Enter your answers directly in the spaces provided below.
Question 1: Usefulness of Management Accounting in a Hotel (70 points)
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel
owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she
had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of
the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during
the past few years, Amy thought that the price of the hotel was reasonable, so she decided to purchase
the hotel. She resigned her position, obtained a loan, and purchased the hotel.
During the first year as a hotel manager, Amy received an offer from a tour operator who proposed to
guarantee a considerable number of room reservations, including during the off-season. However, she
turned down the offer because the tour operator asked for a 20% price reduction compared to the regular
room rate. A few weeks later, she decided to shut down the restaurant, located in the main building of the
hotel, in order to save expenses. With regard to general expenses, she was particularly concerned with
the high room cleaning and service costs. On the sales side, although the reservations for the cheaper
standard rooms were a bit sluggish, the more expensive large-size superior rooms had a very good
occupancy rate of over 90%.
The following year, there was a severe economic downturn and also a very bad weather season that
reduced the number of guests and also caused a resulting mold situation in the hotel building that required
expensive repair work. Amy ran short of cash, became emotionally distraught, and eventually had to sell
the hotel at a significant loss.
Required:
Analyze Amy’s purchase decision and the subsequent events using key management accounting tools
and concepts. Make sure that you clearly indicate how each tool/concept could be used to explain
potential management errors that Amy had made and could have helped her to improve decision-making
and the financial results of the business.
Hint: There are tools from all five sessions of the course that are potentially relevant to analyze this
managerial situation. Credits will be awarded according to the following scheme:
-
Session 1 – Introduction to Management Accounting
10 points
-
Session 2 – Cost-Volume-Profit Analysis
20 points
-
Session 3 – Using Relevant Costs to Make Short-Term Decisions
20 points
-
Session 4 – Cost Management Using Full Costs
10 points
-
Session 5 – Budgeting
10 points
Enter your analysis pertaining to each session directly into the spaces provided below.
2/6
Session 1 – Introduction to Management Accounting
First, Amy based her analysis on the most recent financial statement. Or these statements
are used in Financial accounting and not Management accounting. The problem is that to rely
on such kind of document (specially to invest), you have to be sur that the data is reliable and
objective. Maybe the data collected wasn’t as relevant as she thought. But it’s not a mistake to
use a financial statement, it’s even a good idea, but she should have completed her analysis with
customer measures (Satisfaction and market share for example), and she should have perform
a SWOT and PESTEL analysis of the hotel, to have a clear idea of the viability of the project.
Session 2 – Cost-Volume-Profit Analysis
The CVPA is used to define a relation between variability of costs and the consequences on
profit. Amy didn’t pay attention to this relation before buying the hotel.
Amy needs many information such as:
- The number of rooms that must be reserved to make profit
- The prices for a night = selling price per unit
- The number of clients predicted and the duration = volume of activity
- Electricity, water etc = variable costs
She also must pay attention to what we call the cost driver : it is a variable that influences the cost, for
example the weather.
The CPVA is also used to define the risk, and in this case, Amy must define a margin of safety.
Session 3 – Using Relevant Costs To Make Short-Term Decisions
The tour operator
Amy refused their offer, it’s what we call a special-order decision. But she didn’t really take
the time to analyze the offer, and to make sur that she was taking the right decision. The offer
was interesting because it would assure a fix quantity of cash flow.
Of course, calculus were required to know if the hotel would make money with it, or lose
money, but the offer was interesting.
Shutting down the restaurant
It was a decision that she maid, in order to reduce expenses. But perhaps she didn’t think on a
long term: having a restaurant has a cost, but it can also be a source of revenue. For example, it
can attract client.
Session 4 – Cost Management Using Full Costs
Thanks to full costs, we can evaluate the performance of the entire hotel, and it works with 2
methods: contribution approach and absorption approach.
Amy only has a contribution approach (short-term), so her management cannot be efficient because
without an absorption approach she cannot know the total cost of the hotel, and this could be a real tool
to manage her business.
3/6
Also, 2 fundamental costing processes exist :
cost accumulation and cost assignment. But Amy, only wants to have the higher rooms cleaned, so the other
ones look neglected, and this could cost money.
Session 5 – Budgeting
To get back on track Amy needs a master budget, which will set a cap for the next months. A
master budget must be detailed, so she can follow how the situation evolves, and it will force
her to stop making short term decisions.
Once the budget is ready, she will be able to reevaluate the decision she maid, to know if they
were good or not, and to fix them if required. It will also help her to make future decisions, and
to know if they are good or not.
4/6
Question 2: Preparing a Cash Budget (30 points)
Refer to Amy’s hotel in Question 1. Prepare a cash budget for the first four quarters after Amy’s purchase
of the hotel. To answer the question, invent some basic cost and revenue data. Enter the numbers directly
in the table below. The table of the cash budget itself should not exceed 15-20 lines. In addition to that,
make sure to explain your underlying assumptions and comment on the results in the space provided
below the table.
Credits will be awarded according to the following scheme:
-
10 points – calculation of cash receipts, including assumptions and comments;
-
10 points – calculation of cash disbursements, including assumptions and comments;
-
10 points – for overall coherence / form, and overall conclusions/comments
Cash Budget for the first four quarters:
Cash Item
Beginning cash
balance
Collections from
customers
Payments
for
operating
expenses
Total
cash
available
Borrowing
1st Quarter
0
2nd Quarter
72 930
3rd Quarter
194 035
4th Quarter
230 845
138 930
237 105
289 740
37 455
113 000
113 000
177 000
113 000
25 930
124 105
112 740
-75 545
3 000
3 000
3 000
-3000
-3000
-3000
121 105
109 740
-78 545
50 000
Interest (2% per 3 000
month)
Total cash from 47 000
financing
Ending
cash 72 930
balance
Add additional lines as needed.
Underlying assumptions and comments
200$ a high room, and 130 for a standard one = 165$ average for a room
Calculations :
Total cash available = Beginning cash + Collection from customers – operating expenses
Total cash from financing = Borrowing – interest
Ending cash balance = Total cash available + Total cash from financing
1st quarter: (off-season)
à 842 clients à 842*165$ = 203 610 $
à Operating expenses = 30 employees * 1200$ * 3 months = 108 000$ + 5000$ advertising
= 113 000$
Let’s assume that she has a 50 000$ loan
5/6
She starts paying the interest (2%) on
the first month = 1000$*3 = 3000$
2nd quarter: (High season)
à 1437 clients à 1437*165$ = 237 105$
à interests and operating expenses remain the same
3rd quarter: (High season)
à 1756 clients à 1756*165 = 289 740 $
à Amy hired more people because of the work: 45 employees * 1 200$*3 = 162 000$
She decided to add extra activities to please her clients (10 000$) and had to clean the pool (5000$)
Operating expense = 177 000$
4th quarter: (Off-season)
Economic recession and bad weather
à 227 clients à 227*165 = 37 455$
Operating expense are the same as Q2 and Q1 = 113 000$
Amy lost a lot of money during this quarter.
6/6