Question

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.

• Introduction to Management Accounting
• Cost-Volume-Profit Analysis   
• Using Relevant Costs to Make Short-Term Decisions
• Cost Management Using Full Costs
• Budgeting

Answer 1

Cost Volume Profit Analysis glances in to the effect of cost and volume on working benefit. CVP investigation otherwise called make back the initial investment examination to figure make back the initial investment point. Earn back the original investment point is that where organizations income is equivalent to fixed post..

CVP Analysis makes certain presumption that the selling cost, fixed expense and variable expense per unit is steady. CVP examination decides the adjustments in cost influences organizations productivity.

Amy Richardson has been bought inn by getting credit. She surrendered her situation in inn to secure lodging.

Anyway her compensation salary is called as cost of chance. What's more, open door cost is considered as important expense to decide cost of procurement choice.

Relevant cost concept:

Pertinent expense is the cost that is considered as applicable so as to decide. Variable expense is applicable expense yet fixed expense isn't important in deciding. Here circumstance cost , enthusiasm on credit cost variable expense to run lodging are considered to settle on buy choice.

Cost management using full cost and budgeting

Cost the executives utilizing Full cost strategy implies task of all expense including immediate, circuitous, fixed, variable expense to item or administration. Through this strategy it is determined that the genuine expense to make item or administration. This strategy for costing commonly used to decide absolute cost required for making item or administration. Then again cost administration through planning implies cost arranging before real spending. It includes how much cost we may bear for specific item or administration. Cost the board through planning should consider variable expense and furthermore totally fixed expense to ascertain item cost. Before any venture usage it important to make cost the board arrangement that considers all elements and segments of cost and anticipated outcomes.

Assessment of plan can be made by contrasting comparing actual results with budgeted cost .

For this situation Amy Richardson has make certain mistakes while getting lodgings.

First she ought to be considered present gainfulness of hotel business.

Rate of occupancy of rooms and lodgings consistently. Recognize season in which inhabitance is high. What's more, founded on this cost choice should take.

CVP analysis is significant that causes us to comprehend effect of cost changes on benefit. Additionally critical to figure Break even point to decide when the income from activity will take care of fixed cost.

She should thought on offer from tour operator, by computing BEP. It is required to decide if 20% decrease in cost will cover BEP. In the event that it even just spread BEP, important to think about the idea to running lodging and to hold client that assists with developing business in future.

While procurement of lodgings it is important to considers applicable expense. What's more, overseeing cost by full cost strategy.

Planning before procurement of lodgings it is a significant costing method to discover cost that assists with finding out productivity on obtaining.

Anyway it is suggested that Amy Richardson should take in to accounts costing techniques to decide precise item cost that causes her to take choice.

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