Introduction
Management accounting constitutes an important tool for making decisions in an organization. The current paper discuses the utilization of management accounting in the process of making decisions in any organization that operates in the hospitality industry within the hotel subsector. The company may be operating during the economic recession. In such a period, it has to look for strategies of ensuring it does not close its operations. Using such an organization as a case study, the paper considers the decision made by managers. Besides, it identifies various alternatives that define the decision. It also discusses the Cost-Volume-Profit analysis (CVP) as an accounting method that is helpful to organizations in similar situations. Finally, it offers suggestions on the limitations of the accounting methodology.
Decision made by managers
The Institute of Certified Management Accountants (ICMA) states that management accountants deploy their professional knowledge and skills to prepare and/or present financial information in a way that makes it possible to arrive at requisite decisions on policy formulation, planning, and control (Clinton & Anton, 2006). Thus, decisions made by management accountants focus on the future increased performance of an organization. The TASCO, a hypothetical company operating in the hospitality industry (hotel subsector), was concerned with its capacity to maintain high performance during the recession. It called upon its management accounting department to make the most appropriate recommendation in an attempt to derive a solution to this challenge.
The management made a decision to focus on investment appraisal. This process involves an evaluation of the attractiveness of any investment proposal by deploying various methods such as the typical rate of return, the reimbursement period, the domestic rate of return, and net current value among others (Clinton & Anton, 2006). In this context, managerial accounting is deployed internally within TASCO as a profitability-monitoring tool. Elements of investment appraisal are crucial in forecasting organizational performance. For example, using break-even analysis, hotels’ managerial accountants are able to determine the quantities that are necessary for sales to ensure sustained performance without necessarily making profits.
In an investment appraisal, the ability of an organization to break even within the minimal time is crucial. It gives a rough approximation of the time that the business will start making profit (Sharman, 2003). TASCO utilizes managerial accounting as an incredible tool for determining the optimal output levels in terms of room occupancy, products, and services that are offered to its clients. The management makes decisions on cost volume analysis. It also considers optimizing resource allocation.
Identification of Alternatives that Define the Decision
Several alternatives define any decision in an organization. Within TASCO’s industry, relevant costs and revenue information are worth considering while making decisions. Decisions are merely calls to make choices between two or more competing potential choices. Any accounting management information system that is capable of meeting precisely its objectives must have relevancy. This claim implies that management accounting information needs to correlate with decisions made by managers (Clinton & Anton, 2006).
In the service sector, such as a hotel that is struggling with the advent of recession, relevant costs, and revenues will appreciate the value of information, which plays proactive roles while making decisions during various situations. For instance, “before the management of an enterprise can make an informed decision on any matter, it needs to incorporate all relevant costs which apply to a specific decision at hand in its decision-making process” (Clinton & Anton, 2006, p.791). From this claim, inclusion of costs that are not relevant or exclusion of relevant cost results in making the management base its decisions on misleading information. The repercussion is wrong decision making. On the worst scale, this mistake may make TASCO sink into losses. Hence, it can lose market share and ultimately wide up its operations. To prevent this situation from happening, managerial accounting has an important part to play at TASCO and any other organization. It can ensure accuracy and timeliness of all information relevant for decision-making. When this role is well articulated in TASCO’s decision-making process, the management can make quick and responsive decisions to circumstances that may lead to its departure from forecasted performance.
Apart from basing the decisions of TASCO on investment appraisal to ensure high performance at all economic situations, an alternative is utilizing CVP. Cost-Volume-Profit analysis (CVP) is an essential component of managerial cost accounting that aids in making short-run decisions while at the same time making elementary instructions. Fundamentally, CVP constitutes an expansion of the concepts of break-even analysis.
Decision-making requires budgeting, which comprises a critical tool that is employed in managerial accounting to facilitate planning. Apart from planning, budgeting also facilities control. In an attempt to cope with the challenges of the 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.42). Planning can make TASCO managers sufficiently aware that its current decisions have plausible impacts on its future business existence.
To arrive at an appropriate decision, it is important for decision makers to have realistic forecasts of sales, overheads, cash flows, procurement net margins, and different costs. Strategy Corporate Finance (2011) confirms that with such forecasts, managers make important decisions concerning the future of an organization such as choices on the state of service, savings, earnings, transactions, supply levels, non-payers and payers, and overdraft demands among others. Indeed, management accounting arm of the organization is responsible for making such forecasts. Consequently, deploying management accounting ensures that an organization endures recession by making appropriate decisions based on forecasts to adjust costs so that they do not outdo revenues.
