Travel and tourism industry has contributed a lot to the world's economy in terms of high contribution in GDP. The application of financial management is seen to be crucial within the business environment in determining cost and taking pricing decisions. This unit is focused towards the case of Merlin Entertainments, a leading entertainment company of United Kingdom. As per the given information, company operates around 110 attractions in 23 countries across four continents (Merlin Entertainments, 2016). The present report explains about the importance of costs and volume in financial management of travel and tourism businesses as well as the pricing methods that are used in this sector. However, the next section of study represents the different types of management accounting and the use of management accounting information as a decision making tool in travel and tourism businesses. Factors that are influencing the profit of tourism entrepreneurs specially to Merlin Entertainments Plc are also explained. In addition, case study of The Restaurant Group plc, a leading restaurant company is taken into consideration for interpreting financial accounts to assist decision making in travel and tourism businesses. At last, final section represents the sources and distribution of funding for public and non-public tourism development.
In respect with the given case scenario, Merlin Entertainments Plc is a leading entertainment company which aims at becoming a worldwide leader in branded, location-based, family entertainment from which it creates a strategy to attain high growth, high return and a family entertainment company (Bhowmik and Saha, 2013).
Before explaining the concept of cost and volume, this is important to identify various kinds of costs as it is helpful in financial management of the report. Various types of costs are explained in below:
Direct cost: Cost that is significantly associated with the production is called as direct cost. Direct cost of production process include material, labor as well as many other direct expenditures. Direct cost can be in the form of human resources and materials. These costs are mandatory to be bear at the time of manufacturing process (Adams, 2006).
Indirect cost: The cost which is not directly linked to the production process but it indirectly links with the manufacturing unit is significantly known as indirect costs. Several range of indirect cost are administration, personnel as well as security costs. In other words, factory cost bear by business is known as indirect cost.
Fixed cost: In respect with the manufacturing unit, fixed cost is one which remains same at any level of production. In other words, cost which does not change with the production level is called as fixed cost. The fixed cost is going to be incurred at the production of single unit.
Variable cost: Another form of cost is variable which changes as per the level of production. This cost has a changing nature as per the production volume (Halabi and Carroll, 2015). Dependent cost is said to be the variable cost. For an example: organization produces 100 units so it bears less cost, on the other hand, at the production of 1000 unit it bears increased cost . Such kind of cost is said to be variable cost and has a relevant aspect in manufacturing industry. Examples of variable cost are advertising, insurance and office supplies.
Allocation and appropriation of costs:
Main aim behind the allocation of cost is to identify, aggregate and access cost incurred during manufacturing as per the objectives of costs. However, to calculate actual cost per unit, this is too important to divide the cost within all the departments. In order to allocate cost, it is the foremost important to take pricing decisions. In respect with the mentioned company, major task is of dividing cost into various activities as per the requirements so that process of pricing decision can become easier. For a service industry like as Tourism, It becomes difficult to set price as per the cost occurred from different activities. The mentioned company is facing lot of issues including more competition at the time of offering services to the customers of UK in which prices of offering has become a foremost issue for the company. Allocation of cost is the major concept so as to decide the actual pricing of products by assessing cost per unit (Hu, Tian and Zhu, 2016). Within service industry, appropriation of cost is the actual allocation of cost and assessment of cost per unit. However, it is easier to understand costing concept so that decision over reducing expenses can be taken. However, this is all the round, mandatory to use different costing methods including absorption costing, marginal costing, activity based costing and so on. With the help of such methods, organization can allocate cost to each activity in the most appropriate manner and these arealso helpful in accessing cost per unit as well as making appropriate pricing decision.
Volume, in terms of manufacturing unit is refereed as the level and units of production that are produced in a specific time period. There are various concepts that are associated with the volume of production such as break even analysis, economies of scale and dis economies of scale. These all the concepts are discussed here under:
Break even analysis
Break even point concept is used to determine the volume of production at which Merlin Entertainments Plc will gain the situation of no profit and no loss (IMAM and Spence, 2016). This method is considered as the one among the best methods for calculating the level of sales over net income. In addition, this method is considered to be the best for attaining cost efficiency. This is a point of production at which net revenue equals to the total cost. A hypothetical example is given in respect with explaining Breakeven point concept in below.
This concept is the most important for Merlin Entertainments Plc for assessing the level of sales so as to cover fixed and variable cost. By making the use of such method, business entity can manage expenses as well as can find out the ways to increase sales. In accordance with the results of Breakeven point method, decision of production level can be changed which will be fruitful in generating higher sales as well as profit while making effective pricing decision.
