Accountancy

Accountancy is used to describe the process of measuring in financial terms, the past,
present and future operations of a business. It helps to assess the financial status of an
organisation at any particular point in time.

Management Accounting
Management accounting covers more than just the preparation of financial statements or
accounting reports. It is concerned with the interpretation of the reports and their presentation in a
form that will enable management to make profitable decisions regarding the deployment of
resources.
Financial management, therefore, covers two basic aspects financial accounting and
management accounting.

FINANCIAL ACCOUNTING
The purpose of financial accounting is to pass on relevant information to agencies outside
the establishment for purposes of decision making. For example, if the organisation needs to
borrow money for expansion from a bank, the latter would need information regarding the
credibility of the establishment. Again, every business organisation needs to provide financial
information to income tax authorities or other government agencies who can then assess the
amount of tax payable. The two statements on which the establishment’s soundness can be judged
are the balance sheet and the income statement, which give relevant information regarding the
increase in the assets of an organisation, or its failure to do so. All financial accounting is based
on five main concepts as indicated in Fig. 21.1.

The Entity Concept

The entity concept refers to the establishment being a specific unit of accountability. The
identity of the business is separate from that of its owner or manager. Financial accounting is
done for the establishment and not for the manager. All transactions are thus undertaken on
behalf of the establishment.

The Concept of Going Concern

This concept implies that the business is a continuing entity and its activities are not
wound up at the end of the financial period. The financial statement prepared by every
establishment enables management to review previous performance in terms of profitability and
financial soundness.

The Cost Concept

This is the monetary unit concept and expresses transactions of an organisation in
monetary terms. The concept assumes, that the purchasing power of the monetary unit is
relatively stable from one accounting period to another. Thus, when a transaction is completed it
can be recorded as an actual cost.
The Concept of Realisation
According to this concept, the revenue is said to have been realised when goods and
services are delivered, irrespective of the timing of the payments or receipts in cash.

The Accrual Concept

According to this concept revenue accrues when it results in a net increase in capital
because of transactions, that is, those involving trade exchange of goods and services.

MANAGEMENT ACCOUNTING
Managerial accounting, is meant to provide information on the day to day operations of
organisation to managers who have to make decisions regarding the use of its resources. Unlike
historical accounting, management accounting is a matter of attitude and approach. Although
based on a knowledge of basic accounting techniques it also appreciates the complex nature of
business problems.

Facets of Management Accounting

The different facets of management accounting are indicated in Fig. 21.2.

All the facets shown in Fig. 21.2 form indicate the scope of the subject and its utility in managing
catering operations.

Cost Accounting
This includes the preparation of cost statements and cost estimates identifying direct and
indirect costs involved in the process of production and service. The direct costs incurred in
operating an enterprise refer to actual operating costs of materials, direct labour and overhead
costs where as the indirect costs refer to costs of capital in the form of interest paid on loans, etc.
These have been dealt with in Chapter 24.
The accounting system forms the backbone of conventional management control systems,
which however, do not focus on key variables that are not expressed in financial terms, but are
vital for monitoring the progress of an organisation towards its goals. These variables form the
Qualitative Performance Indicators (QPI) for any establishment and can be grouped under four
main heads as:
Quality
Delivery
Process Time
Flexibility

Quality
This is an evaluation of raw material quality, process control and customer acceptability
and satisfaction. Quality has to be looked at through all the stages of production and service as
discussed in Unit 4.
Delivery
This refers to the delivery performance of suppliers with respect to food materials,
detergents, linen, equipment, uniforms or whatever they supply to the organisation. Delivery
performance can be judged by the number of pending orders and the time schedule adherance for
deliveries.

Process time
Dependence on manual process time is likely to decrease by the introduction of
machinery in all areas of production, clearing, washing up etc. future decisions are likely to be
based more on the ratio of process time to lead time rather than only lead time for supply which
make organisations overstock their raw materials in an effort to prevent time wasting through
waiting for resources.
While staff may not be reduced appreciably due to mechanization or automations in
catering being a service industry it will certainly speed up production per man hour and thereby
increase profits.

Flexibility
The flexibility of an operation is of utmost importance in a food service and is largely
dependent on the choices available to the customer, the extent to which the various sub-systems
have to be coordinated and the number of new food products prepared to attract the customer.
It is important for the cost accountant to study the work procedures and the impact of
introducing technology on them, so that be can understand the effect of various decisions on
performance and productivity. Conventionally performance measurements get compared to
industry averages. This however, increases the acceptability of non-optimum levels of
achievement as is the case with organisations in India.