Accounting Method that is helpful to Similarly situated Managers
Any organization that is in need of maintaining operations during hard economic times may deploy different accounting methods. One of such methods entails the Cost-Volume-Profit analysis (CVP). During times of economic hardships, the focus of any organization is mainly on covering all its costs without inevitably making profits to ensure that its operations are not brought to a halt (Sharman, 2003). Thus, an organization must determine its critical point of operation at which revenues equal the total costs. At this point, neither profit nor loss is made. The point forms the basic tenet for detailed CVP analysis.
Discussion of the Accounting Method
For an organization that is experiencing a recession, CVP emerges a subtle tool for making short-term decisions. In particular, the break-even point is critical. During the recession, the main endeavor is usually to put in place mechanisms for ensuring an organization makes sales that are just sufficient to service all its expenses (costs) (Sharman, 2003). The formula that is applied in managerial accounting for CVP analysis is
px = vx+FC+Profit
p is the price per unit, v is the variable cost per unit, x denotes the produced units, which have been sold, and FC is the total fixed cost (Atrill & McLaney, 2007). From this formula, it is clear that apart from determining the break-even point, CVP endeavors to determine the appropriate sales mix. It also helps in determining the variable cost per unit, unit-selling prices, volume of level of activity, and the total fixed cost.
Hypothetical Illustrations of the Uses and Limits of the Method
Amid numerous benefits that an organization can leap from embracing concepts of management accounting in the service sector, its methodologies share common limitations. The first limitation is that the concept of relevant cost and revenue information is largely based on quantitative decision attributes (Artill & McLarney, 2007). This limitation is critical since qualitative aspects of various decisions are equally important in the decision-making process.
An illustration of limitations for any management accounting methodologies rests on the platform that they focus more on quantitative aspects while making certain managerial decisions. For example, in the hotel subsector, some factors that are immeasurable by dollars and/or cents are negated, yet they can immensely affect the performance of an organization in the sector. Perhaps, from management accounting financial rationale, it sounds substantive to relocate a hotel to regions with low wages. This strategy is perhaps necessary to cut costs to enhance the hotel’s ability to endure the recession. Upon relocation while applying concepts of management accounting, it becomes possible to compute the savings on wages that occur while precisely computing the myriads of cost increments such as import duties and shipping costs. However, it fails to factor in savings that are attributed to goodwill of various community members and/or public relations challenges that are encountered in the new location.
Managerial accounting methodologies are subjective in nature. Subjectivity is more pronounced when metrics and methodologies of performance measurement are considered. Barton (2001) asserts that biasness and personal beliefs of management accountants influence the measurement of performance. This situation is particularly problematic when seeking to realize the role of management accounting in an organization. For instance, a management accountant may be required to measure worker productivity in an organization. He or she may focus predominantly on outputs and neglect the worker inputs. This situation profoundly affects the overall productivity of workers as determined by management accounting. Consequently, the organization is affected negatively since the information garnered is not appropriate for making decisions. Conflicts of interest may also arise, especially where workers have the perception that they are not evaluated fairly (Palmrose, Richardson & Scholz, 2004). In the context of an organization that is experiencing a recession, it may suffer even more due to decreased worker morale, which translates into low output per worker.
Some scholars contend that management accounting faces standardization issues. For instance, Badertscher (2011) says, “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 procedures that are applicable across all organizations. Management accountants may come up with their own metrics that are applicable to a given organization. This case introduces the challenge of generalization of the evaluation and deductions that have been reached through the application of such metrics across different organizations.
To illustrate the above claim, an organization may compute its own critical point of operation under the CVP approach. However, this claim does not imply that all organizations share a common critical point of operation or BVP. Therefore, evaluation and financial benchmarking becomes inconsistent. Lack of (or inadequate) standards infers that management accountants need to develop extra knowledge for them to interpret accounting systems that have been developed by other competing organizations.
Conclusion
Management accounting may enormously help a hotel that is going through challenges of downturn through the provision of mechanisms of investment appraisals, alternative sources of finance, and decision-making under various situations. It has a role in providing information on relevant costs and revenues. It also provides tools such as Cost-Volume-Profit analysis, which make it possible to employ budgeting as a means of planning, controlling, and conducting financial analysis and financial health checks. However, management accounting methodologies present some limitations. They lack standardization. Besides, they are subjective. Additionally, concepts of relevant costs and revenue information are highly dependent on quantitative aspects. However, management accounting is a subtle way of ensuring that service sector organizations such as the hypothetical company endure the recession.
Reference List
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