NAHM 3100 - Hospitality Accounting Test 1

Short Distribution Chain

Services and products go directly from the provider to the consumer with very few or no middlemen.

Labor Intensity

Operations rely heavily on human workers and personal interactions rather than total automation to deliver service

Seasonality

Demand fluctuates widely depending on the time of year, weather, holidays, or local events, creating peak and off-peak periods.

Rapid conversion of raw materials

Inputs like food ingredients transform quickly into finished products, and lodging services are consumed immediately upon arrival.

Flow of Accounting Data

• Source Documents (Invoices, Bills, ETC)

• Accounting Treatment (Journals, Ledger, Trial Balance)

• Financial Report (Balance Sheet, Income Statement)

Business Entity Concept

a business and its owner are separate entities

Money Measurement Concept

recording of facts must be expressed in monetary terms

Objectivity Concept

accounting transactions must be unbiased, verifiable, and subject to validation by third parties

Continuity Concept (Going Concern)

assumes that all business will continue indefinitely

Cost Concept

assets are recorded at their original purchase price, not their current market value. This ensures stability and verifiability

Conservatism Concept

anticipate all possible losses, but never anticipate gains when facing financial uncertainty.

Financial Accounting

the process of recording and reporting financial data to external users (investors, creditors, regulators) using standardized statements.

Managerial Accounting

the process of analyzing financial data for internal users (managers, executives) to plan, forecast, and make business decisions.

Financial vs. Managerial: Time Focus?

Financial focuses on the past (historical data). Managerial focuses on the future (budgets, forecasts).

Financial vs. Managerial: Regulations?

Financial must strictly follow GAAP / IFRS. Managerial has no fixed rules and is customized to company needs.

Financial vs. Managerial: Report Format?

Financial uses standardized statements (Balance Sheet, Income Statement). Managerial uses customized reports (cost-benefit analyses, departmental budgets).

Financial vs. Managerial: Frequency?

Financial is periodic (quarterly or annually). Managerial is continuous (daily, weekly, or as needed).

Financial vs. Managerial: Scope?

Financial looks at the whole company (aggregated data). Managerial looks at specific segments (departments, individual products).

Fixed Costs: Definition & Hospitality Example

Costs that do not change in total regardless of occupancy or sales volume.

Example: Hotel property taxes, building rent, or general manager salary.

How do Fixed Costs behave as volume increases?

• In Total: Remains constant.

• Per Unit: Decreases (spreads out over more guests).

Variable Costs: Definition & Hospitality Example

Costs that change in direct proportion to changes in sales volume or occupancy.

Example: Guest room amenities (soap, shampoo), restaurant food ingredients, or credit card transaction fees.

How do Variable Costs behave as volume increases?

• In Total: Increases proportionately.

• Per Unit: Remains constant.

Mixed Costs: Definition & Hospitality Example

• Costs containing both a fixed base and a variable component.

• Example: Resort utility bill (a base fee to keep the building lit, plus variable usage per checked-in guest).

How do Mixed Costs behave as volume increases?

• In Total: Increases (but not in direct proportion).

• Per Unit: Decreases (due to the fixed component portion).

Step Costs: Definition & Hospitality Example

Costs that remain constant over a small range, then spike to a higher level once a volume threshold is breached.

Example: Front desk labor (one clerk can handle 0–50 check-ins, a second clerk must be hired for 51–100 check-ins).

How do Step Costs behave as volume increases?

• In Total: Increases in stair-step intervals.

• Per Unit: Fluctuates (decreases within a single step range, then spikes when moving to the next step).

Controllable Costs: Definition & Hospitality Example

Costs that a specific manager can directly influence or change within a given time period. Example: A restaurant manager controlling food waste or hourly server scheduling.

Differential Costs: Definition & Hospitality Example

The difference in total cost between choosing one business alternative over another. Example: The cost difference between upgrading to a digital check-in kiosk vs. keeping a traditional front desk setup.

Relevant Costs: Definition & Hospitality Example

Future costs that differ between alternative choices. Past/unchanging costs are ignored. Example: The cost of buying fresh ingredients for a special catering event vs. turning the event down.

Sunk Costs: Definition & Hospitality Rule

• Past costs already spent that cannot be recovered and must be ignored in future decisions.

• Example: $10,000 spent last year on a kitchen consulting study that is now outdated.

Opportunity Costs: Definition & Hospitality Example

• The potential benefit or profit given up when choosing one alternative over another.

• Example: Using a banquet room for a wedding instead of renting it out for a corporate conference.

What is the Indifference Point?

the exact sales volume level where two alternative options result in the exact same total cost or profit. The business has no financial preference between the choices at this specific point.

How do you use the Indifference Point to make a decision?

• Below the point: Choose the option with lower fixed costs (safer for low volume).

• Above the point: Choose the option with lower variable costs (more profitable at high volume).

What are the key assumptions and limitations of Cost-Volume-Profit (CVP) analysis?

• Linearity

• Constant Efficiency

• Constant Sales Mix

• Inventory Balance

• Clear Classification

Linearity (CVP)

Assumes total costs and revenues behave in a straight line.

Constant Efficiency (CVP)

Assumes productivity, technology, and price rates do not change.

Constant Sales Mix (CVP)

Assumes the ratio of products sold remains exactly the same.

Inventory Balance (CVP)

Assumes units produced equals units sold (no inventory buildup).

Clear Classification (CVP)

Assumes all costs can be perfectly split into fixed or variable.

Variable Rate (VR): Definition & Formula

• The proportion of each sales dollar required to cover variable costs.

• Formula:Total Variable Costs ÷ Total Sales Revenue (or Unit Variable Cost÷Unit Price).

• Key Trait: Expressed either as a decimal or a percentage (e.g., a VR of 0.40 means variable costs consume 40% of revenue).

Contribution Rate (CR): Definition & Formula

• The proportion of each sales dollar that remains to cover fixed costs and provide profit.

  • Formula: Total Contribution Margin ÷ Total Sales Revenue (or Unit Contribution Margin ÷ Unit Price).

How do Variable Rate (VR) and Contribution Rate (CR) relate to each other?

They always add up to 1.00 (or 100%)

Contribution Margin (CM): Definition & Formula

• The amount of revenue remaining after subtracting variable costs, which goes toward covering fixed costs and generating profit.

Formula: Sales Revenue−Variable Costs (or Unit Price−Unit Variable Cost)

Break-Even Point in Dollars (BE$)

• The total sales revenue amount needed to cover all operating costs, resulting in a net income of exactly zero.

Formula: Total Fixed Costs÷Contribution Margin Ratio (CR)

Break-Even Point in Units (BE Unit)

• The specific number of items, covers, or rooms a business must sell to earn a net income of exactly zero.

• Formula: Total Fixed Costs÷Unit Contribution Margin (Unit CM)

Sales Mix: Definition & Hospitality Example

• The relative proportion or ratio in which a company's different products or services are sold.

• Example: A restaurant selling 60% burgers, 30% salads, and 10% beverages.