit, corrections of errors, adjust ing entries,
opening and closing entries
• Petty Cash Book ( PCB ) - to records items of small cash payments
...


Trial Balance
List of accounts

Debit ( RM ) Credit ( RM )

Subsidiary Ledgers:

Debtors / Sales Ledger
- Account Receivable A

XXX

- Account Receivable B

XXX

Creditors / Purchase Ledger
- Account Payable A

XXX

- Account Payable B

XXX

General Ledgers:

Bank account

XXX

Sales account

XXX

Purchases account

XXX

Return Inwards account

XXX

Return Outwards account

XXX

BHH 1103 Page 5

Return Outwards account

XXX

Other Revenue account

XXX

Other Expenses account

XXX

• Is a list of accounts and their balances at a particular date
• Purpose:
➢ Checked the accuracy of double entry rules used
➢ Help to detect errors within a given time period
➢ To facilitate the preparation of financial statement
• The total in the Debit and Credit column of the trial balance should be equal
Format
Name of the Business
Trial balance as at ……
...
a
...
a
...
a
...
Allowance for Doubtful Debts
▪ Cr
...
SOPL ( increase )
▪ Cr
...
Allowance for Doubtful Debts
▪ Cr
...
Bank / cash
▪ Cr
...
Bad Debts Recovered
▪ Cr
...
g
...
Expenses
▪ Cr
...
g
...
Accrued Revenue
▪ Cr
...
g
...
Prepaid Expenses
▪ Cr
...
g
...
Revenue
▪ Cr
...
Drawing
 Cr
...
e
...
g
...
e
...
The oldest items are assumed to be sold first, leaving the newest items in inventory
➢ LIFO = the newest or last items received are assumed to be the first items sold, leaving the oldest items in inventory
➢ Using the LIFO method during inflationary period will cause an increase to cost of sales and will reduce gross margin - the effect is true because newer
inventory purchases will cost more than older inventory purchases
➢ Weighted average cost = Total cost of units available ( TC ) / Total units available ( TU )
Cost of Sales - food
• In larger restaurant, it is necessary to make the following adjustments for the cost of sales - food:
➢ Interdepartmental / interdivisional transfers
➢ Employee meals
➢ Promotional expense
Responsibility accounting
• Department heads are held accountable for the performance of their departments - this is known as responsibility accounting
• Objectives of responsibility accounting:
➢ Delegate responsibility / authority
➢ Provide information for measuring performance
• Each department may be identified as a cost centre, sales revenue centre, profit centre or investment centre ( production centre )
➢ Cost centre: department which generate no direct venue, e
...
maintenance department
➢ Sales revenue centre: have little / no costs associated with their operations, e
...
hotel resort lease out a large part of its floor space to retail stores
➢ Profit centre: responsible for maximizing sales and minimizing expenses
➢ Investment centre: each unit in a large chain located in several cities, is given full authority over how it operates and is held responsible for the results of its
decisions
...
as
appropriate
• Distribution of indirect expenses is known as full-cost accounting, and enables a manager to know the minimum revenue required to cover all costs, even though
the control of some of those costs is not their responsibility
Worked example
• Distribute ( or allocate ) total marketing expenses $66,900 to the following departments
Department

Sales Revenue Direct expense Contributory income Contributory income %

Rooms

1,150,200

367,300

782,900

68%

Food

851,600

698,600

153,000

18%

Beverage

327,400

208,300

119,100

36%

Miscellaneous

38,200

19,600

18,600

50%

Total

1,073,600

Total indirect expense

842,400

Operating income before tax

231,200

Sales revenue mix effect
• Changes in the sales revenue mix will affect the net income of the hotel / restaurant even if there is no change in total indirect expenses or in total revenue
• This is due to the change in contributory income
Balance sheet items
• Assets - resources of value owned by the business entity
...
g
...
Examples of current liabilities and long-term liabilities are:
➢ Accounts payable - trade, Accrued expenses, Income tax payable, Deposits and credit balances, Dividends payable, Mortgages
• Ownership equity
➢ Equity - the interest of the owners in the enterprise
...
Changes after the date are not reflected