Standard Costing
This is a means of establishing ‘standard costs’ for every type of resource used, with the
help of time and motion studies and research and development. Standard costing also includes
comparison of actuals with standards and determines any variances arising in the production
process. In catering the importance of standard costing for dishes, meals and functions cannot be
under estimated. It is however, questionable whether the techniques of standard costing are
appropriate in today’s changing business environment, in which the emphasis has shifted to
reducing costs constantly instead of maintaining standard costs. It would therefore seem
inappropriate to calculate material and price variances. Standard costing would however, be a
useful tool for budgeting and estimating future costs, although its role in controlling costs is
gradually decreasing.

Materials Control
This involves planning and control of stocks to determine the extent of use of materials,
details for which have been discussed under inventory management.
Budgetary Control
This is the preparation of fixed and flexible budgets, capital and operating budgets, used
as standards for measuring actual performance.

Interpreting Statements
This the preparation of monthly or quarterly profit and loss position statements, together
with information on operating ratios and orders at hand.

The Accounting System

The establishment of the most appropriate system of maintaining accounts for a food
service organisation is an important part of the management accounting function. This would
involve determination of the books of account to be maintained, the procedures most suitable for
collating data and preparing management information regarding say, use of equipment depending
on the volume of the data and the speed with which it is required for decision making.

Special Studies
This refers to conduct of studies relating to cost-volume-profit analysis, breakeven
analysis and liabilities, so that a sound basis is established for investment decisions. A study of
government policies in respect of licensing, taxation, minimum wage, food and service laws and
so on is also imperative.

Financial Reports
These are used by management accountants to provide assistance to managers in the form
of offering advice on the most profitable courses of action.
Irrespective of the size of the catering operation, accounting reports are useful, because
they provide information of the quantities and manner in which resources have been used in the
past and whether profitably or not. A knowledge of the relationships of resources to each other
and their reactions to environmental changes equips managers of food services to predict the
effects of resource use in the future. The importance of analysis sheets pertaining to costs, sales,
production, etc. have been further discussed in this unit.
Reports of monthly review meetings often consist of complicated schedules only
understood by the accountant or financial manager. It is therefore necessary to move to a simple
costing approach that can adapt to external and strategic considerations without delays.
Accountants must therefore adapt to the requirements of the new-age organisations instead of
submitting delayed reports for post mortem analysis.
Today the role of the management accountant is to grow beyond analysis of costs and
profit data and assist in balancing internal and external issues, mould qualitative and quantitative
data keeping a long term view of issues in mind. This is because all benefits arising from a
decision can never be fully quantified. Financial analysis tools therefore, should be used only as a
means to achieving organisational goals and not as ends in themselves.

Application of Management Accounting

The applicability of management accounting is of special significance where the financial
interests of the catering establishment are involved, because this area deals with all the aspects
like building, machinery, sharp tools, processes and, most of all people, who have to be protected
against any sort of hazards (Unit 7). More important, people today, staff and customers, are aware
of their rights and without attention to these the food service cannot survive.
Although the importance of financial information has been emphasised, it is well to
caution that, statements or figures seen in isolation have little significance. It is necessary to relate
the information to that of technical, staff and materials control, to make it meaningful for making
profitable decisions.
The accounting process is almost a continuous one, because of the wide range of services
and products offered for sale in catering operations. The reports presented generate new choices
and ideas for management, helping them to pick up customer tastes and trends quickly and
develop future targets realistically.
For any future planning, management needs to know the current status of the
establishment in order to be able to evaluate the resources available for channelisation into
various courses of action. A framework is also required for predicting the effects of decisions
being taken for the future and making valid assumptions about future events. Besides, it is useful
to have a basis for studying the cause and effect relationships between environmental factors and
the establishment. These help to build flexibility into the operation. For example, a news report
stating that animal fat is being incorporated in the manufacture of hydrogenated cooking fat in
India, affects the food services immediately. With a vast majority being vegetarian in India, there
suspicions regarding the fats being used for cooking in public eating places would prevent them
from eating out. A shrewd manager however, would immediately react to the situation, and put
up signs outside his food service saying only vegetable cooking oils used and limit the use of the
hydrogenated fat held in stock for cooking of meat dishes only.
A number of examples of the usefulness of cause and effect studies have been cited. It is
only accounting information that can help to establish authentic information regarding current
status or provide the necessary framework for future decision making.
A uniform system of accounting has been followed by most catering establishments in the
West, but with a large number of unorganised establishments mushrooming in developing
countries, a disparity in the methods of maintaining accounts exists.
While accounting is an indispensable tool of management, it also makes the caterer aware
of the standing of his operation in comparison to the average for other similar operations.
Besides, records can help to see at a glance the performance of each area of the service, and
constant comparisons help to improve resource allocation, shifting them from areas of low profit
to those of higher ones.
With the development of the management accounting concept, it is now possible to have
relevant financial information in a readily understandable form for use in making decisions.
Production managers today do not accept the oldtime view of the accountant as their controller.
The emphasis is gradually shifting to Just in Time (JIT) techniques of managing inventory, in an
effort to minimize costs and gain a competitive advantage in the ever changing catering
environment.