Economies of scale
The cost advantage of manufacturing units are known as economics of scale which can be attained by reducing the cost of production and increasing profits. Within the tourism industry, the economies of scale can be achieved by increasing level of service hence, reducing cost. In other words the economies of scale represents the relationship between quality production and cost of production (Shim and et.al., 2008). In respect with the mentioned company, economies of scale is all about increasing production volume and providing benefits through reduction in cost. This is to bring into notice, when company achieves economies to scale, it become important to separate the cost among the large number of units. At the same time, over a larger number of goods it reduced the burden from the organization. Economies of scales help in decreasing the variable cost per unit and increasing operational efficiency and synergies. While increasing the production level company can attain economies of scale level and can attract more profits for the organization.
Management accounting has significant presence in today's corporate scenario. The management accounting includes various concepts such as budgets, variances as well as allocating cost. The adoption of appropriate accounting method is important so as to attain the business objectives (Cohen and Kaimenaki, 2011). The mentioned entertainment company is going to take help of management accounting for satisfying the needs and wants of stakeholder of business. This unit of accounting methods also helps in planning, formulating strategies and adopting strict control of the company's operations. There can be various sources of information that assist company in explaining the implications of management accounting. The information sources are presented hereunder :
Financial statements: Financial statements are also known as financial reports that pertains the financial performance of a company for a specified pried of time (Bhowmik and Saha, 2013). However, it also include the information of profitability, stability and liquidity position. With the help of various financial statements including balance sheets, income statement and cash flow statement. The companies are able to judge efficiency of business operations with the help of such reports. In addition the position of company can be ascertained with the help of such statements and these statements are important for satisfying information needs of stakeholders.
Cost allocation reports: The cost allocation report is important to identify the various cost during the business affairs and the a,location of such cost. This helps in identifying the utilization of resources as well as proper allocation of funds to each activity. In addition to that the organization has to focus on cost allocation of reports so that effective utilization of resources can be made (Pike & Neale, 2003). With the help of cost allocation report that company can find the information which is in relation to various costs that are involved in operations. Hence, the reports are highly valuable in satisfying the needs of stakeholders.
Budgets: For the purpose of setting benchmarks and targets as well as to identify the feasibility of set targets, the tourism entrepreneurs use various tools of management accounting. Budget are the financial plans that are prepared by the company in order to attain desired financial goals of company (Adams, 2006). The budgeted figures are helpful in creating targets and adopting strict control for attaining the budgeted figures of company. In addition to that budget is a tool of munitioning the financial performance as compared to previous decided plans as variance analysis. Hence, It could be said that with the help of budget the mentioned company can design future plans or managing financial resources.
Various effective sources are present which business can undertake with the motive to develop heritage site which has been chosen as one of the capital project. Department of culture is regarded as one of the most effective source where business can take financial support from this department. Further, main role of department of culture is to provide funds to company if they are investing funds in any cultural project. This source is quite beneficial for development of heritage site and large amount of funds can be obtained easily. Regional development fund is also one of the most appropriate source where regulatory authorities provides fund to the firm if they are undertaking any capital project through which development of heritage site. (Gandhi, and Shankar, R., 2016). So, this source can also provide large amount of support to business where it becomes easy to implement the capital project in appropriate manner and in turn is favourable for the business in every possible manner. Apart from this, non governmental bodies are also present in the nation who provide financial support to business when they undertaken any project of heritage site which is for the development of nation and boosts economy. Generally people living in the society are highly attracted towards the heritage sites as they are totally unique and this provides them remarkable experience. Further, government and other type of bodies also supports firm to undertake projects such as development of heritage sites etc. This can be beneficial for business and response from target market can be gained easily (Rahadi and et.al., 2015).
In the above report, the importance of costs and volume in financial management of travel and tourism businesses for Merlin Entertainments Plc is explained. The management accounting information is helpful for making decision such development of new products, investments for expansion, cost benefits analysis and so on. It was found that, the budgeting process helps in development of financial plan as with the helps of budgets the company can find out inflow and outflow of cash for a future time of span. The financial performance of company is improved from previous years. The sources and distribution of funding are helpful in supporting tourism firms to allocate more funds in promoting culture of the nation so that other nations can know about it easily.
Adams, D., 2006. Management Accounting for the Hospitality, Tourism and Leisure Industries: A Strategic Approach. Cengage Learning EMEA.
Bhowmik, K. S. and Saha, D., 2013. Sources of Finance. Financial Institution of the Marginalized India Studies in Business and Economics. pp61-71.
Clark, E. W ,and Hallerberg, M., 2012. Measures of financial openness and interdependence. Journal of Financial Economic Policy. 4(1). pp.58 - 75
Cohen, S. and Kaimenaki, E., 2011. Cost accounting systems structure and information quality properties: an empirical analysis. Journal of Applied Accounting Research. 12(1). pp.5 – 25.
Dlabay, L. and Burrow, J., 2007. Business Finance. Cengage Learning.
Drake, P. P. and Fabozzi, J. F., 2012. Analysis of Financial Statements. 3rd ed. John Wiley & Sons.
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