BHH 1103 Page 9

Week 4: Introduction to Hospitality Accounting
27 January 2021

11:24 PM

Analysis & Interpretation of Financial Statements
Introduction
• Analysis and interpretation of financial statements is the process of looking at the various parts of the financial statements, relating the parts to each other and
to the picture as a whole, and determining if any meaningful and useful interpretation can be made out of this analysis
• Therefore, this discussion will be confined to some of the more fundamental analysis techniques that lend themselves well to the hospitality industry
...
They each draw attention, albeit in a different way, to problem areas requiring investigation, and, if necessary,
corrective action
• However, sometimes one technique will identify problems that should be investigated that the other technique may not indicate
• Therefore, sometimes it is a good idea to complete both a comparative and common-size vertical analysis

BHH 1103 Page 10

Average check, cost, and income per guest
• Average for sales revenue and cost functions are another useful tool to help analyse the income statement
• When using averages, understanding how to calculate averages is essential
• The question is to find the per-guest average - but of what?
• What can be identified as total sales revenue, sales revenue by division, total cost, or cost by category?

Trend index analysis
• An index is calculated by assigning a value of 100 ( or 100% ) in period one for each item being tabulated
• Dividing the dollar amount for each period by the base period dollar amount and multiplying by 100 calculates the trend index for each period

Price and cost level changes ( Inflation or deflation )
• When comparing operating results, and in particular when analysing trend figures, the reader must be aware of the effect that changing dollar values have on
the results
• One hundred pounds of vegetables a few years ago weighed exactly the same as 100 pounds of vegetables today, but the purchase cost was much lower
• Price change over time
...
Selecting the ratios relevant to a hospitality enterprise is
important
• Financial ratios are usually produced from historical accounting information
• For a ratio to have meaning, it must be comparable to a standard or an established base ratio
• A standard ratio could be an industry average
➢ Developed through information received from hospitality organization having the same type of activities
➢ There can have average operation from which the standard ratios are determined
• Ratio comparisons between similar competitive organizations
• Good technique = compare current operating period ratios with previous operating period ratios
• For example: How does the current room occupancy ratio or seat turnover ratio compare with the same ratio previous month?
• Best method: to evaluate current period ratios to pre-determined standards for that operating period
• The pre-determined standards should consider both internal and external factors affecting the operations
➢ Internal factors: fixed and variable costs, internal operating policies, changes in sales
➢ External factors: general economic conditions and what the competition is doing

User of ratio
• Internal operating management
➢ Responsibility to safeguarding the assets, controlling costs, and maximizing profit for the business operations
➢ Ratio evaluation is the technique used by management to monitor the operation's performance against pre-determined standards to determine if the
operating budget objective are being achieved
• Current and potential creditors
➢ Have an equity claim to the assts of the operation - the liabilities
➢ A creditor may require the borrower to maintain a specified level of working capital
• The organization's owners ( including shareholders )
➢ Calculate the certain ratios to measure such items as their return on investment or the risk level of their investment
Ratio categories
• Liquidity ratios
➢ Identify whether the entity is able to meet its short-term obligations ( liabilities )
➢ Current Ratio = Current Assets / Current Liabilities
▪ In a hotel, the current ratio is normally higher than 1
...
It shows whether the business is able to pay its current liabilities in the absence of inv entory
➢ Working Capital = Current Assets - Current Liabilities
▪ Composition of Current Assets
 Inventory
 Accounts receivables
 Credit card receivables
 Marketable securities
 Prepaid expenses
 Cash
▪ Composition of Current Liabilities
 Accounts payable
 Accrued expenses
 Tax payable
 Current mortgage payable

