Managerial skills

what is management accounting? Why it is also applied to service industry accounting practices


The concepts of Management accounting were first developed for the manufacturing industry to measure organizational costs, to analyze those costs, to interpret costs and to communicate all the information for making an effective decision. If a manager knows what is management accounting, he/she can take a decision in a timely manner. This type of accounting helps a manager to take short-term decision effectively. In the modern era, Management accounting is also being applied to service industry accounting practice (Yeshmin F, Fowzia, R, 2010). The application of variable costs, fixed costs, mixed cost and job order costing helps to measure service rendering costs and set the service price. These applications of costing methods are used to control excess cost for reducing service price and increase business activity. The application of managerial accounting to service industry increases productivity, reduces service charge, increase job order, increase Management efficiency and employee efficiency.

Applied to service industry accounting practices:

In today’s world, Management accounting is an integral part of accounting for the manufacturing industry as well as service industry. The concept of Management accounting is applied to the service industry accounting practice to identify variable costs, fixed costs, fixed costs and job order costing for setting service price. Managerial accounting helps to ascertain costs to a specific department or product. It is necessary for analyzing and predicting costs for maximizing organizational goal. It is used for controlling excess costs of services.

The variable costs of service industry vary on the level of service provided to customers. If the level of activities of a service company increases, the variable costs will also increase. In Management accounting, variable costs are measured to identify contribution margin which provides marginal profit per unit of service provided and it can be used to calculate the operating leverage of a service company.

Fixed costs including rent, insurance, premises don’t change with the level of service provided. It is fixed up to the relevant range. If a service company increase its services, fixed cost will remain the same. In Management accounting, fixed costs are used to determine breakeven point and targeted income. Mixed cost of the service industry is the combination of variable and fixed costs. It can be count as variable or fixed or both. For example, electricity can be the mixed cost. Different allocation based is used to allocate fixed costs.

Job order costing is used in manufacturing company as well as a service company. Service companies like movie studios, law firms, accounting firms, advertising companies, hospitals, repair shops etc. use job order costing to measure costs of a specific order or custom services or similar services.

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In a Hotel service, the concept of variable costs, fixed costs, fixed costs, and job order costing can be applied to maximize Management efficiency. In a Hotel company, variable costs are food, beverages, housekeeping cleaning supplies, flower arrangements, guest room amenities, guest room, restaurants and banquets linen, banquet HVAC costs, stationeries used in front desk and restaurants, chemicals for laundry and water treatment plants, t/a commission, flower & decorations, guest supplies -amenities, guest relations, laundry operations, laundry uniform, printing supplies, entertainment, telephone & fax, transportation, other operating supplies, administration & general, human resources,  sales & marketing, management fees etc. (SetUpMyHotel, 2016).

The variable cost of Hotel service exactly related to hotel occupancy. If the occupancy or business volume of Hotel increase, variable costs will also increase. The measurement of variable costs helps the company to determine the contribution margin for which the marginal profit can be measured. The increase in marginal profit means the utilization of variable expenses. By this way, the manager can evaluate the efficiency of the company and can control excess variable costs.

Fixed costs of a Hotel service include Land, Building Taxes to government, Wages to employees, Hotel employees health premium, Outsourced services contracted for fixed amount in a month eg:- security services; Yearly maintenance contract fees ( AMC ) for all equipments, machineries and Hotel Management software’s, Fixed internet, telephone plans, Advertising cost, Yearly external auditing cost, Payroll, Provision, In-house moves / satellite TV, Music entertainment, Reservation expenses; Subscription – Newspaper, magazine etc., Human resources, Sales & marketing, Interest on loan etc. (Hotelnewsnow, 2016). The measurement of fixed costs provides valuable information to managers about the breakeven point, targeted profit etc. This information is helpful to take the future decision. If the occupancy of Hotel changes, the fixed cost of Hotel will remain the same. The company should properly evaluate the fixed costs to determine the allocation base. The proper allocation of fixed cost is helpful to reduce service charge and maximizing profit.

Some mixed costs including electricity, water, telephone bill, internet bill etc. are essential to allocate within the cost object. The accurate measurement of mixed costs helps management to set service price and control of those costs. The accurate measurement of mixed costs increases the efficiency of management as well as the employee. The job order costing of Hotel company is surrounded by activity-based costing. The accurate measurement of the specific order will reduce service costs and increase the business activity.

In fine, Managerial accounting including variable costs, fixed costs, fixed costs and job order costing is essential for manufacturing company at the same time service company. The application of these costing methods helps the manager to take an effective decision. Management accounting necessary for the proper evaluation of costs, marginal profit, break-even-analysis, target profit, cost prediction, allocation of overhead costs and control of unproductive costs. Management accounting in service company identify profitable services and helps to stop non-profitable services. In a Hotel company, Management accounting identifies the cost of each service and profit thereto. So, the concept of variable costs, fixed costs, fixed costs, and job order costing can be applied to the Hotel industry.

The application of Management accounting in service industry accounting practice is helpful to analyze relevant cost, to reduce costs, to increase the financial return, to compare actual costs and budgeted costs, to determine breakeven point, to identify target profit etc. The analysis of variable costs maximizes the utility of each cost. It helps managers to take an effective decision about maximizing efficiency. The analysis of fixed costs necessary for determining breakeven point and target profit. It helps management to reduce unwanted costs to reduce service costs. The effective measurement of mixed cost helpful to reduce service charge.  The price of a specific order can be determined by using managerial accounting in the service industry. Management accounting provides valuable information to opt out less profitable services, controlling costs and maximizing return. Hence the concept of variable costs, fixed costs, fixed costs and job order costing is applied to the service industry.

Published by
Golam Azam

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