The Use of Managerial Accounting Concepts in Service Industry - Paper Example

Introduction

Managerial accounting is a very important process that involves the creation of a management report that is used to generate accurate financial information for making either short or long-term decisions. It is mainly used for internal decision making and therefore it is important for improving the organization performance. Managerial accounting is used both for manufacturing and service industry to support competitive decision making by ensuring there are a collection, processing, and communication of accurate information that managers require for planning, control and appraise company processes and strategy (Pavlatos & Paggios, 2008). Many people believe that the main concepts of managerial accounting such as fixed costs, variable costs, fixed costs and job order costing are only applied in manufacturing industry only but that is not the case (Simon, 1991). Such concepts are also applied in a service industry such as restaurant and consultancy firms because they also plan, control, budget, forecast and evaluate their business processes. Managerial accounting provides accurate information through the use of these concepts to help the company in the service industry create forecast, plan and control the use of its materials and finances or even decision making.

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Variable Costs are costs that change with the change in the level of output. It is also a concept that is used in both manufacturing and service industry such as Restaurants or banking sector (Simon, 1991). The restaurant is a service industry that must pay expenses but it is not that all such expenses are met before entering into a contract. All the variables costs include all the materials and other resources that a restaurant requires to perform any activity. They include wages that a restaurant pays to complete some work, postages and even food supplies. Any other expenses that a restaurant incurs towards a given operation in the restaurant are considered a variable cost. The restaurant cost accountant must use this concept to ensure that it determine the costs that it uses to finance certain activities. As a result, it can be used in determining the breakeven point which is essential for both the manufacturing and service industry (Simon, 1991). Service industry also expects to establish that point at which or the level at which total cost is equal to total revenues. This concept is usually used when determining the contribution margin which is always (price per unit minus variable cost per unit) during decision making. Service company also require to know the level of output upon which when it produces or sells it will start generating profit. There are other variables costs which a restaurant incurs without realizing, they include interest which they always pay when they have taken a loan to start the business.

Service industry also uses the concept of variable cost to ensure they watch their variable expenses and ensure they bill the clients for every variable expense. This is important because restaurants also want to set realistic rates that can allow them to generate profit (Reider & Sohlberg, 2011). Without estimation of variable costs, it will be very difficult to estimate realistic rates or prices that the service company can set to produce a reasonable profit that does not overburden customers. It is, therefore, use for budget estimation or forecasting which is important in ensuring that the service company operates within its expectation.

The concepts of fixed costs are also used in a service industry such as a restaurant. Fixed costs are costs which do not change with the increase or decrease in the level of production or sales volume. This concept is also essential in restaurants because it is also a concept which is used for decision making. It also helps restaurant administrators to determine the level of production at which the company will start earning profits. When determining the breakeven point, it is divided by contribution and therefore it is also important in a service company. Mixed cost is a cost that has both elements of fixed and variable costs (Reider & Sohlberg, 2011). This is possible because the service business does not produce tangible goods and therefore it does not have similar costs. For decision making and planning purposes, all these concepts apply because they help service business to estimate al the costs associated with their operations. All these costs are required when creating forecasts because they can be used as historical costs when projecting future costs. For the service company such as a restaurant to estimate its profits, all these costs are essential because they provide a reflection of total profit the company is likely to earn. For example, the service company with large variable costs can exhibit more predictable per unit profit margin as compared to the service industry with large fixed costs (Simon, 1991). This shows that the service business with large fixed costs has a very small profit margin than the one with larger variable costs. as a result, it is also necessary to use these tow concepts in manufacturing companies only as service companies also require such information for decision-making purposes.

Because it is not only manufacturing companies that expect to control their costs or to develop financial projections, even service companies require the use of their financial resources efficiently and also to predict their future financial performance. Service businesses can also achieve these through the application of these concepts such as fixed costs, variable costs and job order costing because they are the effective managerial accounting tool used in cost estimation and ascertainment (Pritchard & Silvestro, 2005). They therefore also help businesses in the service industry use cost based on estimates thus helping in ensuring that there is no under cost estimation of overestimation. These concepts, therefore, allow service business to only use optimal costs that can ensure they do not incur either high fixed cost and variable costs which affects profit margins of the business organization. With the help of these costs, service businesses are able to predict future sales, expected profit margin, operating costs and cost of sales based on the costs that the service business incur.

Conclusion

Financial planning is important for both service and manufacturing business. It is therefore important for a service business to also create a good plan that helps it to use its resources according to plan. Variable costing, fixed costing and job order costing are concepts that are essential in cost estimation and ascertainment, they therefore useful in determining correct and accurate costs that are used in developing a good plan (Kupper, 1991). The costs ascertained through their use are important in creating a financial plan in the form of profit and loss account, balance sheet and cash flow statement which service business use for control purposes. These businesses are expected to use these financial plans to control the amount of cash available in the business or that goes out of the business. It also helps to estimates the amount of financial resource the business has in the form of assets and liabilities. Therefore, all the managerial accounting concepts are important for both the manufacturing and service industry as they serve the same purpose.

References

Kupper, H. (1991). Multi-Period Production Planning and Managerial Accounting. Modern Production Concepts, 46-62. doi:10.1007/978-3-642-76401-1_3

Pavlatos, O., & Paggios, I. (2008). Management accounting practices in the Greek hospitality industry. Managerial Auditing Journal, 24(1), 81-98. doi:10.1108/02686900910919910

Pritchard, M., & Silvestro, R. (2005). Applying the service profit chain to analyze retail performance. International Journal of Service Industry Management, 16(4), 337-356. doi:10.1108/09564230510613997

Simon, D. S. (1991). Cost accounting: Concepts and managerial applications. The British Accounting Review, 23(3), 263. doi:10.1016/0890-8389(91)90089-k

Reider, B., Jones, B., Chaney, B., & Sohlberg, K. (2011). Choosing A University: Applying Student Experiences To Managerial Accounting Concepts. Journal of Business Case Studies (JBCS), 5(5), 1. doi:10.19030/jbcs.v5i5.4717