• Credit card receivable ratios
➢ May be expressed as a percentage of
▪ Total credits sales revenue
▪ Total credit card sales revenue
▪ Total sales revenue
➢ Average credit card receivables = ( Beginning credit card receivables + Ending credit card receivables ) / 2
➢ Credit Card receivables ratio
▪ Average credit card sales / Total credit sales
▪ Average credit card receivables / Total credit card sales revenue
▪ Average credit card receivables / Total sales revenue
➢ Credit card receivables turnover ratio = Total credit card sales revenue / Average credit receivables
➢ Credit card receivables average collection period = 365 days / Credit card receivables turnover ratio
➢ Credit card turnover ratio = Total credit card sales revenue, Total credit sales revenue, Total sales revenue / Average credit card receivables
• Account receivables ratios
➢ Accounts receivable ratio = Average accounts receivable / Accounts receivable credit sales revenue
➢ Accounts receivable Turnover ratio = Accounts receivable credit sales revenue / Average accounts receivable
➢ Accounts receivable average collection period = 365 days / Accounts receivable turnover ratio
• Profitability ratios
➢ Shows management's effectiveness in income generation
Gross return on assets = Income before interest & tax / Total average assets

BHH 1103 Page 12

•

•

•

•

➢ Gross return on assets = Income before interest & tax / Total average assets
➢ Net return on assets = Net income after tax / Total average assets
➢ Profit Margin = Net income after tax / Sales revenue
Long-term solvency ratios ( or net-worth ratios )
➢ Measure a company's ability to meet its long-term liabilities
➢ Solvency: total tangible assets - total assets excluding nontangible items such as goodwill, less total liabilities
➢ Total Assets to Total Liabilities = Total Assets / Total Liabilities
➢ Total Liabilities to Total Assets ratio = Total Liabilities / Total Assets
➢ Total Liabilities to total stockholders' equity ratio ( Debt to equity ratio ) = Total Liabilities / Total Equity
Activity ratios ( Turnover ratio, Efficiency ratio )
➢ Indicate how well managers are using assets
➢ These ratios help to identify the activity or efficiency of certain classes of assets such as inventory, working capital and long-term assets
➢ The ratios express the number of times that an activity is occurring during a certain period, and can help in measuring effectiveness in using and
controlling these assets
➢ Fixed Asset Turnover: assesses the effectiveness of the use of fixed assets in generating sales revenue
➢ Inventory turnover ratio = Cost of sales / Average inventory
➢ Inventory holding period = Operating days for the period / Inventory turnover ratio for the period
➢ Working capital turnover = Total sales revenue / Average working capital
➢ Fixed asset turnover = Total sales revenue / Total average fixed assets
Operating ratios
➢ Analysis related to food, beverage and rooms operations in the hospitality industry
➢ These key business ratios are often calculated daily for sales revenue and cost analysis
➢ Labour cost percentage = Labour costs / sales
➢ Sales per server = Meal period sales / meal period servers
➢ Guest per server = guest served / number of serves
➢ Average food and beverage by meal period
➢ Seat turnover = no
...
of seats
➢ Sales per seat = sales / total no
...
of rooms cleaned = rooms per housekeeper per day, room sales revenue per front desk clerk per day
➢ Annual sales revenue per available room - diving annual revenue by the rooms in the establishment
➢ Undistributed costs per available room per year - administrative, general marketing, property operation and maintenance
Other ratios
➢ Return on Owner's Equity = Net income after tax / Average equity
➢ Earnings per share ( EPS ) = Net income after tax / Average number of common shares
➢ Price Earnings ratio ( PE ) = Market price per share / Earnings per share

Daily reports
• Hotel Manager's Daily Report and Food Service Daily Report are some of the key daily reports required to monitor the daily success level of the business
• Trends, favourable or adverse, can be detected while they are occurring so that effective action can be taken before too late

Financial Leverage
• Financial leverage refers to 'trading on equity'
...
e
...
Supervision may help to
detect collusion
➢ Collusion - two or more employees working together for dishonest purposes may go undetected for long period
• Monitor and review control systems continually to suit changing needs
• Institute employee selection and training system, so that there is a good system of screening job applicants, selecting trustworthy employees and enhance
competence
• Establish responsibilities
• Prepare written procedures for each area and for each job category
• Maintain adequate records - e
...
delivery orders, market quotations
• Separate record keeping and control of assets, which helps to prevent lapping
• Limit access to assets ( especially cash and inventory )
• Conduct surprise checks - usually in cash counting and taking inventory
• Divide the responsibility for related transactions, so that the work of one person is verified by the work of another
• Explain the reasons to employees who carry out internal control functions
• Rotate jobs to prevent collusion
• Use machines whenever possible
• Set standards and evaluate results
• Design forms and reports to provide the information
• Bond employees to protect from losses by dishonest employees
• Insist on mandatory vacations
• Create an audit trail which documents each transaction from start to finish
• Control documents - by serial numbers, etc
• Institute company audits - an internal audit to appraise internal control system, and external audit by independent certified auditors
Controls of purchases
• In order to have control over purchasing, it is necessary to divide the responsibilities among several individuals or departments
• Five basic documents to achieve various purchasing tasks:
➢ Purchase requisition
➢ Purchase order
➢ Invoice
➢ Receiving report
➢ Invoice approval form or stamp
Purchase requisition

Purchase order

BHH 1103 Page 14

Invoice approval and paid form

Storage
• Immediately upon receiving goods, move them to storage areas or send directly to departments that requested for them
• Proper storage facilities, lock & security are necessary
...
One person should be responsible for the accountability & administration of the
fund
• Random spot checks should be made
• All other disbursements should be made by cheque and supported by an approved invoice
...
The person with this authority should have nothing to do with payroll cheque preparation
• Procedures should be implemented for recording hours worker for hourly wages
• Where necessary, a separate payroll bank account should be maintained
...
Review information in the bank statement, noting the date and balance reported by the bank, which will be reconciled to the check register ( check book )
2
...
Deposits made but not shown on the
bank statement are deposits to be added to the bank statement balance
3
...
The balance of the check register and use information regarding additions, to the company bank account are not known until receipt of the bank statement
...
g
...
g
...
In the short run, some costs are uncontrollable
• Joint cost
➢ One that is shared by two or more departments or areas
➢ For example, a dining room server who serves both food and beverage
➢ The server's wages are a joint cost and should be charged partly to the food department and the remainder to the beverage department
• Discretionary cost
➢ Cost that may or may not be incurred based on the decision of a particular person - e
...
maintenance costs that are not urgent
➢ For instance, the building will have to be painted at some time in order to maintain its appearance
• Relevant and non-relevant costs
➢ A relevant cost is a cost that affects a decision
...
It does not affect any future decisions
➢ If the same restaurant had spent $250 for an employee to study the relative merits of using mechanical or electronic registers, the $250 is the sunk cost
• Opportunity Cost
➢ Cost of not doing something
...
e
...
If sales revenue is zero, then no variable costs are incurred
• Semi-fixed or semi-variable costs
➢ Contain both an element of fixed cost and an element of variable cost, e
...
payroll
• Standard cost
➢ What the cost should be, for a given volume or level of sales
Allocating indirect costs
• Indirect costs are allocated to sales revenue areas or departments on a reasonable basis
• The indirect costs allocated will affect the performance of each department - which is the responsibility of the departmental managers
• Indirect costs are allocated for different management decisions
Management decisions
• Should we operate or rent out?
• Example: Below is the data for a month
...
Should we retain
the operations or rent out?

• Discussion
➢ Distribute Indirect cost Snack bar loss 1,200
➢ Lease 750
➢ Indirect cost 19,350 assumed by Dining
➢ Operating income has decreased 1,800 ( 13,200-11,400 )

• Adjusted Indirect Cost

Example 2
• Which piece of equipment should we buy?
Example: A motel owner paid his accountant $500 to research which photocopier is the better buy
...
Below is the information gathered

• Example Decision

Can we sell below total costs?
• If variable costs are covered and there is a contribution toward fixed costs, then selling below total cost can be considered
➢ E
...
a catering business' total fixed cost is $146,000
...
Variable cost is 60% of sales
...
Advise

BHH 1103 Page 18

• Example: A restaurant can choose between paying fixed monthly rent $5000 and variable rent 6% of its sales
...
06 = $1,000,000
▪ If expected sales = $1 m, either choice is the same
▪ If expected sales > $1 m, choose fixed rental
▪ If expected sales < $ 1 m, choose variable rent
Separating costs into fixed and variable elements
• Semi-variable costs must be broken down into fixed costs and variable costs to aid short-term decision-making
• Methods used to separate total costs into fixed and variable components include:
➢ High-low method
▪ Units and Wage Cost
1) Deduct the low figure from the high figure of each unit and cost categories
2) Divide the change in wage costs by the change in units sold ( Variable cost )
3) Use the Variable cost per unit answer to calculate the fixed cost element

▪ Sales Revenue
1) Deduct the low figure from the high figure for each sales revenue and cost categories
2) Use the change in sales revenue and wages costs from Step 1 to find the variable cost per dollar of sales revenue
3) Use the Variable cost per dollar of sales answer to calculate the fixed cost element

➢ Multipoint graph method

➢ Regression analysis method
▪ Example - using the above information, determine the fixed costs and variable costs using regression analysis
 The regression line is y = a + bx
 Or, total costs = fixed cost + variable cost
 Thus, 'a' represents fixed costs
 Fixed costs =

→ N = No
...
04 a month
 Answer could be rounded to $8,800 a month, which gives us a total annual fixed cost of 105,600

BHH 1103 Page 20

Week 9: Introduction to Hospitality Accounting
13 March 2021

09:02 AM

Pricing
The Bottom-up approach to pricing
• Pricing theory suggests that a hospitality operation should price its rooms and its food & beverage menu items because it is necessary to control costs and
maximise profit, while at the same time offering guests an appropriate value for their money
• Good price structures aim to provide a satisfactory return on investment
Different methods of pricing
• Intuitive method - prices charged may be unrelated to profits
• Rule of thumb method - say, 2
...
All direct costs ( e
...
cost of the food item, labour co st and variable operating costs ) are
expressed as % of sales
• Identify the operating costs - these are the fixed costs or overheads
...
At breakeven, these fixed c ost =
contribution margin
• From the breakeven equation, estimated sales can be calculated, so price can be established
Worked example - Prepare an income statement at breakeven
Known operating costs:
Management salaries 38,000
Administrative expense 18,000
Depreciation expense 24,000
Utilities expense 6,500
Property taxes expense 4,500
Total known costs 91,000
Direct costs:
Cost of sales 38% of sales
( a variable % of total sales revenue )
Labour cost 25% of sales
Operating cost 17% of sales
Income before fixed costs 80%
Sales revenue 100%

Income tax
• If the tax rate is 30% then
➢ Income tax = 30% x Income before tax
• If the tax rate is r, then;
➢ Income after tax = ( Income before tax ) ( 1- r )
• Therefore, income tax can be calculated
➢ Tax = ( Income after tax ) - ( Income before tax )
Calculation Income Tax
• Operating income ( before tax ) x tax rate
➢ Tax: $68,750 x 36% = $24,750
Average check
• The average check indicates the average amount each customer will spend in the restaurant over the next year to achieve the t otal sales revenue objective
• Assuming a restaurant is open 6 days per week for 52 weeks, the operations will be conducted for 312 days
• Average check = Total annual sales revenue / ( Seats x Seat turnover x Operating days )
Average check by meal period
• Most restaurants serving more than one meal per day will have an average check will increase from breakfast to lunch and incr ease again from lunch to dinner
• Average check per meal period = ( Meal period sales revenue (%) x Total sales revenue ) / ( Seats x Meal period seat turnover x Operating days )
Pricing menu items
• A standard cost for each menu item is established - this standard cost is used for pricing decisions
• A cost percentage is then used to determine selling price of the menu items
• Setting selling price is also influenced by
➢ The market being serviced - what potential customers are willing to pay
➢ Competitive operations for the same menu
➢ The sales revenue mix
Integrated pricing

BHH 1103 Page 21

• Integrated pricing
➢ Products should not be priced independently of each other
...
Increase of seat turnover will offset a declining average check
...
4, pg 256 ) showing the menu items, number sold, menu mix %, item food cost, selling price, contribut ion margin, costs, revenues, and
analysis of each menu item ( using Kasavana & Smith's model ) as
➢ Stars ( high contribution margin & highly popularity )
➢ Plowhorses ( low contribution margin but low popularity )
➢ Puzzles ( high contribution margin but low popularity )
➢ Dogs ( low contribution margin & low popularity )

Room rates
• Room supply cannot be increased in the short-run, thus turnover cannot be increased
• The normal turnover rate of a room is once per 24-hour period
• The dollar per thousand method:
➢ Average room rate = ( Cost of construction of room / $1000 ) x 1
• This approach ties room rates to historical construction costs and ignores current costs, e
...
financing costs
• The bottom-up approach:
➢ Average room rate = Sales revenue required / Rooms to be sold
• The average room rate is a guide to pricing the actual room rate for each specific type of room
• Sales revenue required is determined through cost projections for the next year
• Rooms to be sold = Rooms available x Occupancy rate
➢ 50 rooms x 70% x 365 = 12,775 rooms
Example: Single and double room rates
• A hotel has 50 rooms, occupancy rate 70% and double occupancy rate 40%
...
42
...
Calculate both single and double room rates
...
42 = $1449
...
7
Y
= $ 37
...
42 double room rate
▪
Factors affecting average room rate
• Family rates
• Commercial discounts
• Travel agent commissions ( unless accounted for separately )
• Convention or group rates
• Special company or government rates
• Weekly or monthly special rates
• Example: Room rates based on room size
➢ A motel has 30 rooms of size 220 sqft ( including room entranceway, closet, etc ), and 20 rooms with 180 sqft
...
42
...

➢ Solution:
▪ Total sqft = ( 30 x 220 ) + ( 20 x 180 ) = 10,200
▪ Average occupied room = ( 30 + 20 ) x 70% = 35
▪ For each night,
We expect to sell 70% x 10,200 = 7,140 sqft
Daily room revenue = ( 35 x 41
...
203 per sqft
Room rate for
Small room 180 sqft x $0
...
54
Big room 220 sqft x $0
...
66
• Average occupancy
➢ Average occupancy rate ( expressed as % of total rooms available ) is a useful indicator of operational efficiency
➢ Analysing the daily trends of the average occupancy rates helps in decisions like when to hold promotional activities and how advertising should be
geared to improve occupancy
• Discounts
➢ Room rate discounting is the practice of reducing prices below the rack rate
➢ Rack rate is defined as the maximum rate that will be quoted for a room
Discounts are a normal cost of business to maintain occupancy levels, and this reduced room revenue is compensated for by extra profits from those

BHH 1103 Page 22

➢ Discounts are a normal cost of business to maintain occupancy levels, and this reduced room revenue is compensated for by extra profits from those
room guests patronising the hotel's food & beverage facilities
➢ A discount grid may be used to show the impact of various room rate discounts
▪ Discount grid

➢ In room rate discounting, an equation can be used to calculate the equivalent occupancy needed to hold total revenue less marginal costs constant:
➢ Equivalent occupancy =
Original occupancy x ( Rack rate - Marginal cost ) / [ Rack rate ( 1 - discount rate ) ] - Marginal cost
• Potential average room rate
➢ Potential average room rate is defined as the average rate that would result if all rooms occupied overnight were sold at rack rate
➢ The potential minimum average rate is the sales revenue per room if all the hotel's rooms were each occupied by one person ( single occupancy )
➢ Potential maximum average rate is the rate if all the rooms were double-occupied
➢ The difference between maximum and minimum potential average room rates is known as the rate spread
➢ The potential average room rate can be calculated as follows:
Potential average room rate = potential average single rate + ( double occupancy rate x rate spread ) Comparing actual average to potential average can
be expressed in %:
( Actual average / Potential average ) x 100
• Example: Room rates of each market segment
➢ Given the following information of a hotel:

The potential average room rate is %79
...
34
Conference: discounted rate = $86
...
71
Tour: discounted rate = $86
...
07
Other pricing consideration
• Elasticity of demand: the responsiveness of demand for a product / service when prices are changed
➢ If demand is elastic, a change in price will cause total sales revenue to change in the opposite direction
➢ If demand is inelastic, a change in price will cause total sales revenue to change in the same direction
➢ Factors affecting elasticity of demand
▪ Available of substitutes
▪ Income levels of the business' customers
▪ Habit customers ( and brand loyalty )
▪ Thus, the market orientation approach to pricing is important in short-run decision making
...
If the selling price is increased to $220, the demand will fall to 950
units
...
4
▪ So we have P = a - 0
...
4 x 100
▪ 200 = a - 400
▪ A = 600
➢ Step 3
▪ Demand function is therefore
▪ P = 600 - 0
...
8Q
▪ MC = 140 ( variable costs )
▪ MC = MR
▪ 140 = 600 - 0
...
8Q
▪ 0
...
8Q = 460
▪ Q = 460 / 0
...
4 x 575
▪ P = 600 - 230
▪ P = 370
▪ So profit maximising price is $370 and at that price company will 575 units
➢ Results
▪ Revenue ( 370 x 575 ) = 212,750
▪ Variable cost ( 575 x 140 ) = 80,500
▪ Fixed cost = 36,000
▪ Profit = 96,250
• Cost Structure: the breakdown of costs into fixed costs and variable costs
➢ Fixed costs are those that normally do not change in the short-run, e
...
manager's salary, insurance
➢ Variable costs are those that vary directly on sales volume, e
...
food cost
➢ A business with high proportion of fixed costs will likely have less stable profits as the volume of sales revenue fluctuates
➢ Competition: in monopolistic or near monopolistic situation, a hospitality enterprise has more flexibility in pricing
➢ In oligopoly, there tends to be one dominant business and several smaller competitive ones
...
Differentiation, or
psychological pricing may be used
➢ Cost plus pricing
▪ Advantage:
 Widely used and accepted
 Simple
 Can be delegated
 Justification for price increases
 Encourage price stability
▪ Disadvantage:
 Ignores the market
 Different absorption methods
 Doesn't guarantee profit
 Which cost?
 Inflexible
 Circular reasoning
➢ Yield management
▪ Using yield statistics and basic principles of supply & demand, managers seek to allocate services to patrons in such a way as to maximise sales
revenue
▪ Performance is measure by the yield statistic
 Yield = ( Actual sales revenue / Potential sales revenue ) x 100
➢ Market Based Approaches: New Products
▪ Penetration pricing
 Initial low price
 High volumes
 Charging low prices initially, in order to obtain high sales volume and market share
 Company wants to shorten the initial period of the product lifecycle
 Aims to gain rapid acceptance of product in the market
 There are significant economies of scale to be achieved
 Company wants to discourage new entrants to the market
 Tend to be low ticket repeat buy consumbles
▪ Market skimming
 Initial high price
 High profits
 Charging high prices initially, in order to gain high unit profits early in the product's life and reduce the payback period
 Exploit early adopters because product is innovative, different, and at the forefront of technology: customers are prepared to pay high prices
to be 'one up' on people who do not own it
 Heavy advertising spend in product's early life
Short life cycle and development costs needs to be recovered quickly

BHH 1103 Page 24

 Short life cycle and development costs needs to be recovered quickly

BHH 1103 Page 25

Week 11: Introduction to Hospitality Accounting
15 March 2021

01:50 AM

Profit
CVP assumptions and limitations
• Assumes all costs can be separated into fixed and variable elements with reasonable level of accuracy
• Assumes fixed costs remain unchanged
• Assumes a linear relationship between variable costs and sales revenue
• Limited to specific situations or departments
• Assumes economic conditions remain stable during the period being evaluated
• Does not consider non-financial factors
Breakeven analysis
• At breakeven, sales revenue = total costs
• i
...
Sales revenue - Total costs = 0
• Rearranging the breakeven equation,
Sales - Variable costs = Fixed costs
Or, Contribution = Fixed costs
Quantity ( contribution margin ) = Fixed Costs
So, Quantity = Fixed costs / Contribution margin and
Sales = Fixed costs / Contribution margin ratio
The CVP approach to decisions
• In CVP analysis, costs are separated into fixed and variable components
...
A cleaner takes half an hour to clean a room
...

Contribution margin: food 45%, beverage 60%
Required: $5,000 increase in operating income
Determine the required combined increase in sales revenue
Solution: combined required sales revenue = $5000 / [ ( 75% x 42% ) + ( 25% x 60% ) ]

BHH 1103 Page 26

Income tax
• For the sole proprietor or partnership, the business does not pay income tax
...

• For an incorporated company, income tax is payable on operating income
...
It can also be expressed in other quantities e
...
no
...
of rooms to be
occupied, etc
• Objectives of budgeting include:
➢ To provide organized estimates of future operations or needs, broken down by departments
➢ To provide management with long-term and short-term goals for planning future activities
➢ To provide information for control, by comparing actual results against budget plans, and making adjustments where necessary

Types of budgets
• Long-term budget:
➢ A plan for 1-5 years ahead, concerning strategic issues like expansion or creating a new market
• Short-term budget:
➢ A plan for a day, week, or year, involving the management of resources to achieve long -term objectives
• Fixed budget:
➢ A plan based on a certain level of activity or sales revenue
• Flexible budget:
➢ Is based on several levels of activity
...
g
...
Department heads are involved
• Department managers or supervisors handle daily or weekly short-range budgets internally

Advantage of budgeting
• Encourage employee participation, thus improves communication & motivation
• Forces involved employees to consider alternative courses of action
• Standards are pre-determined for comparison, evaluation and control
• Forces those involved to be forward-looking, and to consider both internal and external factors
Disadvantages of budgeting
• In large organizations, preparing budgets can be very costly and time-consuming
• Budgets are based on forecasted or unknown factors, and so could be unreliable
• Confidential information may not remain confidential
• The 'spending to the budget' may not be in the best interest of the organization
The budget cycle
• The budget cycle is a five-part process:
➢ Establish attainable goals or objectives
➢ Plan to achieve these goals or objectives
➢ Compare actual results against those planned, and analyse the variances
➢ Take corrective action where required
➢ Improve the effectiveness of budgeting

Departmental budgets
• Preparing budgeted monthly income statements is necessary so that comparisons with actual results can be made each month
...
g
...
In a dining
room, alcoholic beverage is about 24%-34% of food sales revenue
Zero based budgeting
• Zero-based budgeting requires each department to justify in advance the entire annual budget from a zero base
• No expenses can be budgeted for unless they are justified in advance
...
g
...
g
...
75/room = $8250
• Actual 3100 rooms x $3
...
75 ) x 3100 = $775
Volume variance = ( 3100-3000 ) x 2
...
g
...
g
...
of meals )
▪ X is the independent variable ( e
...
no
...
Bothe descriptive be concise and primarily related to the demand for rooms ( since other services offered by a hotel are generally derived
directly from rooms' usage )
Site Evaluation
• If an in-depth section on the site location is included in the study, that section should include detailed maps of the location
...
Transportation routes, including, for example, routes to and from the airport, should be shown
...
Finally, any other important matters such as zoning
restrictions, height restrictions, parking space requirements, future traffic flow changes, and availability of utility services should be part of this section
Supply and Demand Information
• There are three possible reasons for a new hotel
...
This requires four steps:
➢ Calculate the most recent 12-month average occupancy rate of the most competitive hotels
➢ Calculate the composite growth rate of demand from various sources
➢ Calculate the additional rooms required year by year
➢ Calculate the future supply of rooms required

Space Recommendations
• The feasibility study at this point could include information that the architect might require to prepare more detailed plans
• This should include not only such items as the number of rooms and the proportion of rooms of various types ( singles, doubles, twins ), but also the
proportion of space and number of seats recommended for food, beverage, and related facilities, such as meeting rooms and public spaces ( lobbies ),
and possibly even suggested themes for bars and restaurants
• Back-of-the-house facilities and space requirements ( kitchens, storerooms, offices ) should be included, as should parking space requirements
• Finally, any recommendations concerning recreation facilities should be covered in this section

BHH 1103 Page 30



---